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Financial Adviser Pays for Walking Away With Clients

In an indication that the law may be developing a more employer-friendly approach to restrictive covenants, a financial adviser (FA) who took his loyal clients with him when he left his job to set up his own business has been hit with a substantial damages bill.

The FA had worked in the industry for many years and had established a network of clients with funds under management totalling about £30 million. On taking up a position with a financial consultancy company, he had signed a goodwill agreement whereby he was projected to receive around £50,000 for bringing his clients into the company’s fold.

Both the agreement and his employment contract contained restrictive covenants which provided, amongst other things, that he would not be engaged, concerned or interested in any competing business in any part of the UK for four years after completion of the agreement and for one year after the termination of his employment.

After working for the company for four and a half years, the FA announced that he was leaving to set up a rival business and that he would be taking his clients with him. The company launched proceedings alleging breach of the covenants and claiming more than £200,000 in damages.

The FA argued that the covenants were unenforceable in that the restriction on him working in his specialist field anywhere in the UK for 12 months was unreasonable. However, in rejecting that submission, the High Court noted that the financial services industry is a ‘single geographic market’ and that a country-wide restriction was justified in the circumstances.

The Court found that the agreement – which went beyond the employment context in that it involved the sale of goodwill – was a bargain, fairly entered into between parties of comparable bargaining power, and that the company had a legitimate interest to protect.

The FA had ‘chosen to ignore’ the terms of the covenants and had ‘deliberately and falsely’ claimed not to have read or understood them due to his dyslexia. The parties’ legal representatives were left to calculate the precise sum in damages payable by the FA to the company.