Inducing breach of contract

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First thing we do, let’s call all the Lawyers: Legal advice is a defence to Inducing a Breach of Contract

If you encourage an employee to  break his contract with a former employee the former employer may be able to bring a claim against you for inducing a breach of contract. Typical situations are touting for business with the former employer’s clients or taking a team with you.  The former employer might be especially motivated to do so where they think you have enriched yourself at their expense – or have deeper pockets than them.

As we explain, there is new law on the books that can be used to defend new employers and it is quite a simple step – take legal advice.

We look at:

Restrictive Covenants

Employment contracts often include restrictive covenants preventing an outgoing employee from working for their former employer’s competitors. Restrictive covenants can be a headache not just for those they seek to bind but also their new employers, because of the ability to claim for inducing a breach of contract. If you know when you hire someone that you’re asking them to breach restrictive covenants to come to work for you, their former employer may bring a claim against you. How can you protect yourself in this scenario?

If this situation sounds familiar, the recent Court of Appeal decision in Allen v Dodd &Co Ltd may be of comfort, provided you’ve already spoken with a lawyer.

Accountant v Accountant

The case concerned two rival accountancy firms and an employee who left one to join the other. The employee owed certain restrictive covenants to his former firm. Because accountants know how to follow the money, they brought a claim against the new employer rather than the relatively junior employee.

Importance of Legal Advice

An important element of this case was that the employee and new employer had both obtained legal advice that the restrictive covenants were unenforceable and, relying on this advice, had decided to simply ignore them. It turned out that their lawyers were wrong; the covenants were enforceable and had been breached by the employee when he started his new job. However, in defending the accusation that they’d induced the employee into breaking his employment contract the second accountancy firm argued that they had taken reasonable precautions to ensure that the contract would not be broken by seeking legal advice.

Intention is Key

A claim for inducing a breach of contract is unusual because it requires the claimant to show an actual intention on the part of the guilty party. This is unlike many other civil offences which can arise from mere negligence on the part of the defendant. For a claim for induced breach of contract to succeed it must be shown that the defendant knew about the contract and intended to encourage another person to break it. It is the contractual breach which must be intended – it’s not enough that they induced someone to do something which later emerged to be a breach of contract.

In this particular case the question for the court was whether the fact the new employer had sought out and relied upon legal advice proved that they had not intended for the employee’s contract to be broken, even though the legal advice turned out to be wrong.

The former employer claimed that, notwithstanding the legal advice, the employee and new employer knew there was a risk they were breaking the restrictive covenants. Indeed, that risk was the reason they sought legal advice in the first place. They argued that if a party could escape liability simply by relying upon incorrect legal advice they would be unduly rewarded for having optimistic lawyers.

The fist instance court rejected this argument and agreed with the new employer that there had been no intention to induce the employee into breaking the restrictive covenants. The former employer appealed.

Court of Appeal

When they considered  the case the Court of Appeal placed great emphasis on the importance of people being able to confidently rely on legal advice, even if it later turns out to be flawed.

Barristers for the former employer argued that to avoid liability for inducing a breach of contract the second accountancy firm should have sought ‘definitive’ legal advice. The court dismissed this argument swiftly. They noted that ‘lawyers rarely give unequivocal advice; and even if they do the client must appreciate that there is always a risk that the advice will turn out to be wrong.’  Requiring a lawyer to sign off that a course of action will definitely not breach a contract is a very high bar, and one which would ‘have a chilling effect on legitimate commercial activity.’

The Court of Appeal dismissed the former employer’s claim for a second time, finding that the new employer was protected from liability for inducing a breach of the employee’s contract by virtue of the legal advice they’d received. Provided that legal advice was reasonably sought and relied upon in good faith, it would protect a defendant from accusations of inducing a breach of contract if the advice was that the act envisaged would not result in a breach.

Conclusions

This is a welcome judgement, and a useful illustration of the value of legal advice. If the new employer had not consulted a solicitor it is very likely that they would have been on the hook for their employee’s breach of restrictive covenants.

While this case concerned restrictive covenants in an employment context, the decision is of general application to all contractual situations. In commercial life there are contracts everywhere, and if you are encouraging someone to abandon a business opportunity in favour of some other venture, to share some confidential or proprietary information, or even to switch from an existing supplier, you may be vulnerable to a claim that you have induced a breach of contract. As Allen v Dodd demonstrates, the most reliable defence against such claim is to seek legal advice at an early stage.

Gannons do negotiate and understand the effects of a wide variety of commercial and employment contracts.  We are always happy to help.

Please do give us a call to see how we can help your business on 020 7438 1060.