Charles Lo Presti Pty Ltd v Karabalios

[2000] NSWSC 395

CITATION:	Lo Presti v Karabalios [2000] NSWSC 395
CURRENT JURISDICTION:	Equity
FILE NUMBER(S):	SC 1597/96
HEARING DATE(S):	2 September 1999
JUDGMENT DATE:	15 May 2000
PARTIES :	Charles Lo Presti Pty Limited (P) George Karabalios (D1) Eastside Real Estate Pty Limited (D2)
JUDGMENT OF:	Austin J

COUNSEL :	S Reuben (P) F Donohoe (D)
SOLICITORS:	Denes Ebner (P) Lenehan & Co (D)
CATCHWORDS:	EQUITY - equitable remedies - equitable compensation - principles as to causation - APPEALS - trial judge finds breach of contract and refers proceedings to Master for assessment of damages - whether it was open to Master to award equitable compensation for breach of fiduciary duty
CASES CITED:	Abalos v Australian Postal Commission (1990) 171 CLR 167 Angus & Coote Pty Ltd v Render (1989) 16 IPR 387 Aquaculture Corp v New Zealand Green Mussel Co Ltd [1990] 3 NZLR 299 Brickenden v London Loan & Savings Co [1934] 3 DLR 465 Colour Control Centre Pty Ltd v Ty (unreported, 24 July 1995) Devries v Australian National Railways Commission (1993) 177 CLR 472 Green v Bestobell Industries Pty Ltd [1982] WAR 1 Hospital Products Ltd v US Surgical Corporation (1984) 156 CLR 41 Maguire v Makaronis (1997) 188 CLR 449 Nocton v Lord Ashburton [1914] AC 932 O'Halloran v R T Thomas & Family Pty Ltd (1998) 45 NSWLR 262 Paterson v Paterson (1953) 89 CLR 212 Purkess v Crittenden (1965) 114 CLR 164 Re Dawson [1966] 2 NSWR 211 Schindler Lifts Australia Pty Ltd v Debelak (1989) 89 ALR 275 Seager v Copydex Ltd (No 2) [1969] 1 WLR 809 Target Holdings Ltd v Redferns [1996] 1 AC 421 Timber Engineering Co Pty Ltd v Anderson [1980] 2 NSWLR 488
DECISION:	Appeal and cross-appeal dismissed

THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

AUSTIN J

MONDAY 15 MAY 2000

1597/96 - CHARLES LO PRESTI PTY LTD V GEORGE KARABALIOS & ANOR

JUDGMENT

1   HIS HONOUR: This is an appeal from a decision by Master Macready, assessing damages pursuant to orders made by Cohen J.

2   The respondent and cross-appellant (the plaintiff at first instance) carries on business as a real estate agent under the name of James & Fear, Randwick, managing rental properties in the Randwick area. Its managing director is Mr Lo Presti. The respondent employed the first appellant, Mr Karabalios (the first defendant), as a property manager from March 1988 until late February 1996. In the course of his employment Mr Karabalios was required to maintain contact with landlords with respect to their properties, carrying out inspections, ensuring that rents were paid, organising repairs and following up rental arrears. This involved regular contact with a large number of properties and landlords. By February 1996, there were about 400 landlords who owned properties managed by the respondent.

3   On Friday 23 February 1996 Mr Karabalios told Mr Lo Presti that he was leaving his employment to start his own business, and gave one week's notice. On Monday 26 February, Mr Lo Presti's attention was drawn to the fact that a computer printout of the rent roll, normally kept in a black folder, was missing from the office. The rent roll was a list of the landlords whose properties were managed by the respondent, in alphabetical order. For each landlord, the document listed the landlord's name and address, the addresses of each of the properties which he or she owned, the names of the tenants of those properties and the weekly rent then being paid.

4   Mr Lo Presti confronted Mr Karabalios, who denied taking the list. Mr Lo Presti did not believe him and told him to finish up immediately, giving him a cheque for one week's wages. He also handed to Mr Karabalios a letter from his solicitor, which alleged that the rent roll was confidential and had been improperly used by Mr Karabalios to approach the clients of the firm.

5   The second appellant, Eastside Realty Pty Ltd (‘Eastside’, the second defendant), was incorporated in February 1996. The directors were Mr Karabalios and Mr Dennis Cardakaris. The company entered into a lease commencing on 1 March 1996 and commenced business in competition with the respondent shortly thereafter. On 6 March the respondent received a letter from Eastside, signed by Mr Karabalios, which enclosed letters of direction from 35 of the respondent's clients. In all, 44 letters of direction had been prepared together, in the same typeface, bearing the date 1 March 1996, although some of them were delivered later. The letters of direction stated that the landlord wished to terminate the property management agreement with the respondent and had appointed Eastside as the agent for management of his or her property, and requested that all relevant documents and keys be handed over.

