Inducing a breach of restrictive covenants
12th March, 2020
In Allen t/a David Allen Chartered Accountants v Dodd & Co, the Court of Appeal has been asked to consider whether an employer is liable to an employee's former employer in tort for inducing a breach of restrictive covenants, having acted on legal advice that the restrictive covenants were unenforceable.
An employee of an accountancy firm entered into a contract containing restrictive covenants that would apply for twelve months after the termination of his employment.
The employee was offered a job with a competitor. Before he started work, the competitor obtained legal advice in respect of the restrictive covenants in the former employment contract.
They were advised that the covenants were unlikely to be enforceable or effective as there was no consideration, the 12-month period was too long, the non-solicitation clause “probably” failed and the non-dealing clause “on balance” failed. The employee was hired and subsequently contacted his former employer’s clients in his new role.
The Claimant brought a claim for breach of contract against its former employee and a tort claim against the competitor for inducing a breach of contract.
In order to bring the claim, it must be shown that the third party knowingly and intentionally induced or procured the breach without reasonable justification. There will be no claim if the third party honestly but unreasonably believed the restrictive covenants would not be breached.
The High Court found that the restrictive covenants were enforceable and the former employee had breached them, but they did not consider that the competitor had sufficient knowledge to establish liability in tort for inducing a breach of contract.
The High Court concluded that the competitor did not “turn a blind eye” to the contractual obligations as it had “honestly relied” on earlier legal advice. The fact that the legal advice was incorrect was not enough to prove that it had effected a breach of contract.
Court of Appeal
The Court of Appeal dismissed the former employer’s appeal and held that the competitor should not be responsible for the former employee’s breach of contract.
Although the competitor’s belief that the restrictive covenants were unenforceable was mistaken in law, it was an honest belief. It was found to be irrelevant “whether a defendant’s erroneous belief is caused by his own ignorance or by the incorrect advice he receives from his lawyers”. As such, the competitor did not realise that the act which they were procuring would result in a breach of the contract. It was argued that the fact that the evidence was equivocal should cause the defence to fail, but the Court of Appeal did not accept this.
The Court of Appeal concluded that the burden was on the former employer to prove the competitor’s actual knowledge of the breach, and intention to cause it. The competitor did not have to prove an absolute belief that there would not be a breach, just that this was reasonably and genuinely held.
This decision is useful guidance on the approach which courts may take in respect of claims of this type and illustrates the importance of reviewing the intention of parties in situations like this. The suggestion was made in the Court of Appeal that this could lead to parties obtaining knowingly incorrect advice, however, it is important to remember that any advice must be honestly relied upon for the protection to apply. Whether this stems from their own mistaken belief or incorrect advice is immaterial.
If you have any questions on the above and how it will affect you, please do not hesitate to get in touch with a member of our employment team.