Client “acted reasonably” in relying on incorrect advice

Court of Appeal: Fact that legal advice turned out to be wrong not enough

An employer acted reasonably in relying on legal advice that the restrictive covenants on a new employee were unlikely to be enforceable, even though they proved to be, the Court of Appeal has ruled.

As a result, Cumbrian accountancy firm Dodd & Co was not liable in tort for inducing a breach of contract.

Lord Justice Lewison held it was sufficient that the advice said that, while not entirely without risk, it was “more probable than not” that the restrictive covenants in the new employee’s old employment contract with fellow Cumbrian accountants David Allen were ineffective and unenforceable.

In fact, after a contested hearing, a court held there were enforceable, subject to some permissible excisions, and that, by working for Dodd as he did, the employee was in breach of them.

David Allen sued Dodd for procuring the breach, but at first instance His Honour Judge Halliwell in Manchester found Dodd did not have sufficient knowledge to expose it to liability in tort.

He said Dodd neither turned a blind eye to the employee’s contractual obligations, nor was indifferent to them, because it went to the trouble of obtaining early legal advice; upon which it honestly relied. The fact that the legal advice turned out to be wrong was not enough.

Lewison LJ observed that the recent “tide” of authority has restricted, rather than expanded, the scope of economic torts.

“It must, I think, also be borne in mind that part of the policy underlying the restricted version of the tort as explained both in OBG [a House of Lords case from 2007] and Meretz [from the Court of Appeal in 2008] is that people should be able to act on legal advice, responsibly sought, even if the advice turns out to be wrong.

“As everyone knows, lawyers rarely give unequivocal advice; and even if they do the client must appreciate that there is always a risk… that the advice will turn out to be wrong.”

Though there may be “relatively clear guidelines” about the enforceability of restrictive covenants, that was not the case in other areas of commerce where the tort of inducing a breach of contract applied, the judge observed.

“It is also important to bear in mind that the knowledge in question is not simply knowledge of a fact; but knowledge of a legal outcome. That is often hard to predict, as the constant diet of contested breach of contract cases in our courts demonstrates. To insist on definitive advice that no breach will be committed would have a chilling effect on legitimate commercial activity.”

Lewison LJ added that, if “definitive” advice were the touchstone, there would be a question how definitive the advice must be – no risk at all? 80%? 70%?

“It may be the case that if the legal advice goes no further than to say that it is arguable that no breach will be committed, that would not be enough to escape liability. That question does not arise in this appeal, and I express no opinion one way or the other.

“But in my judgment if the advice is that it is more probable than not that no breach will be committed, that is good enough.”

That was the case here and Lewison LJ held that Dodd was entitled to act on that advice without exposing itself to liability in tort.

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