In the recent case of Ranson v Customer Systems Plc, the Court of Appeal considers whether behaviour of a senior employee during his notice period in taking steps to compete with his employer was in breach of his duty of fidelity and whether there existed a fiduciary duty which would have placed stricter obligations on the employee. The case highlights the importance of the employment contract and reminds employers of the need to update job descriptions, job duty clauses and post termination restrictions as employees are promoted, so as to ensure they are appropriate and relevant to employees’ roles at all times.
What happened in this case?
The case concerned a senior divisional manager, Mr R, an employee of Customer Systems Plc (CS) which provided niche IT consultancy services. Mr R resigned to set up a new consultancy, Praesto Consulting. He opened bank accounts and drafted business plans. Furthermore, during his notice period, Mr R had discussions with a former CS contact, Mr Clothier who worked for Diageo GB Limited. These discussions resulted in Diageo giving Mr R’s new company, Praesto, an order for 10 days’ consultancy work. In addition, Mr R dined with another contact of one of CS’s clients, Mr Boardman of AstraZeneca. No business was promised but Mr Boardman offered to help Mr R to get work from AstraZeneca. Mr R undertook no work until he left CS’s employment.
CS brought claims against Mr R in the High Court for breach of fiduciary duty and breach of his duty of fidelity on the basis that during his notice period:
- he set up Praesto while still employed;
- he sought business for Praesto in competition in CS in his discussions with Mr Clothier of Diageo and Mr Boardman of AstraZeneca; and
- he failed to inform CS of what he was doing.
The High Court (HC) found that since Mr R was a divisional manager in charge of a high proportion of sales, fiduciary duties arose out of the situation with Mr Clothier and as such ruled that he should have informed CS of the opportunity with Mr Clothier. He was also in breach of his implied contractual duty of fidelity because, as someone employed to pursue sales, he should report these opportunities because of his self-interest in them. The High Court also said he was in breach of contractual and fiduciary duties in canvassing Mr Boardman of Astra Zeneca and not informing CS of what he was doing.
The Court of Appeal (CA) disagreed with the High Court’s analysis stating that the High Court judge had wrongly drawn close comparisons with Mr R’s position as an employee with that of a director, analysing a number of cases dealing with breaches of fiduciary duties by company directors; whereas the CA said “there was a highly material difference: Mr R was not a director; he was only an employee.”
The CA also criticised the High Court in that its analysis of the law did not refer to Mr R’s contract; the HC had wrongly started with the facts, finding that Mr R’s dealings with Mr Clothier placed him in a position of conflict of interest with CS, out of which arose a fiduciary duty. The CA said the HC had “approached the question from the wrong end”, and should, instead, have first analysed the contract of employment.
The CA analyses fiduciary duties and the duty of fidelity
A “fiduciary” duty should not be confused with a duty of “fidelity”. The duty of fidelity may be expressly set out in the contract but if not, it will be implied. All employment contracts contain an implied term that an employee will serve their employer in good faith and with fidelity (duty of fidelity) meaning that during employment, the employee should act in their employer’s interests and not use the time for which he is paid by the employer in furthering their own interests. However, it also means that whilst the employee must have regard to their employer’s interests, it does not in general amount to a “promise to give his employer the benefit of every opportunity within the scope of its business”.
A fiduciary duty exists where there is fiduciary relationship, such as between a director and the company of which the director is an officer. Directors are under a fiduciary duty (partially set out in the Companies Act 2006) which requires the director to owe a “single-minded duty of loyalty to the company and act in the company’s best interests”. The CA said that an employee was different and does not, merely by reason of their role as employee assume fiduciary obligations to their employer. Furthermore, even if the employee is a fiduciary, it is important to note that not all fiduciaries owe the same duties in all circumstances. The starting point is the contract of employment; fiduciary obligations arise only where specific contractual obligations place the employee in the situation where the law imposes rigorous additional duties.
Duty to report wrongdoing
There is no general duty to report a fellow employee’s misconduct or breach of contract – whether such a duty exists depends on the contract of employment. Similarly, there was no general principle that an employee was bound to inform their employer as and when they were doing outside work in breach of contract.
How the CA applied these principles to Mr R’s case
The CA noted that Mr R’s contract with CS:
- had no post termination restrictions;
- required him to keep “information of a confidential nature belonging to CS, its customers and its business partners” that came to his knowledge during his employment, confidential;
- required him not to undertake any other employment while employed at CS without prior written consent.
The CA concluded that it was not part of Mr R’s job to pursue Diageo for CS since Diageo was not “on his patch”. The CA said that the High Court was wrong to conclude that this did not matter. There was therefore no contractual term on which any relevant fiduciary duty could “be hung”. In addition, even if Mr R was in breach of contract in responding to Mr Clothier’s overture (which the CA doubted), he was not in breach of contract in failing to report the contact and his reaction to it to CS.
The CA concluded that Mr R was not in breach of contract and did not have a fiduciary duty with respect to his contact with Mr Boardman. He had entertained Mr Boardman in his own time and had merely “put himself in a good position to make approaches for work once he had set up his own business”. This did not divert or interfere with any business opportunities.
What this case means for employers?
This case confirms that having a well drafted contract of employment is absolutely essential to protect employers and their businesses from employees who leave (or intend to leave) and set up in competition with them. The terms of the contract will be the first port of call to determine whether any fiduciary duty is owed by the employee concerned and whether there has been any breach of the duty of fidelity. It is important for HR managers to keep track of employee promotions within the organisation to ensure that employees’ contracts and job descriptions are updated as and when the employee is promoted or takes on new duties. Clauses to consider include, for example, post termination restrictions, duty to inform the employer of both potential business opportunities and the wrongdoing of fellow employees and in some circumstances a duty to report own wrongdoing.
Senior employees may well owe fiduciary duties (which will again be determined by the contract) but it is important to note that these are not necessarily the same in scope as fiduciary duties owed by directors. A fiduciary duty owed by a director would call for single minded, undivided loyalty, but the extent of that duty for an employee would be determined by the contract of employment. Where an employee has a fiduciary duty that will not necessarily include a duty to report the employee’s own breach of contract unless such a duty arises out of the contract of employment; in a previous case a clause which proved very useful for the employer in this regard was an obligation to fully and properly disclose to the Board all of the affairs of the Company of which the employee is aware.
The duty of fidelity on the other hand requires an employee to have regard to their employer’s interests but does not require the employee to subordinate wholly their interests to those of the employer. This means that the employee would be free to prepare to set up in competition with their employer (provided this did not involve breaching obligations of confidentiality) but not actually compete during the notice period.
In practice, the extent to which an employee’s actions will be in breach of either of these duties, if the employee prepares to compete with the employer before leaving the employer’s employment, depends on the particular circumstances but most importantly, the terms of the contract. In Mr R’s case there were no post termination restrictions and his contract had not been updated since he was first employed by CS as a new graduate. The CA did not consider that Mr R was a fiduciary to CS at all. Further, he was not in breach of his duty of fidelity by merely meeting up with a client contact for dinner in his own time, in circumstances where he did not conclude any particular business (AstraZeneca contact), or where he signed up for work with a contact of his employer in circumstances where the contact was in fact a personal friend of his, was not an existing customer and was not a potential customer on his “patch” (Diageo contact).