Restrictive Covenants and Settlement Agreements.

Restrictive covenants are used in employment contracts to restrain the activities of an employee at the end of the employment relationship. There are different types of restrictions that may be used to restrict an employees actions including non competition clauses, which prevent an employee working for a competitor; non dealing clauses, which prevent an ex employee dealing with previous and potential clients or customers; and non solicitation clauses which prevents an ex employee poaching former colleagues.

A restrictive covenant is a term that is usually found in a contract of employment that restrains an employee’s freedom to work or engage in other activities after the end of the employment relationship. A restrictive covenant is void for being a restraint of trade and contrary to public policy unless the employer can demonstrate two things.

Firstly, an employer must show that it has a legitimate proprietary interest to protect; and secondly, that the restriction sought is no more than is reasonable with regards to the interest of the parties and public policy. In addition, certain other considerations must be assessed when the applicability of a restrictive covenant comes before the courts. The courts will not rewrite a badly drafted restrictive covenant to make it enforceable. Ambiguous clauses should be interpreted in a way to provide a commercially sensible solution but if that is not possible it will be interpreted against the party who drafted the agreement, (usually a sheepish legal representative of the employer).

In a recent case, Prophet plc v Huggett, the Court of Appeal overturned a High Court decision which had rewritten a badly drafted restrictive covenant. As a result the employee was free to work for a competitor.

Initially the employer and employee sought an agreement to limit the impact of the covenants and enter into a settlement agreement, enabling the employee to begin work for a competitor however settlement discussions broke down and litigation ensued.

The Court of Appeal reaffirmed the law that the judge in the High Court went too far in trying to resurrect a badly drafted covenant. The court found that the wording of the restrictive covenant was plain in that it prevented Mr Huggett from joining another company where he would be involved in the same products as he had been involved with at Prophet, his former employer. It was however commercially useless as only Prophet employees would be involved with Prophet products but it was not ambiguous.

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