Ranson v Customer Systems PLC  EWCA Civ 841
Appeal against findings that the appellant, a former employee who had set up a rival consultancy, had breached fiduciary duties and duties of fidelity. Appeal allowed.
In brief the appellant had been worked for the respondent business since leaving university. He rose to a position of some seniority but his contract of employment did not reflect these changes of responsibility. He then left to set up his own consultancy, with his initial contract being supplied by a client the respondent business had been seeking to secure, with the help of the appellant, before he left the company. In these proceedings the respondent had alleged other breaches in that the appellant had sought business from other existing clients and had induced fellow employees to breach their contracts of employment. In the High Court, the judge found that the appellant had breached duties of fidelity through some of his actions and also found that, through the nature of his senior position, the appellant was subject to a fiduciary duty, which he breached, with regards to the prospective client.
In this judgment, Lewsion LJ reviews the background and facts before moving on to consider the distinction between directors and employees noting at  that 'Since fiduciary obligations are not "one size fits all" it is, in my judgment, dangerous to reason by analogy from cases about company directors to cases about employees' and that the starting point as to whether the employee owes fiduciary duties is the contract of employment. He also analyses the duties of fidelity and trust and confidence. He endorses the principle espoused by Elias J in Fishel that
'the hallmark of a fiduciary is a single-minded duty of loyalty. The duty of loyalty in that context has a precise meaning: "namely the duty to act in the interests of another"
which means that any fiduciary duty can only arise from the employment contract. As there was nothing in the contract to make this duty arose the appeal on this point was dismissed. Lewison LJ then also dismisses the other claims as the respondent had not pursued a claim for breach of contract.
Neutral Citation Number:  EWCA Civ 841
Case No: A2/2011/0094
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE QUEEN'S BENCH DIVISION
SIR RAYMOND JACK **[
]()**Royal Courts of Justice
Strand, London, WC2A 2LL
Date: 27 June 2012
LORD JUSTICE PILL
LORD JUSTICE LLOYD
LORD JUSTICE LEWISON
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JEREMY MICHAEL RANSON (Appellant)
**- and -
**CUSTOMER SYSTEMS PLC (Respondent)
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MR A STAFFORD QC & MR J BACON (instructed by Sintons LLP) for the Appellant
MR M GRIFFITHS QC & MS A SANDER (instructed by Pinsent Masons) for the Respondent
Hearing dates : 14 & 15 June 2012
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Lord Justice Lewison:
- In April 2001 Mr Jeremy Ranson was recruited by Customer Systems plc ("CS") straight from university, when he was 23 years old. He started work in October of that year. He was issued with a written contract, to which I will return in due course. In January 2009 Mr Ranson resigned from his employment, and left work on 27 February 2009. Before and during his notice period, Mr Ranson made preparations for the establishment of a competing business, through a company called Praesto Consulting (UK) Ltd ("Praesto"). These preparations included conversations with potential clients for Praesto.
- Sir Raymond Jack, sitting as a judge of the Queen's Bench Division, had to deal with a host of issues and a number of other defendants. None of these parts of his judgment have given rise to any criticism. But in the respects mentioned he held that Mr Ranson was in breach of both a contractual obligation of fidelity, and also a fiduciary duty of loyalty. With the permission of Davis LJ, Mr Ranson appeals against that part of the judgment.
The background facts
- I take the relevant background facts from the judge's judgment, for the most part verbatim. CS is the holding company of a group providing a specialist information technology consultancy. It specialises in customer relationship management ("CRM") software provided by the American software company, Siebel Systems Inc. It was founded by Mr Stephen Austen in 1998. There are between 30 to 40 employees at any one time. Immediately before Mr Ranson left there were 29, including Mr Austen. CS has offices in Chertsey, but much of its work is done on site, that is, at the premises of its customers. A CS employee may spend a week working on site. He may also be in effect dedicated to a customer and work at the customer's premises for a year or more, tuning the software to the customer's needs on an on-going basis and solving particular problems.
- There are four grades of technical employee; that is those who actually work on the software. The lowest is application consultant, then senior consultant, then principal consultant, and finally managing consultant. The highest technical grade, managing consultant, may lead on to promotion to consultancy manager. That is a sales position with supervision responsibilities. A consultancy manager may become a divisional manager. That remains essentially a sales function but has wider responsibilities.
- When Mr Ranson was first employed by CS he was an applications consultant. In 2003 he was promoted to managing consultant. By the time he left in 2009 he was the only divisional manager within CS. In the last year of his employment he was responsible directly or indirectly for 59 per cent of the group's total revenue. CS had a board of directors, but Mr Ranson was not among them. Despite Mr Ranson's promotions within CS his contract of employment was unchanged from that which he signed when he first started working for CS. It contained the following relevant provisions:
In the course of your work you may be exposed to information of a confidential nature belonging to Customer Systems Ltd, its customers and its business partners. You agree to keep this information confidential. Should you cease to be employed by Customer Systems Ltd, you agree to maintain this confidentiality thereafter.Business Hours
…normal business hours are 9am to 5.30 pm….. . ..you may sometimes be required to work additional hours for which overtime will not be paid.Other employment
You may not undertake any other employment whilst employed by Customer Systems Ltd without the prior written consent of Customer Systems Ltd.Entire Agreement
This Offer Letter and Terms of employment together constitute the entire agreement between you and Customer Systems Ltd. Any prior arrangements and understandings are superseded by this agreement."
- The contract was to run until determined by notice. Mr Ranson was required to give notice of termination of one month. CS had to give notice of between one month and 12 weeks depending on the length of service. There were no covenants restricting what Mr Ranson did after he had ceased to be employed by CS, except that for a period of one year he was forbidden from transferring his employment to important customers designated as "business partners".
- By early 2009 Mr Ranson was dissatisfied with his potential career path at CS. He wanted a more managerial role. Discussions between him and CS did not achieve a satisfactory resolution; and it was in consequence of this that on 12 January 2009 he gave one month's notice. However, at the time when he gave notice he was working on securing a £1.7 million contract between CS and Reckitt Benckiser. On 13 January he agreed to stay on until 27 February to see this through.
