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Restrictive covenants – employers watch out

Employers can be liable for inducing a breach of a restrictive covenant, but relying on legal advice can provide a defence as held the Court of Appeal in Allen v Dodd & Co Ltd.

Prior to employing Mr Pollock, Dodd and Co sought legal advice on his current employment contract with David Allen Chartered Accountants (‘Allen’), in particular his post-termination restrictions. The legal advice was that it was “more probable than not” that the restrictions would be unenforceable. Relying on this advice, Dodd and Co hired Mr Pollock.

Allen subsequently sought to enforce the post-termination restrictions in the High Court, which, after severing some words, held that the restrictions were enforceable against Mr Pollock. As part of their deliberations, the High Court considered whether Dodd and Co were liable for inducing the breach by Mr Pollock. It was held that they were not liable as “they did not turn a blind eye to the employee’s contractual obligations”. This was evidenced by the fact they had obtained legal advice.

Employers can be liable for inducing a breach of a restrictive covenant.

On appeal, Allen’s case was dismissed again. The Court of Appeal held that where “the defendant honestly believes that the act that he procures will not amount to a breach of contract, he is not liable”.  As Dodd and Co had relied honestly on their legal advice and that the advice did not definitively conclude that there would be a breach, they were not liable.

This is a very useful reminder that employers can be liable for inducing a breach of contract. Employers should take legal advice as early as possible in order to understand the risks of that accompany post-termination restrictions; this will help therefore mitigate any risk of inducement.

For more information on restrictive covenants, get in touch with our Employment department.

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This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full General Notices on our website.

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