Helmet Integrated Systems Ltd v Tunnard & Ors

Between 1993 and 28 February 2002 Mr Tunnard, the first respondent in this appeal, was a senior salesman for Helmet Integrated Systems Ltd (“HISL”), the appellant. All his working life Mr Tunnard has been a salesman. HISL produces and sells protective equipment. In 1993 it commissioned a new helmet design, which has subsequently been successfully marketed as the F600 Helmet. Its largest customer is the London Fire Brigade. It took some four and a half years to develop the design of the F600. Once it was approved, in 1997, sales started in 1998 and continue to this day.

Mr Tunnard was not a designer. But, whilst still in the employment of HISL in 2001, he hit upon an idea for a new modular helmet, primarily, but not exclusively, for fire-fighters. He believed that his employers were not interested in developing a new helmet, particularly on the European market, where he perceived there to be a gap. The London Fire and Emergency Planning Authority had itself convened a briefing day, in September 2000, publicly to consider the development of the next generation of protective clothing, in particular an integrated clothing project. There was a further meeting in relation to such equipment in June 2001. But since the judge did not find that it constituted a maturing business opportunity for exploitation by HISL alone, but merely represented an opportunity for the entire industry as a whole, it is of no further significance in this case. The helmet which Mr Tunnard was thinking of developing, it was hoped, would be of such flexibility as to form part of the concept of integral protective clothing.

Between September 2001 and 28 February 2002 Mr Tunnard took certain steps to advance his idea. He applied for and obtained a SMART award, to provide some funding from the DTI to advance his project. He arranged for product designers, AME, to prepare, on his behalf, initial concept drawings. He discussed the project with a friend, Mr Steve Tyrrell, a consultant to Lion Apparel Systems Limited (“Lion”), the UK subsidiary of Lion Apparel Inc, of Ohio, a rival company engaged in the manufacture and supply of safety clothing and equipment. Mr Tyrrell had previously acted as consultant to HISL. Mr Tunnard showed Mr Tyrrell AME’s drawings, on the basis of confidentiality, and agreed that Mr Tyrrell should show those drawings to Lion. All of this activity took place before Mr Tunnard left the employment of HISL following his notice of resignation on 1 February 2002. He was asked to and did work out his notice before he left on 28 February 2002.

The new modular helmet, which came to be called the TARGA helmet, was developed over a period of three years. Mr Tunnard incorporated Modular Helmet Systems Limited (“MHSL”) two months after his departure from HISL, on 30 April 2002. Shortly thereafter Lion took up a majority shareholding in that company. Lion will no doubt seek to market the TARGA helmet in competition with HISL’s F600, which is still being bought by the London Fire Brigade under an existing contract of supply.

HISL brought claims for infringement of design right. His Honour Judge Fysh QC, in the Patents County Court, rejected those claims. They were not the subject of any appeal. But HISL also brought claims contending that Mr Tunnard had acted in breach of his duty of fidelity by developing a safety helmet which would be in competition with the HISL F600 safety helmet, and had acted in breach of his fiduciary duties in failing to report his activities while still in HISL’s employment. It is those claims, rejected by His Honour Judge Fysh QC, which form the subject matter of this appeal.

HISL contend that the judge erred in failing to identify a fiduciary duty owed by Mr Tunnard and in failing to find that he breached that duty and a duty of fidelity by reason of his activity between September 2001, when he lodged the SMART application form, and the conclusion of his employment. Establishing a breach of fiduciary duty is of particular importance to HISL since, if it is successful, it could reap for itself the benefit of any successful development and exploitation of the TARGA helmet.

Mr Tunnard needed finance if he was to develop his idea. He was a middle-ranking manager with a salary of £31,300.00 per annum. Mr Tunnard had arranged to borrow some money from HSBC. The SMART award scheme, operated by a local branch of the DTI, would provide an additional source of finance, if he could advance a viable business plan. In his application to SMART for finance for the design and development of a modular safety helmet, he identified Lion as his preferred option for a partnership agreement, identified MHSL as the business he would use to develop the idea and, importantly, identified HISL as a competitor.

