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3 July 2012

Employee competing with employer

Steeles Law’s Head of Employment, Oliver Brabbins, considers the implications of a recent Court of Appeal decision in which an employee who set up a business competing with his employer was held not to be in breach of his contract of employment.

In this case, the employee (R) had been recruited straight from university as an applications consultant by a specialist IT consultancy firm, Customer Systems plc (CS).  During the period of his employment, from 2001 to 2009, R was promoted a number of times and in his final year of employment he was responsible directly or indirectly for 59 per cent of the group’s total revenue.  Crucially to the case, however, R’s contract of employment remained unchanged during the period of his employment.  The original contract he entered into in 2001 contained a confidentiality provision, but no post-termination covenants to restrict his activities after his employment ended.

R resigned and left CS in February 2009.  Both before and during his notice period, he had made preparations to establish a competing business, including discussing potential work with existing clients of CS.

CS brought a claim against R for breach of his contractual obligations, and breach of his fiduciary duty to the company by failing to report his contact with the clients to CS.  A ‘fiduciary duty’ is essentially a duty to act in the company’s best interests and is a duty owed by all directors, but not necessarily employees, of a company.  The company’s claim was upheld by the High Court.

R’s appeal to the Court of Appeal has since been successful.  The Court did not agree with the judge’s conclusion that there was no material difference between R’s situation and that of a director.  The judge had failed to take into account the express terms of R’s contract and had failed to properly consider whether, as an employee of the company, R had any fiduciary duties at all.  In the Court’s view, there was nothing to suggest a fiduciary duty applied to R, and there was no express contractual term prohibiting him from contacting clients or setting up in competition.

Comment

This case illustrates very well the danger of failing to ensure that contractual documentation is regularly reviewed and updated to ensure that it accurately reflects the relationship between the parties and provides adequate protection for the employer.  A contract of employment for a junior employee will rarely be suitable for an employee who has been promoted to a more senior position and who is likely to pose a much greater risk to the employer’s business when he or she departs.

Confidentiality provisions and post-termination restrictions (“restrictive covenants”) should always be carefully tailored, depending on the nature of the business and the position of the individual employee within that business.  When an employee is promoted, proper consideration should be given to the question of whether a new contract of employment is appropriate to reflect the employee’s seniority.

A copy of the Court of Appeal’s judgment is available here

 

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