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Restrictive covenants in IFA services contracts

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Posted by Susan Hopcraft on 21 February 2017

Susan Hopcraft - Professional Negligence Lawyer
Susan Hopcraft Partner

Wright Hassall was instructed by 27 independent financial advisers (“IFAs”) who had been told, on termination of their services agreements, that they could not advise their clients for 12 months.

The financial adviser group that they had been working for (Affinity) said that they were bound by restrictive covenants that prevented them from contacting or dealing with clients for 12 months. In effect this cut them off from, and they were unable to service and advise, their clients. In some cases these clients had been advised by them over several decades. All 27 advisers were threatened with injunctions if they did deal and five of them found themselves as Defendants to a claim for breach of covenant.

However, we considered those covenants were too wide to be enforceable. They were too wide in their terms and in length of time. If they were too wide they were unenforceable and neither Affinity nor the court was entitled simply to cut them down to suit.

Court proceedings were issued on 31 August 2016. Affinity sought an interim injunction preventing the 5 from soliciting or dealing with their clients until the full trial of the issue of enforceability. The other 22 IFAs affected wanted to be included in the action, but that was declined by the court, based on an acknowledgment that the outcome for the 5 would apply to them too.

A timetable was set to prepare the case for a ‘speedy trial’, since the question whether the covenants were enforceable needed to be dealt with urgently. It was not only vitally important to the livelihoods of the financial advisers, but also affected considerably the clients who needed financial advice, many of whom were pensioners and expressed a strident wish to be advised by their trusted IFA.

Over the next few months we exchanged documents and witness evidence with Affinity. By the time we started trial, there were over 20 lever arch files for the court, 35 witness statements on behalf of the advisers and 19 witness statements on behalf of Affinity. The case was listed for 8 days, one of which was to allow the judge to read the papers.

On the first day of the trial, the judge was clear that Affinity had some way to go to succeed on some of their arguments but the case continued and witnesses were cross examined. By half way in the trial, when all of Affinity’s witnesses had given evidence, the judge concluded that some of the covenants were not enforceable: they were too wide as they stood and the judge declined to add new words to narrow the restriction. As a result, the claim against 2 of the 5 Defendants was dismissed. Just two days later on 24 November, Affinity discontinued their claim against the other 3 Defendants. Affinity was ordered to pay all Defendants’ costs on an indemnity basis, which is an unusual (and more generous) level of costs to be awarded.

This was an outstanding result for the 27, all of whom were then free to trade unrestricted by the covenants. Had the covenants been more limited in scope when they were set up, they could have been enforceable but in trying to extend the covenant too far the whole clause was deemed void and, effect, struck from the services agreements.

About the author

Susan is a disputes and professional negligence lawyer, mainly in the financial services sector.

Susan Hopcraft

Susan is a disputes and professional negligence lawyer, mainly in the financial services sector.

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