"Team Poaching" and Springboard Relief

The law relating to “team poaching” has come up for consideration in the past few years before the Courts. Typically, in such cases (where employees move en masse to a competitor) Courts are concerned with balancing the freedom of employees to leave employment and set up new ventures with the duty of fidelity owed to employers. Typically, the more senior the employer, the more onerous the duties he owes to his employer. If the employee concerned is also a director, questions of fiduciary duties, the no conflict/no profit rules etc. may also arise. Particularly in cases of team moves, Courts are also concerned to ensure that employees leaving en masse in a planned manner does not result in the new venture getting an unfair competitive lead over the employer. These issues were elaborately discussed at first instance recently in QBE Management v. Dymoke, [2012] EWHC 80 (QB). Justice Haddon-Cave summarized the law in this relation as follows (see para 169 onwards):

“(1) It is indisputable that an employee owes his employer a contractual duty of ‘fidelity’, but how far it extends will depend on the facts of each case (per Lord Green MR in Hivac v Park Royal [1946] Ch 169 at 174).

(2) The more senior the staff the greater the degree of loyalty, fidelity and diligence required (per Openshaw J. in UBS Wealth Management (UK) Ltd v Vestra Wealth LLP [2008] IRLR 965 at paragraph [10]).

(3) The first task of the court is to identify the nature of the employee’s obligations of fidelity and then to decide whether the employee’s activities are in breach (per Moses L.J. in Helmet Integrated Systems v Tunnard [2007] IRLR 126 at paragraph [32]).

(4) The mere fact that activities are described by an employee as ‘preparatory’ to competition does not mean that they are legitimate (per Moses L.J. I Helmet Integrated Systems v. Tunnard [2007] IRLR 126 at paragraph [28]).

(5) It is a breach of the duty of fidelity for an employee to recruit or solicit another employee to act in competition (see British Midland Tool v Midland International Tooling Ltd [2003] 2 BCLC 523).

(6) Attempts by senior employees to solicit more junior staff constitutes particularly serious misconduct (Sybron Corp v. Rochem Ltd [1984] Ch 112).

(7) It is a breach of the duty of fidelity for an employee to misuse confidential information belonging to his employer (see Faccenda Chicken Ltd v Fowler[1987] Ch 117).

(8) The court should ask whether the activities in which the employee is engaged affect his ability to serve his employer faithfully and honestly and to the best of his abilities (see Shepherds Investments Ltd v. Walters [2007] IRLR 110 at paragraph [131]).”

This general discussion of the duty of employees was supplemented by the following propositions, particular to “team moves” or “team poaching” (see para 170 onwards):

“In the context of 'team moves' or 'team poaching', four recent cases provide useful guidance and illustrations of what may constitute illegitimate conduct… In Shepherd Investments Ltd and Anr v Walters & another [2006] EWHC 836 (Ch), Etherton J. held that when former directors and employees set up a competing business, diverting business opportunities and misusing confidential information, they had acted in breach, not only of their fiduciary obligations, but also their implied obligation of fidelity, from the moment that they procured the services of attorneys in the Cayman Islands to set up the rival business. On the facts of that case, Etherton J, held that a former employee was also in breach of obligations as a fiduciary, whether or not he was to be regarded as a director, and that he was in breach of his duty of fidelity… In UBS Wealth Management v. Vestra Wealth LLP (supra) Openshaw J. said at paragraph 24: "I cannot accept that employees, in particular senior managers, can keep silent when they know of planned poaching raids upon the company's existing staff or client base and when these are encouraged and facilitated from within the company itself, the more so when they are themselves party to these plots and plans. It seems to me that that would be an obvious breach of their duties of loyalty and fidelity to [their employer]". In Kynixia v. Hynes [2008] EWHC 1495 Wyn Williams J. said at paragraph 283: "I simply do not see how one can be acting as a loyal employee when one knows that three senior employees (including oneself) may transfer their allegiance to a group of companies which includes a competitor and yet not only fail to divulge that knowledge but also say things which would have the effect of positively misleading the employer about that possibility." In Tullett Prebon plc v. BCG Brokers LP [2010] IRLR 648 Jack J. said at paragraphs 68-69: "[A] desk head must not do anything to assist the recruitment of his desk... Where a desk head decides that he is in favour of the recruitment of his desk and thereafter assists the recruitment in such small or large ways as may arise, he is in plain breach of his duty: he has crossed the line between observing his duty to his employer and acting in the interest of his employer's rival." The position as regards mutual soliciting by employees is usefully summarised as follows in Goulding on Employee Competition (2^nd Edition) at paragraphs [2.164] to [2.166]: "Discussions between employees as to proposed concerted competitive activity will rarely if ever be acceptable, given the near-inevitable damage to the employer as a result of such concerted activity. It remains possible that a discussion between close friends at a similar level within the business as to the potential of working together in the future would give rise to no breach. In such circumstances, neither employee would be soliciting the other and neither would be encouraging the other to terminate their employment with the employer. However, as set out in the British Midland Tool case, once an irrevocable intention to compete is formed, resignation and disclosure of the intention is probably the only certain means of avoiding a breach.”…”

