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Breaching your duty of fidelity can have expensive consequences

1 December 2015


An Auckland man has been ordered to pay his former employer $7 million in damages - $1 million annually for a 7 year period. What could justify such a severe penalty being imposed on a single person? Can anyone really be liable for such a large sum of money?

Michael Mitchell was an employee of the Auckland Gas Company, a subsidiary of Nova Energy. Mitchell decided to leave the company, but before doing so he saved Nova’s “kit book” for setting up a gas brokerage to a USB drive and kept it. The information taken included Nova’s client list and rates.

Mitchell then set up a competing business, National Energy Limited, and used the stolen information to target certain Nova customers. He particularly targeted those who were paying high margins, were without a recent contract, or were near the end of their contract.

Although there was no valid restraint of trade, the Employment Relations Authority found that Mitchell had breached the duty of fidelity that an employee owes to their employer.

Nova Energy was able to project what losses it would incur as a result of the customers they had lost, the loss from customers signed onto more competitive contracts, and also the loss from customers that had their gas prices lowered after being approached by Mitchell’s new company. In addition to the damages, Mitchell was ordered to personally pay $30,000 for breaching his contractual obligations. His company, National Energy Limited, was penalised for ‘aiding and abetting’ the breaches and ordered to pay $50,000.

The outcome of this series of events brings into focus the importance of employees being aware of the duty of fidelity, and the consequences that may result.

Fidelity requires employees to not engage in conduct which undermines the relationship of trust and confidence which must exist between employer and employee. Any conduct by an employee that is likely to damage the employer’s business could constitute a breach of their duty of fidelity to their employer.

For example, discussing changing your employment while still employed is not a breach, but unauthorised use of information and using business opportunities arising from the employment relationship for personal advantage are both classic examples of breaches of fidelity.

Fidelity can often be applied in relatively strict ways. In Communication and Energy Workers Union v Tisco Ltd, the employee’s role as an electrician was to undertake repair work for the company. In his spare time, he refurbished old TVs. This was deemed to be a breach of fidelity as his private business could have prevented customers from using the services of his employer.

It will be a very rare case where an employee will get away with using an employer’s property against them. If you want to avoid finding yourself in a position similar to that of Mr Mitchell, it is best not to use your employer’s information or act in any other similar way that could sour the relationship between you and them.

Cullen - The Employment Law Firm was one of the first eleven law firms in New Zealand approved to provide employment law services to Government and the public sector.

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