Beckett Investment Management Group Ltd and ors v Hall and ors (2007, IRLR 793; IDS 835)

Restrictive covenants are only enforceable if they protect the legitimate business interests of the employer. In Beckett Investment Management Group Ltd and ors v Hall and ors (2007, IRLR 793; IDS 835), the Court of Appeal said that they should be judged on the basis of the objectives they are trying to achieve.

Basic facts

Mr Hall worked for some years as an independent financial advisor within the Beckett Group, consisting of Beckett Investment Management Group (BIMG) Beckett Financial Services Ltd (BFS) and Beckett Asset Management (BAM).

He became sales director for BIMG in January 2004, when Mr Yadev, another independent financial advisor, also joined. Both men had identical post-termination restrictive covenant clauses in their contracts

BIMG had no dealings with clients and provided no direct financial advice - that was done by BFS. Both of them worked out of the BFS office in Leicester.

Mr Yadev decided to leave BIMG at the end of May and set up his own company under the name of Hyrifa. Mr Hall joined him in mid August. The three Beckett Group companies (BIMG, BFS and BAM) alleged that the men were in breach of their restrictive covenants.

Restrictive covenants

Clause 17.3 said that the men must not deal with the clients of the “company” for 12 months after leaving it, and must not supply any “prohibited services” to “relevant clients.”

“Prohibited services” was defined in clause 17.1.2 as “the provision of advice in relation to pensions, life assurance, investments and other advice of a type provided by the company in the ordinary course of its business.”

“Relevant client” was defined as anyone (including any firm, company or organisation) that the employee had dealt with during the 12 months before he left BIMG. In addition, it said that if either of them dealt with an individual of any organisation, then that organisation was also deemed to be a relevant client, as well as the individual themselves.

High court decision

The main issue for the judge was the definition of “prohibited services” in clause 17.1.2 because of its impact on the scope of the restriction set out in 17.3.

Having defined the company referred to in the clause as BIMG, the judge agreed with Mr Hall and Mr Yadev that the words “of a type provided by the company in the ordinary course of its business” did not just refer to “other advice” but to all the preceding words in clause 17.1.2.

The judge concluded that the restriction in clause 17.3 was therefore of “no practical utility whatsoever”, given that neither Mr Hall nor Mr Yadev had tried to provide that sort of advice. It followed therefore that they could not be in breach of it.

He also decided that 12 months was a purely arbitrary figure, and that three months was long enough to allow BFS to contact their clients and to persuade them to continue to work with the company.

Court of Appeal decision

The Court of Appeal, however, disagreed. It said that restrictive covenants should be judged on the basis of the objectives they were trying to achieve. The judge’s definition of “company” was therefore too narrow as it should have incorporated all the subsidiaries. Clause 17.1.2 would then apply to advice provided by BFS.

Nor did it think that a 12 month restriction was “arbitrary”. Given the seniority of both employees and the fact that 12 months was more or less an industry standard, it was perfectly reasonable.

It did agree with the judge that the extended definition of “relevant client” was too wide, but concluded that the clause was not unenforceable because of the test in Sadler v Imperial Life Assurance Company of Canada Ltd. This allowed the offending section to be removed as long as:

  • the rest of the wording did not need to be added to or modified
  • the remaining terms still made sense
  • the character of the remaining contract survived