It is a long established principle that employees owe an implied duty to serve their employer with good faith and fidelity.
In most cases, this duty will include an obligation not to compete with their employer and to inform their employer about the activities of competitors which may harm the employer’s business. The High Court has recently considered how to balance the duties where employees are leaving to join a competitor.
Customer Systems Plc v Ranson and Others
The case concerned a company who provided niche IT consultancy services to large clients. In February 2009, one of the company’s more senior employees, Mr Ranson, left and set up a rival company (Praesto).
As it transpired, Mr Ranson had actually formed Praesto in 2007, writing business plans, registering a web domain and having preliminary discussions with potential clients. Upon resigning and then ‘launching’ Praesto in 2009, other employees of Customer Systems joined him, assisting Praesto in the interim whilst still employed by Customer Systems.
Customer Systems brought claims against its former employees, alleging breach of fiduciary duty, breach of restrictive covenants and breach of the duty of fidelity.
The High Court held that Mr Ranson and the other employees had breached the implied terms of their contracts by assisting Praesto – they were effectively acting in competition.
The facts led the court to consider a wider issue – namely the position of an employee who learns of confidential matters relating to competition from a potential new employer. Does the employee have a duty of confidence to the competitor regarding the information obtained during the recruitment process or must they disclose it to their current employer?
In this situation, the High Court held that an employee should be able to seek new employment without having to disclose what they have learnt in doing so – providing that the employee does not assist the new employer to compete with the current employer.
Where senior employees are given access to clients and are able to develop a relationship with them, employers should take steps to guard against the employees setting up in competition or joining a competitor.
Whilst it is possible to rely upon terms implied into a contract, it is significantly better to include restrictive covenants as express terms of an employee’s contract. If well drafted and ‘reasonable’ in terms of the restrictions they impose, employers can rely upon them – this can enable an employer to apply for an injunction to prevent breach and protect their business interests. Where a breach of restrictive covenants has already occurred a former employer can claim substantial damages for losses sustained as a result of breach by the former employee and also against the competitor for inducing breach of contract by the former employee.
The above case is a useful reminder that employers can successfully claim against former employees; however it appears that employees may not be under a duty to pass on confidential information gained whilst ‘job seeking’.
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If you have any comments or queries please do not hesitate to contact Joanne Holborn, Adrian Maitra, or Tom Scaife on 01228 552600. Alternatively, email one of the team at HR@baineswilson.co.uk.
06 January 2012