Bad behaviour costs dear

The manner in which managers at City brokers Cantor Fitzgerald tried to
introduce new financial terms for two of its brokers ultimately invalidated
vital restrictive covenants in their contracts. Chris Southam urges firms to
learn the lesson that macho management can have unforeseen consequences

Lap dancing as R&R, aggressive and foul language and telephone number
salaries – it’s no surprise that the national press jumped on this summer’s
legal spat between City broking heavyweights Cantor Fitzgerald and ICAP with
unabashed glee.

But now that the brouhaha has died down, it is well worth having a look
beyond the silly season copy to see whether there are any lessons for HR
practitioners to take away.

This was not exactly an everyday tale of country folk but then again, there
was nothing earth-shattering about the legal issues. It was simply an everyday
tale of rival businesses competing for the best staff in their field. Of course
there was a salacious element – but that was by-the-by.

So what was all the legal fuss about? Simply this. Three City brokers employed
by Cantor Fitzgerald wanted to join Cantor’s main rival, ICAP. (There had been
an unsuccessful attempt at a no-poaching protocol after September 11 when
Cantor so tragically lost a substantial number of its most talented people.)

Unreasonable restraint

ICAP very much wanted to recruit the brokers – Edward Bird, Luigi Boucher
and Spencer Gill, three extremely talented and profitable people. There is, of
course, a ‘but’. The three employees had all signed up to contracts with Cantor
Fitzgerald which contained some extremely restrictive covenants. These,
broadly, can be described as non-solicitation of customers, non-competition
(such as by joining a competitor) and non-poaching of employees.

A great deal of care had gone into drafting the relevant clauses and they
seemed watertight. What the three brokers wanted to do was to ‘bust the
covenants’. One way would have been to demonstrate that the covenants were an
unreasonable restraint of trade and thus, as a matter of public policy,
unenforceable. Here the competing interests are clear: the brokers wanted to be
free to sell their services to anyone; Cantor, having paid them an awful lot of
money, wanted to protect its client base and, equally (if not more)
importantly, protect the stability of its workforce. Wooing a large and
profitable team away from a competitor is seen as a real coup. The loss of such
a team can be extremely damaging – hence the ‘no poaching’ clause.

It is interesting to note that none of the brokers sought to argue that any
of the restrictions Cantor sought to enforce was an unreasonable restraint of
trade. So how could they walk away from their covenants with impunity? It is
only now that we get to some real law. The three brokers had to rely upon the
common law concept of repudiatory breach. Briefly, this occurs where an
employer acts so badly towards an employee that the latter is entitled to
resign and complain of constructive dismissal.

Repudiatory breach

Not every breach will allow an employee to make this complaint – it has to
be one that goes to the root of the contract. An obvious example is a
unilateral and substantial reduction in someone’s remuneration. A boss shaking
an employee warmly and painfully by the throat is also likely to qualify. So
what is the result of a repudiatory breach? The employee is entitled to treat
all his obligations under the contract as at an end. These will include
restrictive covenants. The principle is that, if the employer has been in
repudiatory breach of contract, he can no longer rely on covenants expressed to
apply after the termination of employment.

So that was what this case was all about. Citing foul and aggressive
language, and the way in which certain managers at Cantor wished to introduce
new financial terms, the three brokers relied upon the oft-quoted implied term
of mutual trust and confidence. Broadly, this means that an employer must 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. It does not have to be just one incident – there
can be an accumulation of improper acts, the last of which could constitute the
straw that breaks the camel’s back.

For the facts of this particular case, go to the 60-page judgment of Mr
Justice McCombe – but it is the conclusions that are important. The learned
judge held that Cantor did commit repudiatory breaches against Bird and Gill,
but did not do so against Boucher. The breaches related to Cantor’s attempts to
make Bird and Gill accept a ‘new deal’. In their case, the issue was handled on
Cantor’s behalf by Daniel La Vecchia and in Gill’s case ‘significantly by Mr
[Lee] Amaitis’. In Boucher’s, it was handled by Xavier Alcan.

In the judge’s words: "Mr La Vecchia and Mr Amaitis had very different
styles to Mr Alcan. Mr La Vecchia was tough, domineering and persistent in his
handling of the matter." He was "extremely forthright, and as was
standard with his manner of speech, there was much use of swearing and
obscenities. The explanations of the new proposals were perfunctory and
misleading. Nothing was provided on paper except the odd letters which were themselves
opaque and open-ended…" When Bird indicated that he was thinking of
leaving Cantor, "this led to some very unpleasant remarks about [what]
Amaitis would do in response at the insistence of Mr La Vecchia."

Behaved disgracefully

There was discussion of a meeting between Gill and Amaitis which the judge
preferred to describe as an ‘encounter’ in which "Amaitis behaved
disgracefully. Even by the robust standards of this trade, the language and
comments of É Amaitis on this occasion may well, on their own, have crossed the
threshold of conduct repudiatory of the employment contract." So the judge
held that Cantor had breached that implied term of mutual trust and confidence
– and there was no reasonable or proper cause for this. Thus happy to have
escaped their covenants, Bird and Gill exited stage left.

Boucher was not so lucky. It is clear from the judgment that Alcan’s
handling of Boucher was much more diplomatic. Discussions were much more
cordial and, at the end of it all, the judge felt that Cantor had not committed
a repudiatory breach and that it was Boucher himself who was in repudiatory breach
by resigning without giving proper notice.

So what is the moral of all this? It does not matter how well restrictive
covenants are drawn. They may pass muster at trial and, better still, may
deter. But defeat can be snatched from the jaws of victory by an employer
committing that fatal repudiatory breach.

Macho management may be de rigueur in some parts of the City, but such
behaviour can cost an employer dear. Some managers may need to brush up their
skills in tact and diplomacy. If they simply cannot do so, perhaps it is better
to keep them out of what, in Cantor’s case, turned out to be harm’s way.

Christopher Southam is a partner in Speechly Bircham’s Employment Law

Lessons learned from the case

– Post-termination protection will
not be challenged by employees if well drafted.

– If action is to be taken to protect the business, approach
the issue in a holistic fashion. Introduce both garden leave and
post-termination protection into contracts of employment.

– All contract of employment protection, whether garden leave
or post-termination restrictions, is reliant on the employer acting properly.

– Do not allow a climate of bullying and bad behaviour to
develop. It can lead to significant risks to the business and such behaviour
can have a major impact on contract protection.

– Ensure that e-mail traffic and other communications within
the business are conducted in a professional and businesslike manner, in the knowledge
that such traffic will be disclosed in any court action.

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