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Guest Blog – Nathan Combes from Lupton Fawcett Lee & Priestley

Picture the following scenario; you’re a small business and engage an employee at a relatively junior level. Over the years, the company expands and the employee rises through the ranks. As the businesses’ reputation grows it wins a series of valuable new contracts and clients (with the employee playing a key role in securing new business and managing customer relationships).

Over time and unbeknown to you, the employee becomes disgruntled with his lot and hatches a plan to defect to a competitor. Moreover, the employee plots with that competitor to encourage other employees to leave with the expectation that this will enable it to take a large chunk of your business. The plan succeeds. The employee resigns, joins the competitor and shortly after is joined by a significant number of your other employees.

The actions of your former employee leave your company on the brink of commercial disaster and it becomes clear that if you do not take action (and take action swiftly) then all may be lost. You dust down a copy of the employee’s contract of employment and discover to your horror that it was never updated. The contract is very basic and does not contain any post termination restrictions or provisions governing the use of confidential information. Can anything be done?

The above scenario (as many employers have discovered) is not particularly rare or unusual. It is our experience that employers can often “take their eye off the ball” when times are good, and fail to take active and effective steps to minimise the prospect of employees’ defecting to competitors and taking customers with them.

It goes without saying that employers put themselves in the strongest possible position by regularly reviewing and updating their employees’ contracts of employment, and ensuring that those contracts contain appropriate and well drafted clauses which seek to protect the business from unfair competition, and also prevent the misuse of the employer’s confidential business information. However, for employers who have failed to do this, the recent High Court decision in Thomson Ecology Ltd and another v APEM Ltd and others [2013] should provide a glimmer of hope that if effective legal advice is sought, and sought quickly, then all may not be lost.

Briefly, the Thomson case concerned Mr Hall (a biologist) who was employed by Thomsons as the operations manager at its marine biology laboratory. On 27 November 2012, Mr Hall resigned, and on 2 January 2013, he started working for a direct competitor known as APEM Ltd. Shortly afterwards, a significant number of Mr Hall’s former colleagues also resigned from their employment and commenced working for APEM Ltd. It quickly became apparent to Thomsons that Mr Hall had been plotting with APEM Ltd over a number of months (whilst his employment with Thomsons was continuing) to transfer most (if not all) of Thomsons’ business over to APEM Ltd.

We’ve already seen that Thomsons weren’t able to rely on any express contractual provisions against Mr Hall, so what could Thomsons do?

The answer in short is that Thomsons relied on the implied duty of fidelity. It is our experience that employers and employees are often unaware of the various implied terms which are inserted by operation of law into all contracts of employment and of which the implied duty of fidelity is potentially one of the most useful and important. The duty of fidelity was perhaps best summed up by Lord Woolf MR in the infamous Faccenda Chicken case when he stated:

“The employee must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third party without the informed consent of his employer”.

Thomsons and their lawyers issued a claim against Mr Hall and APEM Ltd in the High Court and as part of that claim made an application for summary judgment in respect of various issues, including Mr Hall’s alleged breaches of the implied term of fidelity. Thomsons didn’t succeed on all counts but the application for summary judgment was largely successful.

The court found that Mr Hall had breached the implied duty of fidelity because he had failed to inform Thomsons of the plan to poach staff, he had shared confidential information with APEM Ltd concerning details of staff salaries, he had arranged meetings at his home with some of Thomsons’ employees to discuss their proposed ‘defections’ and he had colluded with APEM Ltd by assisting it to identify and recruit members of Thomsons’ staff.

The Thomson case highlights the potential usefulness of implied terms to employers seeking to protect their business in circumstances where an employee has effectively been actively competing during the continuance of their employment, and that the absence of express restrictions and confidentiality clauses need not prevent action from being taken.

The case also serves as a timely reminder to employees who may be intending to compete (either on their own behalf or with an established competitor) that the implied duty of fidelity will limit the extent to which those activities can lawfully be carried out and that if they overstep the mark then they (and in some cases the competitor also) run the risk of being exposed to costly litigation (including claims for costs and damages).

Our 5 top tips for protecting your business from unfair competition

Implied contractual terms will sometimes come to the rescue of employers when all else fails. However, employers should maximise the prospect of preventing and defeating unfair competition from former employees and competitors by:
ensuring that properly drafted restrictions and clauses governing the use of confidential information are in place from the outset;
remembering that a court will judge the reasonableness of restrictions by reference to the circumstances that existed at the time that they were entered into. It is vital therefore that those restrictions and other important contractual clauses are kept under review and where appropriate updated from time to time;
not letting one employee assume the responsibility for managing a majority of key client relationships;
trying to ensure that employees are motivated and that you maintain competitive in terms of pay and other contractual benefits, terms and conditions. It is always better if possible to incentivise and reward employees in order to reduce the prospect of them becoming tempted to ‘jump ship’ and join the competition; and
taking prompt professional advice; many employers delay taking advice and/or fail to preserve evidence with potentially disastrous consequences in terms of their ability to protect their business.

If you would like to discuss any of the issues raised in this article, Lupton Fawcett Lee & Priestley has specific employment law expertise in this area. For expert advice, please contact Nathan Combes on 0113 280 2158 or nathan.combes@lf-lp.com