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10 December 2012
Queen's Bench Division
Employees owe a duty to their employers not to do anything to damage the interests of their employers. Assisting in setting up a business which competes with one's employer and assisting that business to recruit an employee of one's employer breach that duty.
IS wanted to leave his employers, BAMSL, but did not want to resign as he would then be treated, under a bonus scheme, as a ‘bad leaver' and would lose his rights under that scheme to any bonus which would vest after his employment ended. Terms of his departure were therefore agreed in a compromise agreement whereby he would be placed on ‘garden leave' for the last few months of is employment and would qualify for the fund units under the bonus scheme so long as he complied with the terms of the compromise agreement and his contract of employment.
While on garden leave, he met with a former employee of BAMSL and assisted her in setting up a competing business. For example, he helped to draft a press release for the new business. He also helped the new business to recruit one of BAMSL's employees. When BAMSL found out, it refused to give him the fund units.
IS sued BAMSL, arguing first that he had not breached his contract; or that if he had, the contractual clause permitting forfeiture of his bonus rights amounted to a penalty clause and was therefore unenforceable.
The High Court held that assisting in the start-up of a competitor and assisting in the recruitment breached the duty of fidelity and the express terms of his contract. The forfeiture of his bonus was not a penalty, it was a consequence of his being a ‘bad leaver' within the terms of the bonus scheme and in any case the amount forfeited was not excessive in view of the breach. His claim for the bonus therefore failed
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