If you want exclusive loyalty you have to write it in the contract, argues James Dixon

In Ranson v Customer Systems plc [2012] EWCA Civ 841, the Court of Appeal considered the extent of loyalty owed by an employee. A number of important lessons emerge.

Mr Ranson worked for the company from 2001 until 2009 when he resigned after he became discontent with his career prospects. At the time of resignation he was managing consultant and occupied a fairly lofty position: the only divisional manager with control of 59 per cent of the company’s revenue. Crucially, though, he was not a company director and only ever remained an employee albeit a senior one.

He resigned with one month’s notice. Some 2 years or so before resigning he began taking steps to set up a competitor business through another company including formulating business plans with another employee of Customer Systems, registering an internet domain name for the envisaged company, incorporating the new company and opening a business account for it. The preparation also involved collating a considerable number of contact numbers, many of which were pure business contacts. Moreover, he had talks with existing clients of Customer Systems specifically with a view to them becoming customers of the new company. The High Court, relying on case law with regard to fiduciary duties owed by company directors, found in favour of Customer Systems (Mr Ranson had sought to act in competition with his current employer; albeit by preparation, had not informed Customer Systems about what he was doing, transferring of business contacts was seen to be a breach of the contractual duty of loyalty and as a matter of fiduciary duties he should not have used them contrary to his employer’s interests).

The Court of Appeal overturned that decision, emphasising that there is an important difference between the degree of loyalty owed by a director as compared to that owed by an employee. Company directors are fixed with fiduciary loyalty, whereas employees are not. The mere status of employee will not in and of itself, give rise to fiduciary duties. The High Court was found to have wrongly applied cases about company directors to a case involving an employee.

In a very orthodox approach the Court said that the starting point for deciding whether in a particular case employees owe fiduciary duties is the contract of employment. As to that see, for instance, Kelly v Cooper [1993] AC 205, University of Nottingham v Fishel [2000] ICR 1462.

The Court considered the content or degree of loyalty. There can be an obligation of loyalty owed by an employee but that will not necessarily mean that an exclusive obligation of loyalty is owed. The Court spoke in terms of a fiduciary duty as being a single-minded or exclusive duty (in effect meaning that the employer’s interest must always override those of the employee).

The key consideration will be what the terms of the contract say. It would be a breach of duty of fidelity to make a list of the employer’s customers, but –in the absence of restrictive clauses – an employee does not in general have to give the employer the benefit of every opportunity falling within the ambit of its business. In short, if an employer wants to have the enhanced loyalty or exclusive loyalty then that must be expressly provided for.

As with all decisions, the decision itself repays careful reading as to the facts. Mr Ranson made contact with two clients of his employer during the notice period but the first one was also a friend of his. The Court therefore decided that was not ‘canvassing’. Also, the Court relied upon the fact that he had not instigated the meeting. As to the other client, no specific promises were made by that client.

Also, in the absence of a fiduciary applying, there is not a duty on the part of an employee to report the wrongdoing of another employee or their own wrongdoing. Again, one has to look to what the contract of employment says. The good old case of Bell v Lever Brothers [1932] AC 161 still applies. The High Court misapplied authorities dealing with company directors.

Moral:

To ensure exclusive, fiduciary-type loyalty, there need to be express provisions in the contract as to ‘moonlighting’ and conflict of interests, as to the requirement to report on misconduct, as to the obligation to return company property upon termination and as to prohibiting competitive behaviour after termination and so on.

Relying on an employee, for example, having a senior or especially trusted role is not enough. Employers need to make sure the contract specifically deals with the duties.