What is also particularly interesting about this decision is that the Court found that the non-compete covenants in the employment contracts were not enforceable (see para 237): however, the Court in any case granted injunctive “springboard” relief to prevent the employees from gaining an unfair competitive advantage. This is an interesting point, and I am unaware of an Indian Court refusing to enforce contractual restrictive covenants (say, because of s. 27 of the Contract Act; but then substantially giving the same relief on other grounds). Another interesting point which comes up is this: to what extent is the duty of “fidelity” similar to a fiduciary duty? Justice Haddon-Cave approvingly refers to the following passage from Nottingham University v Fishel[2000] ICR 1461:

“... in determining whether a fiduciary relationship arises in the context of an employment relationship, it is necessary to identify with care the particular duties undertaken by the employee, and to ask whether in all the circumstances he has placed himself in a position where he must act solely in the interests of his employer.”

A more detailed discussion will follow subsequently.

New decision of Presumption of Resulting trust and Presumption of Advancement

An extremely interesting discussion of the role of the “presumption of resulting trust” and the “presumption of advancement” is found in the decision of the Supreme Court of Western Australia (per Edelman J.) in Anderson v. McPherson (No. 2), [2012] WASC 19, available on AustLII here. Interested readers are referred to the discussion from paragraph 87 onwards.

Looking back at 2011: Income tax

A post looking back at some important tax issues decided in 2011 is available on the indian Corporate Law blog, here.

Public Law Symposium at NLSIU, Bangalore

The National Law School of India Review, the flagship journal of National Law School of India University, Bangalore is pleased to present the first NLSIR Public Law Symposium to be held on 10 December, 2011 at the National Law School campus. The theme of the symposium is "Adjudication of Socio-Economic Rights by the Indian Supreme Court", an issue which has seen significant legal developments in the recent past. The symposium will be attended by renowned legal luminaries including Justice Muralidhar, Mr. T. R. Andhyarujina, Mr. Shyam Diwan and Mr. Arun Kumar Thiruvengadam, amongst others.

The discussion will be divided into two sessions. In the first session (scheduled between 10.30 A.M.-12.30 P.M.) the panel will discuss the substantive adjudication of socio-economic rights undertaken by the Supreme Court concerning questions of the ever-widening ambit of Article 21 and the content of the new rights so evolved. The changing nature of the relationship between Part III and Part IV of the Constitution due to such expansion will form an important part of the session. The second session (scheduled between 1.30 P.M.-3.30 P.M.) will focus on the manner in which the Supreme Court has enforced these rights and consider the variety of procedural innovations employed for the same, including PILs and continuing mandamus.

The registration fee for the symposium is Rs. 500 for professionals. There is no registration fee for students. All those interested are requested to register their attendance at the following link: <https://docs.google.com/spreadsheet/viewform?formkey=dEdkRTJua21BY2R5Snh1UWl1QXRCREE6MQ>.

For any further details regarding the symposium, please contact Krishnaprasad K.V. (Chief Editor, NLSIR) at +91-9916589670 or Ashwita Ambast (Deputy Chief Editor, NLSIR) at +91-9986478265 or email us at mail.nlsir@gmail.com.

Lifting the Veil: England & India

In this post on Indian Corporate Law, I have discussed two recent judgments – one of the Bombay High Court, another of the England & Wales High Court – on lifting the corporate veil. The two judgments are Great Pacific Navigation v. M.V. Tongli Yantai and Linsen International v. Humpuss Sea Transport.

Equitable Set-off and Limitation

A reader in his comments on a previous post pointed out that the 2004 Calcutta High Court decision in Peerless General Finance had stated that section 3 of the Limitation Act, 1963, does not affect an equitable set-off. This decision, however,  had not taken into consideration an older line of authority (1915, Madras High Court, Chetty v. Desikar) which appears to hold that the statute of limitations does apply to equitable setoff. This contradiction raises an interesting issue: can an equitable set-off be raised in answer to a claim, even where the equitable set-off could not be pleaded as an independent claim on account of limitation?

