Acme Office Service Pty Ltd v Ludstrom

[2002] NSWSC 277

CITATION:	Acme Office Service Pty Ltd v Ludstrom and Others [2002] NSWSC 277
FILE NUMBER(S):	SC 2880/99
HEARING DATE(S):	11/03/02,12/03/02,13/03/02
JUDGMENT DATE:	9 April 2002
PARTIES :	Acme Office Service Pty Ltd - Plaintiff Vlad Ludstom - First Defendant Anthony Rice - Second Defendant Viking Printing Service - Third Defendant
JUDGMENT OF:	Gzell J

COUNSEL :	T A Alexis with F A L Rogers for the Plaintiff P Roberts SC for the First Defendant
SOLICITORS:	Gells Solicitors Horowitz & Bilinsky Solicitors
CATCHWORDS:	Breach of contract and breach of fiduciary duty - damages for loss or account of profits - time for election - damages plus restitutionary orders granted - no further order for damages - leave nunc pro tunc to proceed against company in liquidation - leave to amend statement of claim on application made in address in reply.
LEGISLATION CITED:	Corporations Act 2001 (Cth) Evidence Act 1995 (NSW) Supreme Court Act 1970 (NSW) Supreme Court Rules 1970 (NSW)
CASES CITED:	Queensland v JL Holdings Pty Ltd (1996-1997) 189 CLR 146 at 155 Briginshaw v Briginshaw & Anor (1938) 16 CLR 336 at 360 Jones v Dunkel (1959) 101 CLR 278 at 308, 312) Colbeam Palmer Ltd v Stock Affiliates Pty Ltd (1968) 122 CLR 25 at 32 Neilson v Betts (1871) LR 5 HL 1 at 22 Led Builders Pty Ltd v Eagle Homes Pty Ltd (1996) 70 FCR 436 at 443 Dr Martens Australia Pty Ltd v Bata Shoe Company of Australia (1997) 75 FCR 230 United States Surgical Corporation v Hospital Products International Pty Ltd [1982] 2 NSWLR 766 at 814 Timber Engineering Co Pty Ltd v Anderson [1980] 2 NSWLR 488
DECISION:	See Paragraph 48

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

GZELL J

TUESDAY 9 APRIL 2002

2880/99 Acme Office Service Pty Ltd v Vlad LUDSTROM & OTHERS

JUDGMENT

1 The plaintiff carries on business as a commercial printer. The first and second defendants were former employees. The third defendant also carried on business as a commercial printer. Its shareholders and directors are the first and second defendants. The plaintiff alleges that the first and second defendants received cash payments from customers of the plaintiff for work carried out by the plaintiff, diverted sales for work carried out by the plaintiff to the third defendant and caused the plaintiff to permanently lose portion of its customer base. The plaintiff sought interlocutory relief and now claims an account of profits and/or damages.

2 After the commencement of the proceedings the third defendant went into liquidation. I granted leave nunc pro tunc to continue the proceedings against the third defendant under Corporations Act 2001 (Cth), s 471B on condition that the plaintiff make no attempt to execute any judgment until further order of the court. The third defendant did not appear and was not represented at the trial.

3 It was common ground that the first defendant was employed by the plaintiff as its print production manager from late 1994 and that he signed a written employment contract with the plaintiff in December 1997. His employment with the plaintiff came to an end on 16 February 1999.

4 The second defendant did not initially appear and was not represented at the trial. The plaintiff sought to read two affidavits by the second defendant which I initially rejected as the second defendant was in the United Kingdom. Arrangements having been made, I directed that the second defendant be cross-examined by telephone conference facilities and I allowed the affidavits to be read. The evidence reveals that the second defendant was employed by the plaintiff from the early 1980s. From early 1994 he was employed as a production supervisor under the direct supervision of the first defendant. He, too, signed a written employment contract with the plaintiff in December 1997. His employment with the plaintiff came to an end on 19 February 1999.

5 By their defences the first and second defendants admitted that their employment contracts contained implied terms that they would perform their work with fidelity and good faith and that they would not make use of the plaintiff’s time, confidential information and resources in a conscious and secret manner to advantage themselves by establishing a business in opposition to the plaintiff’s business. Further, by their defences the defendants admitted that by reason of their employment contracts they owed the plaintiff fiduciary duties in similar terms to the above.