On 7 November 2001 a SMART award was made to Mr Tunnard. On 19 November 2001 he instructed AME to proceed with the design of a new helmet and for that purpose handed over a number of examples of competitors’ fire helmets including HISL’s F600.

In November and December Mr Tunnard met AME and on 20 December AME showed Mr Tunnard initial concept drawings with a product realisation plan, which it had prepared.

In January 2002 the concept produced by AME was further discussed with AME’s designer, Mr Rosie. In February 2002 Mr Tunnard considered it with Mr Tyrrell, Lion’s consultant. On 12 February Mr Tyrrell sent some of AME’s drawings, under confidential cover, to Mr Schwartz, Lion’s corporate counsel. On 1 February Mr Tunnard tendered his resignation from HISL and, on being asked to work out his notice, continued to work for HISL as a salesman until he left on 28 February 2002.

The essential ground on which the judge rejected HISL’s allegations of breach of the duty of fidelity and as a fiduciary was based on his view that Mr Tunnard’s activity, whilst in employment, was no more than preparatory to competitive activity.

The judge concluded that:-

The judge found, in relation to the activities starting with the first working meeting with AME that those activities were legitimate activities:-

The judge concluded there was no breach of any fiduciary duty since:-

Thus the judge declined to find any breach of a duty of fidelity or fiduciary duty on the part of Mr Tunnard.

The judge stressed:-

Mr Tunnard received a printed contract of employment dated 24 June 1993 with several cross-references to a “Company Handbook”. The general conditions included these provisions:-

On 11 November 1998, when his job was described as “International Sales Manager, Fire and Emergency Services Products” Mr Tunnard was provided with a job specification. Amongst his duties, identified in that document, was the duty:-

This obligation was crucial to the submissions advanced, on behalf of HISL, by Mr Stafford QC, who had not appeared below. HISL submitted that Mr Tunnard’s activities would have constituted competitor activity, if it had been undertaken by a competitor. His job specification imposed on him a fiduciary duty to report such activity, and no less so in relation to his own actions.

Mr Platts-Mills QC, on behalf of Mr Tunnard and the other respondents, objected to any reliance either upon the Handbook or, more importantly, the job specification. In the pleadings there is no specific reference to the particular provision in the job specification on which reliance is now placed. The particulars of claim referred to Clause 10.1 of the Company Handbook, but not the obligation on which so much reliance is now placed.

This late reliance has led, so Mr Platts-Mills QC submitted, to an injustice which cannot be cured. Had it been appreciated that the allegation of breach of fiduciary duty would be based upon that particular specification Mr Tunnard might have well have sought to contend that the job specification, arriving as it did well after he had begun employment, was not a part of his contract. The defence admitted that Mr Tunnard’s duties were those set out in the job specification but, submits Mr Platts-Mills QC, at the time such an admission was made, the job specification cannot reasonably have been expected to have been of the significance, for which HISL now contends.

Further, much greater effort would have been deployed in resisting the construction and reliance placed upon that provision by HISL. He points to a number of other duties described in the job specification which have little, if any, relevance to the work undertaken by Mr Tunnard as a salesman. It made no sense, in the context of that employment, to include amongst his duties :

It is true that the judge made no reference either to the handbook or, more importantly, the job specification in setting out the reasons for his conclusion. Since such contentions were central to HISL’s argument it is, indeed, surprising that no reference was made to them in the judgment. The judge stated that it was common ground that Clause 10.1 of the company handbook (cited above at paragraph 16) added nothing to the case on breach of the duty of fidelity (see judgment paragraph 16). He referred to the job specification and commented that HISL had placed much reliance on the document. (see paragraph 18). But no further reference was made to it.

