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Restrictive Covenants

27 November 2012

The clauses dealing with restrictive covenants in a partnership deed are all too often overlooked by both sides at the time the associate is promoted or the collateral-hire appointed.

After all it is the honeymoon period and, in the past, firms took the then sensible view that clients should and would go where they liked.  However, in more recent times, given the recession and its aftermath, firms are far more active in seeking to retain clients following a departure.

The starting point, of course, is that restrictive covenants are void.  Only if they are reasonable in scope, geographical area and duration; protect legitimate business interests; and go no further than is reasonably necessary to protect those interests will the Court uphold them.

Restrictive covenants usually seek to protect a departing partner from seeking to attract the firm’s clients to his new practice; from dealing with their business; or from trying to poach other members of the firm to join him.

For over a quarter of a century the Courts have enforced these covenants on the basis that partners had more or less equal bargaining power; the covenants applied to all partners; and the firm was entitled to protect its goodwill.  However, if the firms of today, those factors are decreasingly at play with greater centralised management; a fluid legal market; and goodwill not featuring to the same extent as it once did.  In the light of these circumstances, a Court may approach the enforcement of such covenants with considerable care.

Consequently, whether the managing partner or a prospective new partner, considerable thought ought to be given to those clauses within the partnership deed.  That exercise should sensibly take place at a regular review of the arrangements of the partnership or on the admission of a new partner.  When it shouldn’t take place is at the point a partner is about to leave.

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