6 By their defences the defendants admitted that from time to time whilst employed by the plaintiff when in contact with the plaintiff’s customers the first and second defendants arranged contracts between the third defendant and the customers of the plaintiff, they failed to disclose to the plaintiff or account to the plaintiff with respect thereto, the first and second defendants diverted some of the plaintiff’s customers to the third defendant, the first and second defendants passed on some of the plaintiff’s customers to the third defendant and to that extent they procured customers of the plaintiff for the third defendant and they are liable to account to the plaintiff for any profit made by the third defendant. Each of the defendants, however, alleged that no profits were derived by any of the defendants.

7 It has been pointed out that the plaintiff seeks an account of profits and/or damages under three headings: misappropriation of cash payments, diversion of customers and permanent loss of customers. As to the misappropriations of cash, the statement of claim alleges that from about 1998 the first and second defendants in breach of their employment contracts and in breach of fiduciary duty unlawfully made use of the plaintiff’s confidential information, time and resources by servicing the plaintiff’s customers, receiving cash payments from those customers for such services and failing to disclose the same to the plaintiff or account to the plaintiff in respect thereof. Particulars referred to specified paragraphs in an affidavit of Gary Alexander Holliday-Smith. Those paragraphs reported a decline in the plaintiff’s profit from towards the end of 1997 and specified discussion between Mr Holliday-Smith and the first defendant with respect to the receipt by the first defendant of moneys of the plaintiff including a receipt signed by the first defendant for $3,000 on 8 September 1997.

8 In his address, counsel for the first defendant took the point that any receipts prior to 1998 could not be considered because the pleading limited the period to 1998 onwards. In reply counsel for the plaintiff sought leave to amend the statement of claim to replace the reference to 1998 with a reference to 1997. The first defendant objected on the basis of prejudice there being no indication that he had to meet a case of misappropriation commencing in 1997. Not only did passages in the affidavit of Mr Holliday-Smith particularised in the statement of claim clearly indicate a complaint of misappropriation of $3,000 on 8 September 1997, but also the reports of Claude Jugmans, the chartered accountant called by the plaintiff, which were made available to the first defendant before trial, clearly indicate that an assessment of misappropriation commencing during the financial year ended 30 June 1997 was being made. The real issue in this respect is whether during their period of employment with the plaintiff the first and second defendants misappropriated funds of the plaintiff. Justice is the paramount consideration in determining an application of this sort (Queensland v J L Holdings Pty Ltd (1996-1997) 189 CLR 146 at 155). I do not regard the lateness of the application nor the alleged prejudice to the first defendant as weighing the scale against my acceding to the application. I give leave to the plaintiff to amend the statement of claim by substituting “1997” for “1998” in paragraph 13.

9 The affidavits relied upon by the plaintiff contained evidence of previous representations made by a number of third parties not called as witnesses at the trial. Prima facie that evidence was inadmissible in terms of Evidence Act 1995 (NSW), s 59(1). I ruled such of the evidence as constituted first-hand hearsay admissible under s 64.

10 With respect to misappropriation of cash payments, the evidence reveals that D J Welcome of Pack & Send, a client of the plaintiff, wrote to the plaintiff complaining that he had paid a deposit of $2,000 to the first defendant for the printing of a book which has not been done properly. He demanded the return of the deposit. He enclosed some documents containing handwriting of the first defendant including a receipt for $2,000 and an earlier receipt for $3,000 dated 8 September 1987. Mr Holliday-Smith deposed to a conversation with Mr Welcome in which he said that he had paid for the first two jobs by cash. When Mr Holliday-Smith accosted the first defendant he at first denied that Mr Welcome had paid him the $2000 deposit but when shown the receipt he said that he used the deposit money to buy stock, the printing had been done but Mr Welcome had not paid for it. Mr Holliday-Smith checked stock purchases by the plaintiff and ascertained that there was more than sufficient stock to print the book had it gone ahead. With respect to other jobs for Mr Welcome the first defendant asserted that he gave the money to Marion. Mr Holliday-Smith produced to the first defendant a video case binder for which the first defendant had quoted $7,000 to Mr Welcome. The first defendant said that the job was not done. Mr Holliday-Smith than showed the first defendant printed sheets of the job and the plaintiff’s printing plates for the job which had been found in the plaintiff’s plate room. The first defendant responded that he did not remember. If he was paid the money he had given it to Marion. Mr Holliday-Smith was unable to locate any records of any moneys received by the plaintiff for the jobs mentioned by Mr Welcome.

