Restrictive covenants – new employer inducing breach of contract?
Anyone who induces an employee to breach his or her contract is guilty of a civil wrong and can expect financial consequences – but what amounts to a state of mind sufficient to make a new employer liable (to the employee’s old employer) for a breach of a restrictive covenant? The Court of Appeal tackled that burning issue in an important ruling for recruiters in Allen v Dodd & Co Ltd (2020).
The case concerned an accountant whose employment contract contained post-termination restrictive covenants which forbade him from soliciting or dealing with a firm’s clients for 12 months after leaving its employment. After he left the firm and joined a competitor, the firm launched proceedings against both him and his new employer. The latter was alleged to have induced him to breach his contract.
Before taking on the accountant, the new employer consulted solicitors and received advice that the covenants were probably unenforceable. It was aware that that might prove not to be the case, but decided to run that risk. Following a trial, a judge found that the covenants were, in somewhat modified form, enforceable and that the accountant had breached them.
The judge, however, rejected the inducement claim against the new employer on the basis that it had not turned a blind eye to the accountant’s contractual obligations. Having taken the trouble to seek legal advice, upon which it honestly relied, it had not shown itself indifferent to those obligations.
In challenging that decision, the old employer pointed out that the legal advice received by the competitor was equivocal and that it was aware of the risk that its actions might amount to inducing a breach of contract. Businesses frequently took such commercial risks and could hardly complain if they came to pass.
In dismissing the appeal, however, the Court found that the competitor was not required to show that it had an absolute belief that its actions would not amount to inducing a breach of contract. Its honest belief, based on legal advice, that the covenants were unenforceable and that it was not procuring the accountant to breach his contract amounted to a sufficient defence to the claim.