This briefing note is only intended as a general statement of the law and no action should be taken in reliance on it without specific legal advice.

Poorly drafted covenants - an albatross around the recruitment agency's neck?
Hugo Plowman
08 August 2014

Poorly drafted covenants - an albatross around the recruitment agency's neck?

The use of restrictive covenants to help protect revenue streams and trade secrets in the recruitment industry is widespread. It is rare to find a recruitment business at the mercy of the competition with no covenant protection at all.

The recent case of Prophet v Huggett [2014] EWCA Civ 1013 serves as a reminder to spend time carefully thinking through the scope and effect of a covenant before recruiting, if necessary tailoring the covenant to keep it in tune with the business as it develops.

In the Prophet case, the Courts looked again at the law on the interpretation and enforcement of restrictive covenants. It was an appeal against a decision that imposed an injunction on an ex-employee restraining him from working for a competitor for a year. The appeal was successful and the injunction was discharged.

The case

Prophet plc, a software provider for the food industry, and its sales director Christopher Huggett had been fighting over the interpretation and enforceability of a 12 month non-compete covenant in Huggett's contract with Prophet.

In November 2013, Huggett was head-hunted and started work for K3 (a competitor of Prophet). Prophet applied for an injunction to enforce its non-compete covenant. All parties agreed that the covenant, read literally, had no teeth. On its face, the covenant prevented Huggett from selling Prophet products through a competing business. However, it did not prevent Huggett from selling other competing software that was not sold by Prophet. It therefore provided Prophet with no protection since K3 was not selling Prophet products.

Prophet managed to persuade the High Court to read into the covenant additional wording to make it enforceable. The Judge ruled that something had 'gone wrong' with the drafting and a wider interpretation was required to give it practical commercial effect. He imposed an injunction to stop Huggett selling Prophet products or something 'similar to' it.

Huggett appealed that decision and won. On 22 July 2014, the Court of Appeal decided that it was not for the Court to re-make the deal that had been struck between the parties. In the Court of Appeal's view, the meaning of the covenant was clear, there was no basis for interpreting it differently and it followed that Huggett's proposed activities with K3, which did not provide Prophet products, would not involve a breach of covenant.

Why is this relevant to recruiters?

Well­-drafted covenants can provide great strategic and economic advantage for the recruitment business. They guard against unfair competition: depriving the ex-employee of the ability to interfere with commercial relationships and preventing the exploitation of competitively important information.

By contrast, poorly drafted covenants can give rise to ambiguity or, as in the Prophet case, provide the business with no protection at all. This is fertile ground for expensive disputes. New recruits who are 'under covenant' when they join, will soon realise if they can wriggle out of a restriction. For the company struggling to enforce them, poorly drafted covenants act to stunt growth and render the business susceptible to team moves with the risk of losing senior management and established client relationships overnight. The 'dog-eat-dog' characteristics that are so often associated with a target-driven, commission-led, fractured business environment are thereby encouraged.

As the economy returns to its pre-crash level, business and candidate confidence will strengthen. Restrictive covenants will be tested. We now know that the Courts are not going to go out of their way to assist the covenant enforcer if there is any ambiguity in its meaning or, as in the Prophet case, it is poorly drafted and clearly offers no protection at all.

For more information, please contact Hugo Plowman

Click here to find out about Mishcon de Reya's Recruitment Services Group.

Related Articles