No Common Law Duty preventing an Employee Setting up in Competition with Employer

In Ranson v Customer Systems plc the Court of Appeal has held that an employee who met his employer’s clients with a view to securing work for his own company after his resignation was not in breach of contract. There was no fiduciary duty on him to report such meetings or his intention to set up in competition and there was nothing requiring this in the employee’s contract.

R started work in October 2001 for CS providing specialist information technology consultancy. His contract required him to keep any confidential information belonging to CS confidential during and after his employment but said nothing of contacting clients. R resigned and left work on 27 February 2009. Before and during his notice period, R made preparations for the establishment of a competing business, including discussing potential work with clients who had approached him. This resulted in an order being placed two days before R left CS. CS sued R for breach of his contractual obligations and breach of fiduciary duties by failing to report his contact with the clients to CS. The High Court considered a number of cases dealing with directors’ breach of fiduciary duties. The judge found, among other things, that R was in breach of both a contractual obligation of fidelity, and also a fiduciary duty of loyalty, by meeting with clients. R appealed.

Allowing the appeal, the Court of Appeal held that it was dangerous to reason by analogy from cases about directors to cases about employees as this was liable to lead to confusion. The judge was wrong to hold that there was no material difference between R’s position and that of the director in Towers v Premier Waste Management Ltd. There was a highly material difference – R was not a director. The judge had failed to refer to the terms of R’s contract of employment and simply stated that he was satisfied that fiduciary duties arose. The judge should have considered whether, as an employee, R had any fiduciary duties at all.
Examining the case law, the Court concluded that it was clear that, unlike directorships, not every employment contract gives rise to a fiduciary relationship and there was nothing to suggest one in this case. The duty of loyalty or fidelity in the context of employment, as set out by the High Court in University of Nottingham v Fishel, requires each party to have regard to the interests of the other, but not that either must subjugate his or her own interests to those of the other. The Court rejected an argument that there was a general duty which required R to report his meetings with CS customers to CS. The Court confirmed Elias J’s conclusion in Fishel that there was no general principle that an employee must inform his employer if and when he is doing outside work in breach of his contract. Any such obligation can only arise from the terms of the contract. On the facts found by the High Court, R owed no fiduciary duty to CS and there was no relevant contractual term. Thus, R was not in breach of contract or fiduciary duty by failing to report his contact with the clients or his plan to set up in competition.