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Restricted view

Restrictions which intend to protect businesses after an employee leaves or an agency agreement ends feature heavily in the financial services world. However, there is a lot of disagreement and misunderstanding about how enforceable these restrictions are.

Surely, if someone has signed up to restrictions after the business and the adviser have parted company, then that individual should be bound by those restrictions?

On the other hand, should the law recognise that employees or agents may not have much bargaining power at the outset of the relationship and will often sign whatever is put in front of them in order to get a job?

Where does the law lie in relation to all of this?

The general position is that courts have traditionally seen these sorts of provisions as unenforceable.

They are seen to be in restraint of trade, to prohibit legitimate competition which, in itself, is contrary to the principles of public policy.

A healthy economy depends on fair competition on a level playing field. Otherwise, restrictions could be drawn up to be so wide as to effectively ban competition, leading to monopolies in certain industries.

But this is not the end of the story. Restrictions can be enforceable if they are carefully drafted. It has to be shown that the person hoping to enforce the restrictions has a “legitimate business interest” to protect and even then the restriction must go no further than is strictly necessary to protect that interest.

If those tests are satisfied, businesses can in fact go a very long way to stopping advisers clearing out their client base and setting up in competition with them over the road.

What is a legitimate business interest?

Staff, confidential information and goodwill, such as details of customers and contacts, are examples of such interests.

Even then, if a business wants to protect these interests, then the restriction in question must go no further than is reasonably necessary to protect that interest.

This is where expensive and convoluted legal battles can start. Not surprisingly, there is often a widely varying difference in opinion between what a business and an adviser consider to be reasonable.

Very commonly debated factors include:

  • Seniority
    Clearly, the more senior the individual, the more likely it is that he or she will have influence over the business and be in a position to attract staff or clients to move to a competing business in view of that level of influence.

    The courts recognise that businesses are entitled to protect against such situations arising.

    However, a more junior employee may well not have any such influence. Expecting to restrain such an employee in this regard is likely to be unenforceable unless they could pose a real threat to the business.

  • Geographical sphere
    Many restrictions fall down on the basis that they restrain activity in a geographical area which is unreasonably wide.

    For example, if a business has a client base principally in the Midlands, why should someone be prohibited from working for another business elsewhere in the UK with client bases which would not be affected at all?

    Some businesses genuinely do trade throughout the whole of the UK and such a restriction may well be justified but it will be on the business in question to show that there could be a threat throughout the UK if they say that is the case. Going too far, however, is almost certain to see a restriction fall down.

  • Duration
    There have been a lot of legal battles over excessively long restrictions.

    It is difficult to give general guidance in this regard but courts will look very carefully at restrictions which extend beyond six to12 months as a general rule. In addition, different industries may justify different restrictions.

    Some cases brought in the insurance industry have looked carefully at renewal periods. If a policy is renewable annually, a one-year covenant may be more justifiable than a six-month restriction.

    The most common types of restriction seek to protect a business against solicitation of staff, dealing with existing or prospective customers after the relationship has come to an end, poaching staff and prohibiting competition.

    However, many interesting and difficult issues arise here. For example, what is solicitation? What happens if customers want to follow their adviser?

    As a general rule, solicitation involves some form of influence, such as contacting clients and letting them know where the adviser will be working with a view to keeping their business.

    If clients track their adviser down, then this may not count as solicitation as no influence has been exerted over them. Many of these cases are finely balanced.

    If restrictions are breached, then a business can apply for an injunction. However, it should be remembered that these are expensive and unpredictable proceedings. Restrictive covenants are subject to detailed scrutiny and unless tightly drafted will not be upheld.

    Using off-the-peg restrictions without giving them any proper thought is usually a disastrous move. Businesses feel that they are protected from adverse activity after the adviser has left the business, only to find that in fact all of the restrictions which apply to all their advisers are useless.

    Careful thought should be given to the individual in question, bearing in mind the above principles and keeping restrictions as narrow in ambit as possible. This can go a long way to deterring an adviser from attacking a client base after the relationship has come to an end.

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