Fiduciary Duties - Competition By Former Employees Directors

Many senior employees are asked to sign contracts containing restrictive covenants which limit their ability to e.g. solicit work from clients or customers, to poach staff or work within a prescribed area on leaving their employment. Such contractual terms must be very carefully drafted to ensure that they are not a restraint of trade, and they must be reasonably necessary to protect an employer’s business. The extent of the period of the restriction and the geographical area must both be reasonable, otherwise the restrictive covenants will not be enforced by the courts.

It has long been established that Directors also owe fiduciary duties to the company, over and above any express contractual provisions.   If these duties are breached a claim in damages can be made, and an injunction granted to restrain breach of those duties.

Do Employees owe Fiduciary duties to their Employers?

In the case of Ranson v Customer Systems Plc [2012]EWCA Civ 841  the Court of Appeal distinguished between the obligations owed by employees to their employer and the fiduciary duties owed by Directors to their companies.  In this case, Mr Ranson set up a competing business. He did not tell his employer what he was doing, and some of the work which he obtained arose out of discussions which he held with his employer’s customers during his notice period.   

There were no restrictive covenants in his contract of employment which the employer could rely on. The only contractual terms of any relevance were an obligation to do his job faithfully and the implied term of trust and confidence (which is implied into every contract of employment).  This did not help the employer, and so the employer claimed that Mr Ranson owed them a fiduciary duty to tell them what he was doing.   The Court of Appeal held that no such duty existed for an employee – unlike a company director.   

Employees were not generally required to disclose their own misconduct, and unless they were created by the employment contract, employees did not owe fiduciary duties to their employer. Obligations of trust and confidence etc did not equate to the loyalty required of a directorfiduciary. In an ordinary employment contract whilst employer and employee must have regard to the other’s interests, an employee is not required to subjugate their own interest to those of their employer.  Further, the Court of Appeal held that Mr Ranson’s acts were preliminaries to starting a competing business after leaving his employment, and this was something which he was entitled to do.

A word of warning:   Even if not expressly set out in a contract of employment, the courts will generally imply a confidentiality term into a contract of employment where it is reasonable to do so, and may restrain any attempt to use genuinely confidential information or trade secrets.

What if an Employer discovers that an Employee is preparing to compete?

This was the situation in Khan & Another v Ladsker Child Care Limited UKEAT/0036/12/DM.  In this case, an email was discovered on Mr Khan’s office computer attaching a document, which in the opinion of the employer showed that he and another employee were making plans to set up in competition to their employer, using  information obtained through their employment.  Both employees were dismissed for gross misconduct on the basis that they had used company resources and breached the fundamental trust and confidence implied into a contractual relationship.  The employees claimed that the plans were not serious ones, and should not have been of concern to the employer.  Their internal appeal against dismissal failed and both claimed unfair dismissal.  

The employer won in the Employment Tribunal, who concluded that the investigation was reasonably conducted and that the employer had a genuine belief that the Claimants were guilty of gross misconduct, and that this was within the “band of reasonable response” which it is open to an employer to make.   The employees then appealed to the Employment Appeal Tribunal (“EAT”).   The EAT upheld the appeal.  They did not criticise the finding that the employer’s belief was genuine or that the investigation which they conducted was reasonable.   However, they considered that the Tribunal had properly considered whether the conduct was, as a matter of law, a breach of the implied term of trust and confidence and gross misconduct.  

The Tribunal looked at the earlier case of Laughton & Another v Bapp Industrial Supplies Limited [1986} ICR 634 which held that it is not, in itself, gross misconduct for an employee to make preparations for a future business to be conducted after his employment with his current employer has terminated.    The EAT pointed out that not every piece of information that the employer has or might consider important or confidential will be regarded, as a matter of law, as confidential information.   They found that the Tribunal did not consider whether the business plan was prepared using what was (as a matter of law) confidential information or if it simply used the kind of knowledge and expertise that a person in Mr Khan’s position would have accumulated over the number of years he had been employed by the Respondent, particularly in the position he occupied.  The EAT felt that until this was decided no decision could be made as to whether or not there had been gross misconduct or if the dismissal had been unfair.  It therefore sent the case back to the Tribunal to look at again in the light of this.

Lessons to be learned

Given that the courts will not infer obligations of fiduciary duty into employee’s contracts of employment, and have made it clear that making plans to compete with an employer does not necessarily amount to gross misconduct, an employer should:

  • Ensure that contracts of employment for senior staff or for staff in important or sensitive positions contain well drafted restrictive covenants;
  • Make sure that contracts are reviewed regularly and fresh contracts be entered into where necessary – and if appropriate payment given for new restrictive covenants (to avoid consideration issues) – it is surprising how many long serving senior executives have only a basic contract of employment which they were given years beforehand when they were junior employees;
  • Tighten up contractual definitions of what constitutes gross misconduct.

If you wish to discuss any matter arising from this article or any other employment problem please contact Janet Long on 020 3254 1435 (direct line) or by email  to j.long@pj-h.co.uk

The contents of this article are intended for general information only.  It is not a substitute for legal advice, and shall not be deemed to be or constitute legal advice.  We therefore cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.  We will, however, be pleased to advise you on the specific facts of your case