Prophet Plc v Huggett

The Claimant ( Prophet ) is, and has for many years been, engaged in the business of developing, selling, and updating computer software for use in the fresh produce industry. Though it has divisions in South Africa and the USA, I have been concerned in this action solely with its operations in the United Kingdom. Its product, marketed as Prophet - in particular Prophet Pr3 and Pr2 (the former being an update of the latter) - offers a suite of integrated software applications covering much of the process functions of businesses supplying fresh produce (which can vary from cut flowers to brassicas, though apparently not including fresh meat), such as accounting, purchase and sales, warehousing, packing, and transport, and may extend from seed to supermarket, assisting a range of actors from growers to retailers and intermediaries. Not all modules will be required or desired by each purchaser, and a sale is preceded by an indepth investigation and discussion of precise requirements, paid for by the customer. The initial licence is for a period of twelve months and renewable yearly thereafter on payment of an annual fee, which will include routine maintenance (but not updates.) In practice, however, moves by customers to a rival software supplier are rare indeed, perhaps because of inconvenience, though it may be that inertia or cost also play a role. According to the evidence which I heard, Prophet s charging structure is not shared by other suppliers in the UK, of whom there are comparatively few, and who grant a permanent licence against an initial fee with an annual maintenance charge.

The Defendant ( Mr Huggett ) is not a software engineer or developer. He has however been involved in fresh produce since leaving college in 1993. He then worked for six years dealing with the supply of fresh cut flowers to supermarkets and subsequently onions. After two years working for a pot plant grower, in 2001 he set up and ran Evolution Flowers Limited, of which he was managing director, sourcing and distributing cut flowers. That company was sold as to 85% in 2008, with Mr Huggett retaining the other 15%, though apparently inactive in that business. He then retreated to being a house-husband and assisting his then partner as an unpaid non-executive director with her new retail fashion business. Both the business and the relationship collapsed in 2010. Mr Huggett was then out of employment until the spring of 2012.

In 2011 Prophet decided that Mr Michael Hetherington, its sales director and an employee of over 22 years, should go to the new office in the USA and that a new sales manager for the UK should be recruited, with the intention that if and when he had grown successfully into the job he would become sales director. One of the two candidates considered by Prophet was Mr Huggett. Mr Mark Peachey, the Managing Director of Prophet, told me that Mr Huggett appeared to him from his cv and interview to be an individual who would be capable of winning business in the fresh produce sector, though more from his experience and abilities than through any existing contacts.

On 2 February 2012 Prophet made a written offer to Mr Huggett of employment as sales manager at 50,000 p.a. plus commission at ten per cent on sales in which he had been instrumental and a notice period of three months. An outline of his role included:

Clause 19 of the contract contained a post-termination restriction in the following terms:

Additionally, in Clause 20 the contract contained (1) a covenant not (during or following termination of the contract) to use or disclose confidential information (2) covenants for one year after termination not to solicit or procure orders or deal or accept orders from any person who in the previous 12 months had been a customer of Prophet or in the habit of dealing with Prophet and with whom the Employee had dealt for goods or services the same as (or similar to) those supplied or dealt in by Prophet.

In November 2013 Mr Huggett was contacted by a headhunter acting for K3 Business Solutions Limited ( K3"), whose managing director is Mr Gary Vincent. Like Prophet, K3 provides and sells business solutions to its customers, known generically as enterprise resource planning or ERP. Unlike Prophet, however, it does so across a variety of sectors. K3 supplies a Microsoft product called Microsoft Dynamics. Though modular, it is sold as a whole and not a la carte, with the client obliged to pay for excess functionality over what it may actually require. K3 has - partly in conjunction with Microsoft - tailored the Dynamics software to meet the specific needs of the various sectors to which it sells. Over recent years it has done this for the fresh produce sector, and the product, known as Fresh Dynamics, is currently available on the Microsoft Dynamics AX 2012 platform. To date, however, K3 has made only four sales of Fresh Dynamics, but recently decided now to market and promote the product more actively, referred to by Mr Vincent as a launch (though slower and more gradual than normally connoted by that word). To this end it wished to recruit a salesperson with particular experience in the fresh produce sector. Mr Huggett s time with Prophet apparently met that bill (though the cv which he provided to K3 seriously and, as Mr Huggett confirmed to me, consciously misstated the extent of his sales success). His earlier activities in the sector, though nothing to do with ERP software, were also seen as a plus by Mr Vincent. The Job Summary prescribed that the candidate would report to the sales manager and be responsible for new business sales of ERP solutions based on Microsoft Dynamics AX software, and that his target market would be the fresh produce sector addressing packhouse, traders and growers with a sales target of 1.6m margin contribution (which I was told would equate to roughly 3.2m in sales orders). His main responsibilities were to be:

