Financial advisers looking to buy a practice should consider putting restraint clauses in place to maximise the benefit of the transaction, according to a litigation specialist.
“You need to look at the underlying circumstances as to whether or not a restraint is enforceable and what time is reasonable in regard to a particular circumstance as to whether the restraint will be enforceable or not,” Super Central head of litigation and dispute management David Nicoll said.
From a legal perspective, individuals need to take into account the special circumstances of the situation involving the restraint clause along with the interests of the public to determine the validity of the arrangement.
General considerations when deciding whether or not to set up a restraint of trade clause include the proprietary interest that is to be protected.
“A legitimate proprietary interest would be something like a business seeking to protect its client connections and relationships it has spent time and money fostering,” Nicoll said.
It must also be determined if the restraint clause is specific to a territory or a group of persons and a reasonable timeframe to protect the interest needs to be selected.
“The length of the restraint is paramount in all circumstances. Because an agreement is drafted and signed by the parties, it doesn’t automatically mean it actually will be enforceable. For example, an employee cannot be restrained for a very long period from gaining employment,” Nicoll said.
The last key element to consider, if setting up a restraint clause, is to determine the damage or loss that may come about from a breach of the restraint.
According to Nicoll, if a restraint clause was breached, the aggrieved party would look to apply for two types of court orders to address the situation.
The first of these would be an injunction to prevent further breaches of the restraint clause.
“For example, it would be to prevent an employee from continuing to contact clients of the employer,” Nicoll said.
The second would be to put in a claim for the amount of profits the business has lost due to the breach of the restraint clause.
