In the recent case of Beckett Investment Management Group v Hall, the Court of Appeal found in favour of the employer by taking a practical approach to the interpretation of 12 month “non-dealing” covenants in the employment contracts of two independent financial advisors. Whilst the case provides useful guidance on the duration and breadth of post-termination restrictions, the question arises as to whether the case indicates a relaxation of the courts’ usually strict approach to such restrictions, or should employers remain wary?

Background

Beckett Financial Services (BFS), a company which provided financial advice, was a subsidiary of Beckett Investment Management Group (BIMG). Mr Yader and Mr Hall were independent financial advisers working in the business of BFS, although they each had a contract of employment with BIMG.

Their employment contracts with BIMG (the holding company) contained nondealing clauses which sought to prevent them dealing with clients, for a period of 12 months after termination of their employment, by providing advice which was “of a type” that “the Company” provided. In the contracts of employment the term “Company” was defined as “BIMG” and did not include its subsidiary, BFS. However, BIMG did not provide any financial advice, as it was just a holding company.

Mr Yader and Mr Hall left their employment with BIMG and set up a new business, which carried out work for a number of clients who were previously the clients of BFS for whom both employees had previously worked. BIMG, in response, sought to enforce the non-dealing covenants and brought proceedings in the High Court to prevent Mr Yader and Mr Hall from doing business with the former clients of BFS.

BIMG was unsuccessful in these High Court proceedings. In particular, the High Court decided that the non-dealing clauses in each of Mr Yader and Mr Hall’s employment contracts did not apply. This was because they were expressed to be undertakings not to deal with clients (of BIMG or its subsidiary) by providing advice of a type provided by BIMG, which, being a holding company, did not provide any advice.

The High Court also decided that the “non-dealing” clauses were nevertheless unreasonable and would have been unenforceable had they applied. This was because the 12 month duration of the non-dealing clause was excessively long and arbitrarily imposed; a much shorter period of 3 months would have been a sufficient period for BFS to retain any business that might be at risk as a result of the departure of Mr Yader and Mr Hall.

BIMG appealed to the Court of Appeal.

The Court of Appeal overturned the decision of the High Court finding that the non-dealing clauses were both applicable and enforceable.

With regard to the application of the non-dealing covenants, the Court of Appeal decided that the High Court had taken too simplistic a view of the BIMG corporate structure. The Court looked at the purpose behind the clause which was to protect the employer from losing its clients. It decided that the parties were aware of this purpose when they entered into the contracts with BIMG; therefore the non-dealing clauses should not be treated as ineffective merely because they only imposed obligations upon Mr Yader and Mr Hall towards the parent company within the group. The only “sensible construction” of the clause was that it also applied to BFS.

The Court of Appeal also decided that the 12 month duration of the nondealing clause was enforceable. The 12 months was only “arbitrary” (as decided by the High Court) in the sense that any fixed duration has an element of arbitrariness. The Court of Appeal considered that a provision of 3 month’s duration, as suggested by the High Court would not be sufficient and was simplistic in its approach to the companies’ clients. Instead, the Court of Appeal felt that the seniority of the individuals, the particular business in which they worked and the time it would take BFS to recruit and train suitable replacements, before those replacements would have been capable of working on stabilising BFS’s client base, meant that a 12 month restriction was reasonable in the circumstances.

What does this decision mean for employers?

Employers will welcome this decision because it shows that the Courts are willing to take a practical approach to post-termination restrictions, looking at the intention of the parties as to the purpose of the provision. The Court of Appeal was prepared to extend the application of the clause to protect the business of BFS despite the fact that BFS’s business was not expressly mentioned in the clause. This wide interpretation of the business to be protected is based on a recognition that subsidiaries are the agencies and instruments through which certain companies conduct their business. It was also an important fact in this case that the parties knew well the company structure and that BIMG had a legitimate interest to protect by a restrictive covenant. It is nevertheless slightly surprising bearing in mind that it departs from the Courts’ usually strict interpretation of these types of clauses. They are, after all, restrictions on free competition (which is why they are presumed in the first instance to be in “restraint of trade” and therefore void) and have been negotiated by a commercially competent company which should have got it right in the first place.

Restrictions should be tailored to the particular employee and their activities within the employer’s business. As regards the duration of any post termination restriction, it is vitally important to think this through very carefully, bearing in mind the particular industry concerned, the seniority of the employees, and their importance and the evidence about business patterns and the logistics of replacing them. Whereas 12 months was held to be reasonable in this particular case, this may not be the same for other companies whether in the financial services sector or otherwise.

Consequently employers should not let this case lull them into a false sense of security. Getting their restrictions right is still of utmost importance to protect their business interests. The real value of post termination restrictions is their “threat value”. Restrictions that are clearly suspect (as they were in this case) mean that employers will lose their negotiating advantage and many employers in a position similar to the employer in this case would rather have given up than pursue the matter to the Court.

Click here for Court of Appeal decision