The recent Court of Appeal decision in the case of Allen v Dodd & Co Limited clarifies the position in relation to potential liability for inducing a breach of contract, of those engaging commercially with persons subject to contractual restrictions.
The decision highlights that where an organisation acts on the belief that its conduct will likely not result in a breach of contract, it will not be liable for inducing a breach. This applies even in cases where an organisation was aware of the risk of breach or where the court subsequently finds that a breach did in fact occur.
Facts and High Court decision
Mr David Allen, trading as David Allen Chartered Accountants (the Appellant), made a claim for inducing breach of contract against Dodd & Co Limited (the Respondent), after the Respondent entered into a contract of employment with a former employee of the Appellant (the Employee), which the Appellant claimed was in breach of restrictive covenants in the contract of employment between the Employee and the Appellant.
Prior to making an offer of employment to the Employee, the Respondent had sought legal advice in relation to the enforceability of the restrictive covenants. This legal advice concluded that on balance it was more likely than not that the restrictive covenants would be unenforceable. The Appellant made an offer of employment to the Employee on the basis of the legal advice.
In the High Court, HHJ Halliwell held that the restrictive covenants were enforceable, but rejected the claim in tort against the Respondent for inducing a breach of contract. The judge held that the Respondent's belief that it was more likely than not that the restrictive covenants would be unenforceable meant that the requirement for knowledge that the contract would be breached was not satisfied. Therefore the Respondent was not liable for inducing the breach.
Court of Appeal decision
The Court of Appeal upheld the High Court decision.
Lewison LJ said "that people should be able to act on legal advice, responsibly sought, even if the advice turns out to be wrong" and held that a person who receives and honestly believes legal advice which states it is more likely than not that their proposed action will not result in breach, will not be liable for inducing a breach of contract. The fact that the legal advice was found to be incorrect was not sufficient to create such liability.
The Court also noted that if the legal advice states that it is merely arguable, as opposed to more likely than not, that the proposed action will not result in a breach of contract then this may be insufficient to offer protection from liability. However, the Court declined to make a definitive judgment on this point.
The Court rejected the Appellant's submission that the Respondent's belief that there was a risk, however small, that the restrictive covenants would be breached was sufficient to establish liability.
This decision recognises the reality that legal advice is rarely unequivocal, that legal outcomes are difficult to predict and that in most cases there will be at least some element of risk. In doing so, it gives greater certainty to those engaging with persons subject to contractual restrictions as to their position when they receive legal advice.
- Those who believe that there is a risk that their conduct will result in a breach of contract should seek legal advice as to the likelihood that this would occur.
- If that advice is that it is more likely than not that no breach will be committed, and in the absence of further knowledge, reliance on this advice is sufficient to offer protection from liability for inducing a breach of contract.
- If that advice is only that it is merely arguable that no breach will be committed, this may not be sufficient to offer protection from liability.
For organisations seeking to enforce provisions against former employees and/or competitors, this decision does not affect the enforceability of restrictive covenants, but does clarify the scope for making further claims against other organisations which may benefit from the breach of such restrictive covenants.
Impact on disclosure
This decision also raises questions about when legal advice will become disclosable, the extent of the advice which a party will be required to disclose and the impact of any disclosure on legal professional privilege. The decision also opens up the possibility of parties seeking pre-action disclosure of legal advice prior to commencing proceedings.
As is often the case in Business Protection cases, getting the right advice at an early stage is critical.
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