Beckett Investment Management Group Ltd & Ors v Hall & Ors

A post-termination non-dealing covenant must be construed objectively in its commercial and factual setting. A construction that makes the covenant futile should be avoided where the parties knew that a group company, rather than the employing holding company, supplied the relevant services.

A holding company may have a legitimate interest in protecting client relationships conducted through its subsidiaries. A 12-month non-dealing restriction may be reasonable where the employees are senior and important, client contact is irregular, and replacements require time to be recruited and established.

An unreasonable extension of a client definition may be severed if it can be excised without rewriting the covenant, the remaining obligation is supported by consideration, and the contract's character is unchanged.

The claimant group provided financial advice through subsidiaries. The first and second defendants, respectively a sales director and financial consultant employed by the holding company, left and joined a competing business. The group alleged conspiracy, misuse of confidential information, breaches of fiduciary duty and breaches of contractual post-termination restrictions.

HHJ Seymour QC dismissed the claim. His findings of fact defeated the non-contractual allegations. He also held that the non-dealing covenant was ineffective because the holding company did not itself provide financial advice, and alternatively that the 12-month duration and an extended definition of client made it unreasonable and incapable of severance.

The claimants appealed on the construction, enforceability and severance of clause 17.3.

1. Appeal allowed unanimously. The court rejected the construction that confined prohibited services to advice supplied by the holding company itself. Read objectively, and against the known structure and purpose of the group, the covenant extended to advice supplied through the operating subsidiary. The contrary reading would give the covenant no practical utility.

2. The holding company had a legitimate interest in protecting the client business carried on through its subsidiaries. The subsidiaries were the means through which the group business was conducted. Corporate personality did not require the covenant to be treated as protecting no interest at all.

3. The 12-month non-dealing period was reasonable between the parties and in the public interest. The judge had wrongly concentrated on the time needed to contact a client after an adviser left. Proper protection also required time to recruit, organise, train and establish replacements for senior advisers, particularly where client contact could be infrequent. A client remained free to seek advice from an unconnected provider during the restricted period.

4. The extended definition of Relevant Client was unreasonable insofar as it treated an individual who had acted for another client as a client in that individual's personal capacity. That defect was severable. The court adopted the three-stage approach: excision must require no addition or modification; the remainder must be supported by consideration; and excision must not alter the contract's character. Each condition was satisfied by removing the extended wording and retaining the primary definition.

5. Clause 17.3, properly construed and severed, was valid and enforceable. The court invited written submissions on the consequential disposition, noting that the lower-court costs order would fall to be quashed if the substantive appeal succeeded.

• Court of Appeal (Civil Division): appeal allowed unanimously in [2007] EWCA Civ 613. The court held that the non-dealing covenant was enforceable after severance.
• High Court, Queen's Bench Division (HHJ Seymour QC): dismissed the claim on 16 February 2007, holding the material post-termination restriction ineffective or unreasonable and inseverable.