In this article...

• The background
• The facts
• The decision
• What does it mean for me?

Sara Woffenden considers a recent case in which the Court of Appeal took a refreshingly pragmatic approach to the enforceability of a post-termination non-dealing clause in a contract of employment.

The background

An employer can limit the activities of a former employee by including a restrictive covenant in the individual’s contract of employment. Such a restraint will be enforceable only if it can be shown to be reasonable, in the sense that it is no wider than necessary to protect the employer’s legitimate business interests.

The recent case of Beckett Investment Management Group Ltd and ors v Hall and ors concerned the enforceability of a post-termination non-dealing covenant. The courts have traditionally been cautious about enforcing clauses of this nature. This is because a non-dealing covenant, unlike a non-solicitation covenant, prevents an employee from having any dealings with former clients for a specified period – even if the clients approach the employee – and not just from taking active steps to solicit their custom.

The facts

Beckett Investment Management Group Ltd (BIMG) was the holding company within a group of companies which provided financial services (“the Beckett Group”). BIMG had no dealings with clients and provided no direct financial advice. These activities were carried out by its subsidiaries, which included Beckett Financial Services Ltd (BFS). BIMG employed Mr Hall as a sales director and Mr Yadev as a financial consultant to work in BFS’s Leicester office.

The contracts of both men contained non-dealing clauses which provided that, for 12 months after the termination of his employment, the employee would not deal with any “relevant client” for the purpose of supplying financial services of a type provided by the company. A “relevant client” was defined as any person who had been a client of the company, and with whom the employee had dealt, during the 12 months prior to the termination of the employment.

In April 2006 Mr Yadev resigned to set up his own business, Hyrifa Ltd, and in August he was joined by Mr Hall. The Beckett Group sought to enforce the covenant to prevent Hyrifa from dealing with former clients of BFS.

The High Court held that the covenant was unenforceable. The non-dealing clause had no practical utility because “the company” was specifically defined in the contract to mean BIMG. BIMG did not provide advice about anything to anybody but acted merely as a holding company. It had no legitimate interest to protect, as it had no clients.

The Court added that the covenant was unreasonably wide, because the period of 12 months was purely arbitrary. In the judge’s view, three months would have been adequate. The Beckett Group appealed against this decision.

The decision

The Court of Appeal overturned the High Court’s decision. It noted that Mr Hall and Mr Yadev had been employed within the Beckett Group for some time and were aware of the roles of the holding company and its subsidiaries. In those circumstances, the Court was reluctant to apply a construction which deprived the covenant of all practical utility. Accordingly, the fact that the companies’ clients dealt with BFS rather than BIMG was not fatal to the covenant’s enforceability.

The Court also rejected the view that BIMG had no legitimate interest to protect as it had no clients. The High Court had taken too purist an approach to corporate personality. In reality, the subsidiary companies were merely agencies through which BIMG conducted its business.

Turning to consider the duration of the restraint, the Court held that the period of 12 months was arbitrary only in the sense that any fixed duration bears an element of arbitrariness. Mr Hall and Mr Yadev were not run-of-the-mill, expendable employees. They were of enormous importance to the success of BFS’s Leicester office. To have any prospect of retaining its clients, the Beckett Group would have to recruit and train suitable replacements.

The Court also had regard to business patterns within the Group and to unchallenged evidence of an industry standard of 12 months in relation to non-dealing covenants. It concluded that 12 months was a reasonable period of restraint.

Accordingly, the non-dealing clause was valid and enforceable, and the appeal was allowed.

What does it mean for me?

		In this case the Court of Appeal took a pragmatic view of the enforceability of a post-termination restrictive covenant. This represents a departure from the strict standards of interpretation applied in some previous cases.
		The Court rejected the literal interpretation that a clause protecting “the company” did not extend to protecting the interests of subsidiary companies in a large group. This recognises business reality and avoids a futile result.
		The decision also makes it clear that the mere fact that a period of restraint is to some extent arbitrary does not prevent a covenant from being enforceable, since any fixed period bears an element of arbitrariness.
		While employers will no doubt welcome this decision, they should still take care in drafting restrictive covenants, especially where complex corporate structures are involved, in order to avoid uncertainty or disputes. Careful thought should also be given to the length of the period of protection needed.