This post was written by Joanna Powis.
The High Court of England and Wales has considered the construction of non-solicitation clauses where the former client initiated contact with the ex-employee. In Baldwins (Ashby) Limited v Andrew Maidstone (PDF), the Court held that the substance of what passes between the parties will determine whether there has been a breach of a non-solicitation clause and that how contact is first initiated is not relevant. The case is a useful reminder of the value of including non-dealing restrictions in addition to non-solicitation provisions in commercial agreements and employment contracts.
What happened in this case?
The defendant, Mr Maidstone, sold his accountancy business to the Claimant (Baldwins (Ashby) Limited) for approximately £1m in September 2007. Following the sale of the business Mr Maidstone was employed by Baldwins until November 2009, when he moved to a firm called Charnwoods. The sale agreement contained a three year covenant protecting the goodwill in the company from Mr Maidstone ‘canvassing, soliciting or endeavouring to entice away’ any of his former clients. Baldwins brought proceedings against Mr Maidstone alleging that he was in breach of this covenant.
Mr Maidstone accepted that a few of his former clients had followed him to Charnwoods but denied that he ‘canvassed, solicited or enticed’ them away. Mr Maidstone, supported by four of his clients who gave evidence, contended that it was the clients’ own independent decision to move their custom to Charnwoods.
The Court distinguished the clause in question from a ‘non-dealing’ clause which is easier to police. The lack of a non-dealing clause meant that Mr Maidstone was able to undertake work for his previous clients if, in competition with Balwins, the clients solicited him to do so without his canvassing, soliciting or enticing them. In this case the onus was on Baldwins to prove that Mr Maidstone’s approach involved some ‘direct and targeted’ behaviour.
The Court found that both Mr Maidstone and Charnwood’s managing partner, Mr Barnett, were dishonest and unreliable witnesses. From the evidence the Court held that Mr Maidstone had entered into a secret agreement with Charnwoods to poach back clients he had sold to Baldwins for a second substantial reward in the form of commission payments from Charnwoods. The Court went on to analyse Mr Maidstone’s dealings with each client to determine whether there had been a breach in each case.
In particular the Court held that Mr Maidstone’s act of telling a client he was leaving and, when asked, explaining he was moving to Charnwoods, was not a breach of the non-solicitation clause. However, when the client said he wanted to move his business to Charnwoods and Mr Maidstone actively encouraged the client to do so and informed Charnwoods of this fact, he acted in breach of the restrictive covenant. In addition, a conversation with a client during a chance meeting was found probably to amount to a breach, while following up this chance meeting with a formal client meeting was a clear breach of the non-solicitation clause.
What does this case mean for employers?
The case provides useful guidance as to the types of behaviour that may be found to be in breach of a non-solicitation clause. In particular, it highlights the fine line between discussing a career move with clients and actively encouraging clients to move their business to a new employer and therefore, the need for potential claimants to establish exactly what has been said in the course of such discussions.
The case is also a useful reminder of the value of including a non-dealing restriction. The Court made it clear that if Mr Maidstone had been so restricted it would have been much easier for Baldwins to prove he was acting in breach and so, prevent him from taking any further action in relation to its clients. Covenants in sale agreements are looked on by the UK Courts with less disfavour than covenants in employment contracts (for example, a 3 year covenant in an employment contract would almost always be regarded as in restraint of trade and unenforceable, whereas it might be upheld if in a sale agreement). However, the desirability of having a non-dealing covenant as well as a non-solicitation restriction applies equally for employment contracts as it does for sale agreements.