A recruiting law firm can face more than it bargained for when making a lateral hire. A recent House of Lords decision clarifies how economic torts can be used to hold a recruiting firm liable in damages to the lateral hire's original firm. The recruiting firm has deeper pockets than the lateral so is often included in any claim.

While partner moves are much more common in the current market, when a partner decides to move on, the interests of that partner's original firm are at odds with those of the recruiting firm. Any prudent firm – whether a general partnership or limited liability partnership (LLP) – will have an agreement in place that ought to subject a partner to a notice period and, after departure, restrictive covenants that limit that partner's ability to work with the firm's clients or hire its staff and deal with confidential information.

But how does this impact on the recruiting firm? Is it able to act as it pleases to attract a lateral it wants, when it wants? In short, the answer is no. The recruiting firm must behave with propriety in order to avoid being liable to the lateral's original firm by way of one or several economic torts. There is scope for the recruiting firm to be liable for inducement to breach contract, causing loss to the original firm's business by unlawful means or conspiracy.

The House of Lords' decision involving three appeals from the Court of Appeal – OBG v Allan, Douglas v Hello! and Mainstream Properties v Young – look at the scope and nature of the first two of these torts for economic loss caused by intentional acts.

Inducement to breach contract

The facts in the case of Mainstream are that two senior employees diverted a development opportunity to a joint venture in which they were interested with a third party, who financed the acquisition. The House of Lords held that the financier who facilitated the acquisition was not liable for the tort of inducing a breach of contract since he did not possess the actual knowledge necessary for this tort and, further, he had no intention to breach any contract. The findings are readily applicable to a lateral hire scenario.

The key to a claim against the recruiting firm is whether it possessed knowledge of the lateral's partnership agreement or its terms. It will be expected that the lateral is subject to partnership obligations, even if the precise terms are unknown. However, it is not sufficient for the recruiting firm to turn a blind eye to such matters by simply not asking the lateral whether he or she is subject to any notice period, restrictive covenants or contractual obligation relating to confidential information. Such an attitude would allow the court to find that the recruiting firm had the requisite knowledge for the purposes of inducement to breach contract.

The recruiting firm therefore gains nothing by indifference. Consequently, it is sensible for it to be fully aware of the exact position and seek salient information from the lateral. While the lateral may be under an obligation not to disclose the exact terms of the agreement, it is doubted that the recruiting firm can be criticised for seeking confirmation of that individual's notice period or whether he or she is subject to any restrictions.

Once this information is known, however, it is for the recruiting firm to assess whether and how it wishes to pursue the lateral, bearing in mind the risk of being held liable for inducement to breach contract. If the recruiting firm is prepared to wait until the notice expires and the restrictive covenants do not affect its plans for the lateral, there is no issue. However, this is rarely the case.

If the manner in which the recruiting firm enlists the lateral would lead to the breach of any term (i.e. joining the recruiting firm before the notice expires and/or acting for clients subject to the restrictive covenant) there is potential for a claim. The aim of the recruitment is to secure an economic advantage for the recruiting firm through the lateral hire. Therefore it is highly probable that the court will find that the recruiting firm had an intention for the lateral to breach the terms of his contract.

Considerable damages

Once knowledge and intention are established, the original firm will be able to recover losses that it has suffered. While amounts are often difficult to quantify in these situations, there is no doubt that the damages could be considerable. If a recruiting firm is going to hire laterally, it must assess the potential risk of claim very carefully in order to understand the full commercial picture surrounding the move.

From the original firm's point of view, the first practical step it should take if it gets wind of a move laterally is to put the recruiting firm on notice of the relevant contractual obligations that the lateral is subject to. This means the recruiting firm cannot argue it did not have knowledge of the contract – if it proceeds and the lateral breaches the terms of his contract, it does so at the risk that the original firm may well have a claim for inducement to breach contract.

Causing loss by unlawful means

In circumstances where inducement to breach contract is claimed, there may also be a separate claim for causing loss by unlawful means. No such action existed in Mainstream on the facts and from the majority in the other appeals it seems the lateral himself would need to be able to bring an action against the recruiting firm in order for the original firm to be able to claim under this tort.

Accordingly, the lateral's breach of contract cannot be the 'unlawful means' for the purpose of this tort since this is not actionable by the lateral himself against the recruiting firm. While this makes it more difficult to bring this sort of claim against the recruiting firm, it remains a small risk in some specific circumstances.

Action for conspiracy

The recruiting firm must also take into account the possibility of the original firm bringing an action for conspiracy against it and the lateral. While the House of Lords did not consider this issue, this tort is alive and well and is often used in these situations.

Ultimately, lateral hires do not come without risk of claims from the losing firm against the recruiting firm. While both can take practical steps to place themselves in a better position, ultimately if the lateral wants to leave and join a new firm he will do just that.

Also, the recruiting firm is unlikely to desist from its preferred choice of partner if there is a real business need for that lateral hire. However, before it takes on that individual, it would be wise to carefully consider the implications of such a move.

Indeed, the upshot may be that it is sensible to reach settlement with the original firm (whether through the lateral or otherwise) so that there is financial certainty about the true of any move.

Alan Watts is a partner and Graeme Gregory and Hayley Evans are associates at Herbert Smith.