Drafting partner restrictive covenants in Irish partnerships
Nov 18, 2017
Clare Murray and Bernadette Quigley explain why you should put restrictive covenants into place now to ensure you avoid conflict in the future.
Post-termination restrictive covenants are crucial in protecting a partnership’s confidential information, client and trade connections, workforce stability and goodwill, which is why they are often the source of disputes between partners in professional services firms.
The drafting and enforceability of restrictions can vary, and sometimes the significance of the precise wording of a restrictive covenant does not come into focus until a partner seeks to exit the partnership to join a competing firm.
While there is fairly extensive case law governing the interpretation of employee restrictive covenants, the same is not true in the case of partner restrictive covenants. However, the limited guidance available from the courts about restrictive covenants concerning partners does make clear that it is imperative that firms and their partners take external legal advice when drafting such restrictions.
It is generally accepted that more onerous restrictions are likely to be enforceable against partners than would be enforceable against employees. This is because partners enjoy substantial bargaining strength and should accordingly expect to be bound by the commercial terms to which they have agreed and from which they benefit.
The true status of an individual is paramount to the enforceability of restrictive covenants. It is necessary to look beyond the label of ‘partner’ and assess the status of the individual concerned, such as involvement in management, remuneration structure and capital contribution.
It should also be remembered that partners cannot claim constructive dismissal. Unlike employees, a fundamental breach of contract by one party does not entitle the other party to bring the contract to an end, and have the restrictive covenants fall away.
As regards the enforceability of restrictive covenants in Ireland, the length of any restriction must be tailored to the specific role and business. In practice, restrictions tend to last for periods of between six months to two years’ post-retirement. It is necessary to consider what legitimate interest the firm is seeking to protect and for how long it needs to be protected in the specific context of the partnership and its partners’ activities. In short, you have to be sure restriction is reasonable.
Liabilities and remedies against an individual partner in breach of their obligations can potentially be very significant. Partners can face costly arbitration or court proceedings, including applications for injunctive relief, in relation to the enforcement of restrictive covenants. Hiring firms can also face potentially significant liability and be named as co-defendants in proceedings, particularly if there is a suggestion that they have been involved in procuring and/or inducing the outgoing partner’s breach of their restrictive covenants.
Partners must not lose sight of the fact that they owe fiduciary duties over and above contractual duties – which potentially include the duty to report their own wrongdoing as well that of their colleagues. Liability and remedies for breach of fiduciary duties are potentially significant and could, in theory, include clawback of profit share.
These factors underline how important it is to ensure from the outset that restrictive covenants are well-drafted and fit for purpose. Partnership restrictions are not to be taken lightly by a departing partner. Restrictive covenant disputes can result in costly, stressful and time-consuming arbitration or court proceedings. In order to manage these risks in a timely and cost-effective manner, it is important that both firms and partners get advice early on.
Clare Murray is Managing Partner at CM Murray LLP in London, and Bernadette Quigley is a Barrister specialising in commercial and partnership law in Dublin.
Read Clare and Bernadette’s Chartered Accountants Ireland article here.