- In fact Mr Ranson's dissatisfaction had begun a couple of years earlier. He had already begun to consider his options, which included seeking work elsewhere. He discussed his options with Mr Atherton, another employee of CS. In September 2007 Mr Atherton registered the name "PRAESTOCONSULTING.COM" as an internet domain. In the same month Mr Ranson had Praesto incorporated. The directors were Mr Atherton and himself and they split the shareholding. By 26 September Mr Atherton had opened two bank accounts for Praesto through his wife who worked for a bank. They were never used, and Mr Ranson set up a new account for Praesto after he left CS. In the following month Mr Ranson prepared a business plan for Praesto and also received logos which he had ordered. However, nothing came of this at the time, and Praesto went into abeyance. In the following year Mr Ranson prepared another business plan for Praesto, having again become dissatisfied with his career path at CS.
- On 20 January 2009 while on a flight returning from New York Mr Ranson created a third "business plan" consisting of an "action plan" and a spread sheet. The spread sheet showed earnings for Mr Ranson and Mr Atherton over a year commencing on 4 March 2007. The action plan included tasks for the two men. Among the joint tasks was to agree a contractor list. Six names were proposed, three of which were not on the list in the 2007 plan. There was also a target employee list of six, of whom only two were CS employees. During the flight Mr Ranson also extracted from his company mobile phone a large quantity of contact numbers. Some were of friends, but many were business related. He later extracted the rest of the numbers.
- In early February, Mr Ranson telephoned Mr Atherton (who was working for CS on site at Reuters) and said he was leaving CS and asked if Mr Atherton was interested in leaving as well. He told Mr Atherton that he might be going contracting but had not fully made up his mind. Mr Atherton said he was staying put. Later that month Mr Atherton agreed to resign as a director and to give up his shares in Praesto.
- Until the end of January 2009 Mr Alex Clothier was employed at Reckitt Benckiser, a good customer of CS. Over two years he had worked closely with Mr Ranson and they had become friends. At the beginning of February 2009 he moved to Diageo Great Britain Ltd as the "IS director, business partner for global sales". In anticipation of his move, on 17 December 2008 Mr Scattergood (a director of CS) and Mr Ranson had lunch with Mr Clothier at Brown's restaurant in Windsor. It was clear that CS was interested in getting work with Diageo. It was agreed at the lunch or in a later conversation that Mr Clothier should be contacted after he had been with Diageo for about 4 weeks to see if there were opportunities for CS. This would have been at the end of February or the beginning of March 2009. It was envisaged at the time that contact would be made by Mr Ranson.
- When Mr Clothier started at Diageo he was immediately involved in discussions to upgrade Diageo's Siebel systems to achieve compatibility with Windows Vista. Between £4-6 million was estimated as the cost of upgrading to a compatible version. There was an urgent need to see if the existing Siebel software could be made to operate with Vista. Mr Clothier had had a similar problem at Reckitt Benckiser. He knew that Mr Ranson was leaving CS and recommended him to Mr Bruhin who was coordinating the work at Diageo and was in a position to employ Mr Ranson. On 4 February 2009 Mr Clothier emailed Mr Ranson his telephone numbers at Diageo. Mr Ranson replied with his own personal number. He asked 'When do you need someone to do the analysis piece of work?' He said he was due to remain at CS until 27 February, but might perhaps finish earlier. Mr Clothier replied: 'I suppose we could get them to let you work on it earlier on the understanding that any work coming out of it could be potentially passed to CS. What do you think? (I guess you don't want to be managing development.)' On 5 February, the next day, Mr Clothier asked what rates Mr Ranson might charge and whether he would have a limited company. Mr Ranson responded that he was thinking of £800 per day and that his company was Praesto. On 16 February Mr Clothier asked Mr Ranson to contact him, saying he was not sure if he had left CS yet. On 19 February Mr Clothier arranged a telephone conference to introduce Mr Ranson to Mr Bruhin who was responsible for deciding who should be given a contract to assess Diageo's Siebel problem. Mr Bruhin was impressed by Mr Ranson and decided to give the contract to Praesto. A factor was that Praesto was an independent company with no tie to Siebel. On 20 February Mr Bruhin sent Mr Ranson a draft version of the proposed analysis. On the same day Mr Clothier emailed to Mr Ranson 'I just dug this out again – I think Diageo may want something like this.' He attached a paper headed 'Response to Reckitt Benckiser master plan request for proposal' dated 12 September 2008. Mr Ranson responded that he would be extremely interested in doing the work and that he had people available to do it. The judge said that the latter part was untrue. Mr Clothier replied that it was just an idea at the moment. Although Mr Ranson pursued this work, in the end he was unsuccessful.
- However his introduction to Mr Bruhin did produce results. On 25 February Mr Bruhin signed an order to Praesto for the work of assessing Diageo's Siebel problem. It was for 10 days at £800 per day. The order was placed two days before Mr Ranson finally left CS.
- In 2009 Mr David Boardman was the manager of the information technology department of AstraZeneca's UK sales and marketing division. Over the 2 years before Mr Ranson left CS Mr Boardman dealt with him as the manager, as Mr Boardman put it, of the AstraZeneca account. He got to know him and they had a good rapport. Mr Ranson was his point of contact with CS, and he had met Mr Scattergood only twice prior to March 2009. He had never met Mr Austen. On 25 February, two days before Mr Ranson left CS, Mr Ranson invited Mr Boardman out to dinner. They went on to the Oxo Tower for drinks. It was an alcoholic evening. Mr Boardman already knew that Mr Ranson was leaving CS. At least one reason for Mr Ranson to entertain Mr Boardman was to pave the way to obtaining work from AstraZeneca after he had left CS. Nothing specific was discussed. No actual promises were made by Mr Boardman. But Mr Boardman said that he would help Mr Ranson find work from AstraZeneca. This is confirmed by Mr Ranson's email to Mr Boardman on 4 March 2009: 'Hope things are well with you. Just a quick note so you have my new contact details. I am keen to meet up in the nearer future – is this something you are still happy to do? Do you have any time that work/don't work [sic] over the next few weeks?' Mr Ranson had told Mr Boardman that he was going to do some contracting work and that he had a company. Mr Boardman understood that he had aspirations for a consultancy on a larger scale but not that he was setting one up at that stage.
