New Zealand: Employer awarded $4.29 million for "springboard" effect of employees' breaches of contract

Last Updated: 7 July 2012

By Tim Clarke, Partner and Liz Coats, Solicitor

The Employment Court recently awarded an employer the sum of $4,290,000 against three former employees for breaches of their implied employment duties of fidelity, trust and confidence and good faith (Rooney Earthmoving Ltd v McTague, Whiting & Bartlett). This is the largest award of damages ever made against employees by the Employment Court.

The Court's latest ruling on quantum and apportionment and its earlier judgment on liability are welcome decisions for employers. They demonstrate that there can be serious financial consequences for employees who set up in competition with their employer in breach of their employment duties before their employment has ended. The case also serves as a reminder to employers of the potential benefits of including carefully drafted express restraint of trade, confidentiality and/or garden leave provisions in the employment agreements of key employees (see "Top tips for employers" below).

Employees liable for breach of contract

Rooney Earthmoving Limited (REL ) brought claims against three ex-managers, Mr McTague, Mr Whiting and Mr Bartlett, for breaching duties they owed to REL by setting up a business in competition while still employed.

In a judgment issued in 2009 (liability judgment), the Court held that the individuals were each liable for breaching their employment agreements with REL.

None of the employees was subject to any express post-termination restraint of trade clauses in their employment agreement. As a consequence, REL's claim was based on the employees' various implied duties of employment. These duties included the obligation to act loyally (duty of fidelity) and in good faith, mutual trust and confidence and a duty to disclose knowledge of misconduct.

In its liability judgment, the Court found that the employees breached their duties of fidelity and trust and confidence and good faith to REL, by (amongst other things):

  • acting in concert to secure customers (by soliciting work from REL clients) and to solicit REL staff for the new business, BMW Contracting Limited (BMW);
  • failing to disclose to REL knowledge of each other's efforts to obtain work from REL for BMW and to solicit REL's employees;
  • destroying confidential information belonging to REL, removing a quotations folder and obtaining a client list from REL; and
  • using unlawfully obtained quotations to undercut REL for the benefit of BMW.

Employees each liable for full amount of employer's loss

In the recent quantum hearing, REL claimed a single sum of loss, rather than apportioning damages between the defendant employees according to their individual breaches.

The Court held that where there were separate causes of action against different defendants (here, the former employees), whose actions materially and substantively caused the same loss to the plaintiff (REL), then the defendants should each be liable for the entire loss.

In the Court's view, BMW would not have been able to commence business when it did, and the three employees would not have left REL by that date and been available to work for BMW, but for their individual breaches of their employment agreements with REL and their actions in concert to set up the BMW business. In other words, the defendants' breaches were the sole factor which caused REL to lose its customers and revenue. The employees' actions were therefore material and substantive causes of the same loss, and thus each employee should be liable for the whole of that loss.

REL's loss was assessed on the basis of lost sales less operating expenses required to generate the sales. Lost sales were calculated by reference to lost revenue of REL or actual sales achieved by BMW. The Court accepted that REL's losses caused by the unlawful "head start" given to BMW extended over a three year period, and that REL had taken reasonable steps to mitigate its losses.

Top tips for employers

Prudent employers should consider including the following types of appropriately drafted express provisions in key employees' employment agreements:

  • Loyalty and conflict of interest provisions which apply throughout the employment relationship;
  • Confidentiality obligations which apply throughout employment and after its termination;
  • Post-termination restraints of trade to protect the employer's proprietary interests, such as customer relationships, confidential information and/or goodwill. Post-termination restraints could include non-compete provisions; non-solicitation of or non-dealing with clients; and/or non-solicitation of employees restraints, which are stated to apply for a specified period after employment has ended. Such provisions allow the employer to take steps to protect its business, client relationships and the stability of its workforce after a key employee leaves. This could include an application to the Court for injunctive relief to stop a former employee from breaching an applicable restraint.
  • However, post-termination restraints (or restrictive covenants as they are otherwise known) must be no wider than is necessary to protect the proprietary business interest in question, and therefore should be limited both in scope and duration.

  • A "garden leave" clause which gives the employer the ability to require an employee to serve all or part of their notice period away from the office. During a period of garden leave, the employee would remain employed by the employer, and therefore remains bound by their duties of fidelity, trust and confidence and good faith (and the employer remains bound to pay their remuneration). However, as they would be out of the office, they would not have access to the employer's confidential information or client relationships during that period.

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.

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