However, I am persuaded that HISL should be entitled to rely upon that provision of Mr Tunnard’s job specification which required him “to advise on competitor activity and pricing structures”. Mr Stafford QC, on behalf of HISL, directed us to passages within the transcript where the point was highlighted in opening submissions, Mr Tunnard was cross-examined about it on two occasions and in his closing submissions counsel for the defence acknowledged the significance of that aspect of Mr Tunnard’s duty. It is too late for Mr Tunnard to dispute the proposition that the obligation to report on competitor activity, whatever that may mean, was part of his duties. For those reasons, I take the view that HISL is entitled to rely upon that provision of the job specification in support of its appeal.

The terms of Mr Tunnard’s job specification are central to HISL’s case. Those terms, in the context of the Company Handbook, are the primary source of its case that Mr Tunnard owed obligations to HISL as a fiduciary, which he has broken. In order to understand the essence of HISL’s case and the focus of its challenge to the judge’s conclusion it is, I believe, worthwhile to start by consideration of Mr Tunnard’s obligation of fidelity as an employee and his right to compete against HISL once he left.

There is no dispute but that Mr Tunnard owed a duty of fidelity which required him as employee to be loyal to his employer and to act in the best interests of HISL. An employee must act with good faith towards his employer (see e.g. Robb v Green [1895] 2 QB 315 at 317). An employee must receive and obey the instructions of his employer, and devote his time and talents to his employer’s business. But whilst he must not compete with his employer during the course of his employment, the duty of fidelity imposes no inhibition on his competing against his former employer once he has left. He is entitled to take the skill he has acquired and developed during the course of his employment and apply it for his own benefit once he has left, even if that involves competing against his former employer. He may also take with him and use knowledge and information which he has acquired, provided he does not use or disclose information properly described as a trade secret (see e.g. Faccenda Chicken Ltd v Fowler [1987] Ch 117 at 136).

This freedom to compete, once an employee has left, unrestrained by any enforceable covenant, carries with it a freedom to prepare for future activities, which the employee plans to undertake, once he has left. In Robb v Green (q.v. supra) Hawkins J concluded that a manager who had copied a list of customers was liable in damages for breach of an implied term not to use such information to the detriment of his employer. But he observed, in words echoed frequently thereafter, that each case would depend upon its own circumstances and there will be cases where an employee may legitimately canvass, issue circulars, have a place of business ready and hire employees (see page 15). The Court of Appeal made no observation suggesting disagreement when it affirmed Hawkins J’s conclusion.

The battle between employer and former employee, who has entered into competition with his former employer, is often concerned with where the line is to be drawn between legitimate preparation for future competition and competitive activity undertaken before the employee has left. This case has proved no exception. But in deciding on which side of the line Mr Tunnard’s activities fall, it is important not to be beguiled into thinking that the mere fact that activities are preparatory to future competition will conclude the issue in a former employee’s favour. The authorities establish that no such clear line can be drawn between that which is legitimate and that which breaches an employee’s obligations.

Mr Tunnard relied on the dicta of Hawkins J in Robb (q.v.supra). In Balston Ltd & Anr v Headline Filters Ltd & Anr [1990] FSR 385 a former director who set up a rival factory and had taken a lease on future business premises and formed a company for his activity was held by Falconer J (at 412 ) neither to have breached his duty of good faith nor his fiduciary duty; he had merely taken preliminary steps to investigate the viability of his plan and to advance his intention.

But, as Mr Stafford QC on behalf of HISL has demonstrated, there are cases which show that the mere fact that activities during the course of employment may be described as “preparatory” will not necessarily be dispositive of the issue as to whether the employee acted in breach of his obligations to his employer. Hart J in British Midland Tool Limited v Midland International Tooling Limited and Others [2003] 2 BCLC decided that a director who has irrevocably formed an intention to engage in a competing business and has taken preparatory steps cannot rely upon the public interest in favouring competitive business as an answer to allegations of breach of fiduciary duty. He can only put an end to his fiduciary obligation by resigning his directorship. Until he has done so, preparatory steps taken in pursuance of an irrevocable intention to compete would generally amount to a breach of his fiduciary obligations as director (see para 89).

