238: Court of Appeal considers employer’s liability for inducing breach of restrictive covenants
In 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 who was subject to contractual post-termination restrictions, having received legal advice that the restrictions were likely to be unenforceable.
Mr Pollock was employed by David Allen, a firm of accountants. He was offered a job by a competitor, Dodd & Co, which he accepted. As Mr Pollock was subject to 12-month post-termination non-solicitation and non-dealing covenants, Dodd & Co took legal advice on whether they were enforceable. The advice was that the covenants were unenforceable due to a lack of consideration; the 12-month period was too long; and the non-dealing and non-solicitation clauses were likely too wide to be enforceable. Based on this advice, Dodd & Co concluded that it was more probable than not that the restrictive covenants were unenforceable and appointed Mr Pollock.
David Allen brought claims against Mr Pollock for breach of contract and against Dodd & Co for inducing that breach. In order to succeed in the claim against the new employer, David Allen had to show that Dodd & Co had knowingly and intentionally induced the breach by Mr Pollock without reasonable justification, and that David Allen had suffered financial loss.
The High Court held that the covenants were enforceable and that Mr Pollock was in breach of them. However, the Court also found that Dodd & Co was not liable for inducing this breach. Dodd & Co had been entitled to rely on legal advice that the restrictions were probably unenforceable and had honestly believed that appointing Mr Pollock would not amount to a breach of contract. This was not a case where the new employer had turned a blind eye to the employee’s contractual obligations or been indifferent to them.
David Allen appealed on the grounds that the legal advice obtained by Dodd & Co had been equivocal, so they knew there was a risk that their actions would amount to inducing a breach of contract.
The Court of Appeal dismissed the appeal, ruling that Dodd & Co’s defence did not fail just because their legal advice was equivocal. Dodd & Co did not have to prove that they had an absolute belief that there would be no breach. The Court held that people should be able to act on legal advice which has been sought responsibly, even if that advice turns out to be wrong. If the advice was that it was more likely than not that no breach would be committed, that was good enough, and Dodd & Co was entitled to act on the advice it had received without exposing itself to liability. As the Court acknowledged, to insist on definitive advice that no breach would be committed would have a chilling effect on legitimate commercial activity. In any event, the significant number of restrictive covenant cases reaching the courts showed that legal outcomes are often difficult to predict in this area.
This case confirms that there will be no liability for inducement to breach of contract in restrictive covenant cases where the new employer has sought advice responsibly and honestly believed that the employee would not (or even would probably not) be in breach of any of the obligations owed to their former employer, even if that advice turns out to be wrong. In any event, bringing claims against a new employer is often used more tactically in order to exert additional pressure on the former employee and because the new employer will usually have greater financial means to meet any award of damages and costs. This case also highlights the importance of careful drafting of restrictive covenants, to ensure that they are tailored to a particular employee and are not unnecessarily wide.