Re-use Collections Limited v (1) Sendall (2) May Glass Recycling Ltd [2014] EWHC 3852 (QB)

Why care?

All employees owe duties of good faith and fidelity to their employer. Although directors owe fiduciary duties to their companies, employees generally do not unless the specific obligations placed on the employee mean that a fiduciary relationship has arisen.

In this case, the High Court had to decide whether a senior employee had breached his duty of good faith to his employer, whether he owed any fiduciary duties, and whether his contractual restrictions were enforceable.

The case

Reuse was a glass recycling business, previously owned by Keith Sendall ("S)'s family. S was responsible for Reuse's Dagenham depot.  From November 2011, S was considering setting up a competing business. In October 2012, he was given a draft contract of employment, including for the first time specific confidentiality obligations and post-termination restrictions. He eventually signed it on 22 February 2013.

In the meantime, S took active steps (the court later found) to obtain finance, premises, skips and vehicles for his new competing business. May Glass was incorporated in January 2013 and S was a director (with his two sons, also employees of Reuse) although he resigned his directorship in February 2013 when he signed his employment contract with Reuse. 

S resigned his employment with Reuse on 27 March 2013, giving his contractual three months' notice.  On 2 April 2013, his sons each gave one week's notice, which was all they required to do.  None of the three told Reuse about May Glass. 

Later that month, Reuse learned that S had been approaching its customers and once Reuse learned of May Glass, S was suspended and subsequently resigned. Reuse was granted an interlocutory injunction against both S and May Glass, pending trial. At that trial, the court noted that as an employee, S owed the usual implied duties of fidelity and good faith to Reuse as an employee. For a senior employee such as S, this included a duty not to compete with Reuse during the duration of his employment, whether or not in working hours and even in the absence of an express contractual term to that effect. The court found that from November 2012 until April 2012, S took active steps (including contacting Reuse customers and suppliers) with his sons (who also, as Reuse employees, owed a duty of good faith and fidelity) to set up a competing business. The court added that, even if all S had done was providing finance to his sons to set up May Glass, this would still have been a breach of his implied duty of fidelity and good faith given his position with Reuse and that May Glass was intended to be a direct competitor.

However, S did not owe any fiduciary duties to Reuse.  He had been a director of the company which ran the business before it was sold to Reuse, but had never been a director of Reuse.  Reuse argued that he was a senior and longstanding employee, the second-highest paid in the company, and had sole responsibility for running the Dagenham depot.  However, S had no formal contract of employment with Reuse until 22 February 2013, which contained no express provision or reference to any fiduciary duty. He was not a director, he did not attend or report to board meetings, he had attended only one strategy meeting, and there is no evidence he was involved in major strategy decisions.

His contract of 22 February 2013 contained restrictions on the use of confidential information and post-termination conduct.  That contract was entered into after months of discussions.  Reuse alleged that the consideration for doing so were various benefits and a salary increase from 1 January 2013.  On the evidence, the court found that the benefits and salary increase were not proper consideration for the express restrictions.

In the alternative, Reuse argued that S had accepted the contract by continuing his employment. However, the court found this was insufficient in a case where a long-serving employee was being asked to accept substantial restrictions for the first time and there was no deadline to accept or be dismissed. As to the confidentiality clause, the court said that even if the same arguments about consideration did not apply, the clause was so wide as to be unenforceable in any case.  

The court found that May Glass had not induced or procured a breach of contract by S, since the only relevant breach was of his implied duty of good faith and fidelity, and S had already "set off down the path of breaching that duty before May Glass was even incorporated". S was the controlling mind and majority shareholder of May Glass and therefore it was conceptually difficult to see how he could have procured his own breach of duty to Reuse, and no evidence that anyone else on behalf of May Glass had done so. 

Reuse also sought damages of £747,609.89.  After consideration of the arguments on quantum, the court awarded £51,822.20 (plus interest).

What to take away?

The case is, of course, decided on its own facts and the court criticised the witness evidence of all parties.  

Obiter, the judge made clear that even a merely financial involvement in May Glass would have been a breach of S's duties to Reuse.

It is also a reminder that consideration is necessary for any new obligations placed upon employees. It is not enough to say that continued employment is sufficient in these circumstances especially as here where the employee had been employed for a long time and had been given no warning that his employment would be at risk if he did not accept the terms.