So long and thanks for all the clients

20 Sep 2013

The High Court in the case of Romero Insurance Brokers Ltd v Templeton and another, has confirmed the validity of a 12 month non-solicitation restrictive covenant in a senior insurance broker's contract.

Mr Templeton joined Romero Insurance Brokers (Romero) in 2011 and brought with him a large portfolio of clients and contacts, which Romero was keen to benefit from.  Mr Templeton was asked to sign an agreement, separate from his employment contract, which included a 12 month non-solicitation clause that, in event of his employment with Romero ending, would prevent him from contacting any clients he had dealt with in the 6 months prior to his leaving date.

An employer must be able to demonstrate that it has a legitimate interest to protect and the level of protection being sought is reasonable when requiring an employee to sign a contract which restricts that employee's trade activities after termination.  In circumstances where an employer terminates an individual's employment in breach of their contract, the individual will no longer be bound by any restrictions contained in their contract.

In August 2012, Mr Templeton was asked to accept a reduction in his basic salary but with the chance to make up the shortfall if there was a substantial increase in turnover.

In September 2012, with a view to increasing turnover, Romero's Managing Director prepared a report which put forward a proposal that Mr Templeton relocate from Halifax to Leeds in order to concentrate on business development.  This would, in effect, make Mr Templeton's role in Halifax redundant.

A consultation meeting was held with Mr Templeton, at which he was informed that his role was at risk of redundancy.  This was subsequently confirmed to Mr Templeton in a letter.  At the end of the consultation meeting, Mr Templeton was told not to come in to work and not to contact any clients.  No mention was made at the meeting or in the letter of the alternative role in Leeds that had been envisaged for Mr Templeton.

On 2 October 2012, Romero's Managing Director sent two emails to Mr Templeton, confirming that he was currently in a period of consultation and his redundancy was not a fait accompli.

Mr Templeton resigned a few days later, stating that he had lost trust and confidence in Romero and its actions since August 2012 constituted a breach of contract.  Mr Templeton commenced work with Eastwood & Partners Limited the following day and a large number of Romero's clients followed him.

Needless to say, Romero were not very happy about this and issued proceedings against Mr Templeton for breach of the non-solicitation restrictive covenant.

The High Court was tasked with deciding whether Mr Templeton had been constructively dismissed, such as to negate the non-solicitation clause he had agreed to at the start of his employment with Romero and, if not, whether this clause was enforceable.

The Court found that Romero had made a genuine attempt to consult with Mr Templeton in relation to the potential redundancy of his role but that Mr Templeton had failed to participate and, instead, jumped to the conclusion that Romero had made up its mind to dismiss him.

The Court also agreed that, given the nature of Mr Templeton's role, Romero had been entitled to require Mr Templeton not to attend work or to contact clients, following the consultation meeting.

In relation to the reduction in Mr Templeton's salary, the Court found that this was unconnected to the redundancy process, although the timing of it was unfortunate.

In those circumstances, it was the Court's decision that Romero's actions did not constitute a repudiatory breach of Mr Templeton's contract of employment.

In relation to the enforceability of the non-solicitation clause, the Court considered the evidence that the duration of 12 months is generally accepted to be the standard length for such a clause in the insurance industry because policies are generally renewed annually and the renewal period is a factor which should be taken into account when considering the issue of enforceability.

The covenant which Mr Templeton had entered into when joining Romero was similar to a covenant that he had agreed with his former employer.  It would allow Romero time to build up a relationship with the clients that Mr Templeton dealt with prior to his departure and Romero's wish to protect those relationships was reasonable.

The Court decided that, taking all these factors into account, a 12 month non-solicitation restriction was reasonable.

Our view:

Employers should take care when drafting restrictive covenants for their employees as these must go no further than is reasonably necessary to protect a legitimate interest.  It is also advisable to review employment contracts regularly as the reasonableness of a restrictive covenant is judged at the time the covenant was entered into, not at the time it is enforced.