Financial Adviser Pays for Walking Away With Clients

3rd June 2014

Financial Adviser Pays for Walking Away With Clients

The basic premise is that a restrictive covenant, i.e. a clause in the employment contract which restricts an employee’s post-employment activity such as a non-competition clause, will be unenforceable. However, the courts will permit a clause that is designed to protect an employer’s legitimate business interests and is no wider in terms of scope, area and period of duration, than is necessary to protect those interests.

In an indication that the law may be developing a more employer-friendly approach to restrictive covenants, in Merlin Financial Consultants Limited v Cooper 2014 a Financial Adviser (FA) who took his loyal clients with him when he left his job to set up his own business has been hit with a substantial damages bill.

The FA had worked in the industry for many years and had established a network of clients with funds under management totaling about £30 million. On taking up a position with a financial consultancy company, he had signed a goodwill agreement whereby he was projected to receive around £50,000 for bringing his clients into the company’s fold.

Both the agreement and his employment contract contained restrictive covenants which provided, amongst other things, that he would not be engaged, concerned or interested in any competing business in any part of the UK for four years after completion of the agreement and for one year after the termination of his employment.

After working for the company for four and a half years, the FA announced that he was leaving to set up a rival business and that he would be taking his clients with him. The company launched proceedings alleging breach of the covenants and claiming more than £200,000 in damages.

The FA argued that the covenants were unenforceable in that the restriction on him working in his specialist field anywhere in the UK for 12 months was unreasonable. However, in rejecting that submission, the High Court noted that the financial services industry is a ‘single geographic market’ and that a country-wide restriction was justified in the circumstances.

The Court found that the agreement – which went beyond the employment context in that it involved the sale of goodwill – was a bargain, fairly entered into between parties of comparable bargaining power, and that the company had a legitimate interest to protect.

The FA had ‘chosen to ignore’ the terms of the covenants and had ‘deliberately and falsely’ claimed not to have read or understood them due to his dyslexia. The parties’ legal representatives were left to calculate the precise sum in damages payable by the FA to the company.

Comment

The courts are more inclined to entertain restrictive covenants entered into under a commercial agreement, where the parties have a more equal bargaining position, than in the employment context and the existence of the goodwill agreement was undoubtedly a key factor in the company’s favour. If nothing else this is a useful reminder that each case will always turn on its own facts and that it is important when drafting covenants, to ensure that they are tailored to the individual circumstances.

One very useful practical point to take from this case which is directly relevant to the employment context is in relation to the enforcement of covenants. Employers will often default to seeking an injunction to prevent an employee breaching a restrictive covenant but, as this case demonstrates, this is not necessarily always the best course of action. Where, as in this case, there is very little an employer can do to prevent clients taking their business to the departing employee’s new employer, damages may in fact be the most effective remedy.

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