- Following further discussions with Mr Boardman, on 23 March Mr Ranson put in a proposal for some particular work. It remained in Mr Boardman's in-tray. Nor did anything else progress between Mr Ranson and AstraZeneca at this time. On the morning after the dinner with Mr Boardman Mr Ranson sent his brother an e-mail. It said:
"'My first signed order has arrived. It is only for 10 days but I start on Monday. Also shook hands on my third deal last night."
- The order was the order from Diageo. The judge found that the third deal must refer to Mr Boardman, although there was no deal at this point. He said that the e-mail was in this respect a reflection of bravado or euphoria, and was untrue. The second deal was the matter raised by Mr Clothier on 20 February, which Mr Ranson pursued but did not succeed in getting. The judge did not regard this e-mail as being important.
- During his last day with CS Mr Ranson e-mailed to himself some invoices, time sheets and order confirmations. He wanted them so he could use the layouts for Praesto. On 2 March 2009 Mr Ranson went to see a firm of accountants to take advice as to what needed to be done in the administration of Praesto. The accountant, Mr Waites, recorded in his manuscript notes 'Left employment last week and set up in competition. IT industry with blue chip clients.'
- The convivial evening with Mr Boardman did not produce any immediate results for Mr Ranson or Praesto. CS continued to carry out work for Astra Zeneca for some months. It was not until September 2009 that CS ceased to work for AstraZeneca. This did not come about because of anything that Mr Ranson did. The problem was that the CS employee who was carrying out the work for AstraZeneca was leaving CS; and AstraZeneca did not like the offered replacement. The judge found that Mr Scattergood made a decision not to provide AstraZeneca with a person qualified to do the job as it would mean moving someone from other work. Thus he also found that Mr Boardman only turned to Praesto when CS could not (or would not) provide someone suitable.
The judge's conclusions
- The judge's conclusions that are challenged on this appeal were expressed by him as follows:
"75. I do not consider that Mr Ranson was in breach of his duty in connection with the second and third 'business plans'. He was entitled to plan a competing business. He had no fixed intention as to his future until after he had given in his notice. I find that his intention when he gave in his notice was not firmly fixed but was moving in the direction of doing contracting work with the idea of developing that into a full consultancy as and when the opportunity arose. By the time he was in discussion with Mr Clothier that was the route he had decided upon.
- In anticipation of Mr Clothier's move to Diageo Mr Scattergood and Mr Ranson had had lunch with him the previous December and then or soon after it had been agreed with Mr Clothier that CS, no doubt - as it was then thought - through Mr Ranson, would get in touch with him after he had been at Diageo for four weeks to see what opportunities there were. But what happened was that sooner than that Mr Clothier and Mr Ranson were discussing opportunities for Mr Ranson and Praesto. Mr Ranson's case is that the work which was the subject of the order was offered to him and that it was not available for CS. Mr Andrew Stafford QC submitted that diversion of the work from CS to Praesto was crucial. But Mr Ranson was the man with whom Mr Clothier dealt at CS. Mr Ranson could not properly use his relationship as he did without informing CS: his duty as divisional manager in charge of a high proportion of sales was to inform CS and let them decide. It does not assist Mr Ranson that his sales duties were reducing as Mr Offland took over or that Diageo was not within his 'territory'. Mr Ranson's position is here not materially distinct from that of the director defendant in Towers.
- I am satisfied that the situation with Mr Clothier was one in which fiduciary duties arose. They were broken when Mr Ranson did not inform CS of the opportunity for which he obtained an order, and of the opening with which Mr Clothier provided Mr Ranson on 20 February. He was also thereby in breach of his contractual duty of loyalty. That could be put more simply that it was his duty as someone employed to pursue sales to report these opportunities because of his self-interest in them.
- If Mr Ranson had performed his duty in connection with these opportunities, what would he have been obliged to report to CS? The fact that he was looking at the opportunities might well have told CS sufficient about his intentions after he had left. I do not, however, consider that he was obliged to inform CS expressly that he was thinking of developing a fully competing business.
- Mr Ranson's dinner with Mr Boardman was two nights before he left CS. Nonetheless it is the fact that he used the occasion to canvass Mr Boardman for work in competition with CS, and that he was then still employed by CS with the duties I have referred to. For the reasons I have stated in relation to his dealings with Mr Clothier, he was in breach of his contractual & fiduciary duties in canvassing Mr Boardman and in not informing CS of what he was doing.
- It was a breach of Mr Ranson's contractual duty of loyalty and good faith for him to transfer the business contacts from his company mobile phone for the purpose of using them in the business of Praesto. Having wrongly extracted them, he was under a fiduciary duty not to use them for any purpose contrary to CS's interests. I find that the likelihood is that in breach of that duty he used some of the numbers in the business of Praesto. The evidence does not enable me to be more specific.
- Mr Ranson was similarly in breach of his duty by copying the invoices, the time sheets and order confirmations. In further breach he used them to provide forms for Praesto."
Directors and employees
- It is, at the outset, necessary to distinguish between directors of a company and employees of a company. Since a company is an artificial person it must have human agents through which it exercises its powers. From the earliest times of joint stock liability companies it has been consistently held that companies can only act through directors. Section 154 of the Companies Act 2006 now requires a private company to have at least one director, and a public company to have at least two. Although company directors are not strictly speaking trustees, they are in a closely analogous position because of the fiduciary duties which they owe to the company: Bairstow v Queens Moat Houses plc  2 BCLC 531, 548. In particular they are treated as trustees as respects the assets of the company which come into their hands or under their control: In re Lands Allotment Co  1 Ch 616, 631; Re Duckwari plc  Ch 253, 262. It is, therefore, a person's position as a director (which he will have voluntarily assumed) and the powers over the company's property which that entails that give rise to fiduciary duties. The duties of a director have been partially codified in sections 170 to 177 of the Companies Act 2006. They are duties imposed by law, and cannot be excluded by the company's articles of association: Companies Act 2006 s. 232; Item Software (UK) Ltd v Fassihi  EWCA Civ 1244  ICR 450. However, unlike an employee, a director who is in breach of duty is entitled to apply for relief against liability, which the court may grant if he acted honestly and reasonably: Companies Act 2006 s. 1157.
