All employees have an unwritten fiduciary duty to their employer which includes an obligation not to work for a competitor while still employed by the employer. Breach of that duty will entitle an employer not only to claim compensation for losses suffered in their business but also all profits made by the competing business. However, the claim may be hard to establish.
In Helmet Integrated Systems Ltd v Tunnard, the Court of Appeal considered a case where a salesman, whose job it was to sell protective equipment including firemens’ helmets, came up with an idea for a new helmet. While still employed, he obtained DTI funding to produce design drawings which he asked a friend to show to a competitor business. He then resigned from his employment and set up his own company to develop and produce his new product. His employer then made claims against him including claims for breach of contract and breach of fiduciary duty which the High Court rejected. The employer appealed to the Court of Appeal.
It found that the employee’s actions prior to his resignation were merely ‘preparatory steps’ and did not amount to competition.
If he had been a director, who had formed an irrevocable intention to compete, those preparatory steps would have been enough to found a claim.
If his activities had been done by a competitor (ie if he had passed his ideas on to someone else) there would have been a breach of fiduciary duty but his own preparatory steps were not to be regarded as ‘competitor activity’.
The employer’s appeal failed.
Points to note–
• Mr Tunnard was not a director or even a senior manager. The Court of Appeal limited the extent of his unwritten duties to his employer in the light of his position within the organisation. Had he been a director, the case would have been decided differently.
• The Court of Appeal noted that Mr Tunnard’s contract did not restrict his freedom to prepare for competition on leaving. He was entitled to believe that he could resign on notice and set up in competition whenever he wanted and could take preparatory steps while still employed. Employers should always consider including restrictive covenants in the employment contracts of employees who may be in key positions (as in this case in the sales force) even though not in senior posts. If they are reasonable in extent and duration and are designed to protect the genuine business interests of the employer, the courts will enforce such covenants and limit the extent of any damage done by an employee who turns into a competitor. We shall be happy to advise further on appropriate contract wording.