• Preparing to Compete

Khan & anor. v Ladsker Child Care Ltd UKEAT/0036/12/DM

Mr Khan and Mr Hemming worked for Ladsker and both were long‑standing and senior employees. They put together a detailed plan for a business competing with Ladsker. They were dismissed on 8 June 2010 for alleged gross misconduct by planning to set up in business and so breaching the fundamental trust and confidence essential to their employer’s contractual relations with them. Each appealed against the decision and were unsuccessful. Claims for unfair dismissal were made but these were dismissed.

On appeal, the EAT looked at whether as a matter of law there had been any breach of contract by Mr Khan and Mr Hemming. They found that nowhere in the Tribunal’s decision was there any evidence of the Tribunal addressing the question as to whether Ladsker genuinely believed after investigation that as a matter of law what Mr Khan and Mr Hemming did constituted gross misconduct so entitling them to be dismissed summarily as a response to gross misconduct. The case was remitted to the same Tribunal for a re‑hearing whether the kind of information they had used could be regarded as confidential to the employer.

Key point: Dismissal for gross misconduct should be on advice. Summary dismissal will only be justified if it was for gross misconduct amounting to a fundamental breach of contract.

TCP Europe Limited v Perry and Others 2012 EWHC 1940

TCP was a company which specialised in the sale of customised commemorative lucites. These are a resin paperweight trophy which were once fashionable and circulated to participating advisers including banks, lawyers and accountants at the conclusion of a financial transaction. From about 2008 onwards with fewer high value financial transactions TCP suffered a downturn in business and 3 of its employees became extremely concerned about the prospect of losing their jobs. As a result they decided to work together to form a new company ART and took away artwork and property belonging to TCP whilst working with one of TCP’s suppliers.

In due course they were suspended and when they took legal advice they were advised they were in the wrong and so their solicitors wrote to their employer’s solicitors apologising unreservedly, admitting breaches of contract and offering to repay all that was due. This offer was rejected but after an 8-day trial described by the Judge as a complete and utter waste of time and money, the employer failed to establish any conspiracy or breach of fiduciary obligations by the 3 employees. TCP’s claims for substantial damages failed for want of proof of loss. TCP was however entitled to nominal damages in the traditional sum of £2 because breaches of contract by the 3 employees plus an account was to be taken of the profit made by ART in respect of certain limited transactions.

The 3 employees owed a fiduciary obligation to TCP during their employment not to seek to divert away from their employer opportunities to sell. However that obligation added nothing to their contractual obligations of good faith, fidelity, mutual trust and confidence. All the fiduciary obligation added was a remedy that in the event of a breach there was a duty to account for the profits earned in breach of the fiduciary obligation. Even though the employees admitted they diverted projects away from TCP, TCP had not sustained any particular loss so only £2 damages were recoverable. Recoveries of money paid under a Compromise to one of the employees was not recoverable as the claim was not properly pleaded.

Key point: Employers should not commence proceedings without proper proofs of evidence, breach and loss. Claims started in the hope of gathering evidence at trial by extracting confessions of guilt and hidden profits are almost always bound to fail.

Ranson v Customer Systems plc 2012 EWCA Civ 841

Mr Ranson worked for Customer Systems. While he was still employed and under notice, he met his employer’s clients with a view to securing work for his own company. It was held by the Court of Appeal that this was not a breach of contract as there was no fiduciary duty on him to report such meetings or his intention to set up in competition and there was nothing requiring this in his contract.

The High Court at first instance considered a number of cases dealing with directors’ breach of fiduciary duties but Mr Ranson was not a director. The Judge had failed to consider his contract of employment when reaching the conclusion that he was satisfied that fiduciary duties were owed. He should have considered whether as an employee he had any fiduciary duties at all. Directors and employees’ duties are not analogous. There was no contractual duty which required Mr Ranson to report his meetings with his employer’s customers to his employer. He could be distinguished from directors who owe fiduciary duties to their companies. Provided he did his job faithfully he was not required to do more. Although his acts were preliminary to starting a competing business he was entitled to do so.

Key point: Employers should consider including certain contractual duties in senior employees’ contract terms such as the duty to disclose his or her own wrongdoing and restrictive covenants as not every employment contract will give rise to a fiduciary duty not to prepare in advance for future activities.

  • Restrictive Covenant Void

Patsystems Holdings Ltd v Neilly 2012 AER 138

On joining Patsystems in 2000 Mr Neilly entered into an employment contract which included a clause preventing him from working for any competitive company for 12 months following the termination of his employment. Five years later he was promoted and was required to sign an endorsement to his contract agreeing variations to his job title, salary and notice period but all other terms of his contract remained unchanged. He left Patsystems in April 2012 when his employment was terminated after he gave notice to join another company.

Patsystems brought proceedings against him seeking an injunction to enforce the non‑compete clause. It was common ground that the clause had not been justified when his employment had commenced. Patsystems argued that the clause was to be treated as entered into again in July 2005 when he signed the endorsement agreeing to the variations to his contract. However, as the clause was void in 2000 when he joined, the acknowledgement in 2005 that his previous terms remained unchanged was insufficient to revive the clause. It could not be revived unless this was done expressly which it had not been. Accordingly the non‑compete clause was not justified and although his intended new employer TT was plainly a competitor, Mr Neilly could go and work for TT.

Key point: Employers should keep restrictive covenants closely under review when there is a change of the employee’s status or role so the covenants do not lapse or become ineffective.

  • Injunctive Relief – Evidence of Misconduct

CEF Holdings Ltd v Mundey 2012 EWHC 1524 (QB)

CEF Holdings employed 3,000 people worldwide and brought proceedings against 19 of its former employees and 2 defendant companies who were planning to compete with CEF in the UK. CEF had applied without notice for injunctions preventing the various defendants from acting in competition. Those injunctions were discharged as the Judge held that CEF had not established sufficient evidence to support conspiracy, other wrongful conduct or the need for springboard relief. Mere suspicion of wrongful conduct was not enough.

The case is a 44‑page caution about seeking an injunction without a clear strategy. Unusually the injunctions were set aside on the basis that CEF had also failed to comply with its duty of full and frank disclosure. The restriction clause which prevented the employees from inducing, soliciting or endeavouring to entice away any employee of CEF irrespective of where that employee worked was invalid because so many of CEF’s employees would not have been known to the defendants. Where there was a customer connection restriction clause, the Judge held that there was no need for a non‑compete clause which was too wide anyway as it had no geographic limitation.

Key point: Ill-considered and hasty applications for injunctive relief risk failure and the associated costs can be very high.