UK: court ruling on non-compete, repudiatory breach, job notification clause and disclosure obligations

The High Court has enforced a six month notice/garden leave period and a six month post-termination non-compete covenant against a senior broker, rejecting his claims that the employer had committed various repudiatory breaches releasing him from those provisions.

The broker alleged that instances of unacceptable behaviour, a failure to deal with his complaints about these, and unfairness in the allocation of remuneration, together amounted to a repudiatory breach. The allegations related to a period of over 8 months starting after the broker had received an offer of employment from a competitor, at which point he became "particularly keen to find fault with the way he was treated .. and to ensure that there was a written record of all interactions". The Court rejected the claim on the facts, noting that careful scrutiny is required where an employee has a significant financial incentive to advance a constructive dismissal claim in order to avoid notice periods and "irksome" restrictive covenants.

The broker also sought to argue that it was a repudiatory breach for the employer to allow colleagues to engage in regulated trading activity, when not authorised to do so by the Financial Conduct Authority, as this amounted to a breach of the duty of trust and confidence owed to him. The Court did not accept that this had occurred and, even if it had, considered that it would not be sufficient to amount to a repudiatory breach. Only if the business operation as a whole was dishonest and corrupt was there likely to be sufficient to amount to a repudiatory breach, and even gross incompetence on the part of the employer would not generally be enough.

With regard to whether the restrictive covenant was enforceable, the Court was satisfied that the employer had legitimate interests to protect. The broker's job involved building up and exploiting customer connections and he had considerable access to confidential information in respect of an "illiquid and opaque" market which was valuable and difficult to discover. The employer had a legitimate interest in protecting this information notwithstanding the submission that the exotics broking industry was essentially a duopoly between it and the offeror.

The Court also concluded that it was reasonable to enforce both the six month non-compete covenant and six months garden leave (even in the absence of a contractual provision setting off time spent on garden leave against the period of the covenants). The purpose of the garden leave clause was to cater for the situation where the employer had concerns about the employee's conduct, for example that he might harvest client information or engage in deceptive behaviour, and therefore would not want notice to be worked. Where there was reasonable foundation for such concerns, it was not unreasonable also then to enforce the full period of the non-compete covenant.

The Court considered two additional points:

• The broker's contract contained a job notification clause requiring him to inform the employer of the identity of any party making a job offer as soon as possible after accepting the offer. The Court ruled that this clause would only bite once all major terms of the offer had been settled. The employer argued that the sending of a first draft of the employment contract by the offeror reflected an agreement of all the essential elements and the drawn-out negotiations over trivial details during the following months were simply trying to obscure that. The Court rejected this, noting that although the changes after the first draft were relatively small, there were some non-trivial amendments (concerning mandate and garden leave). Importantly there had been no indication that the broker had made clear to the new employer that it should regard all the major terms as settled and that these would not be subject to any further reconsideration by him prior to readiness for signature. It was probable that the parties had a high degree of confidence that a binding contract would in due course be executed, but that wasn't sufficient to trigger the obligation.
• Both parties also complained of inadequate disclosure on the part of the other, and the Court took the opportunity to underline that "it is fundamental that the client must not make the selection of which documents are relevant" for the purposes of disclosure. Solicitors owe a duty to the court and should themselves review all the files and determine which documents are relevant and disclosable.

(Square Global Ltd v Julien Leonard)