The Scope Of The Duty Of Fidelity

Sun, 17 Mar 2013

By Nabila Mallick

What are the duties of an Employee who is approached by a family member to supply goods or services to his Employer? 

There is an implied duty of fidelity owed by every employee to his employer. It requires on the part of an employee loyal and faithful service .It can require not only a duty to answer his employer truthfully when asked questions regarding the employer’s business but may also, in certain circumstances, require an employee to take positive steps to ensure that the employer is not kept in the dark on matters that concern his business. 

In Attorney General v Blake ([1998] 2 WLR 805 Lord Woolf MR described this duty - "The employee must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third party without the informed consent of his employer". Therefore the duty of fidelity requires the employee to have regard to the interests of the employer. This was reiterated in the recent case of Ranson v Customer Systems plc [2012] IRLR 769 where it was decided in that particular case that there was no breach of duty of fidelity when Mr Ranson, who worked in sales, took a client out to dinner shortly before he left his employment.

However the duty of fidelity must not be confused with the fiduciary duty. The latter requires more extensive duties from his employee. A fiduciary is required to act solely in the interests of its employer to the exclusion of his own interests. For example a director of a company will owe a fiduciary duty, as may senior employees. (Shepherds Investments v Walters [2007] IRLR 110 where a sales manager was held to have a fiduciary duty). Certain activities of an employee may also give rise to a fiduciary duty, for example in Nottingham University v Fishel [ 2000] ICR 1462 (the employee did not owe a general fiduciary except in relation to one area of work outside of the university for which he was employed). The duty of fidelity does not require that the employee act always in the interests of his employer to the exclusion of his interests. 

The two concepts of the duty of fidelity and fiduciary duty were considered in the recent case of Threlfall - v- ECD Insight Ltd [2013] IRLR 185. Both parties made a claim for breach of contract and both were partially successful. The employee was a journalist/ broadcaster, who prior to his employment with the Respondent was occasionally asked to moderate high profile events for corporate and public sector organisations. The Respondent’s activities are best described as communications training and coaching . Prior to the Claimant’s employment, the Respondent did not offer the services of an events moderator. In the course of his employment, with the knowledge and agreement of his employers the Claimant participated in two major moderations for the Organisation for Economic Co-operation and Development (OECD) and for other corporates such as Citigroup. The Respondent benefitted from the Claimant’s participation in these events, in terms of publicity and marketing. The Claimant was offered a job by Reuters as a TV presenter. The Claimant handed his notice. The Claimant did not leave the Respondent to carry out any work that would be in competition with the Respondent. Whilst serving his notice period, the Claimant was approached by OECD and Eurofinance to carry out further events moderation. The Claimant emailed both clients informing them he could not act as events moderator whilst at ECD as he was leaving but that he could be contacted and carry out events moderation once he started with Reuters. The employer claimed that his continuing with events moderation was in breach of a post termination restriction. The employer also argued that the employee had solicited clients during his contract of employment for his business

Therefore the issues were whether the Claimant could continue to carry out this role for clients (Eurofinance and OECD) after he left the Respondent and whether the Claimant had solicited these clients in breach of his implied term of duty of fidelity and / or fiduciary duty as a senior employee.

The Court ruled that the employee did not breach his restrictive covenant clause in continuing the business that he had brought to his employer. It did not find that the Claimant had a duty to protect the business interests of the Respondent and therefore the Claimant did not owe a fidicuary duty. However, by soliciting Euro Finance and OECD to provide work to him once he left the Respondent the Claimant had breached the implied term of duty of fidelity. 

In giving judgment Lang J stated :

‘The Claimant was not a director and he did not owe any specific contractual obligations of the kind which may give rise to a fiduciary duty. His duties, as Head of Media, under clause 4 of the contract, including the obligation to keep the Board informed of his conduct of the business of the company, were not a sufficient basis upon which to found the existence of a fiduciary duty, particularly in the light of his role in the company'. (§114 of the Judgment)

The Claimant had a contractual duty to act in good faith, the scope of which has to be distinguished from a fiduciary duty. (§115 of the Judgment)

The contractual duty is described in Chitty on Contracts, paragraph 39-057, in the following terms:

"It is another implied term in a contract of employment that the employee will serve the employer with fidelity and in good faith. Thus an employee, during his period of employment, may not solicit the customers of his employer to transfer their custom to him after he has left the employment, nor may he solicit orders from the employer's customers or suppliers, or otherwise deal with them, on his own behalf rather than his employer's behalf." (§116 of the Judgment)

Whilst the other cases discussed below on the duty of fidelity concern ‘team moves’ or ‘team poaching’, there are principles that can be gleaned from them that are useful in considering the duty of fidelity and its implications for the employee. 

