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When leaving presents problems

Alan Hughes, financial services associate, and Mikki Duncan, employment partner, at Bond Pearce LLP consider the implications of two recent legal case which have produced interesting rulings on contract restrictions designed to protect employers.

Much, if not all, of the value in an IFA business lies in its clients.

Two cases this year have highlighted the importance of taking care to consider how best to protect your relationships with clients by using reasonable restrictions on employee competition following the termination of their employment.

While employees are in employment they have a duty of loyalty to their employer, which exists even where the contract is silent on the matter. But once an employee leaves, in the absence of a contractual promise, they are free to take up employment with a competitor, approach clients, poach employees and set up on their own to compete.

It is not as simple as just getting an employee to sign a contract containing a restriction on such activities after they leave. From a public policy standpoint, the law wants people to be able to work freely as far as possible.

In seeking to impose any restriction on a former employee, an employer has to demonstrate that:

l It has a legitimate interest which it should be allowed to protect (such as trade connections, goodwill and trade secrets), andl The protection it seeks is no more than is necessary – bearing in mind the interests of all the parties concerned and the public’s interests.

This means the restriction needs to be as narrow as possible to be effective, which is counter-intuitive to most employers, otherwise, there is a risk that the restriction is treated by the courts as void or unenforceable due to unreasonableness.

The success of a restriction in protecting confidential information, clients and the business, depends on careful tailoring and careful drafting for it to be seen as reasonable and enforceable.

Two recent cases illustrate the importance of these issues and show that the courts are seeking to enforce these restrictions even where there are problems with the way they are drafted.

In the case of Beckett Investment Management Group Limited v Hall, Mr Hall was a independent financial adviser employed by Beckett Investment Management Group, a holding company which provided financial services and investment advice and management through two subsidiaries.

Hall was the sales director of a subsidiary which provided financial services. He left to set up a company in direct competition.

The employer sought to prevent its ex-employee from dealing with its clients, based on non-solicitation and non-dealing clauses contained in the employee’s contracts.

The latter sought to prevent Hall for 12 months from dealing with any client with whom he had dealt in the previous 12 months.

In general, the courts are less likely to enforce a non-dealing clause as it is wider than a non-solicitation restriction.

The court found that Hall was not in breach of a “non-solicitation” covenant – that is, he had not approached protected clients of the employer, they had approached him.

It was also found that the “non-dealing” covenant was flawed as it was drafted to prevent Hall from dealing with clients by providing advice which was “of a type” that the company provided. Due to a quirk of drafting, the company was specifically BIMG, the holding company, which did not provide any advice to any clients itself.

The High Court also found that the length of the restriction – 12 months – was too long to be reasonable and took the view that it would not take that long for the employer to stabilise and retain its relationships with clients.

The employer appealed against the decision and the Court of Appeal disagreed with the High Court.

It ignored the quirk of drafting, instead interpreting the clause on the basis of the intention behind the restriction and what was in the minds of both employer and employee at the time the contract was signed – to protect the group’s business.

It also felt that 12 months was reasonable taking into account the seniority and importance of Hall to the business, the difficulty of replacing him and the nature of the market which the employer faced, in that contact with clients was sporadic and often only once a year.

The second case, Thomas v Farr plc, highlights similar issues. Farr plc was an insurance broker. The Court of Appeal declared that a restriction which sought to prevent Thomas from competing for 12 months following his departure from Farr plc was reasonable and enforceable.

The Court of Appeal took a number of factors into account in the decision, including that:

– Thomas, as managing director of Farr plc, had highly sensitive strategic and financial information which was properly confidential and invaluable to a competitor (such as the facility management fees which had been negotiated with insurers),

– Farr plc was in the specialist market of social housing and so the impact of a new competitor with access to their confidential information would be dramatic; andl Twelve months was a reasonable estimate of the length of time that the confidential information Mr Thomas would have had access to would be current -the period of restriction was therefore reasonable.

What does this mean for employers? Careful consideration and drafting of restrictions are still of the utmost importance but employers can take heart from these decisions enforcing 12-month restrictions which previously might have been considered unreasonable.

Employers should ensure restrictions are tailored to the employee and their activities – a 12-month restriction is less likely to be enforceable for a more junior employee unless very narrow in scope – and should review them regularly as employees and the marketplace change.

Ultimately, clients cannot be prevented from leaving the firm if they want to do so but well drafted restrictions can deter employees from setting up in competition or unfairly using information confidential to their employer in order to poach clients or employees.

It will also improve the negotiating position for the employer even if they do not want to seek an injunction.

Employees should not assume that such restrictions are “not worth the paper they are written on” and should take advice when signing up to new restrictions.

Specifically, they should seek advice on or renegotiate any restriction which might cause unacceptable damage to their ability to move on if the job does not work out.

These issues are also relevant to restrictions which firms impose upon self-employed consultants.

However, firms should be aware that the duties that an employee owes their employer while they are employed, such as loyalty and fidelity, do not apply to selfemployed consultants.

Contracts should therefore contain specific protection for confidential information and clients and prevent the consultant competing during the engagement.


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