Introduction to the duty of loyalty to a business
Business owners are entitled to expect their fellow directors, partners and senior employees to act in the best interests of the business. Regrettably, this is not always the case, and the courts are regularly asked to help a business owner to protect his or her business from former colleagues moving to a competitor or setting themselves up in competition. While the courts will not protect a business owner from fair competition, it is a completely different matter when the competition is unfair.
One example of when the courts will intervene on behalf of a business owner is when a director, partner or senior employee is acting unfairly in competing with a business in which he or she is or was involved.
The duties of loyalty owed to a business should not be confused with contractual duties, and are often termed ‘fiduciary duties’, which simply means 'a duty of good faith'. Some fiduciary duties are created by statute and some through case law. They include:
- A duty to act in the best interests of the business.
- A duty to act in accordance with the company constitution.
- A duty to avoid conflicts of interest.
- A duty not to make unauthorised profits.
- A duty to exercise reasonable skill and care.
- A duty not to accept benefits from third parties.
- A duty to disclose wrong-doing or potential competitive threats.
Not every duty applies in every case and it is important to obtain specialist legal advice in specific circumstances. A business owner should seek advice as soon as they suspect there may be a breach of duty, since any delay may restrict the action that can be taken or the orders that the court may make.
Get expert guidance
For expert guidance on duties of loyalty read our Duty of Loyalty Briefing Note or contact Gaby Hardwicke Employment Law Services Partner Paul Maynard, who specialises in advising clients in this field.
See Paul’s answers to the most commonly asked questions on restrictive covenants in our FAQ videos.
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