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When is a restrictive covenant too wide to be enforceable?

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Posted by Susan Hopcraft on 06 October 2019

Susan Hopcraft Partner

Earlier this year, Wright Hassall was instructed by 27 independent financial advisers (“IFAs”) who were subject to restrictive covenants. We considered those covenants were too wide to be enforceable. But where do you draw the line to ensure that businesses are protected against former employees “poaching” their customers, without leaving those individuals unable to earn a living?

In May 2016, the Wealth at Work Group (“WAW”) took over Affinity Financial Awareness Ltd and Affinity Connect Ltd (“Affinity”). 32 of the 37 IFAs contracted by Affinity left the company at the end of July 2016, amidst concerns that WAW would not be offering independent financial advice. 

Shortly after leaving Affinity, a number of those IFAs received letters from Affinity’s solicitors warning them not to contact existing customers and threatening court proceedings if they did. The letters referred to restrictive covenants in the IFAs’ consultancy agreements which sought to prevent the IFAs from (amongst other things) soliciting or dealing with customers.

There were two definitions of “Customer” at play in this case; for IFAs on a 2009 or later contract, the definition was limited to any person, firm or company introduced by Affinity directly or indirectly who were, or had been in the last year, customers of Affinity. The emboldened wording did not appear in the 2007 contracts though, meaning that “Customer” included all customers of the IFAs whether they were introduced by Affinity or not. In some cases, the IFAs worked for their own family members and friends, which would be caught by the wider definition. This effectively meant that the IFAs on the 2007 contract were not able to work with any of their existing customers at all. To make matters worse, Affinity initially tried to enforce the wider covenant definition against those on a 2009 contract too.

Court proceedings were issued against 5 of the 27 individuals on 31 August 2016 and Affinity sought an interim injunction preventing the 5 from soliciting or dealing with their Customers.  They were successful in this application, which was heard at court on 9 September 2016, and a timetable was set to take to the case to a speedy trial.  In usual circumstances, cases can take 12-18 months to get to trial. However, this trial was listed to start on 14 November, less than 3 months after proceedings were issued.  The covenants came to an end in July 2017, and so the trial needed to be well in advance of that date to be of any benefit to the IFAs.

Even before proceedings were issued, the group of 27 pulled together, pooling resources to fund legal costs and appointing a five-strong steering committee from which we could take our instructions. Given the short period of time to trial, there was no time to waste for the legal team (made up of Susan Hopcraft, Andrew Spooner and me, with trainees and paralegals coming on board to assist with witness statements and trial). We instructed Chris Quinn of Littleton Chambers as the barrister. Once the formal court documents were filed setting out each parties’ position, we completed disclosure (where all relevant documents had to be searched for, identified and provided to the other side). The other side made an application for expert evidence to be adduced and for the trial to be pushed back, which the court rejected. The other side later made an application for specific disclosure of documents, which the court declined to deal with.

By the time we started trial, we had trial bundles running to over 20 lever arch files, 35 witness statements on behalf of our clients (over 20 of which came from customers who were outraged to be prevented from dealing with their IFAs) 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 get home on their arguments in relation to the 2007 covenants. By the end of Affinity’s evidence, the judge concluded that the 2007 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, Affinity discontinued their claim against the other 3 Defendants. All Defendants were awarded their costs on an indemnity basis.

This was a brilliant outcome for our clients and it shows the true benefit of hard work and team work. It also shows the importance of businesses drafting covenants which are suitably limited in terms of scope and duration, and individuals reading contracts to ensure that they understand and are happy with all clauses before they sign the contract. Had these covenants been for 6 months, limited to customers introduced by Affinity, and only prevented solicitation instead of dealing as well, the outcome could have been very different.

This case has been reported in the financial press including the FT Adviser and Citywire.

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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