6   Over the next week or so, some more letters of direction were received by the respondent, some in the same typeface as the initial batch, and others in different typeface or in handwriting. Overall, Mr Karabalios approached between 100 and 120 of the respondent's landlord clients, and about 70 transferred their business from the respondent to Eastside.

7   The respondent took the present proceedings against Mr Karabalios and Eastside, seeking an injunction to restrain them from using the rent roll, and damages for losses suffered because the rent roll had been taken and used.

Cohen J's judgment


8   In his reasons for judgment dated 31 July 1996, Cohen J held that in the absence of a contractual restriction, it is open to an ex-employee to compete with his or her former employer. The employee may make preparations for that competition while still in employment, as long as the employee does not act in breach of the conditions of employment.

9   One of the implied terms of a contract of employment is that the employee will act faithfully to the employer. It is a breach of that duty for the employee, while still employed, to canvas customers of the employer so as to induce them to become customers of the employee when the employee leaves and commences a competing business. In his Honour's view, the former employee is entitled to approach those customers after leaving the employment. The former employee may use information as to customers or methods of work (with the exception of trade secrets) which has been acquired in the course of his or her employment and has been remembered by the employee. But it is a breach of the terms of employment for the employee to take confidential lists of customers or other confidential written material of the employer for the purpose of using that information in furtherance of the employee's own business.

10   Cohen J found that the rent roll was a confidential document of the respondent, which may have had considerable value. Therefore, although Mr Karabalios was entitled to set up his own business in competition with the respondent's business, and to approach people who he remembered to be the respondent's clients, it would be a breach of duty for him to take the rent roll or use it for the purpose of inducing the respondent's clients to come across to his new business. Cohen J granted a permanent injunction to restrain Mr Karabalios and Eastside from using or copying the rent roll or showing it to anyone.

11   Mr Karabalios denied taking the rent roll, and said that he approached clients of the respondent who were relatives or friends of his, and also those clients whose names and addresses he could remember as a result of having dealt with them over many years. Those claims were tested in evidence at the hearing before Cohen J. The respondent drew the Court's attention to a number of patent errors in the expression of names and addresses in the rent roll, which had been replicated in the letters of direction. In his evidence Mr Karabalios sought to explain these as coincidences, but his explanations were rejected by Cohen J, who found that the evidence of Mr Karabalios was not credible.

12   His Honour found that the evidence pointed quite strongly to the rent roll ‘having been used, at least to some extent, for the purpose of obtaining particulars in order to make approaches to former clients’. However, having rejected the evidence of Mr Karabalios, his Honour was unable to determine how many names and particulars had been obtained by him through using the rent roll, as opposed to his personal recollection. He said:
‘It was submitted for the defendants that damages may only be nominal. That may be the case, but much will depend on what further evidence can be obtained as to names or addresses which were copied from the plaintiff's lists. In the circumstances the plaintiff is entitled to an inquiry as to damages to the extent that they can be established. It may be difficult but it would not be impossible to prove what former clients were obtained by an approach resulting from the learning of their names and addresses from the list and what loss has occurred to the plaintiff as a result of that.’
13   That being so, Cohen J ordered that proceedings be referred to a Master for ‘the assessment of damages, if any, found to have been suffered by the plaintiff as a result of the use of any such lists by the defendants or either of them’.

Master Macready's judgment


14   The hearing before Master Macready extended over two hearing days, during which Mr Karabalios was extensively cross-examined. Written submissions were received. The Master delivered his reasons for judgment on 16 November 1998. In giving an account of his reasons for judgment, I shall take the liberty of re-ordering the steps so as to lay bare what I consider to be the chain of reasoning.

15   The judgment is in four parts: findings of fact about the uses to which Mr Karabalios put the information contained in the rent roll; a determination that Mr Karabalios was in a fiduciary relationship with the respondent; some determinations about the causal connections between Mr Karabalios' wrongdoing and the respondent's loss; and a determination of the measure and quantum of damages.

Findings of fact


16   The Master addressed the factual question whether any damage had been suffered by the respondent as a result of the use of the list which Cohen J had found to be available to Mr Karabalios and Eastside. He found that the list may have been used in two separate ways: for the preparation of the direction letters, or for the purpose of identifying clients so they could be contacted.

