UK News

Fiduciary duties and the importance of updating employment contracts

July 2012

The Court of Appeal has decided that a senior employee did not owe a fiduciary duty or a duty of fidelity when he set out to compete with his employer.

Mr Ranson started his employment with Customer Systems as the lowest grade employee at the firm. By the time he left he was at the most senior grade in the firm and responsible for 59% of the firm's revenues but his contract of employment had not been amended throughout this 8 year period. His contract did not contain any post-termination restrictive covenants preventing him from poaching employees, clients or suppliers after the termination of his employment.

During his employment, Mr Ranson set up a company called Praesto which was intended to compete with Customer Systems. He did not carry out any work for Praesto but he did draft a business plan. He resigned as a result of a break-down in discussions with Customer Systems regarding his future career path. At Customer Systems' request, he extended his notice period by an additional 14 days in order to help them secure a new contract. During this 14 day period, Mr Ranson signed an order on behalf of Praesto with a Customer Systems' client and dined with another Customer Systems' client.

The High Court decided that Mr Ranson was in breach of the duty of fidelity implied into every contract of employment and in breach of his fiduciary duty under which he owed 'a single-minded duty of loyalty' to his employer. The Court of Appeal disagreed. They analysed fiduciary duties in employment contracts and concluded that an employment relationship is not usually a fiduciary one which required the individual to place his employer's interest ahead of his own. The Court of Appeal commented that some senior employees will owe a fiduciary duty to their employer akin to the duty owed by directors to their companies but that such obligations entirely depend on the wording in the contract of employment.

The Court of Appeal said that Mr Ranson was not obliged to report his own wrongdoing and that the duty of fidelity implied into employment contracts did not result in undivided loyalty to the employer.

Commentary

Mr Ranson's actions did not have a substantial impact on Customer Systems' client base and revenue. Based on the facts of the case, Mr Ranson's actions were not considered to be wholly inappropriate and this helped his credibility before the court. The case highlights the importance for employers to update contracts of employment when employees are promoted so as to ensure that express fiduciary duties and new job descriptions are added or amended as appropriate. Employers should also consider whether post-termination restrictive covenants are needed to protect the business should a valued employee leave.

Resources

Ranson v Customer Systems Plc

For further information or to discuss the issues raised, please contact Emma Clark or David Widdowson on +44 (0)20 3051 5711.

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