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High Court injunction to protect client connections

Posted on 31st October 2014
Case law

This case report is an excellent example of how the employer was able to rely on its terms and conditions of employment to ensure the employee did not retain the ability to go and work for the competitor in breach of contract.

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the defendant said that he was “not willing or able to return to work”

For many employers protecting client or customer connections is essential, especially when an employee resigns to go and work for a key competitor. In this case the importance of having a well drafted executive service agreement is highlighted as is the court’s willingness to stop a departing employee from going to work for a competitor without first giving the required notice under the service agreement.

Sunrise Brokers LLP v Michael Rodgers Court of Appeal October 2014

Facts

The background to this case involves the defendant Mr Rogers who worked in the city as an interdealer broker. The defendant under the terms of his executive service agreement was obliged to resign on giving 12 months’ notice. The agreement contained a garden leave clause and separate restrictive covenants that would have lasted for six months. The defendant had been employed since May 2009 and by all accounts was a successful employee who was able to earn substantial remuneration.

In breach of the terms of his service agreement, on 5 March 2014, the defendant entered into a new contract of employment with EOX, a key competitor of the claimant company, Sunrise Brokers. This new contract was to start on 1 January 2015 in New York.

On 27 March 2014 the defendant said to his employer that he “wanted to leave now” and walked out. The defendant did not give the required 12 months’ notice.

Repudiatory breach of contract not accepted

The claimant company, via its solicitors, advised the defendant that they were not prepared to accept his conduct as a repudiatory breach of contract. They argued that unless and until he gave the required 12 months’ notice his employment would continue and he was required to attend work. In reply the defendant said that he was “not willing or able to return to work” and requested that he be put on garden leave. The claimant company argued that garden leave did not apply because the claimant had not given the required notice. (Garden leave can only take place once notice has been given by either the employer or the employee.)

The defendant was given an ultimatum; he must return to work to effect a structured handover of his work and clients or he would not be paid. He refused. Thereafter the claimant company refused to pay him his normal salary and other benefits.

High Court decision

The claimant company applied to the High Court for a declaration that the defendant’s contract of employment continued until the expiry of the required notice. The High Court agreed with the claimant company and imposed an injunction on the defendant that he could not go and start work with EOX until January 2015. The High Court based its decision on the fact that it was open for the claimant company to decide whether it accepted the defendant’s failure to give notice as a repudiation of the contract or instead, as it did, elect to keep the contract alive.

The High Court also agreed that there had been no breach of contract by the claimant company arising from its refusal to pay the defendant. This was because he had made it clear he was not ready and willing to return to work. For example he had made it clear in emails that he was busy relocating from London to New York where he was going to start work with EOX.

Appeal to the Court of Appeal

The defendant appealed on the basis that the injunction imposed upon him should not have been granted unless the claimant company had given an undertaking to pay his salary and benefits for the duration of the injunction.

He also objected to the fact that the total period of 10 months’ restraint was excessive given that the Executive Service Agreement provided, had he been placed on garden leave, he would only have been subject to a total period of six months’ restraint. The claimant also argued that the effect of the injunction was to force him to return to work for the claimant company.

Court of Appeal decision

The Court of Appeal upheld the High Court decision and injunction. The Court of Appeal was not persuaded by any of the defendant’s arguments. In particular they said that the claimant company was not required to pay the defendant during the period he was restrained from going to work for his new employer, EOX.

On the evidence they were satisfied that the effect of the injunction was not to compel him to work for the claimant company. He would not have suffered from financial hardship and this was not a case where he had been made to “starve or be idle”. It was clear from the facts that if the defendant had given the appropriate notice would have been placed on garden leave and then after his employment had terminated, at the expiry of his notice period, he would have been subjected to a total period of six months’ restraint.

In this case the extra four months that the court imposed on the defendant arose from the fact that he did not give the required notice meant that he was in effect the author of his own misfortune because he had refused to attend work. The old adage of ‘no work, no pay’ applied.

Accordingly the defendant cannot start work in New York with EOX until the injunction expires in January 2015. It is also likely that he is going to have to pay the majority of the claimant company’s legal costs.

In practice

The claimant company deployed excellent tactics and made full use of its right to force the defendant to act within the terms of his executive service agreement. Ordinarily, when an executive resigns the employer has to continue to pay them because the executive is ready and willing to work. In such circumstances the employer quite often elects to put the departing executive onto garden leave; the terms of which include the payment of normal salary and benefits. This case, however, is authority that if and when the departing employee is not ready and willing to attend work there is no compulsion on the employer to continue to pay them and this non payment will then not amount to a breach of contract. Therefore the restrictive covenants and the other terms of the executive service agreement do not fall away as being unenforceable. This case would not have arisen if the defendant had returned to work. He would have then been placed on garden leave and he would have been paid.

The employer was able to avoid the defendant from unilaterally absenting himself from work because it had an appropriate executive service agreement in place. It then ensured it followed the right tactics to achieve the key objective of preventing the defendant from going off to work with a key competitor without first allowing the appropriate notice provisions to expire.

Would your service agreements help protect your client/customer connections?

For a no obligation review of your director or executive service agreements, please email a copy to Simon Quantrill. Unless yours are up to date you may be exposing your business to unnecessary risk.

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