UK: Protecting A Partnership

Last Updated: 28 June 2006
Article by Robert Hill and Chris Holme

Once a partner decides to leave his firm to join a competitor, he will almost certainly be placed in a position where his interests conflict with those of his fellow partners.

The departing partner in most cases is going to want to ensure that as many of the clients who he services continue to instruct him at his new firm and he may well want his best associates to join him there. Conversely, the firm will be concerned to protect, as far as it can, its client base, employees and confidential information. The protection can arise either under common law or, as is often the case, under the firm’s partnership deed.

Protection for a firm whilst the departing partner is still a partner Many partnership deeds will have express obligations regarding confidential information and duties of loyalty. However, even if this is not the case, the common law provides a significant degree of protection.

Partners in a firm are bound together in a fiduciary relationship. The key element of this is the obligation of good faith due from each partner to all others which, perhaps most significantly here, means a partner must not place himself in a position where his obligations to the partnership and his own interests may conflict.

The effect of this is that a departing partneris going to be in breach of his fiduciary obligations if he approaches clients, employees or other partners of his firm with a view to encourage them to give their business to, or join, the new firm.

Partners looking to "sell" themselves to a new firm may well be tempted to disclose detailed information on clients and billing. The inclusion of such confidential information in any business plans for use in the recruitment process will almost certainly represent a breach of the partner’s fiduciary obligations.

He therefore needs to be very careful when preparing such a document and in considering what information, for instance regarding his current team, its members, clients and financial performance, to include.

The Hong Kong case of Deacons v White & Case (2003) provides clear examples of what not to do if you are a departing partner. In this case a departing partner was found to be in breach of his fiduciary obligations by encouraging and facilitating employees and clients to move to the new firm and by releasing confidential information in a business plan during the recruitment process.

Consideration of garden leave

Upon receiving notice of resignation from a partner, one of the first issues for a firm to consider will be whether to release the partner early from his notice period, as the partner will most probably wish, whether to require him to work out the notice period or whether to place him on garden leave.

Placing the partner on garden leave will often be the most desirable option if the firm is concerned about its hold on particular clients. It has the advantages of removing the partner from contact with clients and colleagues as well as from having easy access to a lot of confidential information.

However, two key disadvantages of the use of garden leave are the continued cost involved (the partner will continue to receive his drawings) and the risk of damaging relations with valuable firm clients who may be frustrated that they are unable to work with the solicitor of their choice.

If a firm is considering placing a departing partner on garden leave it will need an express entitlement in the partnership deed to do so safely.

Protection once the partner has departed

After departing, the ex-partner will continue to be bound by the duty of confidentiality in the same way as an ex-employee would - i.e. he may not disclose or use trade secrets (which may include billing and financial information along with marketing strategies).

However, this limited protection will not assist a firm worried about the solicitation of clients and employees by the ex-partner. Post-termination restrictive covenants are therefore desirable to prevent such solicitation. Some firms may also have in place non-dealing with clients and noncompetition covenants.

The familiar starting consideration is that restrictive covenants are prima facie void as a restraint of trade. They will only be enforceable if they protect a legitimate interest of the firm and they do not extend any further than is reasonably necessary to protect such interest.

Reported court decisions in relation to partners and the operation of restrictive covenants are rarer than those in relation to employees. However, it is clear from the decisions we do have that the courts will adopt a more relaxed approach to assessing the enforceability of partners’ restrictive covenants than those which purport to bind employees (see Robin M. Bridge v Deacons (a firm) (1985)). The key rationale for this is two-fold. Firstly, there is a greater equality of bargaining power assumed between partners rather than between employees and employers. Secondly, and perhaps more importantly, there is a mutuality inherent in partners’ restrictive covenants - any partner may either seek to rely on the covenant (if they are not the departee) or be subject to it themselves.

As a result, properly drafted non-solicitation and non-dealing clauses are almost certain to be upheld by the courts. The position with regard to non-compete covenants is in principle the same although the length of time over which the covenant purports to operate will be of great significance.

Conclusion

It may be very difficult for a departing partner to resist the temptation to approach clients and/or colleagues with a view to taking them to his new firm but resist he must until he has left his old firm if he wishes to avoid breaching his fiduciary obligations, along with any contractual duties he owes. Even after he has left his firm, the ex-partner may well still be restricted in what he can do if he is subject to well-drafted restrictive covenants.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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