On 2 May, the House of Lords issued important judgments in Douglas v Hello!, OBG v Allan, and Mainstream Properties v Young. These cases were heard together because they involve similar points of law.
The single judgment for all three cases clarifies the law relating to so-called ‘economic torts’ and the tests for finding liability for, and the distinction between, the torts of inducing a breach of contract and of causing loss of earnings by unlawful means.
In employment, breach of contract can occur where an employee passes confidential information to a competitor, acts as a ringleader assisting the new employer in hiring the rest of the team, diverts an emerging business opportunity or otherwise breaches their obligations in relation to notice period and restrictive covenants.
In Mainstream Properties Limited v Young and others, two directors and employees of property developer Mainstream formed a competing company. With funding from one of the defendants, Mr de Winter, the two directors diverted property development opportunities, which could have been exploited by Mainstream, to their own company.
Mr de Winter queried whether their actions conflicted with the interests of Mainstream, but was told that Mainstream had refused the opportunities. This was untrue (and the directors were held liable) but de Winter was held at first instance to have honestly believed that the conduct was authorised. The question was whether De Winter was liable for inducing a breach of contract.
The House of Lords upheld the lower court’s decision that Mr de Winter was not liable for inducing a breach of contract. The House of Lords said that for liability to attach, it is necessary to show:
a breach of contract
that a person knows they are procuring a breach of contract (turning a blind eye can amount to deemed knowledge for these purposes, but the focus is not on what they should know, but on what they do know)
the breach of contract must either be an intended end in itself, or the means to an end (but not merely a foreseeable consequence of the intended end).
Mr de Winter was found not to have known that the directors’ actions would amount to a breach of their duties to Mainstream as he was under the mistaken belief that the conduct was authorised.
The test for knowledge is a critical one. If a person honestly believes that no breach is being committed, even if their belief is somewhat eccentric or foolish, then they will not be liable.
For employers that are looking to hire staff, the case provides some comfort. The new employer can escape liability if it can show that it honestly believed what the employee was doing was not a breach of contract. An employer’s honest belief might arise if it can show that it did not believe that there was a breach because, for example, it had received legal advice that restrictive covenants were not enforceable, or if it understood that the employee had the consent of the employer to act as they did. If the belief is honestly held, it will not matter if it is mistaken.
By Dan Lavender, partner, and Lois Kill, solicitor, Macfarlanes