On principle, the argument for allowing an equitable set-off to be pleaded would run thus: Limitation bars the remedy but does not extinguish the right. Equitable set-off is a substantive defence. As long as the right is not extinguished, there is no reason why equitable set-off should not be set up as a substantive defence. On the other hand, it might be contended that equitable setoff operates as a substantive defence on the basis that the two claims are so closely connected, that equity would regard them as one. Hence, when one claim is barred (as a matter of the right to recover, as opposed to a matter of the forum of recovery), equity may not regard the claims as being one. Further, equity must run according to the law and not in derogation thereof. 

I have not come across any Indian authorities discussing the issue and the authorities in detail; however, there appears to be substantial discussion in relation to this issue in English law. Lord Denning MR in Henriksens Rederi v. Rolimpex (The Brede) [1974] 1 QB 233 stated, “In point of principle, when applying the law of limitation, a distinction must be drawn between a matter which is in the nature of a defence and one which is in the nature of a cross-claim. When a defendant is sued, he can raise any matter which is properly in the nature of a defence, without fear of being met by a period of limitation. No defence, properly so called, is subject to a time-bar. But the defendant cannot raise a matter which is properly the subject of a cross-claim, except within the period of limitation for such a claim.” However, in that case, the majority left this specific point open. Lord Denning’s view was, however, approved in Westdeutsche v. Islington Borough, [1994] 4 All ER 89; and then in Filross Securities Ltd v Midgeley [1998] EWCA Civ 1248. 

[The decision of the House of Lords in Aries tankers v. Total Transport, [1975] 1 WLR 185, where the House held that a claim beyond time could not be pleaded as equitable set-off, is explained on the basis that in that case, the contract between the parties had incorporated Article III Rule 6 of the Hague Rules. The effect of Rule 6 is that the right itself is extinguished – so, Rule 6 is to that extent different from a mere limitation provision which only bars recovery.]

Links of Interest

1.       This article by Mr. V. Umakanth discusses put and call options in the context of securities regulation in India. From the abstract: “This article embarks on the modest task of mapping out the legal landscape that presently shapes the enforceability of put and call options in Indian companies. It seeks to review applicable legislation and analyze key judicial pronouncements that hold sway over the field. It finds that the current legal regime governing put and call options in investment agreements is fragmented and hazy and unnecessarily restricts the ability of investors in Indian companies to enter into such arrangements to protect their own interests. It calls for a reconsideration of the legal regime so that physically settled options that are customary in investment agreements may be treated as valid and legally enforceable…”

2.       This post on the UKSC Blog discusses a recent decision of the UK Supreme Court, Belmont v BNY, where the Supreme Court has discussed the “anti-deprivation rule” in insolvency law. The rule is effectively that “There cannot be a valid contract that a man’s property shall remain his until bankruptcy, and on the happening of that event shall go over to someone else and be taken away from his creditors…” Ex p Jay; Re Harrison [1880] 14 Ch D 19. The Supreme Court has held that the rule applies only when there is a deliberate intention to evade insolvency laws, and does not hurt genuine commercial arrangements. Lord Mance’s judgment notes the background of the rules: “I am satisfied that there are, and ought to be, two principles in this area. One is the principle applied in British Eagle, which precludes a bankrupt from agreeing to distribute his, her or its property other than pari passu in bankruptcy (although it does not preclude creditors from agreeing inter se on the distribution inter se of their pari passu shares: In re Maxwell Communications Corpn plc [1993] 1 WLR 1402). The other is a concurrent principle, whereby dispositions of property on bankruptcy may be invalidated as being in fraud or an evasion of the bankruptcy laws… While the two principles are conceptually distinct, they are quite closely allied. British Eagle addresses what happens in bankruptcy. An anti-deprivation principle addresses what happens on bankruptcy. If contracting out of the statutory rule requiring pari passu distribution in bankruptcy is impermissible, it would be surprising if there were no concurrent principle capable of invalidating certain dispositions which, by removing property from the bankrupt on bankruptcy, had the same ultimate effect… “ He then laid down a three-fold test to apply in anti-deprivation cases: “The existence of a contractual scheme, which is said to create the relevant property interest, but at the same time to include provisions providing for its illegitimate deprivation on bankruptcy, raises several questions: First, how far did the scheme confer any property interest on the subsequently bankrupt party? Second, how far did it deprive him of any such property on bankruptcy? Third, in so far as it did deprive him of any such property on bankruptcy, did this amount to an illegitimate evasion of the anti-deprivation principle?”

3.       In this post on Indian Corporate Law, I have discussed the judgment of the Bombay High Court in Retailers Association v Union of India, where the Court upheld the constitutional validity of service tax on renting of immovable property.

4.       This post discusses a recent decision of the England & Wales High Court, where the Court held that members of an limited liability partnership do not as such owe fiduciary duties to one another.

