Protect your goodwill
In recent years there have been a number of high profile cases in the High Court dealing with the protection of goodwill and the enforceability of restrictive covenants.
For most owners of private medical practices, the goodwill in the practice is one of, if not the, most valuable financial assets they will own. It is essentially the value of the reputation of the practice and is intrinsically linked to the patients. Unlike NHS goodwill, which it remains a criminal offence to buy or sell, private medical goodwill can be bought and sold in much the same way as any other goodwill and therefore has quantifiable worth attached to it.
For this reason the owner of a practice is likely to want to protect their goodwill and this may be achieved by a restrictive covenant which, if necessary, can be enforced by the Courts.
There are two alternative circumstances in which a restrictive covenant would be considered necessary. Firstly, those purchasing a practice will want to protect the goodwill they have bought by seeking to prevent the seller from setting up in competition immediately after the sale. Secondly, those with established practices will want to prevent those engaged in the practice from seeking to take patients away with them if they depart and set up a rival business.
In either case a carefully drafted restrictive covenant, contained within either the business transfer agreement (BTA) in the former case or within the consultant’s agreement in the latter case, can ameliorate the risk.
Without having a restrictive covenant in writing, the practice owner runs the risk of their goodwill being diluted if the incumbent (be they the original owner or a consultant – the leaver) leaves the practice and seeks to take advantage of the relationships they have built up direct with the patients whilst at the practice, with the intent of poaching them.
The following principles should be considered for inclusion within either a BTA or a consultant’s contract:
- A statement that the goodwill of the practice belongs to the practice owner;
- A complete bar on the use of the practice name indefinitely; and
- Anti-competitive restrictions on a time limited basis (see below).
In drafting a restrictive covenant it is essential to have regard to the specific business in question. It should never be assumed that “one size fits all” as that approach could risk the enforceability of the restriction at all.
It is essential to ensure a restrictive covenant is reasonable and no wider than necessary to protect the practice’s legitimate business interests. The clause amounts to a restraint on an individual’s ability to work, coupled with a restraint on the ability of a patient to see the practitioner of their choice. It may be construed as being contrary to public law if there is any suggestion the nature of the restrictions imposed is greater than is necessary to protect the interests of the specific business in question. If challenged, the restrictive covenant could be found to be unreasonable in the circumstances and therefore unenforceable.
It is therefore essential to consider the following principles:
This must be reasonable in order to be enforceable and for this reason it should be limited. In fact, the greatest risk to the practice owner arises the day after the leaver departs the practice and the impact of setting up a rival business is likely to dilute over a period of time. On this basis it is worth protecting the initial period at all costs, even if it seems this is compromising longer term future protection. The duration is usually therefore limited, more so in the case of a consultant (when it is likely to be limited to e.g. between six months and one year) than in the case of a seller, when it may be extended to e.g. up to two years.
A restriction on taking the patients of the practice is likely to be considered sensible in almost all cases as essentially this goes to the very heart of the requirement for the restriction. It may also be considered wise to extend the non-solicitation clause to key members of staff.
Careful thought must be given to the area of the restriction – and indeed whether it is relevant to impose a geographical restriction at all. In the case of a very specialist practice where patients are prepared to travel long distances to the practice (e.g. in Harley Street) it may be considered irrelevant and a non-solicitation clause may be all that is necessary.
Beyond this however, the extent of any geographical restriction should vary depending upon the specific circumstances of the practice. For example, in Central London, a restraint of just a few hundred yards or even a specific road might be all that is reasonable, whereas in a more rural setting a five mile radius (or even more) might be acceptable.
Restraints of trade may be considered by the Courts to be unenforceable purely because the field of business encompassed is too wide. The restriction should reflect what needs to be protected and no more than this. For example, it would not be reasonable to seek to restrict a leaver from undertaking NHS medical work elsewhere if the practice owner’s business is 100% private.
Where relevant, a practice owner should be entitled to seek to limit the leaver from practising as a sole trader, in partnership with others as a director or shareholder of a body corporate, or as a practitioner engaged or employed by others. Exceptions can sometimes be agreed such as undertaking emergency treatment or treating immediate members of the leaver’s family.
As an added incentive to encourage compliance, a financial recompense may be built into the agreement for breach, thereby making it less likely the leaver would think it worthwhile taking the chance of breaching the covenant. This would require careful drafting, reflecting the specific circumstances of the practice, as anything which could be construed as being a penalty would not be enforceable.
In conclusion, a practice owner needs to strike the right balance between dissuading any leaver from breaching a restrictive covenant whilst ensuring that they are not so wide as to risk them being held unreasonable and therefore unenforceable. Negotiation of the clauses will be part and parcel of agreeing the BTA or the consultancy agreement as relevant and specialist legal advice should be taken to ensure the practice owner’s interests are protected.