- The appointment of a person as a company director does not make that person an employee of the company. A director is the holder of an office. Nor does appointment as a company director of itself bring into existence any contract between the director and the company. Many directors will have contracts of service running in parallel with their status as officers of the company. But they are distinct legal relationships.
- Whereas a company director will stand in a fiduciary relationship to the company, an employee will not, merely by reason of his role as an employee, assume fiduciary obligations to his employer.
- In addition as Lord Browne-Wilkinson pointed out in Henderson v Merrett Syndicates Ltd  2 AC 145, 206:
"The phrase "fiduciary duties" is a dangerous one, giving rise to a mistaken assumption that all fiduciaries owe the same duties in all circumstances. That is not the case."
- Since fiduciary obligations are not "one size fits all" it is, in my judgment, dangerous to reason by analogy from cases about company directors to cases about employees. The former cases (obviously enough) proceed on the basis that the director, while in office, owes a wide-ranging and single minded duty of loyalty to the company. In the case of a company director there is no question but that the director owes fiduciary duties to the company. The cases explore the extent to which, consistently with those duties, a director may prepare for business life after the end of his directorship. But in the case of an employee there is an anterior question: does the employee owe fiduciary (as opposed to contractual) duties at all?
The role of the contract
- In my judgment the starting point for determining whether Mr Ranson owed fiduciary duties to CS, and if so, what duties, is his contract of employment. As Lord Browne-Wilkinson explained in Kelly v Cooper  AC 205, 214 (in relation to the fiduciary duties of an agent):
"The existence and scope of these duties depends upon the terms on which they are acting."
- In the same case the Privy Council approved the well-known statement of Mason J in Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41, 97:
"That contractual and fiduciary relationships may co-exist between the same parties has never been doubted. Indeed, the existence of a basic contractual relationship has in many situations provided a foundation for the erection of a fiduciary relationship. In these situations it is the contractual foundation which is all important because it is the contract that regulates the basic rights and liabilities of the parties. The fiduciary relationship, if it is to exist at all, must accommodate itself to the terms of the contract so that it is consistent with, and conforms to, them. The fiduciary relationship cannot be superimposed upon the contract in such a way as to alter the operation which the contract was intended to have according to its true construction."
- The contract in that case entitled the agent (an estate agent) to act for competing sellers of property. See also Generics (UK) Ltd v Yeda Research & Development Co Ltd  EWCA Civ 726 per Etherton LJ (§ 80).
- In his masterly judgment in University of Nottingham v Fishel  ICR 1462, 1491 Elias J accurately said:
"…the essence of the employment relationship is not typically fiduciary at all. Its purpose is not to place the employee in a position where he is obliged to pursue his employer's interests at the expense of his own. The relationship is a contractual one and the powers imposed on the employee are conferred by the employer himself. The employee's freedom of action is regulated by the contract, the scope of his powers is determined by the terms (express or implied) of the contract, and as a consequence the employer can exercise (or at least he can place himself in a position where he has the opportunity to exercise) considerable control over the employee's decision making powers. This is not to say that fiduciary duties cannot arise out of the employment relationship itself. But they arise not as a result of the mere fact that there is an employment relationship. Rather they result from the fact that within a particular contractual relationship there are specific contractual obligations which the employee has undertaken which have placed him in a situation where equity imposes these rigorous duties in addition to the contractual obligations. Where this occurs, the scope of the fiduciary obligations both arises out of, and is circumscribed by, the contractual terms; it is circumscribed because equity cannot alter the terms of the contract validly undertaken."
- This approach is also borne out by the decision in Helmet Integrated Systems Ltd v Tunnard  EWCA Civ 1735  FSR 16, where the employer's claim failed because the relevant terms of the employee's contract did not restrict his activities in the manner of which the employer complained.
The contractual duty of fidelity
- It is not disputed that an employee has an obligation of fidelity towards his employer. If the obligation is not express, it will invariably be implied. In Wessex Dairies Ltd v Smith  2 KB 80 Greer LJ formulated the implied term thus:
"… that during the continuance of his employment he will act in his employers' interests and not use the time for which he is paid by the employers in furthering his own interests."
- Maugham LJ said:
"For myself I prefer the more general implication stated thus by A. L. Smith LJ: "I think that it is a necessary implication which must be engrafted on such a contract that the servant undertakes to serve his master with good faith and fidelity. That is what was said in the case of Lamb v Evans, and I entirely agree with it." The Lord Justice then asked himself whether the defendant in Robb v Green acted with good faith and fidelity. The same question has to be answered in the present case. In dealing with it certain considerations should not be left out of sight. First, after the employment terminates, the servant may, in the absence of special stipulation, canvass the customers of the late employer, and further he may send a circular to every customer. On the other hand, it has been held that while the servant is in the employment of the master he is not justified in making a list of the master's customers, and he can be restrained, as he was in Robb v Green, from making such a list, or if he has made one, he will be ordered to give it up. But it is to be noted that in Robb v Green the defendant was not restrained from sending out circulars to customers whose names he could remember. Another thing to be borne in mind is that although the servant is not entitled to make use of information which he has obtained in confidence in his master's service he is entitled to make use of the knowledge and skill which he acquired while in that service, including knowledge and skill directly obtained from the master in teaching him his business. It follows, in my opinion, that the servant may, while in the employment of the master, be as agreeable, attentive and skilful as it is in his power to be to others with the ultimate view of obtaining the benefit of the customers' friendly feelings when he calls upon them if and when he sets up business for himself. That is, of course, where there is no valid restrictive clause preventing him doing so."
- The earliest cases involve what might properly be described as misuse by an employee of his employer's trade secrets or other property (e.g. Yovatt v Winyard (1820) 1 J & W 394 (surreptitious copying of recipes for medicines); Robb v Green  2 QB 315 (surreptitious copying of customer list)). Wessex Dairies itself was a case of a milkman soliciting his employer's customers while actually on his rounds. In Hivac Ltd v Park Royal Scientific Instruments Ltd  Ch 169 the obligation of fidelity was held, prima facie, to apply to workers carrying out in their own spare time skilled work for a competitor of their employer which would damage their employer's business.
