The Employment Law Blog

Restrictive covenants: Allen t/a David Allen Chartered Accountants v Dodd & Co (CA)

Dodd & Co (“Dodd”) recruited a new employee who had post-termination restrictions in his contact of employment with Allen t/a David Allen Chartered Accountants (“David Allen”). Dodd took legal advice on the enforceability of the restrictions and were advised that the relevant term was “probably unenforceable” and on that basis they employed Mr Pollock and allowed him to contact his former clients.

David Allen brought a claim against the individual for breach of his restrictions, but also pursued a claim against Dodd on the basis that they had induced Mr Pollock to breach his restrictions. If successful, this would have significant ramifications for Dodd.

The Court of Appeal considered to what extent an employer may be liable for the tort of inducing a breach of contract where it recruits an employee in breach of contractual post-termination restrictions, having received advice that the restrictions are not enforceable. It was held that the fact that the legal advice received had not been unequivocal did not mean that Dodd’s defence failed. 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.

The Facts

In employment restrictive covenant cases, the former employer will often seek to bring tort claims against third parties, including the former employee’s new employer, on the basis that they have induced or conspired with the former employee to breach their contractual restrictions. Bringing claims against such third parties is a way of bringing additional pressure to bear on a former employee. In addition, this type of third party usually has deeper pockets than the former employee to meet any award of damages and the employer’s legal costs

In order to bring a claim for inducing a breach of contract, the Claimant must show that the third party knowingly and intentionally induced or procured the breach without reasonable justification, and that the Claimant suffered economic loss. The requirement of knowledge is essentially a subjective one; in other words, there will be no inducement to breach where the third party:

  • Honestly but unreasonably believed there would be no breach of contract.
  • Ought reasonably to have known that the act that they were inducing would be or amount to a breach of contract as a matter of law.

A breach of contract is an essential ingredient of the tort of inducing or procuring a breach of contract. If the Defendant merely prevents performance of a contract, or otherwise interferes with its performance, they will not be liable for the tort.

Mr Pollock had been employed by David Allen, a firm of accountants, since 2007. In 2015, he signed a new contract containing restrictive covenants which applied for a period of 12 months post-termination. In 2018, Mr Pollock resigned to join Dodd a competitor. Before he started work, Dodd obtained legal advice about whether the restrictive covenants were enforceable. It received advice that the covenants were unenforceable for lack of consideration, that the 12-month period was too long, that one of the restrictions, a non-solicitation clause, “probably” failed, and that the other, a non-dealing clause, “on balance” failed. The advice was that Dodd could act on the basis that the restrictions were not enforceable and that Mr Pollock could contact his former employer’s clients. (At that stage it was thought that Mr Pollock had not received any pay rise when he signed the restrictive covenants, but he had in fact received a back-dated salary increase on entering into the new contract.) David Allen brought claims against Mr Pollock, for breach of contract, and against Dodd, for inducing the breach.

A High Court judge found that, subject to some parts of the restrictive covenants which could be severed, the covenants were enforceable and that Mr Pollock was in breach of them. However, the judge dismissed the claim against Dodd, holding that the firm had been entitled to consider that it was more likely than not that the covenants were unenforceable and that the employee would be free to take on work from the David Allen’s clients. The judge found that it could not be said that Dodd had turned a blind eye to Mr Pollock’s contractual obligations, or that it had been indifferent to them. It had been entitled to rely on the advice it had sought and did so honestly.

David Allen appealed on the grounds that the legal advice obtained had been equivocal and so Dodd was aware that the restrictive covenants would turn out to be enforceable. It submitted that Dodd knew that there was a risk that their actions would amount to inducing a breach of contract.

Decision

The Court of Appeal dismissed the appeal and upheld the High Court’s decision in favour of Dodd.

For a person to be liable in tort for inducing a breach of contract, the contract had to be binding and enforceable. If not, the inducement could not cause any loss. Dodd had known that there was what appeared to be a contract, but had been advised that the relevant term was probably unenforceable. It had known there was a risk that what it was doing would result in a breach of the employee’s contract, but engaged him anyway. The fact that the legal advice received had not been unequivocal did not mean that Dodd’s defence failed. 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 for the David Allen to prove Dodd’s actual knowledge of the breach, not for the Dodd to prove an absolute belief that there would be no breach. The defence did not require an absolute belief that one’s actions would not amount to inducing a breach.

What does this mean for you?

You can rely on responsibly sought legal advice, even if the advice turns out to be wrong. Lawyers rarely give unequivocal advice, and even if they do, clients must appreciate that there is always a risk that the advice will turn out to be wrong. In addition, the relevant knowledge in this context was not simply knowledge of a fact, but knowledge of a legal outcome. These types of case are constantly contested and are often difficult to predict. If you are looking to employ an individual it is wise to seek legal advice on the enforceability of the restrictions before doing so in order to reduce your liability. It is also a good idea, to make offers subject to the employee not having restrictions that would prevent them from working for you.

It is not possible to insist on absolute advice in most cases. If the advice is that it is more probable than not that no breach would be committed, that is good enough to avoid liability in tort. This case shows the limitations on claims of inducing a breach of contract and you should be mindful of this before pursuing such a claim against another employer. Unless it can be proved that the Defendant knew that their actions would have the effect of breaching the contract (rather than might have that effect), liability will not be made out and it will be an expensive day in court.

We can assist with drafting restrictions and advising on enforceability of restrictions at an early stage to help put you in the best position to act without a significant risk.

This information is provided for guidance only and should not be considered specific legal advice. If you would like further advice or assistance in respect of any of the topics covered please contact Kelly Gibson on 0114 218 4307 or Kelly.Gibson@tayloremmet.co.uk

Kelly Gibson

Kelly is knowledgeable and experienced at helping both employers and employees on both contentious and non-contentious matters covering all aspects of employment law. For more information on this topic email Kelly.Gibson@tayloremmet.co.uk or call her on 0114 218 4307.

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