5.       This post on the Lex Arbitri blog discusses the historical development of arbitration law in India.

Call for Submissions: National Law School of India Review

The National Law School of India Review is now accepting submissions for its upcoming issue - Volume 24(1).The National Law School of India Review (NLSIR) is the flagship law journal of the National Law School of India University, Bangalore, India. The NLSIR is a bi-annual, student edited, peer-reviewed law journal providing incisive legal scholarship on issues that are at the forefront of contemporary legal discourse. Over the last 20 years, the NLSIR has regularly featured articles authored by judges of the Indian Supreme Court, Senior Counsel practicing at the Indian bar, and several renowned academics.

The most recent issue of the NLSIR, Vol. 23(1), featured contributions by Mr. Justice Altamas Kabir (Judge, Supreme Court of India), Professor Christopher Forsyth (Cambridge University), Professor Julian Roberts (Oxford University), Professor Lea Shaver (Yale Law School), Professor Ariel Ezrachi (Director, University of Oxford Centre for Competition Law and policy) and Mr. K. Swaminathan (Head of the Direct Tax Practice at Lakshmikumaran & Sridharan) among several others. Moreover, in August 2009, NLSIR attained the unique distinction of being the only Indian student-run law journal to be cited by the Supreme Court of India, in Action Committee, Un-Aided Private Schools v. Director of Education. NLSIR has also recently been cited in Justice R. S. Bachawat's Law of Arbitration and Conciliation, a leading treatise on arbitration law in India.

Papers may be submitted as Long Articles (approximately 8000 words), Essays (approximately 5000 words) or Notes (approximately 2500 words). Submissions may be made to mail.nlsir@gmail.com. Queries regarding submission may be sent to the same email address. The last date for submissions is November 1, 2011. Formore information, please visit - www.nlsir.in.

Update

I have posted a short note on Indian Corporate Law, dealing with some issues in MAT. The note is available here.

Event Announcement: NLSIR Symposium

4th ANNUAL NLSIR SYMPOSIUM: INDIA’S TAXATION REGIME: PERSPECTIVES ON THE PROPOSED CHANGES

 

The Annual NLSIR Symposium has earned the reputation of being a unique forum for the consideration of contemporary legal developments having attracted leading practitioners such as Mr. Nishith Desai, Ms. Bijal Ajinkya, Mr. Sandeep Bhagat, Mr. Stephen York, Mr. Padam Khincha, Mr. Gourab Banerji, Mr. Arvind Datar, TP Ostwal and renowned academics including Mr. V. Umakanth, Assistant Professor, National University of Singapore, and Mr. Sandeep Parekh, Professor, IIM-A amongst others.

This year, the NLSIR Symposium is themed on “INDIA’S TAXATION REGIME: PERSPECTIVES ON THE PROPOSED CHANGES”. The first of the four sessions will deal with the implications of the anti-avoidance measures incorporated in the Direct Taxes Code Bill. The DTC introduces one of the most sweeping GAARs - treating tax avoidance almost on par with tax evasion. Whether the distinction between tax avoidance and tax evasion will continue to be retained after the coming into force of GAAR – and if so, how it will apply in practice – is an open question which the Symposium seeks to address as also the structuring of business transactions in light of GAARs and its impact on DTAAs. The second session aims at addressing taxation of e-commerce. Tax treatment of such transaction, i.e. whether source based or residence based taxation is to be followed assumes crucial importance. It also seeks to reflect upon issues involving taxation of software transactions and whether taxation should be in the nature of sales tax or service tax. The third session focuses on some of the contentious issues in indirect taxation today. The first is the hotly debated GST. Another controversial issue which this Session addresses is in reference to the interpretation and implications of Part XIII of the Indian Constitution and Art. 301’s interpretation and interplay with the rest of the provisions in Part XIII which has given rise to significant controversy over the years. The fourth and the final session addresses the future of India’s Tax regime. With provisions such as taxing FIIs through the capital gains, the new Branch Profit Tax etc., it is clear that the government is seeking to cast a wide net to pull in revenue from multiple fronts through DTC and such changes are sought to be analyzed in this session.

This years' Symposium is scheduled on the 16th and 17th of April 2011, and will be held at the International Training Center, National Law School of India University, Bangalore. The banquet will be at the Chancery Pavilion. The line-up of speakers includes partners of India's top law firms such as AMSS, AZB, SNR and Khaitan, senior advocates and judges.   

Those interested in attending the Symposium can visit the NLSIR website (www.nlsir.in) for further details. Please register on the website (http://www.nlsir.in/symposium.html) or e-mail us (mail.nlsir@gmail.com). All registered delegates will be awarded a certificate of participation.

We look forward to seeing you at the Symposium!

Regards,

Editorial Board of the National Law School of India Review