- Thus in Faccenda Chicken Ltd v Fowler  Ch 117, 135-6 Neill LJ said:
"While the employee remains in the employment of the employer the obligations are included in the implied term which imposes a duty of good faith or fidelity on the employee. For the purposes of the present appeal it is not necessary to consider the precise limits of this implied term, but it may be noted: (a) that the extent of the duty of good faith will vary according to the nature of the contract (see Vokes Ltd v Heather, 62 RPC 135); (b) that the duty of good faith will be broken if an employee makes or copies a list of the customers of the employer for use after his employment ends or deliberately memorises such a list, even though, except in special circumstances, there is no general restriction on an ex-employee canvassing or doing business with customers of his former employer: see Robb v Green  2 QB 315 and Wessex Dairies Ltd v Smith  2 KB 80."
- What is clear, however, is that an analysis of the employee's contractual obligations (including his job description) is an essential foundation for determining the scope of the obligation of fidelity.
- I conclude therefore that both the content of the contractual obligation of fidelity and also the existence and content of any fiduciary duty are determined, in the first instance, by the terms of the employee's contract of employment.
"Trust and confidence"
- Mr Griffiths QC laid some stress on what he said was the duty of mutual trust and confidence. In my judgment this stress was misplaced. It is true that this alleged duty received a passing mention in Item Software v Fassihi; but Arden LJ mentioned it only to say that the court had not been taken to the cases that dealt with it.
- First, the so-called duty has its origins in an implied term of a contract of employment. The way that the implied term has been formulated was not to impose a positive duty of trust and confidence, but as an obligation that the employer shall not:
"without reasonable and proper cause, conduct itself in a manner calculated and likely to destroy or seriously damage the relationship of confidence and trust between employer and employee."
See Malik v BCCI  AC 20, 45.
- Second, the implied term is not an individualised implied term but a default rule, applicable to all contracts of employment. This is clear from the speech of Lord Steyn in Malik v BCCI:
"The applicants do not rely on a term implied in fact. They do not therefore rely on an individualised term to be implied from the particular provisions of their employment contracts considered against their specific contextual setting. Instead they rely on a standardised term implied by law, that is, on a term which is said to be an incident of all contracts of employment: Scally v Southern Health and Social Services Board  1 AC 294, 307B. Such implied terms operate as default rules. The parties are free to exclude or modify them. But it is common ground that in the present case the particular terms of the contracts of employment of the two applicants could not affect an implied obligation of mutual trust and confidence….
There was some debate at the hearing about the possible interaction of the implied obligation of confidence and trust with other more specific terms implied by law. It is true that the implied term adds little to the employee's implied obligations to serve his employer loyally and not to act contrary to his employer's interests. The major importance of the implied duty of trust and confidence lies in its impact on the obligations of the employer… and the implied obligation as formulated is apt to cover the great diversity of situations in which a balance has to be struck between an employer's interest in managing his business as he sees fit and the employee's interest in not being unfairly and improperly exploited." (Emphasis added)
"This submission loses sight of the particular nature of the implied obligation of mutual trust and confidence. It is not a term implied in fact. It is an overarching obligation implied by law as an incident of the contract of employment. It can also be described as a legal duty imposed by law: Treitel, The Law of Contract, p 190. It requires at least express words or a necessary implication to displace it or to cut down its scope. Prima facie it must be read consistently with the express terms of the contract. This emerges from the seminal judgment of Sir Nicolas Browne-Wilkinson V-C in Imperial Group Pension Trust Ltd v Imperial Tobacco Ltd  1 WLR 589. It related to an employer's express contractual right to refuse amendments under a pension scheme. The Vice-Chancellor held that the employer's express rights were subject to the implied obligation that they should not be exercised so as to destroy or seriously damage the relationship of trust and confidence between the company and its employees and former employees. The employer's blanket refusal was unlawful. The decision did not involve trust law and the employer was not treated as a fiduciary. It was decided on principles of contract law. Sir Nicolas Browne-Wilkinson V-C described the implied obligation of trust and confidence as "the implied obligation of good faith". It could also be described as an employer's obligation of fair dealing." (Emphasis added)
- Since the alleged duty is an incident of every contract of employment, and it is clear that not every contract of employment gives rise to a fiduciary relationship, it is equally clear that reliance on the duty cannot of itself give rise to fiduciary obligations. It is, perhaps, unfortunate that the label given to the duty is so closely aligned with the label commonly applied to relationships that do give rise to fiduciary obligations; but conceptually it is quite different. The scope of the duty is a matter of contract, not of the law of fiduciary obligations.
The difference between the contractual duty of fidelity and the duties of a fiduciary
- As Elias J pointed out in Fishel the hallmark of a fiduciary is a single-minded duty of loyalty. The duty of loyalty in that context has a precise meaning: "namely the duty to act in the interests of another". As mentioned, this is not a feature of an employment relationship. In the employment context the duty of loyalty, although given the same label, "is one where each party must have regard to the interests of the other, but not that either must subjugate his interests to those of the other." Again it is, perhaps, unfortunate that conceptually different things have been given the same label.
- Likewise in Helmet Integrated Systems Ltd v Tunnard Moses LJ said (§ 36):
"An employee owes an obligation of loyalty to his employer but he will not necessarily owe that exclusive obligation of loyalty, to act in his employer's interest and not in his own, which is the hallmark of any fiduciary duty owed by an employee to his employer. The distinguishing mark of the obligation of a fiduciary, in the context of employment, is not merely that the employee owes a duty of loyalty but of single-minded or exclusive loyalty."
- Helmet Integrated Systems Ltd v Tunnard also shows that the obligation of loyalty is no more than an obligation loyally to carry out the job that the employee agreed to do. This, too, is the result of Fishel. The University complained that Dr Fishel had undertaken work abroad which should have been passed on to the University. Elias J rejected that complaint. He said:
"In my opinion the crucial question is whether Dr Fishel was under a specific duty to secure the work abroad for the university. It is not relevant that his fiduciary duty may have been engaged in other circumstances… The question, however, is whether it was engaged in these particular circumstances. I do not think that it was. He was under no contractual obligation to seek to obtain work abroad of this nature on behalf of the university, nor in my opinion could he have been contractually obliged to do the work abroad that he did. … In similar vein, the university also relied upon a passage in Dr. P. D. Finn's book Fiduciary Obligations, p 236, para. 547, where he says: "The important matter is whether or not that opportunity relates to a transaction falling within the scope of the business or venture." The university then says that since research and treatment was the core business of Nurture, it was an opportunity which should have been made available to the university. However, those words were made in the context of considering the scope of the fiduciary obligation as it applies to partners and joint venturers. Such persons are undertaking to share the work which falls within the scope of the partner or joint venture. The same principle cannot simply be treated as being automatically applicable in the very different context of the employment relationship. The employee does not in general promise to give his employer the benefit of every opportunity falling within the scope of its business." (Emphasis added)
A duty to report?
