In a recent High Court judgment,1 the court determined the liabilities of former employees who set up a competing business before resigning, and of employees who were still employed and who breached their duties in disclosing confidential information that damaged the Plaintiff company’s business.
Background
The Plaintiff, an event technology service provider, brought proceedings against three former employees of its sales team – a business director (D1) and two account managers (D2 and D4) – and the corporate vehicle (D3) set up by D1 and D2 in April 2019 to carry on a business similar to that of the Plaintiff, while they were both still employed by the Plaintiff. D1 and D2 are directors of D3 and held 40% and 20% of the shares, respectively.
When they left the Plaintiff’s employ in August 2019, D1 and D2 procured D4 (who was still employed by the Plaintiff) to work for D3 on a part-time basis and pass on the Plaintiff’s confidential information for the benefit of D3, until D4 was terminated in May 2020 upon discovery by the Plaintiff of the scheme.
The Plaintiff’s claims against the Defendants included breach of fiduciary duty, breach of confidence, dishonest assistance, inducement to breach of contract and conspiracy to injure by unlawful means.
Key findings
Fiduciary duties of employees
The court held that fiduciry duties owed to an employer are not limited to directors or senior management. D1, as a business director with significant autonomy over client relationships and pricing, owed the Plaintiff fiduciary duties. D2 and D4, as account managers, also owed fiduciary duties at least in relation to sales work, given their direct client contact and access to sensitive commercial information placing the Plaintiff in a position of vulnerability.
While employees may take preparatory steps towards future competition, the court emphasised that the boundary is fact-sensitive. Employees must not actively compete, divert opportunities or misuse information during the course of employment. On the evidence, the court found that D1 and D2 had gone beyond preparation – they concealed client enquiries, issued quotations through D3 in July 2019 and carried out project work for the diverted clients, all whilst they were still employed by the Plaintiff. This constituted active competition and diversion of business opportunities. The court also commented that these are “mature business opportunities” already crystallised during D1’s employment.
As D1 and D2 were the controlling shareholders and principal operators of D3, their knowledge and conduct were attributable to D3. As such, D3 was found to be subject to the same duties of confidence and was jointly and severally liable, together with D1 and D2, for their breaches.
For D4, she was induced by D1 upon his departure from the Plaintiff to conceal client enquiries from the Plaintiff, which she did. She also assisted D3 by preparing quotations to those clients and coordinating pitches on its behalf.
The Defendants were further held liable for dishonest assistance and conspiracy.
Dishonest assistance
Dishonest assistance imposes liability on a person who assists another’s breach of trust or fiduciary duty, even if that person himself does not bear such duty. The court confirmed four elements for establishing dishonest assistance:2 (1) breach of trust or fiduciary duty by someone other than the Defendant (or one of the Defendants, as in the current case), (2) the Defendant’s assistance, (3) dishonesty, and (4) resulting loss.
Dishonesty is assessed objectively. The question is whether the Defendant’s conduct fell below the normally acceptable standard of honest conduct, taking into account the known circumstances at the time of the conduct, personal attributes such as experiences and intelligence, and the reasons for the conduct of the Defendant. Notably, the test does not require conscious dishonesty or subjective awareness of the dishonesty.
D1 and D2 knowingly assisted each other’s breaches of fiduciary duty and confidence by diverting business opportunities and misusing confidential information, and their knowledge was imputed to D3. They also dishonestly assisted D4 by inducing her to act as an insider and do the same for D3 while she was still employed by the Plaintiff. Objectively, such conduct fell far below the standards of honest commercial behaviour. Accordingly, D1, D2 and D3 were jointly and severally liable for dishonest assistance, and D1 and D4 were jointly and severally liable in respect of breaches involving D4.
Conspiracy
The court further held that D1, D2 and D3 were jointly and severally liable for unlawful means conspiracy. The court reaffirmed the elements of conspiracy comprise: (1) a combination, (2) of persons including the Defendant, (3) to do something which is unlawful in itself, (4) with a common intent to injure, and (5) causing loss to the Plaintiff. The unlawful means in this case is the breach of contract and fiduciary duties. Common intention to injure may be inferred from the joint incorporation and operation of D3, adjacent time of tendering resignations and a common purpose to divert the Plaintiff’s interest.
Confidential information
The court reaffirmed that information obtained in employment falls into three categories: (1) trivial information, (2) confidential information, and (3) trade secrets. The information misused in this case – emails, quotations, client documents and pricing strategies – fell within confidential information. Access to such information was restricted to the sales team through a password protected system. The court emphasised that even where information (such as pricing) is not finalised, it remains commercially valuable and confidential, as it can be used to undercut competitors.
Assessing loss for the diverted client opportunities
The court accepted a loss-of-chance approach for quantifying equitable compensation. The formula is:
Loss = quotation price × Defendants’ chance of getting the deal × gross profit margin
Two probability figures were applied: 40% where the Plaintiff was deprived of the opportunity to quote at all and 20% where the Plaintiff had quoted but the Defendants’ improper use of confidential information had reduced its competitive position.
The court accepted the gross profit margin of 35% proposed by the Plaintiff, given the Defendants’ failure to challenge this evidence.
Key takeaways
This judgment is a welcome decision for employers wishing to protect their valuable confidential information and customer relationships. Where employees occupying positions of trust and confidence abuse the trust reposed in them by the employer by setting up a competing business whilst they are still employed, the employer would have recourse for the betrayal of trust. The judgment now confirms that fiduciary obligations are not confined to directors or senior executives – they may extend to client-facing employees such as sales personnel or account managers. The court emphasised that such employees may occupy positions of trust that may place the employer in a vulnerable position, such that an abuse of that trust would lead to liability that is readily quantifiable.
Acknowledgements to Trainee Solicitor Elaine Ng for research and contribution to this article.
For further information, please contact:
Jenny Zhuang, Dentons
jenny.zhuang@dentons.com
