Financial planner prevented from working for clients of his practice Restraints of Trade: Reasonableness and enforceability

Provided a restraint is reasonable, it will be enforceable by the employer. As shown in the financial planning world by the recent case of Reeves and Koops Martin. Julian Smith and Mira Stammers

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The learning from the case

Financial planners should be alert to any restraint clauses in their employment contract that restrain them from advising their former employer's clients. If those clauses are reasonable they are likely to be enforceable against the planner.

Employers that include restraint clauses in their employment contracts must make sure those clauses are reasonable in length, geographical location and who they cover — otherwise, they will likely be ineffective.

The facts

Mr Reeves was a financial planner for Koops Martin Financial Services Pty Limited His employment contract provided that on ending his employment at Koops Martin for the next 12 months he could not — within the city of Coffs Harbour — directly or indirectly, accept instructions to perform any financial planning work from any current or past clients of Koops Martin.

Reeves resigned from Koops Martin and moved to a competing firm. At this new firm, Reeves accepted instructions from several clients of Koops Martin. Then Koops Martin applied for an injunction to restrain Reeves from breaching the contract. Reeves cross-claimed for an order under section 4(3) of the Restraint of Trade Act 1976 (NSW) that the restraint was invalid.

The Decision

The NSW Supreme Court held that while Reeves had not enticed clients away from Koops Martin or revealed confidential information, he had accepted instructions and performed financial planning work in breach of his contract with Koops Martin.

It was held that the restraint clause was:

• not unreasonable as to length (12 months);
• not unreasonable in prohibiting Reeves from accepting instructions from clients of Koops Martin;
• excessive in prohibiting Reeves from accepting instructions from customers of Koops Martin other than those whom he had acted for previously; and
• excessive in that it prohibited Reeves from accepting instructions from customers of other divisions of Koops Martin.

The Court ordered that until one year after his employment with Koops Martin ended, Reeves would be restrained from directly or indirectly:

1. approaching or enticing or endeavouring to entice away from Koops Martin any persons, firms or companies who were clients of Koops Martin; and
2. accepting any instructions to perform any financial planning or advisory work for any such person.

Summary

The Courts are prepared to enforce reasonable restraint clauses contained in employment contracts.

Financial planners should be aware of any restraint clauses in their employment contract that restrain them from advising their former employer's clients.

If employers include restraint clauses in their employment contracts, those clauses must be reasonable in their length and geographical location, and will likely be ineffective in preventing former employees from advising clients of the firm who were not originally serviced by the relevant employer.