On 18 December 2013 Mr Huggett emailed Mr Peachey notification that he was resigning from his position with Prophet. Referring to his understanding that 12 weeks notice was required, he asked whether it would be possible to release him from his employment as soon as possible. Mr Peachey asked in his reply that in order to enable him to consider that request he should told what Mr Huggett s plans were as to future employment. Mr Huggett responded the next day, quite mendaciously, that he had been offered a role heading up European marketing in food manufacturing . Pressed by Mr Peachey to identify the new employer, Mr Huggett replied tersely It s K3": Mr Peachey was well aware that K3 was a software supplier operating in part in the fresh produce sector, and not a food manufacturer. A telephone conversation ensued, described by Mr Huggett as abusive on Mr Peachey s part. Whether or not that adjective is accurate, I have little doubt that Mr Peachey would at least have expressed himself with some vigour. Mr Huggett accepts that in the course of that conversation Mr Peachey told him that he would be in breach of his employment contract if he went to work for K3 (an obvious reference to the restriction in Clause 19) and that he, Mr Peachey, would be taking legal advice. Mr Peachey told me that he was advised that he should agree to the early termination (though I was not told the reason behind the advice). A more moderate conversation took place on 20 December 2013, recorded and confirmed in a letter the same day from Mr Peachey to Mr Huggett:

On 23 December 2013, the next working day given the intervention of the weekend, solicitors for Prophet wrote a letter before action, referring to Clause 19

K3 was not, for whatever reason, joined as a co-defendant. It has however made clear that it stands behind Mr Huggett in his opposition to the grant of an injunction. In particular, it has now - as the result of an enquiry on my part - formally intimated that it will, if required, provide undertakings to the Court that (1) until 2 January 2015 it will not permit or encourage the Defendant to act in breach of the Clause 20 covenants against solicitation and dealing and disclosure or use of confidential information (2) it will pay to Prophet any award of damages or costs ordered by the court arising out of this matters, if not previously satisfied by Mr Huggett. Prophet s position is that such undertakings, even if cumulated with similar undertakings from Mr Huggett, are insufficient protection, and it continues to seek an injunction in terms of Clause 19, while properly acknowledging that in its practical effect - though the wording of the clause is narrower - it will preclude Mr Huggett from working for K3 or any other software supplier in the UK fresh produce sector until January 2015.

The essential law is now conveniently summarised by Cox J in TFS Derivatives v Morgan [2005] IRLR 256 at [37] to [39]:

When the matter came before me, counsel for Prophet, Mr James Laddie Q.C., was seeking an injunction in terms of Clause 19, as he had when seeking the interim injunction. At the same time, however, and somewhat paradoxically, he accepted and indeed actively submitted that the words of Clause 19 read literally would provide him with no protection. This was because no competitor would ever be selling Prophet products, which were the only products in or on which Mr Huggett would realistically ever have been involved whilst employed by Prophet.

Counsel for Mr Huggett, Mr Andrew Burns, submitted that there remained nonetheless some field of application for Clause 19. He drew my attention to the existence of 3 or 4 third parties, who with the approval of Prophet provided ongoing assistance to some existing customers, and who also might introduce potential customers to Prophet in return for an introductory commission, if accepted. Unhelpfully for him, however, the evidence before me did not establish that the existence and role of the third parties was something which at the time of signing the contract Mr Huggett either knew or could be reasonably expected by Prophet to have known and thus could assist (as part of the matrix ) in construction of the clause. Mr Burns also posited as a possibility that Mr Huggett might, on termination, engage in a business of advising Prophet customers. However, this scenario - and indeed that involving a third-party agent - would fail the test for a competitor included in Clause 19 that the new business should provide computer software systems. Moreover, both scenarios were so improbable as to render quite implausible the notion that it was to protect Prophet against them, and solely for that purpose, that the parties agreed

On this basis, Clause 19 was on its face indeed pointless. That something had gone wrong in the drafting was therefore clear. To revise it by construction would however require it to be clear what correction was necessary, in other words what a reasonable person would have understood the parties to have meant by their use of the language (see e.g. Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101 at [21] to [25]). I asked both counsel how that meaning was to be formulated.

In response to that enquiry Mr Laddie eventually came up with wording under which Clause 19 was to be construed as meaning that Mr Huggett was prohibited from being directly involved in the provision of business process computer software designed for the fresh produce industry . Mr Andrew Burns, counsel for Mr Huggett, was for his part unable to suggest any candidate for alternative wording, if his argument as to primary meaning were, as I have now held, to be rejected.

