Court of Appeal considers to what extent an employer may be liable for inducing a breach of post-termination restrictive covenants - Allen t/a David Allen Chartered Accountants v Dodd & Co

Summary

The Court of Appeal has held that an employer was not liable to an employee’s former employer for inducing a breach of contract after they recruited someone in breach of their restrictive covenants, following legal advice that they were not enforceable.

The law

An employer is able to bring a claim against another employer under the legal principle of ‘tort’ if they have induced or conspired with a former employee to breach their contractual post-termination restrictions. To do so, it must be shown that the new employer knowingly and intentionally induced or procured the breach without reasonable justification and that the former employer has suffered economic result as a result of the breach. In this case, the Court of Appeal considered this requirement of knowledge, which is a subjective test, in light of the fact that legal advice had been provided.

Facts

The contract of employment of an employee of David Allen, an accountancy firm, contained restrictive covenants applying 12 months after termination. The employee resigned and joined a competitor, Dodd & Co Ltd, who obtained legal advice on whether the restrictive covenants were enforceable. They were advised that the covenants were likely to be unenforceable and hired the employee, who then contacted his former clients at David Allen. David Allen thereafter brought claims for breach of contract against the former employee and against Dodd & Co for inducing the breach.

The High Court held that the restrictive covenants were enforceable and that the former employee has breached them, the claim against Dodd & Co was however dismissed as they did not have sufficient knowledge to establish liability in tort for inducing a breach of contract. The former employer appealed highlighting that the legal advice received was equivocal.

Outcome

The Court of Appeal emphasised that the fact that the legal advice received had not been unequivocal did not mean that Dodd & Co's defence failed. It was noted that lawyers rarely give unequivocal advice and if they do, clients must appreciate that a risk will always still exist that the advice will be wrong, people should however still be able to act on legal advice, even if the advice turns out to be wrong.

The court considered the case law on this issue and emphasised that to be liable for inducing a breach of contract, a person had to know that they were inducing a breach; they had to actually realise that the act they were procuring would have the effect of breaching the contract.

It was highlighted the Claimant had the burden of proving the defendant's actual knowledge of the breach and the defendant did not need to prove an absolute belief that there would be no breach. The requirement of knowledge is not one of absolute belief that there would be no breach, just that this belief is genuinely held. It was concluded that ‘If the defendant honestly believes that the act that he procures will not amount to a breach of contract, he is not liable in tort even if his belief is mistaken in law’ and it did not matter if this erroneous belief was caused by their own ignorance or incorrect legal advice.

Implications for Employers

The case is a useful reminder of how the courts will approach the issue of liability in this area of law and highlights the importance of a party’s state of mind in economic tort claims. The position remains that a defendant must know that their actions would have the effect of breaching the contract, rather than might have this effect, in order to give rise to liability.

The law and practice referred to in this article or webinar has been paraphrased or summarised. It might not be up-to-date with changes in the law and we do not guarantee the accuracy of any information provided at the time of reading. It should not be construed or relied upon as legal advice in relation to a specific set of circumstances.

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