Beckett Investment Management Group Ltd and others v Hall and others (Court of Appeal)
When is a post-termination restraint clause enforceable? Is a 12-month restraint too long? In Beckett Investment Management Group Ltd and others v Hall and others, the Court of Appeal gave some useful guidance in the context of the financial services sector.
Beckett Investment Management Group (BIMG) was a holding company. Its subsidiary, Beckett Financial Services (BFS), provided financial advice. Two senior employees, Hall and Yadev, worked at the office of BFS as financial advisers. Both resigned around the same time to start up their own competing business.
Both of their contracts of employment had been made between the employees and BIMG (the holding company). The contracts contained a ‘non-dealing’ clause to restrain the employees from providing “advice of a type provided by the company in the ordinary course of its business”. The contracts defined “the company” as BIMG (without including its subsidiary, BFS). However, BIMG did not provide any financial advice because it was merely a holding company. The restraints applied for 12 months post-termination.
The employees argued that they were free to provide financial advice to clients of BFS because the non-dealing clause only applied to BIMG. They also argued that the period of 12 months was arbitrary and excessive, so the clause was unenforceable.
The judge agreed with the employees, but the Court of Appeal overturned the decision, saying the trial judge took a view of the clause that was too literal. It said that the purpose of the non-dealing clause was clearly to protect the employer from losing its clients to the employees, and that the parties were aware of this purpose when they made the contracts. In the court’s view, the “only sensible construction” of the clause was that it also applied to BFS.
The original judge also found that 12 months was too long a period to restrain the employees from dealing, making the clause unenforceable. He considered three months to be reasonable.
Again, the Court of Appeal disagreed. It took into account the facts that:
- the employees were senior and important to the business
- it would be difficult and time consuming to replace the employees
- the clients might only contact BFS annually
- the industry standard is 12 months.
The court held that, on those facts, 12 months was not too long, but noted that a longer period would have been unreasonable and unenforceable.
The positive message for employers is that the law is willing to recognise the realities of big business when interpreting restraint clauses. It will take a practical approach to corporate identity, accepting that corporate groups are often actually “one concern under one supreme control”, even when they are made up of several companies.
The case also provides useful guidance on the duration and breadth of restraint clauses. Some of the comments in the judgment suggest that if the employees in this case had been more junior and replaceable, then 12 months would have been too long. The industry standard for financial services was also important, meaning that 12 months might be seen as excessive in other industries.
Despite the practical approach of the court in this case, the wording of restraint clauses cannot be overlooked. A restraint that is too broad will still often be unenforceable. Employers should review their restraint clauses in light of this decision to ensure they are drafted as effectively as possible.
Eliza Meehan, professional support lawyer, Allen & Overy