- Mr Griffiths emphasised that the case turned on the judge's finding that Mr Ranson was in breach of his obligation to report to CS his contact with Mr Clothier and his dinner with Mr Boardman. It was not the fact that he had had that contact or that dinner that was the gravamen of the complaint; but the fact that CS were unaware of them. Had Mr Ranson reported his activities, then CS would have been in a better position to resist the assault on their business carried out by Mr Ranson and Praesto once the latter was up and running.
- In Sybron Corp v Rochem Ltd  Ch 112 Stephenson LJ said:
"…there is no general duty to report a fellow-servant's misconduct or breach of contract; whether there is such a duty depends on the contract and on the terms of employment of the particular servant. He may be so placed in the hierarchy as to have a duty to report either the misconduct of his superior, … or the misconduct of his inferiors, as in this case." (Emphasis added)
- What goes for the reporting of misconduct of fellow employees must apply with at least equal force to reporting one's own misconduct.
- In Fishel the University argued that:
"… the employee's duty of loyalty and good faith obliged Dr Fishel to inform the university that he was being paid for his outside work. The argument then is that, had the university been aware of the opportunity to do outside work, it would have sought to do it itself."
- Elias J rejected that argument. He said:
"In my view the premise is wrong. I do not think that as a general principle an employee is bound to inform his employer if and when he is doing outside work in breach of his contract."
- In amplifying his reasons he referred to:
"… the well established rule in Bell v Lever Brothers Ltd  AC 161 that employees are not obliged to disclose their own past misconduct or breaches of contract."
- Mr Griffiths argued that the decision of this court in Item Software Ltd v Fassihi had changed the legal landscape. It is of critical importance to note that Mr Fassihi was a director of the company in question, with undoubted fiduciary duties towards it. Most of the discussion of the legal principles was in that context. As Arden LJ pointed out (§ 34):
"… the duties of a director are in general higher than those imposed by law on an employee. This is because a director is not simply a senior manager of company. He is a fiduciary and with his fellow directors he is responsible for the success of the company's business."
- The fact that a director owes fiduciary duties to the company is the critical distinction between a director and an employee (§ 38).
- Even in the context of the fiduciary duties of a company director this court rejected the argument that there was a free-standing duty on the part of a director to inform the company of his own wrongdoing. Arden LJ said (§ 41):
"For my part, I do not consider that it is correct to infer from the cases to which I have referred that a fiduciary owes a separate and independent duty to disclose his own misconduct to his principal or more generally information of relevance and concern to it. So to hold would lead to a proliferation of duties and arguments about their breadth. I prefer to base my conclusion in this case on the fundamental duty to which a director is subject, that is the duty to act in what he in good faith considers to be the best interests of his company."
- On the facts Mr Fassihi was held to have been in breach of his general duty of single-minded loyalty for having failed to disclose his own attempt to take for himself a contract in which the company was interested. Arden LJ said, however, that it was unnecessary to decide to what extent an employee owed any duty to disclose his own misconduct (§ 60); and she did not do so. Fishel was cited in argument; but not referred to in the judgments. The court expressed no criticism of it. Mr Griffiths emphasised the fact that in discussing Mr Fassihi's duties Arden LJ repeatedly referred to the duty of loyalty. However, as I have said, that label in the context of an admitted fiduciary relationship does not describe the same duty as it describes in an employment context.
- I would endorse the general principle as stated by Elias J in Fishel.
- That is not to say that an employee can never have an obligation to disclose his own wrongdoing; but any such obligation must arise out of the terms of his contract of employment. Mr Stafford QC took us on a tour d'horizon of cases where such an obligation (or an analogous obligation) did arise. In Swain v West (Butchers) Ltd  3 All ER 261 the employee manager had a contractual obligation "to promote, develop and extend the interests of the company." This contractual obligation required him to disclose misconduct by the managing director. In [QBE Management Services (UK) Ltd v Dymoke]()  EWHC 80 (QB)  IRLR 458 Mr Dymoke's contract contained obligations to use his best endeavours to promote and protect the interests of his employer, and a further obligation that he would "fully and properly disclose to the Board … all of the affairs of the Group of which he is aware." These obligations meant that Mr Dymoke had a duty to disclose his own activities in soliciting fellow employees to defect en masse, his misuse of confidential material and solicitation of his employer's customers while he was still employed. He also showed us different contracts made between CS and other employees which contained far more restrictive terms than those contained in Mr Ranson's contract.
- On the other hand in Helmet Integrated Systems Ltd v Tunnard, where Mr Tunnard's contract contained an obligation "to advise on competitor activity and pricing structures", Mr Tunnard was not in breach by developing his own product (in his own time) which was intended to be a direct competitor of his employer's product, and in not disclosing his activities to his employers. Mr Griffiths relied in particular on Moses LJ's acceptance that Mr Tunnard did owe fiduciary duties to his employer. However that acceptance must be put in context. It is necessary to quote the whole passage:
"42 I accept that if Mr Tunnard had learned that a competitor of HISL proposed to develop a helmet which was a rival to the F600 produced by HISL and was in the process of preparing a preliminary concept of such a helmet, he was under an obligation to report that information. Such activity, even though it consists merely of preparation and even though such a concept might never be developed, would be information properly described as "competitor activity" within the meaning of the job specification.
43 I am also prepared to accept that a "competitor" within the meaning of the job specification might include a third party which had never previously competed but proposed to do so.
44 I also accept that Mr Tunnard would be under an obligation to deploy such information exclusively in the interests of his employer. It would not be open to him to pass on that information to someone else for the benefit of that other person, nor would he be permitted to use such information for his own benefit without being in breach of his duty of fidelity to HISL. I am even, with some diffidence, prepared to accept that if Mr Tunnard used information about such activity either for the benefit of someone other than HISL or for his own benefit he would be in breach of a fiduciary obligation.
