Thursday, 22 May 2014

Why businesses need cover for restrictive covenants

Many employers don’t consider what issues might arise if they get the wording of a restrictive covenant wrong. The following case illustrates the potential pitfalls, not to mention the cost of having to take a restrictive covenant case to court, to protect your business interests.

Prophet Plc v Huggett

In this particular case the restrictive covenant had been incorrectly drafted by the employer which meant it did not give them the commercial protection it was supposed to. Prophet sells a suite of software products in the fresh produce sector. Mr Huggett was employed as a sales manager with a three month notice period. In December 2013 Mr Huggett accepted a job offer from a competitor called K3 who sold a similar product.

A clause in Mr Huggett’s contract was intended to prevent him from working or being engaged in any competing business for a set period of time. An error in the wording of the covenant meant that it only prevented Mr Huggett from selling Prophet products; as Prophets products were unique to Prophet, it didn’t offer the commercial protection it was intended to. 

The Court allowed Prophet to add a small change to the covenant preventing Mr Huggett from selling “similar products”. Having made this change, the covenant became enforceable and the High Court granted an injunction preventing Mr Huggett from working for K3 or any other software supplier in the sector until his covenant expired in Jan 2015.

Although unusual, the court can interpret a restrictive covenant so that a drafting error does not make it unenforceable. It is still a costly and complicated matter to take it to court to ensure the interests of a business are protected.

Restrictive covenants can be tricky to draft correctly and very problematic if a mistake is made, as a result issues with them are quite common. ARAG’s commercial cover will pay the legal costs involved in resolving cases like this one for commercial customers.  

David Haynes
Head of Underwriting & Marketing

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