Why you need restrictive covenants in employment contracts

A recent High court decision highlights the need for restrictive covenants in employment contracts to protect businesses from employees who use their information and contracts for personal benefit.

While it is established that employment contracts contain an implied term that employees will serve their employer with good faith and fidelity, it is also true that deciding to set up a competing business in the future and even discussing that idea with friends and family is not sufficient to breach these implied terms.  The case of Customer Systems Plc v Ranson & Others is an example of taking too many preparatory steps.

Mr Ranson incorporated a competing company in 2007 but did not do any real business until he resigned from Customer Systems in 2009.   However, before he left Mr Ranson, in the name of his new company, had pitched for opportunities at a number of Computer Systems’ customers instead of passing on the information to his employer. Mr Ranson had also taken business contact numbers from his company mobile phone and emailed them to himself.

The High Court decided that, even though there were no specific restrictive covenants in Mr Ranson’s contract of employment, these actions were in breach of his implied duties to the company. The Court felt that, even once Mr Ranson had handed in his notice, as he continued working in a sales capacity for Computer Systems, he was obliged to bring sales opportunities to their attention. He was not in a position to use the information that he gathered for his own benefit or the benefit of his new company.

Mr Ranson had also discussed his plans with a colleague, Mr Offland and offered him a job with the new company. The Court felt that if Mr Offland was not obliged to pass on this information and had he done nothing more then he would have been safe from any breach of contract. The court held that an employee who becomes aware of confidential matters relating to competition from a potential new employer is under no obligation to pass this information to his existing employer, as this would mean he would be in breach of confidence to his new employer.  A duty of fidelity to an existing employer would not necessarily defeat a duty of confidence to a new employer.

However, Mr Offland had assisted Mr Ranson in preparing tenders and the Court felt that this breached his contract.

This case illustrates the importance of having effective restrictive covenants in place. Relying on implied conditions is not straightforward.  It is much easier if the contract is clear about what the employee can and cannot do.

Hardwick HR can provide suitable employment contracts for you.