Departure of a team raises questions over breach of contract

The recent High Court case of Lonmar Global Risks Limited v West & Others is a salutary tale for insurance brokers faced with one of their teams moving to a direct competitor.

The three defendant employees worked for Lonmar until mid-2009 when, with others, they left; each was summarily dismissed by Lonmar on the basis that they had, by their conduct, committed a repudiatory breach of their employment contract. This conduct included soliciting clients and other employees of Lonmar and taking steps to move work and employees away from Lonmar, largely to a direct competitor, Tyser, to which the three employees subsequently moved.

Lonmar claimed damages of approximately £2.5 million against the three employees for breach of contract and breach of fiduciary duty and against the three employees and Tyser for inducing breaches of contract and conspiracy. The judge concluded that Lonmar had not suffered any loss arising from the employees’ or Tyser’s actions and that there had been no conspiracy on their part.

At trial, some breaches were found and others were admitted. They were held to have entitled Lonmar to dismiss two of the three defendant employees. However, the breaches did not entitle Lonmar to damages. The judge stated that, despite the level of wrongdoing, there was no evidence that any of it had resulted in Lonmar losing any particular client or any particular piece of work or any money in respect of which it might be entitled to compensation.

The claims for breach of fiduciary duty were unsuccessful. Although fiduciary duties can arise out of the contractual obligations of an employee, the relationship of employer/employee does not, of itself, give rise to such duties and no such duty was established in this case. The judge considered the duty of fidelity to which employees are subject, but did not consider that this incorporated an obligation on an employee to report to his employer his own wrongdoing or the wrongdoing of other employees.

On the facts, the judge had doubts as to whether Tyser had intended to procure any breaches of contract. The judge noted that inducing a breach of contract is a tort that requires a claimant to prove not just wrongful interference with contractual relations but also damage in consequence of the relevant breach. The judge found that none of the breaches relied upon by Lonmar had any proved damage.

This case is significant for employers facing the departure of teams to competitors as it emphasises how important it is to properly formulate claims and establish clear loss. Lonmar’s failure to establish a quantifiable loss meant that it failed to recover any financial compensation. And the sting in the tail was that notwithstanding the breaches by the employees Lonmar was ordered to pay all their costs.

This article first appeared in Law-Now, CMS Cameron McKenna's free online information service, and has been reproduced with their permission. For more information about Law-Now, please go to www.law-now.com