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Protecting your business when an employee leaves to join a competitor or to set up their own business

We have been involved in many cases recently where employees have left to join a competitor or to set up their own business

In this series of bulletins we look at what you can do to protect your business when this happens. In part 1 we discussed evidence gathering.  In part 2 we considered the process of deciding whether to threaten or take legal action.  In part 3 we looked at starting legal action and the types of interim (temporary) relief for which you can apply.

This time we look at the final remedies that may be available.

 It is usual to seek both a final injunction, which may be temporary (such as the enforcement of non-compete clauses or non-solicitation clauses), or permanent (such as a prohibition on the misuse of confidential information) and a financial remedy.

 The principles which apply to the granting of a final injunction are broadly the same as those which apply to the granting of interim injunctions (see part 3 ).

 Over the last few years, there have been significant developments in respect of the types of financial remedy that are available.

These may now include:

  • Damages for breach of contract;
  • Tort-based damages;
  • An account of profits; and
  • Gain-based contractual damages.

Damages for breach of contract

Damages for breach of contract are the main remedy in a contractual claim. You are entitled to be put in the same position as you would have been in if the contract had been complied with.

 The losses could include the costs of recruiting replacements for the employees who have left, and lost business from clients. 

You must prove (on the balance of probabilities) that, but for the breach of contract, you would not have suffered the losses.

It is important to remember that:

  • You are under a duty to mitigate (ie reduce) your losses;
  • Your claimable losses are limited to your net losses; and
  • The court will assess losses both up to the date of the remedies hearing and prospective future losses.

Tort-based damages

The principles which apply to assessing tort-based damages (for example, against a new employer for the tort of unlawful inducement of breach of contract) are similar to those which apply to the assessment of contractual damages.

The key difference is that tort-based damages are based on the sum which is required to put you in position in which you would have been if the tort had not been committed. In practice, the sums assessed in respect of contractual damages and tort-based damages are often the same.

Account of profits

An alternative remedy to damages is an account of profits, which enables you to recover the profits that the defendant has been able to make as a result of the unlawful conduct. In assessing the amount to be awarded by way of an account of profits, the court will order an inquiry into the profits earned by the defendant.

It will take into account any costs and business expenses which can be said to be attributed to earning the revenue concerned.

 An award of an account of profits can be useful, particularly where it is difficult to show that particular losses have been suffered as a result of the unlawful conduct (for example, the evidential difficulties in showing that a particular client would have provided work to you had the defendant not solicited them in breach of post-termination restrictions), or where the loss suffered is minimal, but the financial gain obtained by the defendant is significant and it would be unjust to allow the defendant to retain those benefits. 

An account of profits is a discretionary remedy, and the courts will consider all of the circumstances.

As a minimum, you would need to show that:

  • The remedies of compensatory damages, specific performance, and injunctions would be inadequate; and
  • You have a legitimate interest in preventing the profit-making activity and depriving the defendant of those profits.

Gain-based damages

Lastly, the courts have the power to award gain-based damages in appropriate cases for breach of contract or breach of tortious duties. 

Gain-based damages differ from an account of profits, in that the remedy does not entitle you to all the profits which a defendant has made as a result of the unlawful activity. Instead, the court attempts to value the benefit that the defendant obtained as a result of his unlawful conduct, and award you the value of that benefit.

An example of gain-based damages is where, as a result of a breach of confidentiality, the defendant obtains the use of a customer list. The courts will assess how much it would have cost the defendant to purchase such a list on the open market had a hypothetical negotiation taken place, or the amount of money it would have had to invest in order to develop the list for itself.

 There are many ways in which the gain can be assessed, and the court will decide the best way of assessing it. In some cases, the sum awarded may be more than would have been awarded by way of an account of profits, for example where the defendant has not been successful in obtaining any orders from a new customer it unlawfully obtained.

By HRC Law

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