Why restrictive covenants may be unenforceable - High Court ruling gives guidance to employers

The recent tribunal case of Quilter Private Client Advisers Ltd v Falconer and another has given some clarification into the murky waters of restrictive covenants, ruling that the non-compete, non-dealing and non-solicitation covenants included within the employment contract were unenforceable.  Louise Bodeker, Employment Law Solicitor, reviews the case here and explains how employers can avoid a similar situation in the future.

In this case, Ms Falconer worked as a financial adviser for Quilter.  Her employment contract included the following conditions:

• Nine month non-compete clause – Ms Falconer could not work for a competing business for nine months after her employment terminated with Quilter.
• 12 month non-solicitation and non-dealing clause – Ms Falconer was not allowed to contact, solicit or deal with clients of Quilter with two specifications:
  • With whom she had been materially concerned or had material personal contact in the 12 months before termination.
  • Who had been clients of Quilter in the 18 months before termination.
• Six month probationary period – during which either side could terminate the contract with two weeks’ notice.

Ms Falconer resigned from Quilter before her probationary period was due to end and went to work for a competitor, which Quilter claimed was in breach of her employment contract.  Subsequently, they brought breach of contract claims against her and her new employer.

Why was the non-compete clause found to be unenforceable?

Even though Ms Falconer moved to a competitor, a fact that was disclosed to Quilter, they refrained from applying for an injunctive relief until four months later when they discovered she was giving advice to Quilter’s clients.  The non-compete clause however was deemed unreasonable on the basis of five points: 

1. The High Court found that this clause did not take into consideration the fact that she had worked for Quilter for less than six months and therefore her client base would have been limited after such a short amount of time; given the nature of her role her success would have been determined by the relationships she would need to develop over a longer period of time.  Quilter agreed with this, acknowledging that it takes at least 12 months to build a relationship with clients and become a trusted source.  She had inherited 120 clients from a colleague who had retired however she had only contacted 40 by the time she resigned from her post. 
2. The nine month time period was not reflective of her length of service and was therefore deemed to be unreasonable, a point that was supported by the relatively short notice period of two weeks.  The Court specifically commented “the threat of a departing employee requires less protection if she has had less of an opportunity to build such a relationship with the clients.  Having access to client-related documentation does not of itself build a strong relationship.”
3. The Court considered the legitimate business reason that Quilter may have had for preventing Ms Falconer from moving to a competitor and found that the clause went beyond what was reasonable in protecting these business interests.  The Court recognised the need to protect relationships with their clients but did not deem it legitimate to prevent working with a competitor.
4. The Court also reviewed the employment contract of her colleagues, including the head of Quilter, who only had a six month compete clause in his employment contract.
5. The location was deemed to be too wide to be reasonable.  The clause was on a UK-wide basis, despite the fact that Ms Falconer worked on a regional client base.

Why were the non-dealing and non-solicitation clauses deemed unenforceable?

There was one specific reference within these that was a cause of concern for the Court, which was the reference to those clients who had been with Quilter in the 18 months before Ms Falconer’s termination.   Quilter was not able to provide an adequate explanation as to why this time period was required to be so long, particularly when clients have six monthly reviews.  The Court therefore ruled this unenforceable.

The Court also reflected on the particular sector, the financial advice sector.  Clients should be free and open to choose their own advisor and so placing a restriction on liaising with clients who may happen to be a client of Quilter was outside the scope of public interest.  While there were other issues within the covenants that were more important than this, the Judge did note it as a point of interest.

Was the new employer responsible for the breach?

The Court found that Ms Falconer was at fault in her actions with her new employer; namely she failed to show her new employer her employment contract containing the covenants.  She also attended an induction course during her working hours for Quilter, however the Court found that the new employer was under the impression that she was able to attend the induction course, and Quilter did not raise any mention of the restrictive covenants at the point when asking for a reference.

What should employers consider when including restrictive covenants in their employment contracts?

This case demonstrates that employers need to give due consideration to the reasons why they are including such covenants in an employment contract, the legitimate business interests they may have for such an inclusion and any flexibility that may be needed given length of service.  Some specific areas must be reviewed:

• Length of time – employers should take into account the length of time that any covenants will be needed and ask whether they are reasonable.  There could be time periods within the client relationship that could be called into play in any debate regarding the length of time, for example.
• Length of service – employers may wish to use a different set of covenants applicable for the probation period, or specify that covenants will only come into force after a certain amount of time in employment.
• Geography – employers should consider any restrictions placed on the location and geography of the restrictions.  If an employee is based in one area or has a focus in one area, then the covenants should not go further than that.
• Sector – some sectors may be more open to a competitive nature and therefore it may be more reasonable for there to be such covenants in an employment contract.
• Job role – there should always be consideration given to the job role itself and the seniority of such a person as this will reflect the clients they come into contact with and the information they may have access to.  Review the covenants of their colleagues, both more junior and more senior roles to determine whether they are reasonable. 

The key when drafting restrictive covenants is to tailor each person’s employment contract to their own role and not to use a one-size-fits- all approach.  These should be reviewed on a regular basis, particularly when an employee is promoted or their role changes, as any differentiation in their role could leave the covenants unenforceable.

To discuss introducing restrictive covenants into your employment contracts, or if you are concerned that an employee has breached their covenants, you can contact Louise on 023 8071 7448 or email louisebodeker@warnergoodman.co.uk.

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ENDS

This is for information purposes only and is no substitute for, and should not be interpreted as, legal advice.  All content was correct at the time of publishing and we cannot be held responsible for any changes that may invalidate this article.