First off, a confession. I can’t make your contracts ‘bullet-proof’, but there are things you can do to make your contracts better.
It’s not until something goes wrong that you really learn the benefit of your contract, as well as your lawyer.
Let’s start with the kind of contracts you’re likely to come across in your business lives that affect you the most. One of these might be your agreement with your discretionary fund manager (DFM). It’s worth reviewing this contract and taking the time to understand who is liable for what and at what point, and to let the client know.
Or it might be your employment contracts, client agreements or your appointed representative contract. Here, I am going to spend time briefly considering the first two of these.
There are three key issues which are frequently raised in relation to employment contracts. These are:
- Can I stop someone who is leaving from taking clients, or even a whole team with them?
- Can I stop that person actually acting for my clients, rather than just stopping them from contacting my clients? What about if those clients contact them independently?
- Can I stop former employees from dealing with clients they brought to my firm? In these circumstances, whose clients are they, and what is the legality around this?
The answer to all of these questions is yes you can, as long as you have the appropriately drafted employment contract.
These are ‘restraint of trade’ clauses, and the law says where these exist they must not be unduly onerous. They must not go further than they need to in order to protect your legitimate business interests as at the time you are entering the contract.
For example, you may take on a junior member of staff thinking that that person is going to become a senior member of staff. You are therefore going to want to protect your business interests to a greater extent.
However, you may find your restraint of trade clauses unenforceable if they are more onerous than they need to be for their junior role.
So what do you do? Well, you can amend your contract and increase the effectiveness of those post-termination restrictions, but you have to give something in return. There has to be consideration for the fact you are making those clauses more onerous for the employee.
This could be more money, or more holiday, but there has to be more something. That consideration must be directly linked to the stricter post-termination provisions.
Providing your client with a client agreement is a regulatory obligation – you must send it before you provide services to them. You must also keep a copy of that agreement for the duration of your relationship (or where you are giving pension transfer advice, you have to keep a copy of that client agreement indefinitely).
However, that regulatory obligation doesn’t mean you cannot protect your legitimate business interests. It’s not about simply saying to your client: “I will advise you, you will pay me, let’s crack on.”
In a legal sense, the client contract will define the scope of your duty to your client. If I were to sue an adviser, I would do so on several bases. These would be breach of contract, breach of statutory duty or negligence.
Yet it’s important to understand these are not three completely separate things. The question of whether or not you have breached your statutory duty, or whether you have been negligent, is dictated to a large extent by your contract. It is not the case that one size fits all.
A client agreement is a contract the same as any other. Therefore someone who signs that contract, regardless of whether they have read it or not, ought to be bound by that contract.
If you are concerned about protecting your business, then you need to start that from day one. It’s not appropriate to send out a pro forma contract which has no thought behind it. You must consider what it is you will and will not do for your client.
The only thing you can’t do is contract out of the regulator’s rules. If contract is king, then the regulator’s rules are the emperor.
Disclaimers and limited liability
Sometimes I’m asked about the inclusion of disclaimers.
My answer is you can put these in your terms and conditions of business, while being mindful of the FCA’s concerns around treating customers fairly. There’s a whole section on the FCA website on what are considered to be fair terms and what are not.
That said, restricting your liability is not necessarily unfair. Your client will be protected by both the Unfair Contract Terms Act and by the FCA. The regulator can require you to change your contract if you have been unfair, but I haven’t found any instance where the FCA has asked someone to change their contract where they are limiting their liability.
However, any limit on liability has to be reasonable as at the time you are entering into the contract otherwise a court may find that it is unenforceable.
For example, you may limit your liability to pay damages to the extent of your insurance indemnity, but you must give a specific figure.
You might also want to limit the period during which a client can issue court proceedings (you cannot limit the time period for FOS complaints). I have seen limits of liability used very successfully where the limit is set to six years, rather than a full 15-year term.
It’s worth mentioning that if your clause is found to be unreasonable, it is simply struck out of your contract. So there is no downside to seeking to protect your business in a reasonable manner.
This article is written from a presentation given by Philippa Hann at Pension Debate III