11 Mr Holliday-Smith gave evidence of a conversation with Mr Paul Cheok of Rainbow Kids, a client of the plaintiff, in which he said that a fellow called Vlad gave him a price for a job. As he did not have an account he had to pay cash. He paid Vlad around $1,400 for the work. Mr Holliday-Smith gave evidence that a female from Kelsey Kidswear, a client of the plaintiff, said she came to the plaintiff to get a quote. She spoke with a gentleman with a strong accent. The first defendant has a strong accent. She had to pay cash. She paid him around $550. Mr Ian Dunn of Cat Magazine, a client of the plaintiff, told Mr Holliday-Smith that he had Docutech photocopying done. Vlad had him pay cash for which he gave him handwritten receipts. Mr Holliday-Smith searched the plaintiff’s records but was unable to find any record of Docutech photocopying for Mr Dunn. A facsimile was sent to Mosman Italy Direct Fashion containing a quoted price in the handwriting of the first defendant. The client placed an order by facsimile. On 16 February 1999 Mr Holliday-Smith asked the first defendant whether the plaintiff was doing any cash jobs. Having received a negative answer, Mr Holliday-Smith showed the first defendant the facsimiles and accused the first defendant of taking a cash job. The first defendant replied: “Okay, I resign then.” He left the premises that day. There was no record of a cash job for Mosman Italy Direct Fashion in the plaintiff’s business records.

12 Mr Holliday-Smith noticed a decline in the plaintiff’s profit towards the end of 1997 and, in particular, a significant increase in the ratio between the volume of sales and the volume of the costs of purchases in both the commercial printing and photocopying areas of the plaintiff’s business. He identified the possible reasons for this increase: an increase in the number of jobs with printing errors requiring reprinting at the plaintiff’s expense, costs of goods being increased by suppliers and not passed on to customers, over-stocking and jobs being produced but not invoiced. He investigated the plaintiff’s records and found nothing to indicate that the cause of the increase in the costs of purchases was attributable to the first three of these factors and it was the plaintiff’s business practice to invoice jobs within a short time of production.

13 The admissions by the first and second defendants in their defences do not extend to misappropriation of cash sales. Counsel for the first defendant submitted that the seriousness of the allegation of misappropriation affects the answer to the question whether the issue has been proved to the reasonable satisfaction of the court in accordance with the observations of Dixon J in (Briginshaw v Briginshaw & Anor (1938) 16 CLR 336 at 360) and that on the above evidence I should not be so satisfied. Of the equivocation following the confrontation of the first defendant with Mr Welcome’s allegations it was submitted the I should accept that the first defendant gave the cash to Marion or to Paul as appropriate officers of the plaintiff. It was submitted that the lack of documentation of cash sales was explicable in terms of documentation not having been made up properly or being lost.

14 The first defendant chose not to give evidence and thereby not to expose himself to cross-examination. Since the first defendant was able to speak to this matter his failure to do so entitles me to draw the inference that his evidence would not have assisted his case (Jones v Dunkel (1959) 101 CLR 278 at 308, 312). Mr Holliday-Smith was not cross-examined with respect to this matter. The first defendant’s denial that he received any money from Mr Welcome, followed by his assertion that he used the moneys to buy stock, followed by the assertion that he gave the money to Marion, followed by the assertion that he gave the money to Paul, give me the strong conviction that the man was lying and the appropriate inference is that he pocketed the money. Appreciating the seriousness of the allegation, I am nonetheless satisfied that the evidence leads to the conclusion that the allegation of misappropriation of cash received from Mr Welcome is made out.

15 Of the incident leading up to the first defendant’s resignation, it was submitted that I should not draw the inference that cash received the previous day by the first defendant had been pocketed by him. From the chain of events which preceded this incident, however, the first defendant’s statement that no cash jobs had been done I find to be a lie. When confronted with evidence of cash received on the previous day, I infer from his statement “Okay, I resign then” that he had, indeed, taken the cash on the previous day.

16 In light of my finding that despite his protestations to the contrary the first defendant received and retained cash from customers of the plaintiff, I draw the inference that a like conclusion should be reached both with respect to the $1,400 received by him from Rainbow Kids, the $550 received from Kelsey Kidswear and the non-specified amounts paid by Cat Magazine. I am satisfied that the plaintiff has made out a case that the first defendant received and retained cash belonging to the plaintiff in breach of contract and in breach of fiduciary duty.