This approach was followed by Etherton J in Shepherd Investments Limited and Anr v Walters & Anr ]2006] EWHC 836 (Ch). He held that when former directors and employee set up a competing business, diverting business opportunities and misusing confidential information, they had acted in breach not only of their fiduciary obligations but their implied obligation of fidelity 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, he 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. The case affords an example, on its facts, of work of preparation which constituted breaches of both the implied duty of fidelity and fiduciary duties.

I agree that it is insufficient merely to cloak activities with legitimacy by describing them as preparatory. The first task, as Mr Stafford QC contended, is to identify the nature of the employee’s obligations. Once they have been identified, the court is then in a proper position to discern whether the activities of an employee undertaken in pursuance of a plan to be fulfilled on his departure is in breach of his duty to his employee or not. It was the judge’s failure, so Mr Stafford submitted, properly to analyse the nature of Mr Tunnard’s express contractual obligations, as identified in the job specification, which led the judge into error. His conclusion, between paragraphs 61 and 65, that because Mr Tunnard had only undertaken acts of preparation, he had not acted in breach, either of his duty of fidelity or of any fiduciary duty, was wrong because it depended upon the conclusion that Mr Tunnard’s activities were only acts of preparation. Proper analysis of his obligations would, so it was argued on behalf of HISL, have revealed that such activities amounted to a breach not only of the obligation of fidelity but also of an obligation which he owed as a fiduciary.

That HISL should concentrate its efforts on establishing that Mr Tunnard owed an obligation as fiduciary and acted in breach of his obligation is not surprising. Since the essence of the obligation of an employee as fiduciary is that the employee must act solely or exclusively in the interest of his employer, it will be easier for an employer to establish that activities in preparation for competition were themselves in breach of a fiduciary obligation. Moreover, in this case if HISL merely establishes a breach of the obligation of fidelity it is difficult to see what damage it could establish.

Such dual importance was frankly acknowledged by Mr Stafford QC. During his opening of this appeal he pointed out the importance to HISL of establishing that even at the early stages of the SMART application, Mr Tunnard was acting in breach of his fiduciary duty. If HISL can establish that Mr Tunnard was under a fiduciary obligation to disclose his plan then he could have only pursued his SMART application by resigning first. But if he had done so he would not have been in a position either to fund the bank loan which he had also taken out or to make the necessary contribution to the funding in addition to any SMART funds, without which the project could not have been developed. HISL would, once it established a fiduciary obligation, be in a position to demonstrate that Mr Tunnard would have been forced into position of either persuading his employer to pursue the project or abandoning it by reason of his inability to raise funds. It would, additionally, hope to recover profits on the sale of the TARGA helmet.

This appeal, therefore, turns on HISL’s ability to establish a breach of a fiduciary obligation.

It is commonplace to observe that not every employee owes obligations as a fiduciary to his employer. An employee owes an obligation of loyalty to his employer but he will not necessarily owe that exclusive obligation of loyalty, to act in his employer’s interest and not in his own, which is the hallmark of any fiduciary duty owed by an employee to his employer. The distinguishing mark of the obligation of a fiduciary, in the context of employment, is not merely that the employee owes a duty of loyalty but of single-minded or exclusive loyalty. The decision of Elias J in University of Nottingham v Fishel & Anr [2000] ICR 1462 provides the clearest analysis of the distinction between the duty of fidelity which every employee owes and a fiduciary duty which requires an employee to act solely in the interest of his employer and not in his own interest, still less the interests of anyone else. Care, as Elias J remarks, must be taken not to equate the duty of good faith and loyalty owed by every employee with a fiduciary obligation (see page 22). Unless that distinction is maintained common law rules of causation and remoteness of damages may be:-

