IFAs sued on restrictive covenants

Posted: 30th September 2016

Hands tiedCompanies are entitled to protect their trading position by insisting that their former workers desist from joining competitors for a reasonable period after their departure. However, balancing such contractual rights against the liberty of workers to earn a living and plan their careers can be a tricky legal exercise.

The issue arose in the case of a group of independent financial advisers (IFAs) who worked as self-employed consultants for a company that specialised in advising those approaching retirement. Following a takeover of the company, its business model changed and the IFAs either were not offered, or declined to accept, contracts of employment. Their consultancy agreements were therefore terminated.

The agreements contained a number of restrictive covenants which, amongst other things, forbade them from working for competing concerns for 12 months following termination. They were also required not to make use of connections that they had enjoyed whilst working for the company to solicit, canvass or entice away any of its clients. The company had launched proceedings against the IFAs, seeking damages and injunctive relief in respect of alleged breaches of those covenants.

A number of issues arose as to the validity of the covenants and the extent of the obligations that they imposed upon the IFAs. The matter was time sensitive and the High Court directed a speedy trial of preliminary issues, pending which the IFAs agreed to give certain undertakings in order to maintain the status quo. The issues to be resolved at the preliminary hearing include the enforceability of the covenants and whether the IFAs had breached them.