Do employees need to disclose intention to compete?

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All employment contracts have an implied term ensuring that employees will serve their employer with good faith and fidelity. This implied term covers numerous things, including prohibiting employees from competing with their employer. However in MPT Group v. Peel the High Court found that employees are not under a duty to disclose their intention to compete post-termination.

Facts

One moderately senior manager resigned from MPT Group in order to go freelance, enabling a more flexible working routine. Another manager on a similar level also resigned and both were planning to leave at the same time. The employer became suspicious and so asked the managers what their intentions were after leaving the company. They both denied that they planned to set up a new business in competition with the company after their post-termination restrictions expired; this was actually exactly what they intended to do.

The company sought an interim injunction based on misuse of confidential information and upon breach of the duty of good faith based on the employee's failure to answer the questions truthfully.

Decision 

The court noted that, while there was a general duty to answer questions truthfully, it was reluctant to hold that a departing employee is under a contractual obligation to explain his confidential plans to lawfully compete with the company after the expiry of his post-termination restrictions. The court found that the law will however step in to prevent unfair competition, to hold employees to enforceable restrictive covenants or to protect confidential information. However, as in this situation, ex-employees are free to set up a rival business upon the expiry of their restrictive covenants.

Practical impact

As long as employees observe their restrictive covenants, there is not much that a company can do in terms of preventing ex-employees from setting up rival businesses.  Therefore it is a good reminder that employees' restrictive covenants should be properly drafted and tailored to each employee to ensure that legitimate business interests are protected for as long as is reasonable. The court did not consider it here, as there was no need, however it may well have reached a different conclusion had the employees been more senior and owed the company fiduciary duties, as such fiduciary duties would require the employees to disclose conflicts of interests and anything that could be detrimental to the company.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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