I regard it as very far from clear that Mr Laddie s wholesale reformulation of Clause 19 is what the parties should reasonably be understood as having agreed. Though neither party was prepared to espouse it, I would have found more persuasive a correction in the form of a simple addition at the end of the clause of the words or similar thereto . This is not for reasons of drafting elegance but because it in my view represents (a) the minimum change necessary to produce a commercially sensible result and (b) the probable formula which parties would employ for this purpose. As regards the latter, my view is reinforced by the fact that these parties included (in parenthesis) the additional word similar in the non-solicitation and non-dealing covenants in Clause 20(b) and (c).

Ultimately, however, what matters is whether the formula by which the enjoined activities are specified in any order falls within any plausible candidate for the true meaning of Clause 19. Addressed in this way, I consider that Mr Laddie s formula passes muster. Not only would it fall plainly within the word similar , but I am unable to conceive of any other credible candidate for construction which would not prohibit at least the activities described by his formula.

In urging me nonetheless to determine the true meaning (even if not corresponding to his formula) Mr Laddie expressed concern about how otherwise the reasonableness of the term could be assessed. That appears to me a false worry, in that the potential reasonableness or otherwise is itself a factor in the process of interpretation. As it was put by Waller LJ in Turner v Commonwealth & British Minerals Limited [2000] IRLR 114 at [14]

Legitimate interest

While a covenant intended to protect against competition by an ex-employee will not be enforced, the court will take a different view if persuaded that a covenant with this content is reasonably necessary to protect trade secrets or confidential information: see e.g. Littlewoods Organisation Ltd v Harris[1977] WLR 1472 at 1478. That is to be tested as at the date when the parties entered into the employment contract, and thus on a prospective basis viewed at that time. As stated by Diplock LJ in Gledhow Autoparts Ltd v Delaney [1965] 1 WLR 1366 at 1377:

The job outline which I set out earlier in paragraph 4 specified the roles which Mr Huggett would or might be called upon to perform in the course of his employment. Clearly, many (if not all) of them would, or might realistically, result in Mr Huggett becoming privy to considerable quantities of confidential information. Indeed, I did not understand Mr Burns to contend otherwise. His essential argument was rather that Clause 19 went beyond what was necessary for the protection of that information, because that was adequately secured by the more limited and targeted covenants in Clause 20.

As regards the non-solicitation and non-dealing covenants, that submission faced the difficulty that they would not protect confidential information relating to prospective customers. Such information (and much else) would of course be covered by the covenant relating to confidential information. But the courts attitude to such an argument is scepsis born of practical reality. As Lord Denning MR put it in Littlewoods v Harris at 1479 (Footnote: ¹):

The temporal element

Mr Burns also submitted that the 12 month period of the restriction was excessive, and hence not reasonably necessary. He pointed out that it was the same as that to which Mr Huggett s seniors at board level, such as Mr Peachey, were subject. But what matters in this regard is rather the nature of the confidential information to which the particular employee will or may realistically become privy during and by virtue of his employment, and how long its non-use or non-disclosure may be expected to remain of significant value to the employer. In the present case, I heard that the contracts were renewed on an annual basis. Knowledge of the renewal date in any particular case could be of assistance to a competitor, and might fall as late as eleven months after any change of employment to that competitor. Nor does it appear to me that knowledge about a potential new customer would necessarily become stale and useless to a competitor before the expiry of 12 months. Overall, in my estimation that is not such a period as would render the covenant unreasonable (Footnote: ²).

In reaching this conclusion I have assumed for analytic purposes that its true meaning is rendered by the addition of the words or similar thereto . That conclusion would be no different if I were to assume Mr Laddie s suggested construction.

Witness credibility

Some of the matters which I am required to consider under the heading of discretion involve oral evidence given by Mr Vincent, Mr Peachey, and Mr Huggett. Both Mr Vincent and Mr Peachey appeared to me entirely honest witnesses, though the latter was on occasion cautiously defensive. That minor stricture is however insignificant compared to my evaluation of Mr Huggett as a witness. He was frequently constrained to accept that a passage in documents, in his witness statements, or even in earlier answers in his oral testimony, were errors and then further constrained to accept that they had been lies. That these admissions were made often without great resistance was almost disarming, but did little to counter the clear and inevitable conclusion that he was a thoroughly unreliable witness, whose evidence would at the lowest have to be treated most sceptically.

