Restraints of trade: important principles for FSPs and advisers

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A judgment handed down by the Labour Court highlights important legal principles that FSPs and financial advisers should keep in mind when it comes to restraint of trade agreements.

What the court called “fierce and direct” competitors in the wealth management and advisory space were among the parties to the matter: AdviceWorx, the first applicant, and Wealth Associates South Africa, the eleventh respondent.

About half the staff at the Gqeberha and Cape Town offices of AdviceWorx and AdviceWorx Advisory (collectively referred to as ADX) handed in their resignations between the end of August and September last year.

Many of these staff immediately took up employment with Wealth Associates SA and Wealth Associates Central (collectively, WA).

As a result, ADX brought an application to enforce its restraint of trade agreements and/or confidentiality undertakings against 10 former employees: eight financial advisers, the head of its financial adviser business in the Western Cape, and a senior para-planner.

Carmel Wealth, which owns WA, was also cited as a respondent.

The financial planners serviced 1 918 clients while employed by ADX. Following their departure, 820 clients terminated their relationship with ADX and moved to WA, while a further 433 clients retained only a partial mandate with ADX.

The value of the clients when the advisers were with ADX was estimated to be R2.5 billion.

In December last year, ADX obtained an interim relief order that enforced the restraints of trade and confidentiality agreements against the former employees.

On 23 February, the Labour Court granted ADX a final order interdicting the eight advisers from in any way or capacity being engaged by WA and Carmel for 12 months, from 1 October 2023 to 30 September 2024.

For the same period, they were also interdicted from persuading, encouraging, or inducing any of AdviceWorx’s employees to leave its employ. They were also prohibited from persuading, encouraging, or inducing anyone who was an ADX client as of 30 September last year from ending their relationship with ADX or divesting any investments made through ADX.

The court also awarded costs against the respondents.

The full details of the final order can be found in the judgment.

The judgment once again shows that restraints of trade covenants are enforceable, notwithstanding the misconception that these agreements are unconstitutional. It illustrates other important principles in respect of restraints of trade.

Value of client information

First, the court confirmed that an FSP’s client information is a protectable interest.

Acting Judge Sean Snyman said a client or customer base could be described as an intangible asset that accrues to the employer’s business in the form of what is known as goodwill.

“Especially in the financial services industry, this goodwill is one of the primary assets of the employer’s business upon which its success is dependent. The financial adviser employees in essence maintain and cultivate this goodwill, for the purposes of generating and also maintaining revenue. Without this goodwill, a financial service provider business has little value,” he said.

The court drew attention to the nature of the working relationship between the advisers and the clients, saying it was marked by trust and confidence and was direct and close.

“It is the kind of relationship where it can be confidently said the FA [financial adviser] respondents would carry the clients in their pocket. It is also undisputed that the services are of such a nature that the rendering thereof can with relative ease be moved to a new service provider. This constitutes a proper protectable interest for the purposes of the enforcement of a restraint of trade,” Snyman AJ said.

Although the judge was referring specifically to the matter at hand, his observations about the nature of the adviser-relationship are true in a broader sense.

He went on to cite what the Supreme Court of Appeal (SCA) stated in Rawlins and Another v Caravantruck (Pty) Ltd: “The need of an employer to protect his trade connections arises where the employee has access to customers and is in a position to build up a particular relationship with the customers so that when he leaves the employer’s service, he could easily induce the customers to follow him to a new business […]”

Clients belong to the FSP

Further to the issue of an FSP’s protectable interest, the judgment underscores that once an adviser signs a mandate with an FSP, the adviser’s clients become the clients of the FSP, even if the adviser signed up the clients before accepting the mandate.

Snyman AJ said the close working relationship between clients and an adviser often results in the adviser describing them as “my clients”, “but that does not make it so”.

He said the Labour Court specifically addressed this issue in TWK Agriculture Ltd v Wagner and Another. The court held as follows with respect to a broking relationship:

“The applicant’s interest in those connections is an important aspect of the applicant’s incorporeal property in the form of goodwill, and it is trite law that it is entitled to protect that interest. When the respondents dealt with those clients, they did so on behalf of the applicant’s business and not for their own account. Whether those clients were ones that they had originally brought into the applicant’s business through the sale agreement, or whether those with clients they acquired in the course of working for the applicant, the insurance business and relationship developed with those clients and was that of their employer and not theirs to exploit for their own personal gain, even if they had been responsible for obtaining such business or sustaining it through their personal relationship with those clients.”

Solicitation of clients

Related to the above is what the court held about the post-resignation solicitation of clients.

One of the defences raised by the respondents was that they did not solicit the clients to stay with them when they moved to WA, but the clients, of their own accord and for their own reasons, decided to follow them.

Snyman AJ said this proposition was “untenable”, and if ascribed to, would render most trade connection restraints completely valueless, particularly in the service sector.

“Simply described, all that an employee would have to do to defeat a restraint is to say it was not me, but it was the client, and it will be virtually impossible to prove the contrary, especially considering that the client obviously would support the employee. In fact, this kind of situation is still regarded as client solicitation, in the form of ‘indirect solicitation’.”

He said the High Court, in Experian SA (Pty) Ltd v Haynes and Another, said the following about the argument that the clients instigated the contact and not the employee, and thus it did not amount to solicitation:

“This argument is devoid of merit: it has been held that it makes no difference whether or not an employee contacts the customers of his ex-employer or whether such customers contact him. Both forms of conduct amount to solicitation of the customers of the ex-employer, which is impermissible during the restraint period.”

Snyman AJ said ADX’s restraint of trade agreement specifically provided for indirect solicitation.

“That being so, and even if the individual respondents were approached by the clients they serviced at ADX of those clients’ own accord and initiated no contact themselves with those clients, it simply does not matter. What the individual respondents needed to do was to turn those clients away and inform those clients that they cannot be assisted because of the restraint of trade,” he said.

Reciprocal performance defence

Another defence raised by the respondents was exceptio non adimpleti contractus – “exception of non-performance of contract”. This defence allows each party to a reciprocal contract to refuse the performance of an obligation under the contract if the other party has not performed its respective reciprocal obligation.

ADX and the financial advisers had entered ownership participation agreements. The respondents submitted that ADX failed to honour these agreements. They argued:

  • The ownership participation agreements, the employment agreements, and the restraint agreements were reciprocal and should be considered in conjunction with one another because they formed one holistic package.
  • Because ADX failed to honour the ownership participation agreements, they were excused from fulfilling their undertakings in the restraints of trade and confidentiality agreements.

Snyman AJ rejected the respondents’ exceptio defence for various reasons. Notably, he concluded there was no reciprocity between the ownership participation agreements and the employment and restraint agreements. “They are separate from one another. The performance of the one is not dependent on the performance of the other.”

The key take-away for advisers who want to rely on the reciprocal performance defence is to ensure that:

  • any benefits offered in return for restraint and non-solicitation undertakings are quantifiable, tangible, and deliverable; and
  • it is explicitly contracted that the restraint and non-solicitation undertakings are subject to the provision of any such benefits.