In AFH Independent Financial Services Ltd and another v Baker and another, the High Court considered the enforceability of restrictive covenants by a parent company against a financial adviser described as self-employed. The court looked at the interaction between worker status and the Contracts (Rights of Third Parties) Act 1999 (the 1999 Act) and whether a group company could circumvent the statutory position by relying on a trust of a promise. The judgment provides a timely reminder that standard group-company enforcement provisions may be ineffective where the individual engaged under the contract qualifies as a worker or employee.
Background
AFH Independent Financial Services Ltd (AFH), engaged the defendant, Ms Baker, as a self-employed independent financial adviser. AFH Group Ltd was the parent company of the AFH group, a substantial financial advice business serving hundreds of thousands of retail customers through various group companies.
As part of Ms Baker's engagement, she entered into contractual documentation containing restrictive covenants. The documentation expressly sought to extend the benefit of those covenants beyond AFH itself to other group companies. In particular, the agreements stated that the covenants were intended for the benefit of AFH and each member of its group and that each group company could enforce the deed "to the fullest extent permitted by law" as if it were a party to it.
Following her departure to join a competitor, AFH and the parent company alleged that Ms Baker had breached post-termination restrictions by dealing with former clients.
Could the parent company enforce the covenants?
One of the issues was whether the parent company, who was not a party to the contract, could enforce the restrictive covenants. The clauses set out in the Ms Baker’s contract were intended to bring a third party within section 1 of the 1999 Act, allowing that third party to enforce contractual terms made for its benefit. However, Ms Baker argued that she qualified as a worker and relied on section 6(3) of the 1999 Act, which provides that section 1 confers no right on a third party to enforce "(a) any term of a contract of employment against an employee (b) any term of a worker's contract against a worker (including a home worker), or (c) any term of a relevant contract against any agency worker".
Ms Baker was a worker
The court applied the principles established by the Supreme Court in the case of Pimlico Plumbers Ltd v Smith, which confirmed that an individual may qualify as a worker notwithstanding being labelled as a self-employed consultant where they undertake to perform services personally and are not genuinely operating a business undertaking work for a client or customer of their own. The judge concluded that Ms Baker had worker status.
The judge accepted that, absent the worker issue, the contractual wording would have been sufficient to confer enforcement rights on other group companies under the 1999 Act. However, section 6(3) prevented the parent company from relying on the 1999 Act to enforce the restrictive covenants in her worker’s contract against Ms Baker because she was a worker. Only AFH, as the contracting party, could pursue the claim.
Could the parent company rely on a trust of a promise?
The parent company advanced an alternative argument that the restrictive covenants were held on trust by the company for the group companies under the common law concept of a trust of a promise.
The court rejected this submission. The judge noted the starting point of English contract law, the doctrine of privity of contract, under which only parties to a contract can enforce it. Although authorities recognise that, in some circumstances, a contractual promise may be held on trust for a third party, this principle has traditionally been applied in cases involving promises to pay money or transfer property. The judge observed that neither party could identify any authority in which a trust of a promise had been used to enforce restrictive covenants or confidentiality obligations.
In addition, the contractual wording in question did not demonstrate an intention to create a trust. While it showed an intention to confer benefits on group companies, that was more naturally explained as an attempt to engage the 1999 Act. Accordingly, the parent company's claim failed.
Were the restrictive covenants enforceable?
The court also considered whether the restrictive covenants themselves were enforceable. The restrictions operated for 12 months after termination and included both a non-solicitation covenant and a non-dealing covenant. The court was satisfied that the non-solicitation restriction was reasonable.
AFH's evidence showed that advisers typically had annual contact cycles with clients. In those circumstances, a 12-month period was justified because a shorter restriction would not adequately protect AFH's client connections. However, the non-dealing restriction was unreasonable as AFH already had sufficient protection through the non-solicitation covenant. Significantly, AFH's own evidence suggested that clients generally remained with the business unless they were actively approached. Against that factual background, preventing Ms Baker from accepting business from former clients who approached her of their own accord went further than was reasonably necessary to protect AFH's legitimate business interests. The non-dealing covenant was therefore an unenforceable restraint of trade.
Why does this matter for employers and businesses?
Employers should regularly review any restrictive covenants that they have in place with employees, workers or anyone who is described as a self-employed consultant who may fall within the worker category. If restrictive covenant or confidentiality protection is required for third party group companies, consider how this can be achieved in light of this case. The 1999 Act will not assist, however clear the wording. It seems unlikely now that a trust argument will be effective either. The safest option is to ensure that any group company that needs protection signs up to a direct agreement with the individual, giving them the direct right to enforce.