Legal framework as regards discretion

Mr Laddie referred me to a passage in the judgment of Colman J in Insurance Company v Lloyds Syndicate [1995] 1 Lloyds Rep. 272 at 277 3 dealing with a duty of confidence arising under an arbitration agreement and in which, having reviewed well-known authorities such as Doherty v Allman [1878] 3 App Cas 709 and Sharpe v Harrison [1922] 1 Ch 515, which concerned restrictive covenants concerning the use of land, he resumed the position in the following propositions:

In the case of Shelfer v City of London Electric Lighting Company [1895] 1 Ch 297 the Court of Appeal considered the proper approach in deciding whether to order damages in lieu of an injunction under Lord Cairns Act. In the course of his judgment on that appeal A.L.Smith LJ formulated a four-fold test of now considerable celebrity (though not in fact endorsed by the other members of the Court):

Less frequently noted are the introductory words of A.L.Smith LJ in which he described his test as as a good working rule . Despite this, it has since often, though not invariably, been understood and applied as if it were exhaustive. In Coventry v Lawrence [2014] UKSC 13 (handed down in the middle of the hearing before me) members of the Supreme Court disapproved that tendency. Lord Neuberger stated (at [116] to [123]:

Shelfer and Coventry both concerned claims in nuisance rather than breach of covenant. That means that the negative obligation was imposed by the general law rather than having been voluntarily assumed by the defendant, but the source

Potential damage and risk

Earlier cases on restrictive covenants have emphasised that the absence of any loss from the breach, or intended breach, does not of itself require the refusal of an injunction. Having stipulated for a particular right, the covenantee should not be refused its enforcement merely because it has no monetary value. Such is the sense of Lord Cairns observation in Doherty v Allman [1878] 3 AC 709 at 720 that:

As emphasised by Astbury J in Sharpe v Harrison (at page 515), that statement by Lord Cairns was not intended to remove from the court its ultimate discretion nonetheless to refuse the injunction. It does however indicate a factor of substantial importance, and which may in many, perhaps most, situations be decisive. Non-compete restrictions in employment contracts require however closer analysis. Unlike, say, the beneficiary of a covenant not to block a treasured view from his property, a covenant which seeks to protect the employer against competition is unenforceable: that is in the eyes of the law an illicit interest. Its validity is dependent upon the existence of a different interest, the protection of the employer s confidential information against its use to his detriment. While that has to be determined, prospectively, as at the date of the contract in deciding upon reasonableness, the position at the date of its termination is not without possible significance at a later stage in the context of the court s discretion. As Toulson LJ observed in Thomas v Farr [2007] ICR 912 at [47]:

(a) Though he had access to databases containing confidential information as to existing and prospective customers and leads, Mr Huggett claimed to have consulted them little himself. And he strongly downplayed the significance of such documents as weekly sales reports. All this, probed tenaciously in crossexamination of Mr Huggett, I found far from convincing.

In short, I am not persuaded that there is no threat to a legitimate interest underpinning Clause 19.

In the post-Coventry climate of greater flexibility, it appears to me that the court can have regard, not only in binary fashion to the existence or not of such a threat, but also to the level of the risk that the threat will materialise. That may be separated into two principal elements: (a) the chance that confidential information will be used to the detriment of the former employer, and (b) the level of any loss if that occurs.

I can deal shortly with the latter, which in the present case would in practice relate to the loss of an order or renewal. On the figures recounted to me in evidence, even at the bottom end of Prophet s clientele the value attached to these is not inconsiderable and may reach substantial levels as one moves upwards - account must also be taken of the value of renewals over potentially some years.

Understandably, therefore, Mr Huggett s case, supported by evidence from Mr Vincent, focussed rather on the first element, contending that there was no risk of the confidential information being used to Prophet s detriment, in effect to conclude sales to actual or potential customers of Prophet.

Mr Vincent told me that K3 had no interest in the lower part of the market, where most of Prophet s current customers were found. Indeed, he explained to me that K3's costs in effecting the sale and installation (apparently much greater than Prophet s costs) were such that only higher value customers were a viable proposition. But Prophet already has large scale customers, and would no doubt be interested in landing another fish of similar size (Footnote: ³). While I accept Mr Vincent s evidence that he did not hire Mr Huggett for his contacts book, that does not mean that there could not be an occasion in the coming months when the two companies are, or potentially might be, in competition for the same prospect. I also consider that Mr Vincent would not, particularly in the light of this litigation and even more so if I were to accept the proffered undertakings by K3, knowingly encourage or permit Mr Huggett to breach the confidentiality covenant. But that does not eliminate the possibility that Mr Huggett may, unbidden and unencouraged, use prohibited information to secure a sale, not least where it carries a commission entitlement and may affect the award of an annual bonus.