Elias J’s decision is not only of importance in distinguishing between an employee’s implied duty of loyalty and a fiduciary obligation but also in identifying how a fiduciary relationship might be established. I can do no better than recite Elias J’s statement of principle:-

He was, however, under a specific duty to direct his fellow embryologists to work in the interests of the university and not in his own financial interest. When he received financial reward for work undertaken by other embryologists abroad, he acted in breach of his fiduciary duty and was required to account for the profit he had made. (para 1497, page 25)

Guided by the need to identify particular duties as the source of a fiduciary obligation, Mr Stafford draws a bead on the job specification. Mr Tunnard was under an obligation to report on competitor activity. This obligation was necessarily to be fulfilled when Mr Tunnard was working on his own, out of the office. His employer was not in a position to supervise him but was obliged completely to rely on him to identify information which might be of interest to the employer and to report it. Whether Mr Tunnard did so was exclusively within his control. Thus, submitted Mr Stafford, HISL was so dependent upon the unsupervised fulfilment of Mr Tunnard’s obligation that it can be seen in respect of that obligation Mr Tunnard did owe a duty as a fiduciary. That obligation, undertaken by Mr Tunnard, placed him:-

Once Mr Stafford has established that in respect of that obligation Mr Tunnard owed a fiduciary duty, HISL seeks to advance its case in two stages. Firstly, if a competitor had undertaken the activities in fact undertaken by Mr Tunnard he would have been under an obligation as fiduciary to report such activity. Secondly, if he was under an obligation to report such activity if undertaken by a third party he was equally obliged to report such activity if undertaken by himself. In short, he was obliged to report such activities whether they were undertaken by a competitor or by himself as part of his plan to compete with his former employee.

In support of the crucial argument that Mr Tunnard was under an obligation to report his own activity, Mr Stafford draws attention to Item Software (UK) Limited v Fassihi and Others both at first instance and in the Court of Appeal [2003] IRLR 769 and [2004] IRLR 928. A director established his own company and diverted a contract from the company of which he was sales and marketing director to that new company. The Court of Appeal concluded that it was wrong to state that there were no circumstances in which an employee was under an obligation to disclose his wrongdoing. Mr Fassihi’s fiduciary obligation of loyalty as a director required him to disclose his own wrongdoing (see paras 63-65). The court was not seeking to make any substantive extension of the duties of directors but rather to make the existing liability of a director to account for secret profits and for the diversion of corporate opportunities more effective (see para 63). But if Mr Stafford is right in his reliance on the job specification, he has no need to draw any analogy with the conduct of Mr Fassihi, save that it does establish that there is no overriding rule that an employee can never be under an obligation to report his own misconduct.

I accept that if Mr Tunnard had learned that a competitor of HISL proposed to develop a helmet which was a rival to the F600 produced by HISL and was in the process of preparing a preliminary concept of such a helmet, he was under an obligation to report that information. Such activity, even though it consists merely of preparation and even though such a concept might never be developed, would be information properly described as “competitor activity” within the meaning of the job specification.

I am also prepared to accept that a “competitor” within the meaning of the job specification might include a third party which had never previously competed but proposed to do so.

I also accept that Mr Tunnard would be under an obligation to deploy such information exclusively in the interests of his employer. It would not be open to him to pass on that information to someone else for the benefit of that other person, nor would he be permitted to use such information for his own benefit without being in breach of his duty of fidelity to HISL. I am even, with some diffidence, prepared to accept that if Mr Tunnard used information about such activity either for the benefit of someone other than HISL or for his own benefit he would be in breach of a fiduciary obligation.

