The duty of fidelity and penalty clauses; Imam-Sadeque –v- BlueBay Asset Management (Services) Ltd  EWHC 3511 (QB)
In Imam-Sadeque -v- Bluebay Asset Management (Services) Ltd Popplewell J had to consider the scope of an employee's duty of fidelity. He was referred to nearly all of the recent cases, but found them of "limited assistance" because whilst they provided "helpful guidance as to the application of the principles to particular cases .... the precise scope and content of the duty ... and whether it has been breached, is a question of fact which depends upon the particular circumstances of the case" (para 132). That said, his judgment is an example of the recent direction of travel in the authorities, which as Hadden-Cave J observed in QBE (covered in an earlier post) has seen a tightening of the standards expected of an employee.
Simplifying the facts somewhat, the claimant was a senior employee with BlueBay, an asset management company. As at July 2011, he had been granted Fund Units (under a bonus plan) that vested between January and March 2012. Under the plan, he forfeited those fund units if he left before the vesting dates as a "Bad Leaver", and he was a bad leaver if he left voluntarily. In July 2011, the parties made a compromise agreement under which the claimant was placed on garden leave until 31.12.11, but would be treated as a "Good Leaver" (and thus entitled to his Fund Units) provided that he was not in repudiatory breach of his employment contract as at the date of the agreement and had not acted in repudiatory breach of that contract whilst on garden leave. Unknown to BlueBay, the claimant had agreed to join a new start up asset management company (Goldbridge) at the date of the compromise agreement, and he started working for Goldbridge after 31.12.11. BlueBay contended that the claimant was not entitled to his fund units because (i) he had assisted Goldbridge in planning and launching its competitive business and had failed to disclose to BlueBay that Goldbridge had the funding, resources and infrastructure in place to launch, (ii) he had encouraged and assisted Goldbridge to recruit one of his BlueBay colleagues, and (iii) he had disclosed various other pieces of information to Goldbridge (such as details of an internal restructuring, the terms of the compromise agreement and the terms of BlueBay's employee handbook and bonus plan) whilst on garden leave.
In dealing with the law, Popplewell J rejected three principal submissions made by the claimant:-
- First, that the duty of fidelity required in essence no more than a duty to act honestly - rejected because "an honest but misguided disloyalty is no less a breach than a dishonest one" (para 126).
- Secondly, that the claimant's duty of good faith was attenuated when he was placed on garden leave - rejected because "one of the common purposes of putting an employee on garden leave is to secure his loyalty to the current employer during the notice period, and to delay the transfer of his loyalty to a new employer until after its expiry. An employer may thereby legitimately seek to restrict the impact of any competitive activity by the employee, and protect the integrity of the employer's workforce. There is no reason in principle, or authority, why the aspects of the duty of loyalty which touch upon competitive activity, or the enticing away of employees, should be attenuated so as to interfere with these legitimate purposes of garden leave" (para 145).
- Third, that the claimant was not obliged to disclose or report things told to him in confidence by a prospective new employer when exploring the possibility of moving employment - rejected because"if a senior employee, who is seeking to join what he knows to be a potential rival, learns of a competitive threat from that source, of which he would otherwise be under a duty to warn his employer, he can not relieve himself of that obligation by virtue of having entered into a contractual duty towards the rival not to fulfil it. If he could, the duty of fidelity in such cases could be bypassed or severely emasculated by the expedient of entering into an NDA with the competitor. It is not unusual for parties to undertake mutually inconsistent contractual obligations. The existence of one does not excuse non performance of the other" (para 148).
Applying these principles, Popplewell J concluded that the claimant's duty of fidelity (i) required that prior to 31.12.11 he should not have provided any assistance to Goldbridge in setting up and launching its business beyond agreeing to join, negotiating terms and making and cooperating in the legal, administrative and regulatory arrangements to enable him to start when free to do so, and (ii) obliged him to tell BlueBay that Goldbridge intended to launch a competitive business in October 2011, and had the infrastructure in place to enable it to do so (paras 150 and 151).
In the Judge's view "[a]ny discussion about ‘how the business might develop,' or its ‘philosophy' would likely be a breach of duty because it would assist Goldbridge in the formation of the shape and direction of the business" (para 155). On the Judge's findings of fact, the claimant's involvement in the Goodbridge launch went much further than this, and this may well have coloured his conclusions on the law, but how realistic is this extremely restrictive approach? Senior employees are obviously entitled to look for work elsewhere or to respond to approaches from head hunters. In any employment interview the candidate will have to sell himself to the prospective employer - to identify how he might fit in and what he is likely to bring to the table. Applying the conclusions expressed in this judgment, that might of itself place the employee in breach of his duty of fidelity, and he would be required to report the competitor's interest to his employer. In the Tullett Prebon case, Jack J accepted the validity of an express clause obliging the employee to disclose offers of alternative employment made to him, but this judgment comes close to saying that such an obligation will frequently arise by implication, as an incident of the duty of fidelity. And if an employee cannot legitimately give a prospective employer some assurances of confidentiality in relation to their discussions, doesn't this impose a practical inhibition on his ability to seek alternative work - at least without resigning first and placing himself on the open market?
The claimant also argued that the terms of the compromise agreement that provided for him to forfeit his Fund Units in the event of a breach of the compromise agreement was unenforceable as a penalty clause - the effect of the compromise agreement was to provide for the forfeiture of existing contractual rights (dependent upon performance of contractual obligations) on the occasion of any breach, however trivial, and did not constitute a genuine pre-estimate of loss. The Judge rejected that the doctrine was even engaged, because (i) "[t]he Compromise Agreement did not provide for forfeiture of his interest in his 2012 Fund Units upon breach of that Agreement, either in form or in substance. It conferred a conditional benefit in relation to his interest in the Units which never accrued because he failed to fulfil the condition, namely performance of the Agreement" (para 208), (ii) "even if the forfeiture were to be treated as occurring by reason of breach of the Compromise Agreement, what was forfeit were contingent future interests in the 2012 Fund Units. These are not to be treated as equivalent to the payment of a money sum by Mr Imam-Sadeque upon breach so as to come within the doctrine" (para 210), and (iii) "[t]here is a distinction between contingent rights and accrued rights. I would not extend the doctrine to apply to such [i.e contingent] rights in the light of the authority I have cited which dictates that because the doctrine is an interference with freedom of contract its application is not to be expanded more widely than its current limits".
In any event, the Judge found that even if the penalty doctrine was engaged, "it would [not] be right to categorise the terms of the Compromise Agreement, taken as a whole, as using the possibility of the Units not vesting in a way which is predominantly intended as a deterrent against breach. Their treatment is one element of a bundle of rights and obligations which must be viewed as a whole and is commercially justifiable" (para 232). The Judge was clearly impressed by the fact that the compromise agreement was negotiated at arms length by parties of equivalent bargaining power with legal advice. His approach echoes that taken by Nelson J in another penalty case (Tullett Prebon -v- El Hajjali  IRLR 760 at patra 74) that "[w]here a bargain has been struck by two parties of equal bargaining power, with each party legally represented, a court should consider long and hard before permitting one of the parties to resile from that agreement."
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