In short, I do not accept that the risk which legitimises enforcement of Clause 19 is now non-existent. But while it is a real, and not fanciful, risk, I do not think that it greatly exceeds that low threshold.

Adequacy of damages as a remedy (Footnote: ⁴)

The classic judicial pronouncements on this topic offer in my view no assistance when considering restrictive covenants in employment contracts. In other cases, one is typically concerned with a single continuing breach (which may or may not have already incepted) on which it may - though not always - be possible to place a monetary value of sufficiently reliable accuracy. The position is quite different in a case such as the present one. Any damage would occur non-continuously, differentially, and sporadically, if and as Prophet is deprived of an order or a renewal through misuse of confidential information. Assessment of a figure for damages in lieu of an injunction would in such circumstances be in high degree arbitrary. The argument for Mr Huggett appears moreover to assume that Prophet should be left to sue for damages if and as any loss occurs, forcing on Prophet a potential series of actions, in each of which Prophet would have to prove a breach of the confidentiality requirement, causation, and quantum of damage. That is far from what appears to me to be contemplated by Lord Cairns Act (now embodied in section 50 of the Senior Court Acts, 1981). And each such claim for damages would have embedded within it difficulties of assessment of a nature which courts regularly regard as making damages an inadequate remedy, or, in the now more often preferred formula, rendering it unjust in all the circumstances to confine a claimant to a remedy in damages (Footnote: ⁵).

I set out earlier in paragraph 8 how the employment came to be terminated by agreement with effect from 3 January 2014. In essence, having told Mr Huggett that his proposed employment with K3 would breach his contract with Prophet - an obvious reference to the restriction in Clause 19 - Mr Peachey agreed to the request for early termination on the basis, as his letter of 20 December 2013 expressly stated, that Mr Huggett would be starting work for K3 on 6 January 2014. He did this following advice from Prophet s solicitors, who on 23 December 2013 (the next working day) despatched a letter requiring Mr Huggett to refrain from entering K3's employment for 12 months. An odour of bad faith emerges from this conduct, leading Mr Burns to submit that in seeking an injunction Prophet does not come to the court with clean hands. The force of that submission may be reduced, though it is not eliminated, by the fact that Mr Huggett s own actions were scarcely a model of honest dealing, resorting to not only concealment but blatant lies about the identity and nature of the new employer until the truth was dragged out of him. While not in my view sufficient to constitute a bar to the relief sought by Prophet, its conduct is a factor to which I should have regard in the exercise of the discretion as to whether to grant it.

In this connection, I understand from Mr Vincent that the first four weeks since 6

Hardship

Mr Huggett gave extensive evidence as to the effect which the grant of an injunction would have financially on him and those he has to support. The practical effect of an injunction, as I understand Mr Laddie to accept, will be to exclude him from work in this industry. In addition, he told me that in the two years before joining Prophet he had sought work in the fresh produce industry itself, but without success, and asks me to conclude that he has no prospect of obtaining employment in the next nine months. Nor does he have any financial reserves. It is likely that his partner will have to abandon her course at a teacher training college to earn the family bread.

Given my view of Mr Huggett s reliability as a witness, I have to view this evidence with serious caution. I have no real, and certainly no reliable, picture of how long or how intensively he sought work or from what companies, nor is the position clear as to potential employment in other sectors other than fresh produce. Mr Huggett suggested that posts (in, I believe, the fresh produce industry) are available but in locations which would cause problems for familial reasons, and with a significantly lower remuneration.

There is, however, a more fundamental consideration. It was in practice an inevitable consequence of the restriction accepted by Mr Huggett that he would be shut out from employment in the fresh produce ERP software industry and obliged to seek employment elsewhere. The availability of such job opportunities might be expected to vary with economic conditions, but that risk was inevitably assumed by Mr Huggett in agreeing to the restriction (Footnote: ⁷). It is not in my view the kind of matter contemplated by the reference in earlier cases to hardship, even discarding – in loyalty to the observations in Corner - their requirement that the case should be exceptional.

If nonetheless I were to regard this a factor which ought to be taken into account, it would be of such small weight as not to affect the outcome of my discretionary evaluation.

Overall assessment

As I indicated above, I do not regard the risk of any abuse of confidential information to the detriment of Prophet as more than modest: its case rests on a suggested picture which in the light of the evidence which I have heard is overalarmist to a considerable degree. Nonetheless, weighing such risk as does exist along with the other considerations, for and against, which I have examined above, I have concluded that in all the circumstances the appropriate order in the exercise of the court s discretion is to enforce the restriction by the grant of an injunction.

I will therefore make an order restraining Mr Huggett in terms reflecting the formula proposed on behalf of Prophet.