Potential for clarity on enforceability of post-termination restrictions against consultants

Hannah Netherton

A judgment in the claim of Affinity Financial Awareness Ltd and anr v Ferguson and ors tantalisingly suggests that we may finally have a decision on enforceability of post-termination restrictive covenants against self-employed contractors.  The full hearing is listed for November 2016 and, absent pre-trial settlement within the next month, the court’s decision may prove interesting reading for employment law practitioners and beyond.

The contractual restrictions in question were contained in consultancy agreements of the five individual Defendants, who were engaged by the Claimant business as self-employed advisers. The agreements contained restrictions in a familiar form, seeking to prevent the individuals from (very broadly speaking) soliciting and dealing with “Customers” or “Potential Customers” and soliciting or employing “Restricted Representatives” for 12 months following termination of the agreement.

When the Claimants’ business was bought, the new owner sought to re-engage the advisers as employees and so (in most cases) offered them new employment terms, which were declined. The consultancy agreements were then terminated and the Claimants subsequently brought proceedings against the five Defendants for breaches of the restrictive covenants.

Whilst there is a large (and ever-expanding) body of case law on the enforceability of restrictive covenants against employees, little or none touches directly on the question of enforceability against consultants – although it is generally anticipated that such restrictions would in theory be enforceable in relation to self-employed individuals.

The parties have agreed that the issue of enforceability of the covenants will be considered at the seven day speedy trial listed for 16 November 2016.

Other issues considered

A number of other notable points arose in the Judgment of Mr Martin Chamberlain QC, including the following:

  • Somewhat unusually, the five Defendants sought an order that 22 additional defendants should be added to the proceedings, since each of these other individuals wanted to secure a finding that the restrictions are unenforceable. The court dismissed this application on a number of grounds, including that there is no general obligation on a claimant in private law proceedings to join as a defendant every person who is or may be affected by the claim. There may be tactical, evidential or other reasons why a claimant brings proceedings against some individuals and not others. In this case, the Claimants’ position was that they did not have good enough evidence of breach of obligations by the other 22 individuals.

 

  • The Claimants sought interim relief preventing disclosure and requiring delivery up of its Confidential Client Lists and information derived from them. The Defendants argued that the phrase “information derived from” those lists was vague, indeterminate and liable to give rise to difficulties in interpretation. Counsel for the Defendants gave an example of an adviser contacting a client from the List but who was also a relative or a friend, and posed the question as to whether he would be in breach of the undertaking if he used the List to remind himself of the friend or relative’s contact details. The court considered this objection to be somewhat unrealistic and noted that this type of concern can be dealt with in the drafting of the undertaking. Since the Defendants were unable to provide a concrete example of any actual customer in respect of whom the undertaking would actually give difficulty, the order was granted.

 

  • The Claimants sought witness statements from the Defendants detailing the solicitation of Customers and Restricted Personnel and use of the Confidential Client Lists that occurred after the termination of the consultancy agreements on 31 July 2016. The Defendants resisted the order on the basis that it is not for them to present the Claimants with evidence of breach at this stage in the proceedings. The court acknowledged that this type of order should be made in exceptional cases and refused the application, relying on the decision in Aon v JCT reinsurance Brokers Ltd [2009] EWHC 3448 (QB) which set out a number of factors relevant to the exercise of this discretion. Importantly, the court did not consider that the Claimants needed this order to enable them to plead their case (as Particulars of Claim would be filed before the date for service of the witness evidence in question). Similarly there would not be a significant cost saving – particularly since, if the witness evidence did disclose further breaches of which the Claimants were currently unaware, their Particulars would need to be amended anyway. Further, the court did not consider that the granting of the order was required to protect the business from further damage. The Claimants argued that they needed to know which customers had been solicited so that steps could be taken to repair those relationships. However, the court took the view that the Claimants had instigated proceedings against only five of the possible defendants and that they had the contact details of each of the Defendants’ clients so there was nothing to stop them from contacting those clients (and, indeed, the Judge noted that this would be a sensible precautionary step). For these reasons, and others, the application for witness evidence in the terms sought was denied.

Regular litigators in this field will be familiar with the above issues, which are commonly grappled with in these types of employee competition disputes. However, the question of enforceability of the particular restrictions in this case will no doubt pique the interest of more general practitioners as well, if or when the speedy trial takes place next month.

Affinity Financial Awareness Ltd and anr v Ferguson and ors [2016] EWHC 2319 (QB)

Post By Hannah Netherton (1 Posts)

Connect

Leave a Reply

Your email address will not be published. Required fields are marked *