For any business currently engaged in a growth phase, it is inevitable that you will have new employees at a senior level joining you who will be keen to bring business to you from their existing contacts as soon as they can.
In the financial services sector in particular, those employees are likely to have restrictive covenants in place that prevent them from soliciting or dealing with clients of their former employer, and potentially even working for you. They may also have a requirement to show or disclose those covenants to you, and their old employer may write to you to let you know about the covenants.
All of this creates a risk to your becoming caught up in a claim for inducing the employee to breach those covenants.
First we want to dispel a few persistent and dangerous misconceptions that exist in Jersey:
- "Restrictive covenants are not valid" – this is simply not correct. Covenants in Jersey are enforceable, provided they are no wider than necessary to protect a legitimate business interest. Non-solicitation and non-dealing covenants for senior employees are examples of covenants that are very likely to upheld in Jersey;
- "Covenants that last 12 months are too long in Jersey" – this is also wrong. The Royal Court has commented that a 12 month restricted period is likely to be valid; and
- "New employers can't be held responsible if an employee breaches their covenants" – this is false. New employers can be brought into a claim if they have induced a breach of contract. New employers that know, or that ought to know, about their employees' covenants can be held responsible if that employee goes on to breach their covenants. We frequently draft contracts for senior executives in Jersey and it is standard for them to have restrictive covenants. Given this, businesses in Jersey can be fixed with knowledge of their new employees' covenants if they simply turn a blind-eye to them.
An inducement claim was recently considered by the English Court of Appeal in the case of Allen t/a David Allen Chartered Accountants v Dodd & Co  EWCA Civ 258. In this case, Dodd & Co took legal advice on the enforceability of a new employee's non-solicitation and non-dealing covenants. The advice was that these covenants were not likely to be valid. As a result, Dodd agreed that their new employee could act in breach of the terms of the covenants.
It turned out at trial that the covenants were actually valid and enforceable. Allen tried to claim for damages caused by the breaches of covenants that Dodd had agreed to in allowing the employee to solicit and deal with Allen's clients. In order to succeed on a claim for inducement, Allen needed to show that Dodd knowingly and intentionally induced or procured the breach without reasonable justification, or that they wilfully / recklessly ignored the possibility of a breach of contract and went on to induce or procure a breach. Therefore, Dodd's knowledge of the covenants, and whether they reasonably believed that there would be a breach, were key issues for the Court of Appeal.
In Dodd, the key point was that the new employer had taken legal advice on the covenants, which indicated that the covenants were unlikely to be enforceable. Dodd therefore had an honestly held belief that they were not acting in breach of the covenants. The fact that this was mistaken was irrelevant. The claim failed, as Dodd had acted with reasonable justification, in relying on legal advice.
Our advice to businesses when bringing on new senior hires is:
- Do not turn a blind eye to the existence of covenants. Senior employees in financial services are likely to have restrictive covenants;
- Obtain a copy of the covenants and seek independent legal advice on the validity of those covenants – this advice must be responsibly sought from someone qualified to give that advice. We would suggest obtaining advice from an advocate specialising in employment law;
- If the advice is that the covenants are likely to be valid, make sure that the employee is directed in writing not to breach the terms of the covenants. Business development activities should be targeted during the covenant term to avoid a risk of a breach of the covenants; and
- If the advice is that the covenants are not likely to be enforceable, you should be able to rely upon that advice as a defence to an inducement claim.
Reviewing covenants should be a regular part of your business' management of legal risk. Please get in touch with Dan Read if you would like to discuss the restrictive covenants in your existing contracts of employment, or if you need to consider a new employee's covenants with their former employer.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.