• Contact Us

Post-Termination Restrictive Covenants

on Friday, 13 March 2020.

Can post-termination restrictive covenants be enforced where an employer honestly believes that engaging an employee will not cause a breach?

In a recent case, Allen (t/a David Allen Chartered Accountants) v Dodd & Co, the Court of Appeal considered whether an employer was liable for inducing breach of contract where it knowingly recruited an employee subject to post-termination restrictions. This was after taking legal advice indicating that the restriction were unlikely to be enforceable.

Who Is Responsible for Proving a Breach of Contract?

In order to bring a claim in tort for inducing a breach of contract, the burden of proof is on the employee's former employer. They must show:

  • that their new employer knowingly and intentionally induced the breach of contract without reasonable justification
  • that the former employer suffered financial loss as a result

There will be no inducement to breach where the new employer honestly believed that the employee would not be in breach of any obligations owed to their former employer.

Were the Restrictive Covenants Enforceable?

Dodd & Co had offered Mr Pollock a job whilst he was still employed by a competitor, David Allen Chartered Accountants (David Allen). Before appointing Mr Pollock, Dodd & Co obtained legal advice about whether the post termination restriction in his contract of employment with David Allen were enforceable.

In summary, Dodd & Co's solicitors advised that:

  • the restrictive covenants were not enforceable due to a lack of consideration
  • the 12 month period during which the restrictions operated was too long
  • the non-dealing 'on balance' failed
  • the non-solicitation clause was 'probably' unenforceable

Based on the advice received, Dodd & Co took the view that whilst the matter was not entirely without risk, it was more likely that the restrictive covenants were unenforceable and appointed Mr Pollock.

David Allen argued that Mr Pollack had taken up the new role at Dodd & Co in breach of the restrictive covenants in his employment contract and made a claim against the Dodd & Co for inducing a breach of contract. Dodd & Co contested on the basis that they had relied on the legal advice obtained that it was more than likely that the restrictive covenants were unenforceable. Therefore, they believed Mr Pollock would not be in breach if he took up the offer of employment with them and contacted the clients of his former firm.

Coronavirus Legal Advice



Were Dodd & Co Liable for Inducing a Breach of Contract?

The High Court held that Mr Pollock's post-termination restrictions were enforceable. However, it found that Dodd & Co were not liable for inducing a breach of contract.

This was on the basis that they had to know that they were inducing a breach to be culpable and having taken legal advice which indicated the restrictions did not stand up, it was permissible for them to conclude that there would be no breach. It was for David Allen to prove Dodd & Co had actual knowledge of the breach, not for Dodd & Co to prove an absolute belief that there would be no breach. David Allen was unable to meet this threshold. and Dodd & Co were able to establish that they honestly believed that appointing Mr Pollock would not amount to a breach of contract. Therefore they were not liable in tort, even though they were mistaken in law.

Additionally, the Court rejected the submission that this requirement encourages people to obtain bad advice, and unfairly disadvantages a person who obtains correct advice. Lord Justice Lewison stated that it did not matter whether a defendant's erroneous belief is caused by their own ignorance or by the incorrect advice they received from their lawyers.

What Do You Need to Consider?

This case acts as a reminder of the limitations of a claim in tort of inducting a breach of contract. If responsibly obtained advice concludes that the planned actions would be unlikely to amount to a breach of contract, and this advice is honestly relied upon, a new employer would be well placed to argue that they are not liable for the tort of inducing a breach. This is even if the Court arrives at a different conclusion regarding the enforceability of the restrictions.

This case also acts as a reminder to employers for the need of clarity when drafting restrictive covenants. To be valid, it must be clear that the restrictive covenants in an employment contract protect a legitimate proprietary interest and the protection sought is no more than is reasonable having regard to the interests of the parties and the public interest. Employers must give serious thought to the duration and scope of restrictions to ensure that they are not unnecessarily wide and are proportionate to the seniority of the employer and the role that they perform.

It is also important to note that once the employer in the above case was put on notice of the enforceability of the restrictions, they were bound to observe them. Appropriate steps would therefore need to be taken to ensure that they did not require Mr Pollock to do anything that would be breach to avoid giving rise to a new cause of action for inducement with far greater prospects of succeeding.


If you have any queries about restrictive covenants please contact Joanne Oliver in our Employment Law team on 0117 314 5361 or complete the form below.

Get in Touch

First name(*)
Please enter your first name.

Last name(*)
Invalid Input

Email address(*)
Please enter a valid email address

Telephone
Please insert your telephone number.

How would you like us to contact you?

Invalid Input

How can we help you?(*)
Please limit text to alphanumeric and the following special characters: £.%,'"?!£$%^&*()_-=+:;@#`

See our privacy page to find out how we use and protect your data.

Invalid Input