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Law for Business

Knowhow - guidance - precedents

13 NOV 2012

Bolting the stable door - restrictive covenants and injunctions for the Family Business

Family businesses are often one step ahead of their competitors because they are nimble and reactive. This is often due to the informal nature of operations and a reliance upon trust, both between family members and between the family and its workforce. As a result signing people up to written contracts of employment can fall to the bottom of the agenda.

This means that for family run businesses, key employees or family members leaving and setting-up in competition can be a ‘worst case scenario'. The High Court has recently provided some comfort that the courts will step in to assist if key employees breach their fiduciary duties or misuse confidential information.

Team moves and ‘springboard' injunctions

The case of QBE Management Services (UK) Ltd v Dymoke and Others concerned a situation where employees left en masse in order to set-up in direct competition.

Springboard injunctions are traditionally used where a former employee has already used confidential information to their own advantage. In such cases, an ordinary injunction would not work as the confidential information is no longer confidential (it has already been published and used). As a result, the former employee's use of the confidential information is used as a ‘springboard' by their former employer to prevent them obtaining a head start in a competing business.

In this case, three key employees of QBE tendered their resignations in order to join a competing business. They were placed on garden leave. Whilst still on garden leave, the three employees persuaded eight junior employees to resign and join the competing business. The employer took legal action and was initially granted an interim injunction which enforced the duty of fidelity and non-competition during the period of garden leave. The court also ordered disclosure of documents. 

Following disclosure QBE alleged wholesale misuse of confidential information and soliciting of customers in favour of the competing business. It alleged that months of covert unlawful breaches of employment contracts had resulted in a significant advantage for the former employees' new venture. In short QBE argued that wholesale breaches of trust were involved. The High Court agreed and granted an injunction for a lengthy period preventing the former employees gaining an advantage from their unlawful actions.

Whilst this was a good result for QBE, their position would have been significantly strengthened, and the likelihood of very costly litigation reduced, if their contracts of employment had clearly spelt out all of the duties which applied to each of the key employees (for example the duty to report wrongdoing and the duty not to set-up or work for a competing business).

To discuss any of your family business employment needs, please contact Michael Halsey, an employment specialist and Senior Associate in our Family Business team, on 020 7665 0842 or at mhalsey@vwv.co.uk.

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