45 I am prepared to go thus far because HISL would have no control over how Mr Tunnard deployed what he had learned as a salesman, and would be dependent upon him to pass on the information. Were it not so, the employee could pick or choose what he did or did not pass on. Thus HISL would be vulnerable to any misuse of such information, the dissemination of which was outside the employer's control. Such vulnerability is what Lord Millett described (op cit 219) as a "defining characteristic" of a fiduciary relationship. To obtain and then divert the benefits of such information seems to me closely analogous to the condemned activities of the director, Fassihi."
- Paragraph 42 of the judgment is addressing Mr Tunnard's contractual obligation. Moses LJ quotes expressly from Mr Tunnard's job specification in order to define the scope of his reporting obligation. Paragraph 43 is also concerned with defining the scope of Mr Tunnard's contractual obligation. The first part of paragraph 44 deals with Mr Tunnard's contractual obligation of fidelity. Thus far the decision considers the matter wholly in terms of Mr Tunnard's contractual obligation. Moses LJ then says (unusually) "with some diffidence" that he would accept that misuse of information that Mr Tunnard was contractually obliged to pass on to his employer would have been a breach of a fiduciary obligation. Speaking for myself, I cannot see why it is necessary to add a fiduciary obligation in order to buttress what would have amounted to a breach of contract anyway. That is by the way. In fact Mr Tunnard was held not to have been in breach of any fiduciary obligation. The reason is most clearly expressed in paragraph 51:
"The reason why Mr Tunnard did not breach any fiduciary obligation was because his own preparatory activity could not legitimately be described as "competitor activity" in the context of his employment as a salesman and his right to prepare for competition once he had left employment as a salesman."
- In other words, Mr Tunnard had not broken his contract.
The judge's analysis
- In his analysis of the law the judge directed himself by reference to a number of cases dealing with breaches of fiduciary duties by company directors. In my judgment this was an approach liable to lead to confusion. Thus in paragraph 76 of his judgment the judge said that "Mr Ranson's position is here not materially distinct from that of the director defendant in Towers." But in my judgment there was a highly material difference: Mr Ranson was not a director; he was only an employee.
- In addition, in his analysis of the law the judge did not refer to the terms of Mr Ranson's contract of employment. In paragraph 77 of his judgment the judge said that he was "satisfied that the situation with Mr Clothier was one in which fiduciary duties arose". Mr Stafford submitted that the judge had, in effect, approached the question from the wrong end. He had started with the facts; finding inferentially that Mr Ranson was in a position where there was a conflict between his interests and those of CS, and had reasoned backwards to find from that conflict the existence of a fiduciary duty on the part of Mr Ranson. Having decided that fiduciary duties arose as a result of "the situation with Mr Clothier" the judge reasoned that Mr Ranson was "thereby in breach of his contractual duty of loyalty". There is undoubted force in these submissions.
- In my judgment, therefore, the judge's analysis got off on the wrong foot.
The terms of the contract
- Mr Griffiths emphasised that the contract between Mr Ranson and CS was made when Mr Ranson first took up employment with CS at a junior level. The documentation remained unchanged despite his successive promotions and increases in responsibilities. Thus, he argued, the terms of the employment contract cannot be limited to the contents of a home made document produced at the start of the relationship, without regard to the changes in seniority and trust which followed. In support of that submission he relied on Lord Hoffmann's observations in Carmichael v National Power plc  1 WLR 2042, 2050:
"...the parties did not intend the letters to be the sole record of their agreement but intended that it should be contained partly in the letters, partly in oral exchanges at the interview or elsewhere and partly left to evolve by conduct as time went on. This would not be untypical of agreements by which people are engaged to do work, whether as employees or otherwise."
- Mr Stafford rightly accepted that despite the entire agreement clause the contract contained an implied term that Mr Ranson would carry out his job faithfully. He also rightly accepted that as Mr Ranson's job changed through his various promotions within CS the functions that he was required to carry out faithfully also changed. However, the judge made no clear findings about what Mr Ranson's job was. We were not shown any job description applicable to Mr Ranson's various positions within CS. Nor, it seems, was the judge. We were shown (as was the judge) a number of annual appraisals of Mr Ranson's performance which also set out objectives for the coming year; and a number of Mr Ranson's answers during cross-examination.
- What is clear is that there were no (relevant) restrictions on Mr Ranson's activities after he had ceased to be employed by CS. He was, therefore, free to compete with CS either on his own account or through Praesto as soon as he had left CS' employment. In Helmet Integrated Systems Ltd v Tunnard Moses LJ said (§ 27):
"This freedom to compete, once an employee has left, unrestrained by any enforceable covenant, carries with it a freedom to prepare for future activities, which the employee plans to undertake, once he has left. In Robb v Green … Hawkins J concluded that a manager who had copied a list of customers was liable in damages for breach of an implied term not to use such information to the detriment of his employer. But he observed, in words echoed frequently thereafter, that each case would depend upon its own circumstances and there will be cases where an employee may legitimately canvass, issue circulars, have a place of business ready and hire employees."
- Mr Griffiths argued that Mr Ranson had accepted in cross-examination that his job entailed both nurturing existing clients (what Mr Ranson described as "farming") and also looking for new ones (what Mr Ranson described as "foraging".) From this foundation he argued that it was part of Mr Ranson's job to pass on to CS information about potential customers at least if they were potentially worth pursuing, so that CS could decide whether to instruct Mr Ranson to pursue the opportunity. He submitted that not only was it Mr Ranson's job to pass on information about existing and potential customers which would be of interest to CS, but that Mr Ranson also had a duty to report to CS his own plans to set up in competition and that he was pitching for business. This duty to report was not limited to reporting his own (or anyone else's) misconduct; but was a duty to give CS information that would enable it to fight the potential threat that Praesto would pose to CS once Mr Ranson had left.
