No fiduciary duties were found to be imposed upon employees recruited by a competitor.
Lonmar Global Risks Ltd, a Lloyds insurance and reinsurance broker claimed approximately £2.5m of damages against each of the first, second and third defendants for breach of contract and breach of fiduciary duty, and also the fourth defendant, a direct competitor of Lonmar, for inducing breaches of contract and conspiracy.
The first and second defendants, Mr West and Mr Niel Mee were employed by Lonmar as “producers” whose roles were to obtain and retain insurance business from international brokers. In particular, Mr Niel Mee specialised in French insurance. The third defendant, Mr Karpus was employed as a broker and undertook some of the technical service work for clients.
It so happened that the fourth defendant, Tyser, was keen to expand into the French insurance market. Following lengthy discussions, Mr West and Mr Niel Mee accepted positions offered by Tyser in mid-2009. In the meantime, Tyser had advertised for French speaking technicians to work in their new French team. Several technicians employed at Lonmar applied for the role, including Mr Karpus. Having successfully applied for the position, Mr Karpus handed in his resignation to Lonmar.
Prior to the expiry of Mr West’s notice period, Lonmar received a broker of record letter requiring it to transfer a client account to Tyser & Co. This caused Lonmar to suspect a conspiracy between Mr West and Mr Karpus and following an interrogation of Mr West’s emails, all three were subsequently dismissed in July 2009.
Lonmar brought claims against Mr Niel Mee, Mr West and Mr Karpus for breach of contract and fiduciary duties, as well as claims against Tyser. In particular, Lonmar claimed that Mr Niel Mee and Mr West had:
- solicited clients and conducted business on behalf of a competitor by introducing Lonmar’s clients to Tyser;
- solicited employees by endeavouring to arrange the move of Lonmar’s employees to Tyser; and
- breached their fiduciary duty by:
- failing to disclose theirs and another employee’s wrongdoing;
- failing to persuade the clients and employees to remain with Lonmar; and
- failing to inform Lonmar that a client was entering into a business transaction with a competitor
Lonmar’s claim was dismissed. Although Mr Justice Hickinbottom found that the defendants’ actions had warranted their dismissal, having breached the express and implied terms of their contract of employment by introducing clients to Tyser and also carrying on business on its behalf during the course of their employment with Lonmar, he was not persuaded that the defendants owed any fiduciary duty to Lonmar. Perhaps most significantly, he also opined that Lonmar had not suffered any loss as a result of the breaches complained of.
As outlined by Mr Justice Hickinbottom, “the hallmark of a fiduciary duty is a requirement that a person pursues the interests of another at the expense of his own”. He went on further to explain that an employment relationship does not in itself require an employee to pursue his employer’s interests at the expense of his own. Although such fiduciary duties do arise out of an employee’s contractual obligations, “the employment relationship does not give rise to such duties per se”. Therefore, in the absence of any express contractual provision, an employee is under no obligation to report his own misconduct, or the misconduct of his fellow employees to his or her employer. Furthermore, a contractual duty of fidelity is not synonymous with a fiduciary duty, and therefore does not, as a general rule, impose an obligation upon the employee to report a fellow employee’s wrongdoing to his or her employer.
An exception to this rule applies in circumstances where there is an express contractual provision imposing such duties, or where an employee is part of senior management; for example, is a director. In this case, neither Mr Niel Mee nor Mr West were under any obligation to perform the onerous duties of a fiduciary as neither were part of senior management, nor was there an express term within their respective contracts of employment which imposed such duties.
Proof of loss
Mr Justice Hinkinbottom was of the view that Lonmar’s claim also failed on grounds of quantum, having failed to successfully prove that it had suffered any loss. It was clear from the evidence submitted that even without any solicitation of clients by the defendants, Lonmar’s clients would have stayed loyal to the defendants and would have followed the defendants to Tyser in any event. In the case of one particular client, Lonmar had suffered loss only for reason of failing to obtain a renewal of insurance cover in good time.
Inducement of breach of contract
Guidance was also given by Mr Justice Hinkinbottom on the subject of inducement. There was no finding on the part of Tyser that they induced Mr West and Mr Niel Mee to breach their respective contracts of employment. Whilst Mr Justice Hinkingbottom acknowledged that Tyser was aware that Mr West and Mr Niel Mee may have been acting in breach of their obligations to Lonmar, he emphasised that mere knowledge of such a breach is insufficient to prove inducement. Rather, a claimant must show that a defendant “intended to interfere with the claimant’s contractual arrangements with his employee”.
The outcome of this decision is unusual in that it shows that an employee is able to avoid liability for damages even in circumstances where he or she has breached an express term of their contract of employment. Whilst the decision in this case was specific to its own facts, it highlights the significance of the distinction between those duties that are imposed under a contract of employment, and the more rigorous duties that arise out of a fiduciary relationship, as well as the circumstances in which those duties arise.
The decision also provides employers with some practical guidance in relation to employees who are intending to move to a competitor. For example, in those circumstances, employers would benefit from including an express clause within a contract of employment which prevents employees from taking clients to a competitor, or which places an obligation on employees to report any misconduct on their part or the part of their fellow employees. Had Lonmar taken such steps, it is likely that the defendants in this case would have been found liable, subject of course to Lonmar adequately proving their losses claimed.