17 Mr Jugmans analysed gross profit margins achieved by the plaintiff before and after cash misappropriations by the first defendant. In his initial report he based his contrast on the adjusted actual gross profit margin for the 1996 financial year. Warwick Dolman, Chartered Accountant, provided a commentary upon the first report of Mr Jugmans. He criticised Mr Jugmans’ comparison with the adjusted gross profit margin of the 1996 financial year because of a low performance in the 1995 financial year. In his second report, Mr Jugmans analysed a number of factors accounting for the higher adjusted gross profit margin in the 1996 year. There was a change in focus of the business towards the provision of more economical and profitable publishing services and away from the provision of traditional and less profitable services. Additional equipment was installed enabling greater capacity. A new and highly profitable client was secured. There was an increase in the number of staff leading to increased capacity.

18 Because the plaintiff did not have a sufficient trading history to demonstrate its ability to maintain the adjusted gross profit margin of 40.14% in 1996, Mr Jugmans chose to average the adjusted gross profit margins of the 1995 and 1996 year to arrive at the figure of 34.28%. The third defendant was incorporated on 2 September 1998. Mr Jugmans attributed the difference between 34.28% and the lower adjusted gross profit margins achieved in the 1997 and 1998 years and the two months to August 1998 to cash misappropriations. He calculated the figure at $57,022. This is a calculation of loss to the plaintiff rather than a calculation of profits obtained by an errant fiduciary. It goes to a claim of breach of contract rather than to an account of profits.

19 In re-examination Mr Jugmans said that he had made inquiries of the plaintiff as to whether in the financial years ended 30 June 1997 and 1998 sales prices had increased or decreased without corresponding increase or decrease in the cost of sales, whether or not extra discounts were given to customers, whether or not cost of sales had increased without increase in sales price and whether or not mix of sales had changed. Having received negative answers to these inquiries, Mr Jugmans said he could not see any other explanation for the change in gross profit margin other than missing sales.

20 Mr Dolman criticised the first report of Mr Jugmans because the 1995 gross profit margin was lower than that in 1996. He said there are many reasons for variation in a gross profit margin from year to year including discounting, competition in the market place, productivity of staff, increased costs not passed on and quality control and wastage. Mr Dolman regarded an increase in turnover of 48% from the 1996 to the 1997 years as inconsistent with a misappropriation of sales. Mr Dolman said that Mr Jugmans had produced no evidence of any misappropriation of sales and that net profit in the 1997, 1998 and 1999 years was affected by increases in amortisation, leasing and rent. This last criticism is hardly relevant since the relevant ratio is gross profit divided by gross sales. There was also some difference between the experts as to the classification of the first defendant’s wages as direct costs falling within the calculation of cost of sales or administration costs falling outside that classification. As will appear, Mr Dolman conducted minimal investigations in arriving at his conclusions whereas Mr Jugmans sought a number of explanations from the plaintiff. Mr Jugmans ascertained that the first defendant was employed as a production manager whose responsibilities included the planning of jobs, purchasing of supplies and liaising with clients. Mr Dolman had regarded his duties as “primarily still fairly hands-on.” In my view the responsibilities of a production manager and the first defendant in particular extend beyond production line activities and I prefer Mr Jugmans’ classification of the salary of the first defendant as falling outside cost of sales.

21 In cross-examination, Mr Dolman said he had a 15 minute telephone conversation with the first defendant, he skimmed the material provided to him, he assumed that because there was no mention of evidence of misappropriation in Mr Jugmans’ report none existed and he carried out no analysis to determine whether any of the factors mentioned by him as accounting for a change in gross profit margin occurred in the instant circumstances. I gained little assistance from the views of Mr Dolman. In his second report Mr Jugmans explained the initiatives which led to the increase of 48% in turnover in the 1997 year. I accept Mr Jugmans’ evidence that the mostly likely explanation for the drop in adjusted gross profit margin in the 1997 and 1998 financial years and in the two month period ended 31 August 1998 is the retention of cash sales by the first defendant.

22 The comparison of adjusted gross profit margins is merely an indicator of the loss suffered by the plaintiff by the first defendant’s cash retentions. It is not a quantification of those retentions. Ratio analysis is not an exact science. I propose to take a robust approach to the quantification of the loss in this instance. In doing so I note that in averaging the ratios for the 1995 and 1996 years Mr Jugmans has been conservative because of the inclusion of the effect of the lower margin of 1995 which preceded the 1996 initiatives leading to a higher gross profit ratio. I assess the loss to the plaintiff due to cash misappropriations at $50,000. There is no evidence linking the second defendant or the third defendant with the cash retentions and I will not make orders against them with respect to this issue.

