How far can employees go in setting up a competing business?

In Re-use Collections Ltd v Keith Sendall and May Glass Recycling Ltd, Mr Sendall was employed by Re-use as a depot manager. He had signed a contract part way through his employment which included restrictive covenants. Whilst employed by Re-use, he was involved in setting up a competing business, May Glass. When he resigned, Re-use claimed that:

  • Mr Sendall had acted in breach of duty in setting up the competing business; and
  • May Glass had induced or procured the breaches and/or unlawfully conspired with him to do so.

The High Court held that Mr Sendall did not owe Re-use any fiduciary duty. Nor was he bound by the restrictive covenants. Re-use did not provide any consideration (payment/benefit) for agreeing the new terms and the length of the covenants was unreasonable. Therefore, they could not be enforced. However, Mr Sendall was so involved in setting up May Glass that he was in breach of his duty of fidelity and good faith. May Glass was liable for conspiring with him to breach his Re-use contract. Both Mr Sendall and May Glass were liable for damages. Mr Sendall was not constructively dismissed; he resigned voluntarily and, in any event, Re-use could have dismissed him summarily for gross misconduct.

Comment

Only directors and some (normally very senior) employees will owe their employers fiduciary duties which, if breached, allow potentially valuable claims for an account of profits. However, all employees owe implied duties of fidelity and good faith. These permit employees to take some limited preparatory steps if they wish to resign and compete with their employer, once their employment has ended. Deciding which steps fall on the right side of the line between what is/is not a breach of duty can be a finely balanced judgment requiring legal advice.

Employers introducing new contract terms, especially those that do not take immediate effect, such as covenants, must ensure there is appropriate consideration for the change. In Mr Sendall’s case, neither a pay rise that would have been awarded anyway nor his continued employment provided appropriate consideration. Careful thought must be given to covenants’ wording. They must be tailored to the individual and go no further than is reasonably necessary to protect the business. Dealing with employees who plan to compete can be a difficult business. If an employer is suspicious, it should tread carefully and take a strategic approach. If not, it may face allegations of breach of contract and that any covenants have fallen away. Mr Sendall’s case provides useful guidance on these issues.