In Kynixa Ltd v Hynes [2008] EWHC 1495 (QB) Wyn Williams J stated:

‘A crucial aspect of the implied duty of fidelity is the concept of loyalty. The Third Defendant’s actions were not consistent with that concept. I simply do not see how one can be acting as a loyal employee when one knows that three senior employees (including oneself) may transfer their allegiance to a group of companies which includes a competitor and yet not only fail to divulge that knowledge but also say things which would have the effect of positively misleading the employer about that possibility’ (§283).

Therefore the underlying aspect to fidelity is loyalty (albeit not an absolute duty as with fiduciary duty) and this requires a positive duty from the employee to act in the interests of his Employer. As Wyn Williams J indicated that an employee cannot be acting with loyalty, if his allegiance is divided. In such circumstances, ‘Kynexia’ would suggest that there is a positive duty to make disclosure to his employers. 

Tullet Prebon Plc v BGC Brokers [2010] EWHC 484 [2010] IRLR 684 supports the proposition that the employee must not act in manner that is not in the interests of the Employer. Therefore, even the assistance he provides against his employer’s interest is small , the employee can be said to have crossed the line. 

In QBE Management Services v Dymoke [2012] EWHC 80 Haddon –Cave J referred to a tightening of the law - the standards of good faith and loyalty expected of an employee, he referred to Goulding on Employee competition ;

"Goulding advises, rightly in my view, that the working assumption should be that there has been a tightening of the law in this area [2.138]:

In summary, given the conflicting first instance decisions and the running of the current judicial tide against directors, the working assumption must be that directors and senior employees ought to disclose: (a) any action at all, if taken by others, that will lead to competitive activity; and (b) any action of their own, as soon as the irrevocable intention to compete is formed (unless they resign immediately)."

In QBE Management Services, Haddon- Cave J did not make a distinction between employees with a fiduciary duty and those who did not owe their employer a fiduciary duty. Some commentators have suggested that the decision of QBE is wrong in its failure to make such a distinction. I, however, believe that it is consistent with the decision inHelmet Integrated Systems Ltd v Tunnard [2007] IRLR 126, where Moses LJ refers to the general duty of fidelity and loyalty owed by every employee and absolute loyalty to act exclusively in the employers interest owed by an employee with a fiduciary duty. 

My view is also supported by the case of Imam-Sadeque v BlueBay Asset Management (Services) Ltd [2012] EWHC 3511 decided after QBE, where Popplewell J referred to Moses LJ's judgment in Helmet Integrated Systems. This case concerned a leaver’s bonus. The Claimant had worked for a number of years for an the Respondent, an asset management company. He was not promoted by the Respondent. As a consequence. he handed in his resignation, but did not tell the Respondent that he was leaving to join a new asset management venture. It was held that duty of fidelity may also require an employee to report to their employer a competitive threat of which they become aware. Whether it does so is fact sensitive and will depend on the terms of the employment contract, the nature of the role and responsibilities, the nature of the threat and when the employee becomes aware of it. The Claimant was not entitled to his leaver’s bonus as he had breached the implied term of duty of fidelity by not disclosing that a new asset management had started in competition to the Respondent.

Therefore in the context of general employment, QBE confirms that there is an general duty of fidelity owed by all employees , and that there can be no doubt that higher standards of fidelity and loyalty are expected of employees in positions of responsibility. Therefore, it is the writer’s opinion in light of QBE, with or without an express conflict of interest term, the implied duty of fidelity will mean that an employee must generally disclose situations that would result in a conflict of interest to his employer’s business interests. 

Of course it must not be forgotten that there may be specific express terms in the contract of employment that further reinforce the duty of fidelity, such as a conflict of interest clause, requiring the employee to disclose anything material to his duties that might place him in conflict . An express conflict of interest clause will reinforce the duty on the employee to make such disclosures and may extend the employee’s duty beyond the period of employment. Such a clause may work to impose a fiduciary duty where one may not have existed. 

The authorities suggest that when considering an unfair dismissal or breach of contract claim for breach of duty of fidelity, what the court must do is consider what in the context of the particular employment, the nature of the employee’s obligations of fidelity are and then to decide whether the employee’s actions were in breach of that duty. The greater the degree of responsibility, the greater is the required duty of fidelity. In deciding whether the employee is in breach, the court should ask itself whether the activities that the employee has engaged in affect his ability to do the job honestly serving his employer’s interests. 

In conclusion, an employee responsible for engaging contractual services of third parties, would have a duty to disclose to his employers, that he had been approached by a family member (or indeed a third party personally known to him) and the basis upon which he was prepared to agree any contract for supply of goods/ services to his employer. The failure to make such a disclosure would render the employee in breach of his duty of fidelity, irrespective of whether there was a conflict of interest term in his contract. 

By Nabila Mallick

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