Merlin Financial Consultants Ltd v Cooper

A restrictive covenant protecting goodwill acquired from an employee is enforceable where it protects a legitimate business interest and imposes no more restraint than reasonably necessary. Reasonableness is assessed when the agreement is made, including matters then within the parties’ reasonable contemplation. The parties’ relationship and bargaining power are material, but equal bargaining power does not save a covenant extending beyond legitimate protection. In financial services, the market may properly be treated as geographically broad because client relationships and advice are not confined to a local area. Damages for breach must reflect the realistic likelihood that clients would have remained with the business, and mitigation depends on the circumstances. Contractual remuneration is not recoverable for a period in which an employee, in breach of contract, fails to work out notice.

Merlin employed Jonathan Cooper as a financial adviser. It entered into a Goodwill Agreement under which it purchased goodwill associated with Cooper’s existing client base and imposed post-termination restrictions. Cooper later left to establish a competing business and took clients with him.

Merlin claimed damages for breach of the restrictions. Cooper alleged fraudulent misrepresentation and challenged the agreement’s enforceability, including because Schedule 1 had not been completed and consideration was inadequate. He also counterclaimed for unpaid remuneration, holiday pay and commission.

The central issues were whether the restrictions were enforceable restraints of trade, the recoverable loss and mitigation, and the extent of Cooper’s counterclaim.

1. Misrepresentation and agreement. The Goodwill Agreement was consistent with the parties’ discussions, and no actionable misrepresentation was established. The absence of Schedule 1 did not make the agreement unenforceable because it had been performed using the agreed payment formula. There was consideration for the purchase of goodwill. The adequacy of consideration was relevant only, if at all, to the reasonableness of the restraint.
2. Restraint of trade. The court applied the principles reviewed in Cavendish Square Holdings BV v Makdessi [2012] EWHC 3582 (Comm). Merlin had a legitimate interest in protecting the goodwill and income stream acquired from Cooper. The covenant was assessed at the date of agreement. The parties had comparable bargaining power and had negotiated a business transaction involving goodwill, rather than merely an employment restraint. The restrictions applying for one year after termination were reasonable between the parties and in the public interest.
3. The financial services market was properly treated as a single geographical market. The United Kingdom-wide scope was therefore not excessive. The court also regarded the approach in Beckett Investment Management Group Ltd v Hall [2007] EWCA Civ 613 and Croesus Financial Services Ltd v Bradshaw & Bradshaw [2013] EWHC 3685 (QB) as supporting the reasonableness of a twelve-month restriction in this context.
4. Loss and mitigation. Merlin acted reasonably by allowing Cooper to continue dealing with clients in their interests, inviting clients to remain, and suing for breach rather than seeking injunctive measures. The loss calculation was reduced because it was unlikely that all clients would have remained for the first year. The court assessed likely retention at 70 per cent in year one and reduced the second-year assumption to 40 per cent. Counsel were invited to agree the resulting figures.
5. Counterclaim. Cooper was entitled to £19,788.22. He was not entitled to further remuneration after leaving because he had not worked his notice and was in clear breach of contract. The court applied Miles v Wakefield Metropolitan District Council [1987] I.C.R. 368 (H.L.). The admitted sum was to be set off against Merlin’s judgment debt.