17   After carefully reviewing the evidence, the Master found that Mr Karabalios had used the respondent's rent roll for the purpose of preparing the 44 letters of direction dated 1 March 1996. He found that of the remaining 26 letters of direction, 16 had been prepared using the respondent's rent roll. Thus, the Master determined that Mr Karabalios had used the rent roll to prepare letters of direction to 60 of the 70 clients who transferred their business.

18   Later in his judgment the Master considered whether Mr Karabalios had used the respondent's rent roll for the purpose of contacting clients to solicit their business. Mr Karabalios had given evidence that he had personally visited 45 of the 60 clients, telephoning 11, writing to one, and receiving telephone calls from the other three. His evidence was that he did not use the rent roll for any of those contacts. The Master did not accept Mr Karabalios' evidence, but he was not prepared to infer on a global basis that the rent roll had been used for the purpose of making contact, simply because it had been used in the preparation of the letters of direction.

19   Nevertheless, given the dates of the letters of direction and contacts made, and the ‘logistics’ involved, the Master concluded that it would be reasonable to find that most, if not all, of the letters of direction for clients visited personally had been prepared by Mr Karabalios prior to the visits, and taken by him when he called upon the clients - and therefore (I infer) used for the purpose of ascertaining the addresses of the clients. Similarly, ascertainment of the telephone numbers and addresses of those clients who were contacted by telephone or letter could have been facilitated by the use of the letters of direction that had already been prepared.

20   The question for the Master was whether it was the information in the rent roll (or in the letters of direction which had been prepared from the rent roll) that enabled Mr Karabalios to visit or make contact with the clients, rather than his recollection of their addresses. The Master accepted the evidence of Mr Karabalios that of the 60 clients who signed letters of direction prepared by use of the rent roll, some were his personal friends, some were relatives, two were next-door neighbours, and others were business associates.

21   The Master made inferences, from Mr Karabalios' descriptions of his relationships with the clients, as to whether it was likely that he would have knowledge of their addresses without using the rent roll. He found that in respect of 30 clients, whose names he listed, it was not likely that Mr Karabalios would have personal knowledge of addresses, and it was therefore likely that he used information from the rent roll or letters of direction to make contact with them in order to solicit their business.

22   Many of the clients who transferred their business were friends or close associates of Mr Karabalios. Mr Karabalios therefore submitted that the respondent's loss of all or many of the 70 clients who transferred their business was caused by the close association between them and him, rather than any use by him of the rent roll for the purpose of preparing letters of direction or making contact with the clients. The respondent countered this submission by contending that Mr Karabalios breached a fiduciary obligation, and consequently that the damages which were to be assessed were properly to be regarded as equitable compensation. The respondent then submitted, as a matter of law, that the question of causation raised by Mr Karabalios did not arise in the assessment of equitable compensation.

Fiduciary relationship

23   The Master considered whether the employment relationship between the respondent and Mr Karabalios was a fiduciary relationship. He observed that, while the employer and employee relationship is not one which has traditionally attracted fiduciary responsibilities, the class of persons who may be bound by an obligation of confidence extends well beyond the traditional categories of fiduciary relationships. He noted that in the present case, Mr Karabalios was under a duty of confidence, his duty being not to use the information contained in the confidential rent roll which he had wrongfully taken from the respondent prior to termination of his employment. He regarded this as nothing more than a continuation of the former employee's obligation of confidence while he was in employment. That obligation of confidence, he said, could be regarded as a fiduciary obligation, attracting fiduciary liabilities. Therefore, misuse of the rent roll was a breach of ‘the fiduciary duty of confidence’.

Causation


24   That being so, the Master regarded it as necessary to consider the question of the extent to which causation plays a role in the assessment of equitable compensation for breach of fiduciary duty. After referring to Maguire v Makaronis (1997) 188 CLR 449 and O'Halloran v R T Thomas & Family Pty Ltd (1998) 45 NSWLR 262 and other cases, the Master identified two alternative tests of causation for equitable compensation. He drew attention to the need to consider the purpose and scope of the particular fiduciary rule which is being applied, before undertaking any analysis of causation.

25   The first alternative test identified by the Master applies to a trustee of a traditional trust and also, according to O'Halloran's case, a director who wrongfully disposes of company property. The test is whether the loss would have occurred had there been no breach of equitable duty. For convenience, I shall refer to this as the ‘but for’ test of causation. When this test is applied, the defendant may be obliged to pay equitable compensation even in respect of losses that have not flowed from the breach, in the common law sense. Further, as the High Court remarked in Maguire's case (at 470), ‘there is no translation into this field of discourse of the doctrine of novus actus interveniens’.