23 With respect to the second issue, diversion of sales to the third defendant, Mr Holliday-Smith had a conversation with the second defendant in which he asked whether he knew anything about a company called Viking Printing. The second defendant denied any knowledge. Mr Holliday-Smith said he was getting a search done on Viking Printing. The next day, 19 February 1999, the second defendant resigned and left the plaintiff’s employment. The plaintiff received a number of telephone communications from its clients indicating that jobs placed with the plaintiff had been invoiced in the name of the third defendant. In respect of a number of those clients a search of the plaintiff’s premises established that the film printing plates and artwork for those clients were missing. Those clients were Burns & Burns, Global One, Sunman and Walker, Brewster Murray Pty Ltd and Austar Entertainment. The plaintiff also received information from the following clients that jobs placed with it had been invoiced by the third defendant: CIBC Woodgundy, IHS Australia and The Mind The Eye.

24 At the end of March 1999 the first and second defendants returned to the plaintiff’s premises and the first defendant said to Mr Holliday-Smith words to the effect:

“I’m going to close Viking and open tomorrow as Acme Printing, what do you think of that? You’ll be gone and we’ll have all the clients. Now won’t that be nice.”

Mr Holiday-Smith gave evidence of telephone conversations with former clients who informed him that one or other or both of the first and second defendants solicited business for the third defendant: GPR Dehler, ICS Learning, Telephone Information Services Standards Council, Northside Sports Therapy and Chapman & Eastway. Mr Holliday-Smith also gave evidence of a conversation he had with the first defendant in June 1999 to the effect that the plaintiff had lost Newsletters as a client, the first defendant was about to approach Pacific Waste and ICS, the plaintiff had lost Andersen Contracting because the first defendant had told them that the plaintiff was overcharging and had picked up their client and that the plaintiff had lost AWA.

25 The first defendant vilified Mr Holliday-Smith to clients of the plaintiff by alleging that he was a paedophile. Mr Holliday-Smith swore that intimidation and threats by the first defendant made him fearful that he would be killed or injured along with his family. He obtained an apprehended violence order against both the first and second defendants. On 15 July 1999 by consent and without admission of liability Registrar Berecry ordered that until further order each of the defendants be restrained from soliciting business from any person who was a customer of the plaintiff at any time whilst either the first or second defendant was employed by the plaintiff and each of the defendants be restrained from making or publishing any false statement containing any imputation concerning the plaintiff or Mr Holliday-Smith calculated to, and likely to, injure the plaintiff in its business or trade or otherwise cause it to suffer loss.

26 The second defendant swore that in the period before he and the first defendant left the employ of the plaintiff, the first defendant actively canvassed work from the plaintiff’s clients for the third defendant. He swore that the first defendant said to him: “I’m telling clients we’re going into business together and would be pleased to get work from them” and “Clients won’t want to do work with paedophile.” Following their departure from the plaintiff, the second defendant swore that he and the first defendant went to ICS, a client of the plaintiff and the first defendant said to a purchasing officer: “Would you work for a paedophile?” to which the officer replied: “No. Why?” and the first defendant continued: “Neither would we. That’s why we left Acme. Alex is a big paedophile. Acme biggest producer of paedophile magazines in Australia. Here’s what we have to print. Alex forced me and Tony to work on weekends to produce his filth. We family men, that’s why we left. We would like to do work for you.”

27 The second defendant swore that on other occasions the first defendant said to him:

“I’ve fixed Newsletters”
“Alex won’t get Austar back. I told them about Mr Paedophile. We keep all the work.”
“Cord, I warn them about Mr Paedophile. They won’t use Acme again. We’ll get all their work.”
“ I’ve been onto Andersen Contracting, they are very interested in talking to me about Alex. They flying up from Melbourne to have meeting. Arthur Andersen man coming as well. We’ll get all their work. Won’t Alex be happy.”
“I’ve fixed problem with Burn & Burns. They won’t do work with paedophile. I help them. They will see and we keep work.”
“I showed Northside Mr Smith’s grotty printing, we get all their work. He said I should tell police.”

The second defendant indicated that he understood this to be a reference to Northside Clinic, a client of the plaintiff. A further conversation with the first defendant to which the second defendant swore was as follows:

“I’ve called Shore School. I told them that prices from Acme ripping them off for years. I said that they can use a paedophile or use us. We’ll be cheaper. We’ll get all their work.”

