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Employee Disloyalty – A Well Drafted Contract Makes All the Difference!

PLEASE NOTE: Information in this article is correct at the time of publication, please contact DFA Law for current advice on older articles.

Every sensible business owner is aware that today’s trusted employee may become tomorrow’s competitor. However, as a High Court ruling showed, with the right legal advice and professionally drafted employment contracts, powerful steps can be taken to discourage disloyalty.

The case concerned a company that specialised in providing sports-related tours and holidays. Following a breakdown in relations between its managing director and its operations manager, the latter was first suspended, then summarily dismissed, following an internal disciplinary investigation.

The manager’s employment contract contained various restrictive covenants which, amongst other things, forbade him from disclosing the company’s trade secrets or other confidential information. During the six months following termination of his employment, he was also banned from enticing, inducing or encouraging any of the company’s clients or suppliers to shift allegiance.

A new company was incorporated three days after his suspension, and the manager became its sole director and shareholder shortly after he was sacked. His company had since operated in direct competition with the company that formerly employed him. After seeking legal advice, the company launched proceedings against the manager, alleging breach of the covenants and misuse of confidential information.

In ruling on the matter, the Court noted that the company, like any other business, must compete in the free market. However, the manager had held a senior position and the company clearly had a legitimate interest in protecting its trade secrets, in particular its lists of customers and suppliers. The manager was entitled to use his experience and know-how in order to compete with the company, but the six-month period of restraint on his freedom to do so was, in the circumstances, very modest and reasonable.

The Court found that the manager had in several respects breached the terms of the restrictive covenants. When helping to set up the rival, he had also gained a competitive springboard by the wrongful use of the company’s confidential information. He was ordered to pay the company £12,929 in damages, the majority of that representing the sum that he would reasonably have been required to pay in order to achieve release of the covenants. Having procured the manager’s breaches of contract, the rival was made jointly and severally liable for £10,000 of that award.

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