12 Month Non-Compete Clause Enforceable


3 mins

Posted on 15 May 2014

A 12 month non-compete covenant in a “goodwill agreement” with a financial adviser has been upheld as enforceable.

In Merlin Financial Consultants v Cooper, C worked for Merlin for four years before leaving to set up a competing business. He had over 23 years’ experience in the financial services industry before joining Merlin and had built up a significant client base. Prior to joining Merlin, he entered into a “goodwill agreement” under which Merlin paid £43,420 for the goodwill in and right to receive future income from his client base. The agreement contained a covenant preventing him from being engaged in any competing business in the UK for 12 months after the termination of his employment. The term “clients” was defined as those persons listed in Schedule 1, but Schedule 1 was never created. 

C’s employment contract also contained six month post-termination restrictions preventing him soliciting clients, but clients he brought with him when he joined Merlin were expressly excluded. 

When C handed in his notice, Merlin reminded him of the restrictions in the goodwill agreement and employment contract. He replied that he intended to continue to work for “his” clients and he challenged the validity of the restrictions in the goodwill agreement. Merlin brought a claim for breach of contract. 

C argued that the restriction in the goodwill agreement was unenforceable as Schedule 1 was never created. The High Court disagreed. The non-competition clause was not limited to C acting for the clients who would have been listed in the schedule. Instead he was prevented from engaging in a competitive business. The missing schedule did not therefore directly affect the restrictive covenant. 

The High Court rejected C’s argument that the clause was too widely drafted as it precluded him from working in a competing business in any part of the UK, whereas the majority of Merlin’s clients were in London and the South East. It noted that in previous case law the financial services industry has been considered to be a single geographical market and this was all the more true today in the age of electronic communication. The 12 month restriction was reasonable and therefore enforceable. 

The Court considered that the goodwill agreement was more akin to a business sale agreement than an employment contract. Courts will be more prepared to uphold restrictions in commercial agreements where parties have equal bargaining power than in employment contracts where the employer tends to have the upper hand in negotiations. C had received a substantial sum of money for the goodwill in his client base when he joined Merlin and Merlin was entitled to protect its asset in the event that he left their employment. 

In many cases a 12 month non-compete clause in an employment contract will be considered too wide to be enforceable, not just due to the length of the restriction but also because an employer’s customer base can be generally be protected adequately through more targeted non-solicitation and non-dealing provisions. However, where, as here, an employee has significant influence over customers a court may be prepared to uphold a non-compete covenant if it considers that non-solicitation and non-dealing provisions will not provide adequate protection because they are difficult to police. 

The drafting of restrictive covenants is a complex area. Covenants must always be tailored to fit the particular circumstances – there is no one size fits all. If in doubt, seek legal advice.

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