HM Insights

Restrictive covenants and the benefits of proactive legal advice in the recruitment process

A recent court case considered whether an employer was liable for inducing a breach of contract where it knowingly recruited an employee who was subject to post-termination restrictions.

Liability on the part of a new employer cannot be established if the employee is not liable for a breach of contract on the basis that the post-termination restrictions are unenforceable.

This case provides a mechanism for employers to obtain a defence to any claim that they encouraged, facilitated or otherwise induced a breach of post-termination restrictions if they, acting in good faith, seek and receive legal advice to the effect that the restrictions are unenforceable.

With covenants more commonly featuring in the consciousness of the recruitment process, and disputes over covenants of this nature increasing, businesses need to be clear on the benefit of taking legal advice and making strategic recruitment decisions with clear risk assessments undertaken.

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The facts of the case

In the Court of Appeal case of Allen v Dodd & Co Limited, the contract of employment of an employee employed by Messrs David Allen, a Carlisle-based accountancy firm, contained restrictive covenants applying 12 months after termination. The employee resigned to take up employment with a competitor, Messrs Dodd & Co Ltd. Before the employee started his new job, the competitor obtained legal advice on whether the restrictive covenants were enforceable.

If enforceable, these would have prevented the employee from working for the competitor. The advice given by the solicitor to Messrs Dodd & Co was that the restrictive covenants were ineffective and unenforceable.

In summary, it was advised that:

  • the restrictive covenants were not enforceable due to a lack of consideration (an issue specific to England & Wales);
  • the 12-month period during which the restrictions operated was too long;
  • the non-dealing clause 'on balance' failed; and
  • the non-solicitation clause was 'probably' unenforceable.

Based on this advice, Messrs Dodd & Co hired the employee, while being aware of the potential risk it faced in doing so.

Messrs David Allen made a claim against Messrs Dodd & Co for inducing a breach of contract and argued that the employee had taken up the new role at Messrs Dodd & Co in breach of the restrictive covenants in his employment contract, when in doing so he thereafter made contact with clients with a view to providing his services.

Messrs Dodd & Co defended the action on the basis that it had relied on the legal advice obtained that it was more than likely that the restrictive covenants were unenforceable. Based on the advice it had received, Messrs Dodd & Co contended that it believed it would not be in breach if the employee took up the offer of employment with them and contacted the clients of his former employer.

This centres on the question of knowledge, an essential component in any successful claim for inducing a breach of contract (a tort (England and Wales) / delict (Scotland).

Decision at first instance

The High Court held that despite the advice received, the covenants were enforceable and there had been a breach of those covenants.

The judge however accepted that Messrs Dodd & Co had not induced any breach, saying that it had not ignored the employee’s contractual obligations, had not been indifferent to those obligations and had gone to the trouble of taking early legal advice upon which it honestly relied.

The fact that the legal advice turned out to be wrong was not enough to hold Messrs Dodd & Co liable for inducing the breach.

Decision on appeal

Messrs David Allen appealed. The question raised on appeal was whether Messrs Dodd & Co had sufficient knowledge to expose itself to liability for inducing a breach of the employee's contract. Messrs David Allen argued that Messrs Dodd & Co was aware that there was a risk that the covenants would prove to be enforceable, and if it was aware that there was a chance that the acts it was inducing could amount to a breach of contract, that is or should be enough to found liability for inducing a breach of contract.

The Court of Appeal did not agree. The Court of Appeal held that if the legal advice provided is that it is more probable than not that no breach will be committed, that is good enough to absolve the new employer (assuming they are acting responsibly and honestly in procuring and acting on receipt of that advice).

This decision is welcome news for employers as, provided they act responsibly by seeking legal advice on the enforceability of the restrictions and are provided with legal advice to the effect that it is 'more probable than not' that the restrictions are unenforceable, they cannot be held accountable for any loss which an ex-employer might suffer as a result of any encouragement or facilitation of a breach of post-termination restrictions. This is the case even if that legal advice turns out to be wrong and the restrictions are ultimately held by a court to be enforceable.

Lessons to be learned for employers

The benefit in obtaining legal advice early on in the recruitment process of an employee subject to post-termination restrictions is clear – if the advice is that the restrictions are unenforceable this will protect against a claim of inducement of a breach of contract and liability for any loss suffered by the ex-employer.

While the rules on assessing the enforceability of covenants are the same throughout the UK, the court processes/rules around enforcement of post-termination restrictions are very different so specific advice should be sought, ideally prior to any offer of new employment being made.

For legally privileged advice to be disclosed in the course of litigation is unusual, but evidently this case presents a clear example of where (a) obtaining legal advice timeously prior to recruitment; and (b) disclosing the same, was and will be vital to assist in the defence of one key aspect to proceedings of this nature.

Putting appropriate protections in place in Scotland - caveats

Legal advice should be sought early on in the process, and, for all businesses with a presence in Scotland, caveats should be lodged to protect a new employer's position (and should also be lodged for the ex-employee).

Caveats are a very useful, cost effective, tool to mitigate against certain risks, for example, interim interdict (an 'injunction' in England). These caveats are only available in Scotland and operate to prevent an interim order (such as an interim interdict) being granted against a business or individual without that party's knowledge.

If an appropriate caveat is in place, and another party applies to the court to grant an interim interdict against you, the court would not consider granting that interim order until you had first been given an opportunity to address the court on the reasons the interim order should not be granted. If a caveat is not in place, there is a risk that an interim interdict maybe granted by a court against a business or individual, who would not be aware of this until the court order is served on them. They would then have to comply with the court order.

Get in touch

We recommend that all corporate entities which have a presence in Scotland have caveats in place and renew these on an annual basis. We can assist with this.

The cost of litigation greatly outweighs the cost of initial advice; businesses should be proactive in sourcing and relying on advice from their trusted advisers, to help manage the risks faced.

Carolyn Morgan | [email protected] | 0141 227 9564
Partner, Litigation
Dual qualified & licensed to practice in Scotland, England & Wales

Lorna Davis | [email protected] | 0141 227 9304
Partner, Employment
Accredited specialist in employment law