We were instructed by a group of 27 Independent Financial Advisers (IFAs) who sought advice on the enforceability of a set of restrictive covenants in their consultancy agreements.
Susan Hopcraft headed up a specialist litigation team to defend 5 of those financial advisers against a hefty £10 million restrictive covenant claim and an interim injunction imposed as part of that claim.
Successfully defended by Wright Hassall, they were released from the interim injunction and are at liberty to deal with their client base without any further restraint. This excellent outcome was achieved for the IFAs by Wright Hassall within an impressively short timescale of 11 weeks from the issue of proceedings. Added to that, the IFAs were awarded a stand-out 90% of their legal costs incurred in defending the large claim, paid back by the company that brought proceedings against them.
In May 2016, the Wealth at Work Group (‘WAW’), a discretionary investment management company acquired Affinity Financial Awareness Ltd and Affinity Connect Ltd (‘Affinity’), who were independent advisory firms. 32 IFAs contracted by Affinity left the company at the end of July 2016.
After leaving Affinity, a number of those IFAs received letters from Affinity’s solicitors warning them not to contact existing customers, or to risk court proceedings if they did. In making those threats, Affinity relied on restrictive covenants in the IFAs’ consultancy agreements. The restrictive covenants sought to prevent the IFAs from soliciting or dealing with their customers at termination of the consultancy.
On 31 August, Affinity issued court proceedings against 5 of the 27 IFAs and sought an interim injunction preventing those 5 from soliciting or dealing with their customers. An interim injunction was granted by court in September 2016. Breach of an injunction can amount to a contempt of court, which is punishable by a fine or imprisonment.
Not only was the livelihood of the IFAs severely affected by this claim, but also the customers of the IFAs, some of whom had been advised by the IFAs over several decades, were prevented from contacting their trusted adviser.
The IFAs required quick action and a vigorous defence from Wright Hassall.
Validity of restrictive covenants:
Wright Hassall argued that the restrictive covenants in the IFAs’ consultancy agreements were too widely drafted to be enforceable.
In order to protect freedom of trade, a court will only find restrictive covenants in employment contracts or in consultancy agreements to be enforceable if they are tailored carefully to protect a legitimate business interest and as long as they go no further than is reasonably necessary to protect that business interest.
The restrictive covenants in the IFAs’ consultancy agreements were drafted to last 12 months, where 6 months would have been more reasonable. There was no limitation as to which customers the IFAs would be prevented from dealing or soliciting with, where a particular customer or considered group of customers could have been specified. They also prevented both soliciting and dealing, whereas restricting one of those activities would have been more a more measured provision.
For further information about the enforceability of restrictive covenants, see our article: ‘How to ensure the restrictive covenants in your employees’ contracts are effective’.
Wright Hassall applied to court for a speedy trial. In an interim injunction situation, where restraint of trade is at stake, an expedited trial is often appropriate. This is because whilst an interim injunction is in place, the ability of the subject of the injunction to earn a living continues to be restrained, despite the fact that the substantive issues behind the injunction have not been considered or ruled on by the court. A full trial which takes on average 12 to 18 months to come to court would not best meet the interests of justice in this type of case. Wright Hassall recognised this and successfully applied for an expedited trial for the IFAs.
Practically, the restrictive covenants in question (had they been deemed enforceable) would have expired in July 2017 in any event, so a trial after this date would have been altogether less beneficial.
The Judge concluded that the covenants were not enforceable and dismissed the claims against 2 of the defendants part way through trial. No doubt partly as a result of this, just two days later on 24 November 2016, Affinity discontinued their claim against the other 3 IFAs. This successful result released the 27 IFAs from all restraints of trade and marked the end of the weighty £10 million legal claim against them.
Optimum Costs Recovery:
The defendants were awarded their costs on an indemnity basis, meaning they were able to recover 90% of the legal costs incurred in defending the action. This was an outstanding costs result achieved by Wright Hassall. A successful party in court proceedings can usually expect to receive approximately two-thirds of their legal costs back by order of the court. However, in circumstances where parties have behaved unreasonably or delayed matters, a penal costs order such as in this case, can be made by the court.
Cross-undertaking in Damages:
When an interim injunction is granted, the court usually requires the party asking for the injunction to give a cross-undertaking in damages. This is intended to compensate the defendant if it is later found that the interim injunction should not have been granted. A cross-undertaking in damages was given by Affinity to the IFAs in this case. Wright Hassall is now acting for the IFAs to enforce this cross-undertaking in damages and ensure that all damages owed to the IFAs by the claimant company for wrongfully preventing them from working since 1st August 2016 are recovered.
Wright Hassall achieved a brilliant outcome for their IFA clients, fighting hard to ensure the IFAs could continue to work, and the IFAs’ customers could resume contact with their trusted advisers as soon as possible.
The case brings to the fore the importance of ensuring restrictive covenants are drafted carefully and specifically at the time a new contract is signed.