Threlfall v ECD Insight Ltd & Anor

An employee’s contractual equity entitlement is construed according to the natural meaning of the agreement. A forfeiture clause triggered by leaving to engage in competing activities did not apply where the employee left to take unrelated employment, even though he had developed a minor sideline while employed. Event moderation was outside the employer’s core business and outside the scope of restrictive covenants limited to management and communications development. A concluded agreement increasing the equity stake could be established informally. A discretionary bonus decision is lawful if it falls within the band of reasonableness. A senior employee does not owe fiduciary duties merely because of seniority; however, the implied duty of good faith may prohibit soliciting the employer’s customers during employment.

The claimant was employed by ECD Insight Ltd as Head of Media. His contract provided for an equity stake, bonus arrangements and post-termination restrictions. He later agreed with the managing director that his equity stake would increase from 8 per cent to 20 per cent. He left ECD to become a television presenter with Reuters.

The claimant sought the value of his equity stake and unpaid dividends, together with a termination payment and bonus. ECD counterclaimed for breach of restrictive covenants, breach of contract and breach of fiduciary duty. The central issues were the construction and operation of the equity provisions, the scope of the restrictive covenants, the lawfulness of the bonus decision and the duties owed by the claimant during his employment.

1. Equity entitlement. The claimant acquired an 8 per cent equity stake automatically after completing the required two-and-a-half years’ service. The contractual payment on leaving represented the value of that equity stake, rather than a separate termination payment. He could elect to retain the stake in shares or receive the contractual valuation payment. The forfeiture provision applied only if he left to engage in activities competing with ECD’s activities, assessed at the date of departure.
2. Variation and dividends. The exchanges between the claimant and the managing director on 22 November 2005 created a concluded agreement increasing the equity stake to 20 per cent. No formal signed agreement was required. The equity entitlement carried the ordinary benefits of share ownership, including dividends from the commencement of employment, subject to the contractual service condition.
3. Competition and restrictive covenants. The claimant left to join Reuters as a television presenter, not to engage in ECD’s coaching, training or consultancy activities. Event moderation was a distinct, minor sideline and was outside the natural meaning of business relating to management and communications development. The restrictive covenants therefore did not apply. Applying Phoenix Partners Group LLP v Asoyag [2010] EWHC 846, event moderation had ceased to be an ECD activity after the claimant left.
4. Bonus. The applicable test was whether the decision was irrational or perverse, such that no reasonable employer would have exercised the discretion in that way: Clark v Nomura International plc [2000] IRLR 766 (QB). The burden of establishing irrationality was emphasised by Commerzbank AG v Keen [2007] IRLR 132. The decision to award no bonus was within the band of reasonableness, having regard to ECD’s financial position and the claimant’s conduct.
5. Fiduciary and good-faith duties. The claimant was a senior employee but was closely managed by the sole director and shareholder. His role did not give rise to fiduciary duties. The ordinary contractual duty of loyalty and good faith was distinct from the obligation of single-minded loyalty characteristic of a fiduciary relationship. During employment, however, he breached that contractual duty and his express duty to keep the board informed by arranging for Eurofinance work contracted to ECD to be performed under Reuters’ auspices, and by soliciting the OECD for future moderation work. The counterclaim for breach of restrictive covenants was dismissed.
6. Disposition. Judgment was entered for the claimant against ECD for the 20 per cent equity entitlement, or its contractual value, and unpaid dividends. The claims for a separate termination payment and the third-quarter 2008 bonus were dismissed. The managing director was not personally liable.