The importance of distinguishing contractual and fiduciary duties: Ranson v Customer Systems plc

July 13th, 2012 by Paul Nicholls QC

Julian Wilson has recently blogged about Ranson v Customer Systems plc and what it says about the circumstances in which employees may owe fiduciary duties. In addition, the case is important for what it says about the different duties owed by ‘ordinary’ employees (i.e. those who owe just contractual duties) and fiduciaries. 

The case concerned allegations about a senior employee undertaking illegitimate steps to compete. It was alleged that these included meeting clients in the run up to the employee’s departure. There was a suggestion that in doing so the employee was seeking to encourage the clients to send him business once he had left and set up on his own. However, the employer’s principal case was not that the fact of the meetings and discussions was unlawful but that the employee’s duties, alleged to be fiduciary as well as contractual, required him to report to the employer that he had such meetings. 

The Court of Appeal held that Mr. Ranson did not owe fiduciary duties. There appears little doubt that, if he had done so, Mr. Ranson would have been obliged to report not only his discussions with clients but also that he was planning to leave. That is the effect of a series of cases such as British Midland Tools v Midland International Tooling [2003] 2 BCLC 523 and Shepherds Investments v Walters [2007] IRLR 110. A fiduciary owes a duty to act in the best interests of the beneficiary of the duty (a duty of single-minded or exclusive loyalty, per Ranson at paragraphs 41-2). That includes a duty to inform the beneficiary of the duty of matters which could damage those interests. The departure of a senior executive could damage those interests and so should be something that is reported. Further a fiduciary owes a duty not to allow his interests to come into conflict with his duties. Where a fiduciary decides to leave, that creates a conflict between the duty to act in the best interests of the company and the fiduciary’s interests in competing with it. Once that conflict arises, the fiduciary must either resign or disclose the intention to compete. 

However, since Mr. Ranson was an employee and not a fiduciary, the Court of Appeal held that he did not owe a fiduciary obligation to report his contacts with clients. 

Further the Court held that he did not owe a contractual duty to report his activities. Mr. Ranson did of course owe an obligation to act with fidelity. However, the duty of fidelity did not require him to report his contacts with clients. Importantly, the Court stressed that the scope of the contractual obligation depended on the terms of the employee’s contract (paragraph 34). Thus whether the employee owed an obligation to report his acts (even his misconduct) would depend on those terms. The Court held that there was no general obligation on an ‘ordinary’ employee to report their own misconduct. However, there might be such an obligation if the terms of the contract required it. Lewison LJ referred to some cases where such an obligation was imposed (paragraph 55). 

As I have indicated, the case advanced by the employer was primarily that there had been a breach of duty by Mr. Ranson in not reporting his activities. In the absence of such an obligation, that allegation failed. 

The case should not be seen as one relaxing the duties of fidelity nor the duty not to solicit clients during employment. Whilst there had been meetings with clients, it was accepted on the facts that Mr. Ranson was on the right side of the line because he had been (quoting Wessex Dairies v Smith)           

‘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.’ 

However, he had not, on the facts, canvassed customers for their business

What is most important about this case is that it is a timely reminder of the substantial differences which exist between contractual and fiduciary duties. I have commented on the importance of those differences in another context, namely the case where employees decide to leave together, and I have suggested that in some recent cases the Courts have erroneously treated those who are employees owing only contractual duties as if they owed fiduciary duties: click here 

It will be interesting to see whether the Court’s reminder of the different scope of contractual and fiduciary duties in Ranson has wider effects.

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