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This case concerns the application of the fiduciary duty of loyalty and the implied contractual obligation of fidelity to an employee who has left his employer and set up his own company in competition. The Court of Appeal determined that the fiduciary duty of loyalty (which normally only applies to directors) did not apply in the circumstances and that he had not breached his contractual duty of fidelity by meeting with potential customers whilst employed by the Claimant (Customer Systems PLC) or when he competed for work after. In particular, employees (and directors in relevant circumstances) do not have a positive duty to report their own wrongdoings or breaches of contract to their employer.

The facts in Ranson v Customer Systems Plc

Mr Ranson (“the Defendant”) worked from Customer Systems PLC (“the Claimant”) from 2001 to 2009. By the time he left the Claimant he had worked his way up to a position of responsibility. However, at no time during his employment was the Defendant made a director of the Claimant. He was an employee at all times during his employment. Before and during the expiry of his notice period Mr Ranson made preparations for the establishment of a competing business, Praesto Consulting (UK) Ltd (“Praesto”). The Defendant had no post-termination restrictive covenants contained within his contract of employment so the Defendant was unable to object to the establishment of the competing business. However, the Claimant did object to Mr Ranson not telling it that he had had dinner with a client in February 2009 (2 days prior to his leaving) where future work for Mr Ranson was discussed. The Claimant asserted that this was both a breach of the contractual duty of fidelity and the fiduciary duty of loyalty. The High Court found that this was indeed the case and that Mr Ranson had breached his contractual duty of fidelity and his fiduciary duty of loyalty. Mr Ranson appealed these two points.

The law relating to fiduciary obligations and whether they apply to employees

As a general principle, the employee’s contractual duty of fidelity does not prevent him from competing with a former employer once he has left employment, and he is free to prepare for the establishment of a competing business prior to the termination of his contract of employment (Helmet Integrated Systems Ltd v Tunnard).

Fiduciary duties are not contractual in nature – they are equitable. They normally apply to directors of companies as a result of the fact that they are in a position of trust. However, senior employees can be subject to a fiduciary duty if they have a contractual obligation that signifies this or in exceptional circumstances. One of the common law fiduciary duties (for there are a number of statutory fiduciary duties contained within the Companies Act 2006) is that of the fiduciary duty of loyalty. Those subject to the fiduciary duty of loyalty have a single-minded duty to act in the interests of their company. Those subject to a fiduciary duty must therefore not act in a manner that would contravene the interests of their company. Employees are generally not subject to such a strong loyalty. Further, this duty of loyalty does not extend to reporting one’s own wrongdoings or contractual breaches – for directors or employees. Such an obligation must normally be contractual in nature.

The Court of Appeal’s decision in Ranson v Customer Systems Plc

The Court of Appeal upheld the Defendant’s appeal and found that the Defendant was neither liable contractually nor as a result of a breach of a fiduciary duty. The Defendant was entitled to prepare to set up his own business (see above) and did not have a contractual obligation to report his own wrongdoings to the Claimant. Thus there was no breach of contract. Further, the Defendant was not in a position of fiduciary responsibility. Such obligations did therefore not apply to him. However, even if they did there may not have been a breach of fiduciary duty as the Defendant would not have had an obligation to report his own wrongdoing in such circumstances.

Our specialist employment lawyers’ views on Ranson v Customer Systems Plc

This is clearly a complex case. It outlines quite neatly the extent of the obligations of employees and directors to their companies and when preparing to set up your own business does and does not breach contractual and/or fiduciary duties. Further, it emphasizes the need for post-termination restrictive covenants to be included within all employees’ contracts. The failure to do so here may have cost the Claimant quite a sum of money.

 

About Chris Hadrill

Chris is a specialist employment lawyer at Redmans. He specialises in contentious and non-contentious employment matters, including breach of contract claims, compromise agreements and Employment Tribunal cases. He writes on employment law matters on a variety of websites, including Direct 2 Lawyers, Lawontheweb.co.uk, LegalVoice, the Justice Gap and his own blog. Contact Chris by emailing him at chadrill@redmans.co.uk

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  1. […] case again shows, along with Ranson v Customer Systems plc (a Court of Appeal case just handed down) that the fact that an employee is found to be considering […]

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