- Mr Stafford accepted that "farming" and "foraging" were part of Mr Ranson's job, but only within his "patch". By reference to the annual appraisals he showed us that Mr Ranson's "patch" was a limited one. It included pharmaceutical companies (with one exception), public sector organisations (with three exceptions) Reckitt Benckiser and Aviva Group (with two exceptions). Outside that "patch" it was not Mr Ranson's job to chase new clients. There was some debate before us about whether Mr Ranson's "patch" was informally extended as a result of the Windsor lunch (see § 11 above) so as to include the cultivation of Mr Clothier once he had moved from Reckitt Benckiser to Diageo. However, the judge made no finding that it was, and in the absence of a Respondent's Notice I do not consider that we should make findings of primary fact. In fact the tenor of the judge's judgment is that Diageo was not part of Mr Ranson's patch even after the Windsor lunch because he said (§ 76):
"It does not assist Mr Ranson that his sales duties were reducing as Mr Offland took over or that Diageo was not within his 'territory'." (Emphasis added)
Mr Clothier and Diageo
- I have already set out the judge's findings of fact about this incident. To my mind, the salient points are these:
i) Mr Clothier was not just a CS contact, he was also a personal friend of Mr Ranson (§ 40);
ii) Mr Clothier knew that Mr Ranson was leaving CS and recommended Mr Ranson to Mr Bruhin even before he made contact with Mr Ranson (§ 42);
iii) Mr Ranson did not initiate the contact with Mr Clothier: Mr Clothier did (§ 43);
iv) The information that Mr Ranson gave Mr Clothier related to his future activities after he left CS;
v) Mr Clothier arranged Mr Ranson's introduction to Mr Bruhin. Mr Bruhin was impressed and one factor in that was that (unlike CS) Praesto was an independent company with no tie to Siebel (§ 43);
vi) Although the work order was signed on 25 February 2009 (two days before Mr Ranson left) it was for work to begin after his departure;
vii) Diageo was not an existing customer of CS and was not on Mr Ranson's "patch". It was therefore no part of his job for CS to pursue any opportunity with Diageo;
viii) Mr Scattergood knew that Mr Clothier had moved from Reckitt Benckiser to Diageo, so he knew that there was a potential business opportunity to attract Diageo as a customer of CS;
ix) But there is no finding that he (or anyone else within CS) contacted Mr Clothier after Mr Ranson's departure, even though such contact had been envisaged at the Windsor lunch.
- On these facts I cannot see that Mr Ranson had any relevant fiduciary duty to CS. There is no contractual term on which such a duty can be hung; and the potential vulnerability to which Moses LJ referred in Tunnard (i.e. the employer's ignorance of the potential business opportunity) does not arise on the facts. In my judgment the judge was in error when he said that the fact that Diageo was not part of Mr Ranson's territory did not help Mr Ranson. In my judgment it did. Quite simply, it was not part of Mr Ranson's job to chase Diageo. Even if Mr Ranson was in breach of contract in responding to Mr Clothier's overture (which I doubt) he was not in breach of contract (or fiduciary duty) in failing to report that overture and his reaction to it to CS.
- As Mr Griffiths made clear, CS' complaint was not that Mr Ranson had obtained £8,000-worth of work; it was that he had failed to report his contact with Mr Clothier and Mr Bruhin. In my judgment this allegation fails.
- I have already set out the judge's findings of fact about what transpired at the dinner with Mr Boardman. In paragraph 79 of his judgment the judge said that Mr Ranson was "in breach of his contractual & fiduciary duties in canvassing Mr Boardman." In my judgment the facts found by the judge do not amount to canvassing. Mr Griffiths said that paragraph 79 of the judgment was a further finding of primary fact which we should not disturb. I do not agree. In my judgment this was the judge's shorthand for referring back to the findings of primary fact that he had already made.
- To my mind, the salient points are these:
i) Mr Boardman was well-known to CS as an important contact. Mr Ranson had been his point of contact within CS, but his handover notes to Mr Offland stressed that Mr Boardman was a "key contact";
ii) When the dinner took place Mr Boardman already knew that Mr Ranson was leaving CS (§ 45);
iii) A reason for the dinner was "to pave the way" to obtaining future work from AstraZeneca after Mr Ranson's departure, but nothing specific was discussed and no promises were made. However, Mr Boardman did say that he would help Mr Ranson find work (§ 45);
iv) There was no further contact until after Mr Ranson had left CS;
v) When in March 2009 Mr Ranson did put in a proposal for some work from AstraZeneca, nothing came of it;
vi) CS continued to count AstraZeneca among its customers and to supply services to it for a further six months; but the relationship collapsed for reasons unrelated to Mr Ranson or Praesto.
- I do not consider that on the judge's findings of primary fact Mr Ranson did canvass Mr Boardman. His entertaining of Mr Boardman (in his own time) was no more than being "as agreeable, attentive and skilful as it is in his power to be to others with the ultimate view of obtaining the benefit of the customers' friendly feelings when he calls upon them if and when he sets up business for himself." It was merely paving the way. He did not divert or interfere with any business opportunity then being pursued by CS. He was in my judgment not in breach of contract. Nor do I consider that Mr Ranson owed CS any relevant fiduciary duty vis-à-vis Mr Boardman. Once again the potential vulnerability to which Moses LJ referred in Tunnard does not arise on the facts. It is plain that CS suffered no loss as a result of the convivial evening, because it continued to supply services to AstraZeneca until months later. Once Mr Ranson had left CS he was fully entitled to compete for work.
- Once again the real complaint was that Mr Ranson had failed to inform CS of what he was doing. This, according to Mr Griffiths, would have entailed not only telling CS that he had had dinner with Mr Boardman but also that he was planning to set up in competition. In my judgment Mr Ranson had no such duty, whether contractual or fiduciary.
- This allegation also fails.
- I would allow the appeal. The Appellant's Notice envisaged that the action would proceed in relation to two paragraphs of the judgment. The paragraphs in question were paragraph 74 and paragraph 81. However, on examination it became clear that paragraph 74 did not deal with a pleaded breach of contract or duty, and consequently there is no purpose in allowing a quantum claim to proceed in relation to that. Although in paragraph 81 the judge did find that a breach of contract or duty had been established, Mr Griffiths made it clear that CS did not pursue a claim for damages in respect of that breach. In those circumstances there is no useful purpose to be served by the envisaged quantum hearing. In those circumstances I would invite written submissions on precisely what order should be made.
Lord Justice Lloyd:
- I agree.
Lord Justice Pill:
- I also agree
Published: 29/06/2012 18:43