Inducing a breach of contract – guidance on employer’s liability

In employment restrictive covenant cases, the claimant, the former employer, will often seek to bring a claim against the former employee’s new employer for inducing a breach of contract.

In order to bring a claim for inducing breach of contract, the claimant must show that the third party knowingly and intentionally induced or procured the breach without reasonable justification.

The case of Allen v Dodd & Co Ltd [2020] EWCA Civ 258 was brought to the Court of Appeal on 19 February of this year raising the issue of what amounts to a sufficient state of mind or ‘knowledge’ to make a party liable in tort for inducing a breach of contract.

Relevant facts

Mr Pollock was initially employed by accountancy firm, David Allen Chartered Accountants, in 2007 as a business service specialist. In 2015 he signed a new contract of employment and simultaneously signed a restrictive covenant agreement containing stringent post-termination restrictions which lasted for a period of 12 months after termination in consideration for a back-dated salary increase.

During May 2018 Mr Pollock was offered a new job with competitor accountancy firm, Dodd & Co Ltd which he accepted. He commenced this new role in July, three days after leaving his former employer, David Allen.

Prior to the commencement of Mr Pollock’s employment, Dodd & Co Ltd sought legal advice about whether Mr Pollock’s restrictive covenants were enforceable. The advice they received was that while the matter was not without risk, it was more likely than not that the restrictive covenants were ineffective and unenforceable. Dodd & Co obtained further information over time, following this initial advice, which it duly referred back to its solicitors for review and the same advice was received on the enforceability of the restrictive covenants. The advice given led Dodd & Co to believe it could act on the basis that the restrictions were not enforceable and that Mr Pollock could contact his former employer’s clients.

David Allen pursued a claim against Mr Pollock for breaching his restrictive covenants and joined his new employer to the proceedings for inducing the breach.

The Court’s decision on inducing a breach of contract

After a contested hearing it was held that the covenants were in fact enforceable, subject to some minor, permissible excisions, and therefore Mr Pollock was in breach of them in working for Dodd & Co. However, the judge dismissed the claim against Dodd & Co. HHJ Halliwell held that these circumstances were not sufficient knowledge for Dodd & Co to be considered liable, stating that Dodd & Co went to the trouble of obtaining prior legal advice, upon which it honestly relied, and was therefore not dismissive of or indifferent towards Mr Pollock’s contractual obligations. The fact the legal advice turned out to be wrong was irrelevant. David Allen appealed this decision.

On appeal, Counsel for David Allen submitted that the advice Dodd & Co received was not firm and Dodd & Co were aware there was a risk the restrictive covenants would prove to be enforceable.

In his judgment, with which Richards LJ and Rose LJJ agreed, Lewison LJ cited the House of Lords decision in OBG Ltd v Allan [2007] where it was stated that: ‘an honest belief by the defendant that the outcome sought by him will not involve a breach of contract is inconsistent with him intending to induce a breach of contract….it matters not that his belief is mistaken in law. Nor does it matter that his belief is muddle-headed and illogical…’

Lewison LJ dismissed the appeal and highlighted the fact that lawyers rarely give unequivocal advice, and, even if they do, clients must appreciate that there is always a risk this advice will turn out to be wrong. He stated in his judgment ‘it is also important to bear in mind that the knowledge in question is not simply knowledge of a fact; but knowledge of a legal outcome. That is often hard to predict… [and] to insist on definitive advice that no breach will be committed would have a chilling effect on legitimate commercial activity.’

It was however noted that if the legal advice expresses a lower standard, such as advice that it is arguable no breach will be committed, liability may still arise. Lewison LJ commented that this question does not arise in the present appeal and expresses no opinion one way or the other, thereby summarising: ‘if the advice is that it is more probable than not no breach will be committed, that is good enough.’

Comment

Bringing claims against a former employee’s new employer is common place as it puts additional pressure on the former employee, and the new employer usually has better means than the former employee to meet any award of damages and the employer’s legal costs. However, this case is a reminder of the importance of the state of mind of a defendant to a tort claim.

The test established in this case very much falls upon the long-established standard of proof in civil litigation cases: the balance of probabilities, what is likely to happen if there is a dispute regarding the terms of the contract. If the defendant knew that its actions would have the effect of breaching the contract, rather than might have that effect, liability will be made out. It also shows the importance of obtaining responsible legal advice on a potential breach of contract before the breach occurs.

The case is useful guidance not only to employers but also to those seeking legal advice on any contractual relationship. It reaffirms protection for them if there is an honest reliance on legal advice that a particular outcome is more probable than not, even if such advice turns out to be inaccurate.

If you are considering employing someone who has recently worked for a competitor you should ask them whether or not they have any restrictive covenants in their exiting employment contract and if so, to be provided with a copy. If, on the face of it, there is a possibility of the restrictive covenants being breached upon your employment of that person, it is worthwhile seeking specialist legal advice from our employee competition and confidentiality experts on the enforceability of the covenants before hiring the person so that you are aware of the potential risks and consequences of doing so.