UK Employment Law Update: Restrictive covenants - in agreement for sale of business goodwill

16 May 2014

Warren Wayne, Jonathan Ollivent

In Merlin Financial Consultants v Cooper, the claimant company successfully claimed that a restrictive covenant was enforceable and was awarded compensation to cover lost revenue when the defendant employee had left the company and clients had followed him.

The covenant was contained in a separate ‘Goodwill Agreement’ which the defendant (an experienced financial advisor with a significant client base) had signed when he joined as an employee.

In return for a sum equivalent to a percentage of all funds transferred to the employer by his clients, the defendant agreed to a post-termination restrictive covenant to last for one year after termination of his employment not to compete with the employer ‘in any part of the United Kingdom’.

The court applied the usual test - the employer had a genuine business interest to protect and the restriction was reasonable in extent and duration.

So far as the financial services market is concerned, the courts currently accept a twelve month restricted period as being an ‘industry standard’ and also that, in the age of electronic communication, there is really only a single geographical market.

Points to note –
• In this case, the High Court judge confirmed that courts  appreciate that there is more freedom to negotiate in business sale agreements than there is when signing an employment contract. Where the parties are of equal bargaining power, the court will find it easier to enforce a restrictive covenant that the parties have freely agreed.
• The defendant in this case argued that the claimant company should not be entitled to full compensation because it had failed to mitigate its loss. Following his resignation, it should have taken away his laptop and mobile phone or put him on gardening leave. The judge disagreed. The claimant employer was only required to take reasonable steps to mitigate its loss. It preferred to have the defendant work out his notice so that clients were properly looked after. It was reasonable for them to do this and simply require of him that he should not notify them of his impending departure but let the company notify them and invite them to stay.