28 The second defendant swore that while employed by the plaintiff the first defendant received orders made out to the plaintiff and changed the order to the name of the third defendant, took work from the plaintiff’s clients, produced the work at the plaintiff’s premises and billed the clients through the third defendant. He swore that the following clients of the plaintiff fell into this category: Planet Entertainment, The Mind The Eye, Global One, Chapman and Eastway, Burns & Burns, IHS, Austar, Woods Gundy, Mozz Art, Shoes & Sox, Sunman & Walker, TISC, J Curtain, Hausmann and Hornsby Heights Public School. The second defendant swore that the first defendant took all the film negatives for Tracey Brunstrom Hammond from the plaintiff’s premises saying: “I spoke to Chan, told him Acme ripping him off and we have all his film and art on disk.”

29 Mr Rice was cross-examined with respect to a conflict between the two affidavits read at trial and an earlier affidavit. Of the conversation with ICS set out above he had sworn in his earlier affidavit that he did not recollect the conversation. Mr Rice said that his earlier affidavit was prepared by solicitors and brought to him at work and he swore it without going through its contents. He did not realise that was what he had sworn in his earlier affidavit. He conceded that at the time of swearing his first affidavit he was prepared to swear to anything that was put in front of him without knowing whether it was true or false. He agreed that in April 2001 he and the first defendant had a falling out as a result of which he was arrested and spent a night in custody. His affidavits read at trial were sworn in September 2001. He said he had no understanding as to the effect that the swearing of the affidavits would have on the case against him. He denied that he was motivated to swear the affidavits in a desire to get even with the first defendant. He denied that he was prepared to say anything in the affidavits to harm the first defendant. It was put to him that he neither saw, nor did it occur to him, while the first defendant was employed by the plaintiff that work was done for the plaintiff’s clients at the plaintiff’s premises and then billed by the third defendant. He said it did occur. He said he took part in some of these activities. He said he got the information which lead to the list of clients in this category from the job tickets. He said he obtained records from the premises of Keydock Pty Ltd, a company incorporated by him and the first defendant in June 1999 to take over the work previously done by the third defendant. He said that he sat down with Mr Holliday-Smith and went through this material which was the source of his list of work done at the plaintiff’s premises for plaintiff’s clients for which invoices were sent by the third defendant.

30 It was submitted that I should ignore the evidence of Mr Rice. It was submitted that he bore a grudge against the first defendant and would do anything to settle the score and he thought that by swearing his affidavits of September 2001 he was going to get some benefit. I reject those submissions. The evidence given by Mr Rice is congruent with that of Mr Holliday-Smith. Regrettable though it was for him to swear the earlier affidavit without checking its contents, having heard the second defendant on the telephone link I concluded that in giving his evidence in cross-examination he was being truthful. I find that the plaintiff has made out a case of breach of contract and breach of fiduciary duty with respect to the diversion of customers of the plaintiff to the third defendant which is different from the breach of contract and breach of fiduciary duty with respect to the misappropriation of cash sales. I find that the third defendant was a knowing participant in these latter breaches.

31 The plaintiff obtained under subpoena and upon discovery copies of sales invoices issued by the third defendant up to 31 August 1999. Mr Holliday-Smith constructed a schedule which contained only those sales invoices addressed to customers of the plaintiff. That schedule was used by Mr Jugmans to construct his schedule 4 to his first report. Mr Holliday–Smith said that Berney Pty Ltd, Blackdog Graphics and Planet Entertainment were clients of the plaintiff because the plaintiff had copies of sales invoices directed to them. In his address, counsel for the first defendant conceded that there was evidence that the following customers of the plaintiff were diverted to third defendant during the period the first defendant was employed by the plaintiff: CIBC Woodgundy, Burns & Burns, Brewster Murray and IHS. As to the other entities specified in schedule 4 it was submitted there was no evidence their diversion to the third defendant. I reject that submission. There was ample evidence set out above to justify the conclusion that the customers mentioned by Mr Holliday-Smith and the second defendant were customers of the plaintiff diverted to the third defendant. Counsel for the first defendant further submitted that there was no evidence that North Point Auto Repairs, Hornsby Publications and Wild Escapes were ever clients of the plaintiff. Hornsby Publications is not mentioned in schedule 4. As to the other two companies, while there is no direct evidence as to those companies, I accept the general evidence of Mr Holliday-Smith that he complied his schedule only in relation to customers of the plaintiff.

