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Restrictive covenants and the importance of context

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04/06/2014

In Merlin Financial Consultants Ltd v Cooper [1], Mr Cooper was a financial adviser employed by Merlin. He had already established a considerable reputation and following before joining Merlin. When he joined Merlin he signed two contracts: the first was an employment contract, which contained a post-termination covenant preventing him from competing with Merlin for six months following termination of his employment.

The second contract was described as a “goodwill agreement”. Under this agreement Merlin purchased the goodwill in, and the right to receiver future income from Mr Cooper’s client base. This agreement contained a post-termination covenant by which for a period of one year after termination of his employment, Mr Cooper agreed not, in any part of the UK, to “be engaged, concerned or interested in, or provide financial support or management services or technical, commercial or professional advice to any other business which supplies goods and/or services which are competitive with or of the type supplied by [Merlin]”.

Mr Cooper decided to leave Merlin and set up in competition. Merlin brought a breach of contract claim against him and Mr Cooper challenged the validity of the restrictive covenant in the goodwill agreement.

It is settled law that a restraint of trade clause must not go beyond what is reasonable to protect the legitimate business interests of the party seeking to enforce it. In this regard the court emphasised the distinction between a business sale agreement – which is in effect what the goodwill agreement was – and an employment contract. The parties to a business sale agreement were to be taken to have a greater equality of bargaining power. In the words of the court: “Where the parties are of equal bargaining power, the court is slow to intervene to prevent the enforceability of what has been freely agreed, as they are the best judges of what is reasonable as between themselves, but if the restraint goes further than is reasonably necessary to protect a legitimate business interest, it will be held unenforceable.” In this case, the restraint of trade clause did not go beyond what was necessary to protect Merlin’s legitimate business interest and the covenant was enforceable.

The court also noted that there were instances in the financial services sector where 12-month post-termination restrictions had been upheld in contracts of employment, reflecting the importance of the personal relationship between the adviser and client. It also rejected Mr Cooper’s argument that the UK was too wide a geographical territory as his client base was primarily in the South East and London; the court explained that the case law showed the financial services industry was to be considered a single geographic market and that was becoming more the case, rather than less, with developing means of electronic communication.

WM comment
The case is a reminder that an assessment of the validity of a post-termination covenant must always be made on its own facts – who the individual is, what is his or her line of work, where are their clients located. It also reinforces the distinction the courts make between covenants in an employment contract and those in a business sale agreement.

[1] [2014] EWHC 1196 (QB)

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