Accountants could have to sign draconian restrictive covenants when they join a new partnership following a ruling in the High Court, lawyers have warned.
The precedent-setting ruling potentially gives the green light to accountancy firms to bar their partners from poaching clients for up to three years after they leave to join a rival firm or to set up their own business.
With many clients preferring to stick with the person they know rather than switch to another partner in the firm, the court’s findings are bound to make life more difficult for accountants in future.
The ruling follows a civil action brought by a small Wembley firm of accountants, Taylor Stuart, against former employee Timothy Croft, who took 30 clients with him when he left to form his own practice.
Before leaving, Croft signed a restrictive covenant preventing him from soliciting, canvassing or enticing away clients from the firm for three years. The agreement said that Croft could face damages claims equivalent to two years’ fees per client if he broke its terms.
Croft’s solicitors Vanderpump & Sykes argued that a three-year restriction was excessive, but the judge declared that, on the basis of previous legal precedents, he had no doubt that a three-year restraint was reasonable.
Despite his ruling, the judge refused to award damages to Taylor Stuart.
He ruled that the company’s damage clauses were unreasonable and that it should have claimed for the actual losses incurred under common law.
Mark Heselton, a partner with Vanderpump & Sykes, said the finding could encourage more accountancy firms to adopt restrictive employment contracts.
‘There could be many firms that will think a three-year restriction will be very helpful,’ he says. However, they will have to word any penalty clauses carefully, he warned.