I am prepared to go thus far because HISL would have no control over how Mr Tunnard deployed what he had learned as a salesman, and would be dependent upon him to pass on the information. Were it not so, the employee could pick or choose what he did or did not pass on. Thus HISL would be vulnerable to any misuse of such information, the dissemination of which was outside the employer’s control. Such vulnerability is what Lord Millett described (op.cit. 219) as a “defining characteristic” of a fiduciary relationship. To obtain and then divert the benefits of such information seems to me closely analogous to the condemned activities of the director, Fassihi.

But, to my mind, HISL’s argument breaks down at the conclusion sought to be drawn from the premise. I have accepted that Mr Tunnard’s activities would have amounted to “competitor activity” if undertaken by a competitor and I have accepted that he owed an obligation as a fiduciary not to misuse information about such activity for his own benefit or for the benefit of someone other than HISL. But it does not follow that he was under any obligation, be it fiduciary or otherwise, to inform HISL of his own activities or such activities undertaken on his own behalf.

There seem to me two fundamental reasons why Mr Tunnard was under no obligation to report his own activities. Firstly, the words of the job specification do not restrict Mr Tunnard’s freedom to prepare for competition on leaving. Secondly, he was under no relevant fiduciary obligation to HISL.

As to the first reason, Mr Tunnard was employed as a salesman, not as a designer. It was never in the contemplation of either HISL, nor of Mr Tunnard, that he would develop a helmet. When he entered into his contract of employment with HISL he was entitled to believe that he could, subject to his obligations as to notice, leave when he wished and work in competition to HISL. He was further entitled to take preparatory steps prior to leaving in order to assess the viability of any competitive activity once he had left or whether it was sensible for him to leave at all. There was no reason for him to think that he was required to accept that :-

HISL contends that on the introduction of the job specification in November 1998 such freedom was radically restricted. I do not accept that it was. If, by the introduction of a specification which referred to “competitor activity” it was intended to take away Mr Tunnard’s pre-existing right to prepare for competition and make an informed assessment as to whether it was viable, far clearer words would be required. It is true that the job specification must be construed in the context of the prohibition (in the Company Handbook at paragraph 10.1) against undertaking work or arranging the undertaking of work:-

Secondly, no relevant fiduciary obligation can be identified. Mr Tunnard owed no fiduciary obligations in relation to the development of a preliminary concept for a new helmet; he was not in breach of any such obligation by seeking to raise funds for such a project while still in employment. The only identifiable fiduciary obligation might have arisen in relation to the deployment of information about similar preparatory development by a competitor. That is not this case. Mr Tunnard was working in his own time; the concept developed on his behalf belonged to him. In so far as any invention derived from his activities, it did not enure to the benefit of HISL under the Patents Act 1977 or pursuant to the Copyright Designs and Patents Act 1988.

For these reasons I am in agreement with the judge that HISL has failed to establish any breach, either of an obligation of fidelity or as a fiduciary. But I should emphasise that my reasons are different to those expressed by the judge. No doubt this has arisen because of the change of emphasis in the way HISL’s case has been presented. The reason why Mr Tunnard did not breach any fiduciary obligation was because his own preparatory activity could not legitimately be described as “competitor activity” in the context of his employment as a salesman and his right to prepare for competition once he had left employment as a salesman. However, the mere fact that his activities were preparatory was not, in my judgment, a sufficient answer to HISL’s claim. Mr Tunnard’s activities may well be described as reasonable and necessary acts of preparation for departure (see the judgment at para 62). But that of itself does not determine whether they amounted to a breach either of an obligation of fidelity or an obligation as fiduciary. Many activities might be described as reasonable and necessary for the purposes of future competition but that does not assist in deciding whether they were in breach of either obligation. The true reason, as I see it, why Mr Tunnard’s activities did not amount to a breach of any obligation to HISL lies in the fact that HISL had not restricted the freedom which Mr Tunnard had to prepare for future competition on his departure. I would dismiss the appeal.

I agree.

I also agree that this appeal should be dismissed for the reasons stated by Lord Justice Moses.