Inducing a breach of contract- a new landscape?
It is commonplace when an employee leaves his old employer to join a competitor, in breach of an arguably unenforceable restrictive covenant, that the old employer threatens to sue not only the transferring employee, but also the new employer.
The claim against the new employer is called “inducing a breach of contract”. In a very significant decision in the Court of Appeal on 27 February 2020 (Allen v Dodd & Co Limited) the Court of Appeal has potentially stopped such claims in their tracks and re-set a landscape.
The position now appears to be that provided the new employer has received legal advice from its solicitors that the old employer’s restrictive covenants are probably unenforceable – and provided it reasonably believed that advice – then it will not be liable for inducing a breach of contract, even if that advice turns out to be wrong.
The transferring employee may still be in trouble if he is sued, but that may be of little comfort to the old employer if it has incurred significant costs in Court proceedings, and it has nobody other than a poor, and now out of work, ex-employee to recover costs from. Adding insult to injury, the old employer may be required to pay the new employer’s legal costs of defending the inducing a breach of contract claim.
No doubt there will be lots of cases in the future about whether it was “reasonable” for the new employer to believe its solicitor’s advice. Questions will arise whether the new employer took advice from an appropriate specialist. Letters before action to the new employer will set out all the factors why, in the old employer’s opinion the restraints are enforceable, and will urge the new employer to take specialist advice. However, for the moment, it seems that if advice has been taken from its solicitors that the covenants are probably not enforceable, the new employer has a top trump to play.