32 Under subpoena and by discovery the plaintiff obtained copies from other printing companies which supplied work to the third defendant of supply invoices addressed to the third defendant. Mr Jugmans set out this information in his schedule 5. There were some sales invoices in schedule 4 which did not have a corresponding supply invoice in schedule 5. Mr Jugmans expressed the opinion that the likely reason for such absence was that the plaintiff’s resources were used to produce the goods sold. I accept that is the proper inference to be drawn in the instant circumstances. There were some supply invoices in schedule 5 which could not be matched with a ales invoices in schedule 4. Mr Jugmans pointed out that their inclusion was conservative because it reduced the ultimate calculation of the gross profit earned by the third defendant from sales to customers of the plaintiff.

33 By comparing supply invoices obtained from third party suppliers with supply invoices discovered by the third defendant, a deliberate falsification of the third defendant’s records to increase its cost of sales was revealed. For example, the copy invoice number 3104 of A & R Printing Pty Ltd for $2,568 was adjusted to $12,568 on the invoice in the third defendant’s hands. Mr Jugmans set out in the schedule 5 the amount of each supply invoice according to the third defendant and the amount of each supply invoice according to the third party supplier. The difference was $63,100.

34 There were no supply invoices for sales affected by the third defendant between 1 July 1999 and 31 August 1999. Mr Jugmans assumed that supply invoices were received by the third defendant after 31 August 1999 and he adjusted gross sales for that period downwards by applying the gross profit margin achieved in the period 3 September 1998 to 30 June 1999 to the sales of that later period. Mr Jugmans concluded that the third defendant had earned a gross profit of $233,573 from sales to customers of the plaintiff during the period 3 September 1998 to 31 August 1999 as follows:

Sales	$337,093
Less: Cost of sales	165,506
$171,587
Plus: Inflation of cost of sales	63,100
$234,687
Less: Assumed supply invoices for sales between 1 July 1999 and 31 August 1999	1,114
$233,573

35 This approach seeks to quantify the profit earned by the third defendant. It is appropriate to a claim for equitable compensation for breach of fiduciary. It is inappropriate to a claim for damages for breach of contract.

36 Mr Dolman criticised Mr Jugmans’ approach on the basis that it revealed a gross profit margin of 69.29% which was greatly in excess of any percentage achieved by the plaintiff, that direct costs applicable to making the sales including costs of production, wages, workers compensation, superannuation, light and power and the like had been ignored and that there was an imperfect match of supply invoices to sales invoices in schedules 4 and 5.

37 Mr Jugmans had already indicated in his first report that the higher gross profit margin was due to the use of the plaintiff’s time and resources to complete some of the orders. Furthermore, the actual work in other respects was performed by third parties and not by the third defendant. Mr Jugmans in his second report said that Mr Dolman’s criticism of the high gross profit margin was appropriate if the proper compensation of the plaintiff was by way of damages rather than by the way of an account of profits. If damages were the appropriate remedy, Mr Jugmans calculated a figure of $115,555 by applying to the sales diverted from the plaintiff to the third defendant of $337,093 the average gross profit margin for the 1995 and 1996 years were 34.28%. I accept the approach taken by Mr Jugmans in preference to the criticisms of Mr Dolman.

38 The distinction between an account of profits and damages is that the former requires the infringer to give up ill-gotten gains to the party whose rights have been infringed whereas the latter compensates the wronged party for the loss it has suffered (Colbeam Palmer Ltd v Stock Affiliates Pty Ltd (1968) 122 CLR 25 at 32). The plaintiff’s preference under this second head is for relief in the form of an account for profits. Strictly speaking the relief sought is not for an account of profits, presumably to be taken by a master or referee, but for an order of the court that the defendants pay to the plaintiff a sum of money calculated to restore to the plaintiff the profits wrongly earned by the third defendant in breach of the fiduciary duties of the first and second defendants. If restitutionary relief is appropriate, I am of the view that the court can make such an order without accounts being taken. Equity will mould an order to suit the justice of the case. Since both the plaintiff and the first defendant conducted their cases upon the basis that the court would decide all issues before it including an ultimate amount to be paid to the plaintiff if it was successful, I am of the view that the justice of this case demands my making an order for restitutionary relief if that is the appropriate form of relief.

39 The plaintiff cannot have both damages for loss and an account of profits for the two forms of relief are mutually exclusive. If one takes an account of profits one condones the breach of fiduciary duty (Neilson v Betts (1871) LR 5 HL 1 at 22). It has been said that a plaintiff must elect between the two forms of relief before any hearing on the quantum of monetary relief to be ordered is embarked upon (Led Builders Pty Ltd v Eagle Homes Pty Ltd (1996) 70 FCR 436 at 443). That was not the case in this trial. Led Builders was not followed in Dr Martens Australia Pty Ltd v Bata Shoe Company of Australia Pty Ltd (1997) 75 FCR 230 in which it was held that the election need not be made until the close of evidence and possibly not until just before final judgment. I prefer that approach.

