Duties of Fidelity and Good Faith - Employment Court: Manawatu Motors 1970 Ltd v Renner

The Employment Court has ordered a former sales manager to pay his employer $900,000 in damages after he actively undermined its key supplier and customer relationships while preparing to leave. The case is a timely reminder that an employee's duties of loyalty and good faith continue right up until their last day of employment and that breaching those duties can have serious financial consequences.

Facts of the Case

The Employment Court’s judgment was a de novo challenge to an Authority decision that declined to award a remedy to either party, finding that they both had breached their obligations.

This case concerned Mr Renner, a long-serving sales manager at Robertson Isuzu, a vehicle sales business in Palmerston North. A central part of his role involved developing and managing the company’s exclusive New Zealand distribution relationship with ShinMaywa Industries Ltd, a Japanese manufacturer of truck-mounted equipment.

While he was still employed by Robertson Isuzu, Mr Renner began positioning himself to work with ShinMaywa or through a competitor after his departure. He facilitated introductions between Robertson Isuzu's customers and ShinMaywa directly, provided a competitor with ShinMaywa's contact details, and actively raised doubts with ShinMaywa about whether Robertson Isuzu would be able to adequately service the relationship once he left. He also negotiated a potential $200,000 sign-on bonus with a competing business to convert Robertson Isuzu's existing customers across.

Shortly before resigning in July 2023,  ShinMaywa advised Robertson Isuzu that it intended to move from an exclusive to a non-exclusive distribution arrangement, putting Robertson Isuzu on notice that something might be wrong.

Mr Renner’s employment agreement contained a restraint of trade clause, but it was left incomplete, making it unenforceable.

Robertson Isuzu claimed that Mr Renner breached his common law duties of fidelity and good faith.

Mr Renner claimed that his commission was not correctly calculated by his employer and that, as a result, he had not been paid correctly.

Held

The Court found that Mr Renner had breached both his common law duties of fidelity and good faith, and his employment agreement. While an employee is entitled to take preparatory steps to compete against their employer even while they remain employed and they are also not required to inform the employer that they have started begun taking such steps, an employee cannot take steps that cause, or risk causing damage to the employer’s good will and reputation.

It was also established that Mr Renner’s conduct was a substantial factor in causing ShinMaywa to end its exclusive arrangement with Robertson Isuzu, and in causing customers to seek to deal with ShinMaywa directly rather than through Robertson Isuzu. He acted as a conduit to arrange for customers of Robertson Isuzu to deal directly with ShinMaywa, and undermined Robertson Isuzu’s relationship with ShinMaywa, including raising issues about whether Robertson Isuzu was going to be able to provide adequate service to ShinMaywa after he left. These were all in breach of his common law obligations of fidelity and good faith to his employer, which were also set out in his employment agreement.

The Court also reaffirmed the need for a causal connection between the employer’s loss and the employee’s breaches, ruling, that where the breach was a substantive factor in causing loss, that will suffice. The Court found that Mr Renner’s conduct caused Robertson Isuzu’s loss.

Remedies

On remedies, the Court adopted a loss of a chance approach. It accepted that some of what Mr Renner did would have been legitimate competition once his employment ended, and that Robertson Isuzu's loss was not solely attributable to his breaches.

The Court awarded $900,000, representing slightly over 40 per cent of the lowest loss estimate put forward by Robertson Isuzu's expert, plus interest.

The Court found that the suggested discount was reasonable and ordered damages of $900,000 plus interest until the debt was paid.

The Court also found in Mr Renner’s favour on the commission issue, confirming that Robertson Isuzu misapplied its commission policy. An amount of $75,812.36 was left for parties to resolve, and this sum will reduce the damages payable by Mr Renner.

Key Takeaways for Employers

This case carries several important messages for employers.

• Finalise Agreements:  Employers who rely heavily on a single employee to manage a key supplier or customer relationship are exposed to real risk if that employee departs, particularly if the employment agreement does not contain a properly completed and enforceable restraint of trade clause. A template agreement with blank restraint clauses will not assist. Agreements should be carefully reviewed and completed before they are signed.
• Good Faith: Employees owe duties of fidelity and good faith to their employer until employment ends. Those duties do not prevent an employee from quietly planning to leave or to compete, but they do prohibit taking active steps that damage the employer's business, relationships, or reputation while still on the payroll. As this case shows, where an employee crosses that line, the financial consequences can be significant.
• Actively Manage Remuneration Processes: Robertson Isuzu lost the commission argument because the Court found the entitlement arose earlier than it had been paying it. Employers with commission-based remuneration should ensure their agreements are clear and that their actual practice is consistent with those terms.

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Disclaimer: We remind you that while this article provides commentary on employment law topics, it should not be used as a substitute for legal or professional advice for specific situations. Please seek guidance from your employment lawyer for any questions specific to your workplace.