Post-termination restrictive covenants in the financial services sector
26 May 2015 |
1 minute read
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When an employment (or other contractual relationship) comes to an end, the potential misuse of confidential information and/or the loss of client relationships can give rise to harsh, and potentially very costly, consequences for the business. This is a particularly important consideration for financial advisory firms, professional services firms and business acquirers, where the preservation of client relationships is key.
For that reason, many businesses in the financial services sector try to protect themselves in the case of a departing employee/adviser by seeking to rely on post termination restrictive covenants ("PTRs"). In this article, we consider the extent to which PTRs are enforceable.
PTRs are contractual clauses which prevent a departing employee from using information or contacts that they have gained, either for their own benefit or for the benefit of their future employer. They are particularly important in the context of senior employees, who will frequently have considerable influence over staff, access to significant confidential information and relationships with key clients.
For public policy reasons, clauses which attempt to impose onerous restrictions on rights to compete are generally not enforceable, as they are viewed as unreasonable restraints of trade. However, in recent years, the Courts have been prepared to enforce restrictions if they are drafted in a manner which meets the following two key criteria:
Legitimacy and reasonableness are therefore the key considerations.
Precisely what constitutes a legitimate business interest depends on the nature of the business in question. A business cannot restrict an employee from activities which do not compete with its business. However, legitimate business interests which can be protected include trade secrets and/or confidential information, connections with clients and the stability of staff. PTRs are also more likely to be considered enforceable for senior and/or key employees, as they present the greatest risk to the business.
An important consideration is the duration of the PTRs and, in particular, how long the business requires the restrictions to remain in place. Relevant factors include:
As a general rule, restrictions of between 6 and 9 months stand a better chance of being considered reasonable and therefore enforceable. However, each case will turn on its own facts.
In the recent case of Merlin Financial Consultants Ltd v Cooper [2014] EWHC 1196 (QB), the parties entered into a business sale agreement, as opposed to an employment contract, and the PTRs in question were contained in that agreement. The Court upheld a 12 month restrictive covenant on the basis that (a) PTRs of that duration were common in the financial services industry, and (b) there was an equality of bargaining power between the parties in light of the nature of the agreement between them.
In general terms, the greater the extent of the geographical area involved, the greater the potential restraint on trade.
This means that a Court would be more likely to hold the restriction to be unenforceable, unless it is strictly necessary to protect legitimate business interests. Factors to take into account in this regard include the area of activities of the party subject to the restriction, the size and nature of the population of the area and, most importantly, whether there is a relationship between the interest to be protected and the chosen geographical area.
Where a PTR has been breached, there are a number of potential enforcement options:
Unfortunately, however, there is no guarantee that a PTR will be upheld. The enforceability of PTRs will turn on the specific circumstances of the case and the construction of the particular clause(s) in question. It is important to bear in mind that a PTR may be declared void in its entirety if it is held to be unenforceable such that the employee or contracting party would be free to act as if there had never been a restriction at all.
It is therefore worth investing in legal advice at the outset to ensure that any restrictions are appropriately drafted and, in particular, are likely to be enforceable. This will minimise the potential for future problems and costly disputes to arise. If a dispute does arise, it is crucial that legal advice from a specialist dispute resolution lawyer is sought as soon as possible.
For advice or guidance, please contact me on +44 (0)1752 675078 or email [email protected]