40 An account of profits is generally appropriate where a fiduciary’s relevant gain is the derivation of profits from a particular activity rather than by acquisition of a particular asset: it is directed to revenue rather than to capital (United States Surgical Corporation v Hospital Products International Pty Ltd [1982] 2 NSWLR 766 at 814). I regard that view as applying equally to the form of relief I am asked to make. In this case I am of the view that the appropriate form of relief is of this restitutionary kind rather than compensation for loss.

41 I have already said that it is appropriate to grant damages for loss due to breach of contract with respect to the misappropriations of cash sales. Such an order would ordinarily exclude restitutionary relief. However, I regard the misappropriations as a separate vice from the diversion of customers. It has been held that one can recover damages for breach of a contractual duty of good faith as well as an account of profits made in breach of fiduciary duty (Timber Engineering Co Pty Ltd v Anderson [1980] 2 NSWLR 488). I propose to follow that course and make orders that the first and second defendants pay to the plaintiff an amount assessed by me to represent the profits wrongly diverted to the third defendant. Since the third defendant was a knowing recipient of those profits, I intend to make an order that it, too, pay such an amount to the plaintiff.

42 Again I propose to take a robust approach to the assessment of the amount of the profit wrongly gained by the third defendant since some expenses may have been incurred by it in servicing the customers of the plaintiff. I find that the profits to be accounted for by the defendants to the plaintiff are $200,000.

43 The third head of claim is in relation to customers permanently lost to the plaintiff. Mr Jugmans was provided with a list of the clients of the plaintiff permanently lost to it which he sets out in his schedule 8. Mr Jugmans analysed actual sales to those customers in the financial years 1996 to 1998 and averaged them over that period. Since the restraint of trade provision in the contracts of employment with the first and second defendants was for a period of two years, he doubled that average annual sales figure. In order to avoid a double count of sales made by the third defendant in schedule 4 he identified sales common to both schedules in his schedule 9 and subtracted that figure from the result. He then applied the average gross profit margin for the 1996 and 1997 year by 34.28% in his revised schedule 8A to his second report to arrive at a gross profit loss of $475,589.48. This is a quantification of a claim for loss rather than a claim for restitution of profits wrongly earned by a fiduciary.

44 Mr Dolman criticised Mr Jugmans’ approach because of information provided to him by the first defendant to the effect that the third defendant did not service the customers in question. Since the first defendant did not tender any evidence, the basis for Mr Dolman’s criticism fails.

45 Counsel for the first defendant criticised the list on the basis that Andrew Scard & Co, Amnesty International, Boehringer Ingelheim, Crawford Partners, Bond James Norrie, Computer Results Team, Hilti Australia, Ramsey Health and Tracey Brundstrom were not mentioned in the evidence as clients of the plaintiff let alone clients lost as a result of the first defendant’s actions. In cross-examination Mr Holiday-Smith conceded that IHS, Blackdog Graphics and The Mind The Eye gave work to the plaintiff after the first defendant left its employ. The attempt to resurrect this evidence in re-examination was not successful. I am not satisfied that the plaintiff has established any significant permanent loss of custom attributable to a breach of contract or a breach of fiduciary duty on the part of the first or second defendants.

46 There is a more fundamental problem which confronts the plaintiff. I do not find that any permanent loss of custom stems from a breach different from that which gave rise to the diversion of customers to the third defendant for which the appropriate form of relief is restitution of lost profits. Once that form of relief is claimed, a party cannot also have damages for loss. I decline to make any order in favour of the plaintiff under its head of claim for permanent loss of custom.

47 Mr Jugmans carried out a series of exercises calculating interest upon an assumption of a spread of the losses and generation of the profits in the third defendant. I propose to take a more robust approach. Both with respect to the powers formerly exercised in equity to grant an award of interest and with respect to the power under the Supreme Court Act 1970 (NSW), s 94 I propose to award interest at the rates prevailing from time to time in Supreme Court Rules 1970 (NSW), schedule J from 20 February 1999 with respect to the first head of claim and from 31 August 1999 with respect to the second head of claim.

48 I will hear the parties on costs and on the question of execution of the judgment against the third defendant. I direct the parties to bring in short minutes of orders in accordance with these reasons for judgment.

Last Modified: 04/10/2002