26   The second test, an even greater departure from the common law of causality, is that an errant fiduciary who fails to disclose a material fact cannot be heard to maintain that his wrongdoing did not alter his victim's conduct, and therefore once the court has found that the undisclosed facts were material, speculation about the effect which disclosure would have had on the victim's conduct is irrelevant. This test, arising out of Brickenden v London Loan & Savings Co [1934] 3 DLR 465, seems to render it unnecessary even to inquire whether the loss would have occurred had there been no breach of duty - although in Maguire's case Kirby J suggested (at 494) that a kind of ‘but for’ test arises out of the requirement that the Brickenden rule applies only if undisclosed facts are ‘material’.

27   The Master said he was concerned with the loss arising to the respondent by virtue of its clients transferring management of their rental properties to Mr Karabalios. He held that while the use of the rent roll to prepare letters of direction was a breach of equitable duty, it was not a breach but for which the respondent's loss would not have occurred. He said: ‘The mere preparation of the directions letters of itself does nothing as there is no connection between that action and the lessor's action in moving the management’. In effect, the client's decision to move the management might have been initiated independently of the letters of direction. Accordingly the use of the rent roll for preparation of the letters of direction was not a breach attracting the ‘but for’ test of causation.

28   The Master also held that the preparation of the letters of direction alone, although admittedly a breach of duty, was not a breach leading to the application of the Brickenden rule, because the preparation of a letter of direction is, by itself, ‘something which has no real consequence’. This is an application of the observation of Kirby J in Maguire (at 44) that ‘ if a breach occurs which has no real consequences, the pre-condition of the Brickenden formulation, in the case of a breach constituted by non-disclosure of material facts, will not be made out’.

29   The Master also considered causation with respect to the breach that arose when Mr Karabalios used information in the rent roll to contact clients and persuade them to transfer their business. Noting that the courts apply the strict ‘but for’ standard to a trustee because of the vulnerability of the beneficiaries ( O'Halloran , at 277), he said that certain factors made the respondent vulnerable, and therefore it was appropriate to apply the ‘but for’ test in the present case. The factors that he identified were:
(1) Mr Karabalios was not simply an employee but managed the respondent's rent roll as a property manager;
(2) he knew that a number of rent rolls were acquired during the course of his employment for substantial value;
(3) he was in the unique position where the respondent relied upon him to protect its interests in the business and to obtain and service clients;
(4) he was in a position where he was continually in touch with clients;
(5) he concealed his intentions prior to his leaving; and
(6) he took the list of clients obviously with the intention of using it.

30   Applying the ‘but for’ test, he concluded that since the 30 clients whom he had identified were not personal friends or family of Mr Karabalios, the loss of those clients would not have happened if Mr Karabalios had not wrongfully used the information in the rent roll to contact those clients. He observed that even if he were wrong in this conclusion, he would not have been satisfied that the clients in question would have changed to Eastside in any event. In other words, the Master's opinion was that the transfer of business by the 30 clients flowed from Mr Karabalios' wrongful use of the information in the rent rolls to contact clients, on the common law standard of causation.

Measure and quantum of damages

31   The Master found that the appropriate measure of damages was the market value of the confidential information that had been misused. Expert evidence had been adduced as to the value of rent rolls in the Randwick area. On the basis of that evidence, he calculated damages by determining the annual income earned from managing the properties of the 30 clients whom he had listed, and applying a capitalisation rate of 2.9 to that figure. This led to a verdict of $120,858.66 together with interest.

The grounds of appeal and cross-appeal

32   Mr Karabalios and Eastside have challenged Master Macready's judgment on grounds relating to:
(a) errors in his findings of fact;
(b) an error in his assessment of the respondent's loss;
(c) errors in his application of the principles of causation;
(d) errors due to his treatment of the case as a case about breach of fiduciary duty; and
(e) other matters.


33   The respondent's cross-appeal asserts that the damages found by the Master were inadequate. Its contention is that it lost the ability to deal with the rent roll as an asset, and therefore the Master should have found that the proper basis for damages was to restore to it the value of the lost asset. The respondent seeks damages of $293,689 plus interest.

34   I shall deal with each of the grounds of appeal, and then I shall consider the cross-appeal.

Errors in findings of fact

35   The ground of appeal is that:
‘The Master's finding that the First Appellant used the Respondent's list to contact the thirty (30) people referred to on pages 31 and 32 of his decision was contrary to the evidence of the Appellants and/or not supported by any other evidence’.

36   The Master expressly rejected Mr Karabalios' evidence on various points. In particular, the Master (like Cohen J) did not accept his denial of using the rent roll for the purpose of preparing the letters of direction (AB 492). In my view there is no basis for challenging the Master's assessment of the credibility of Mr Karabalios. Therefore the critical question is whether the Master's finding was not supported by the evidence as a whole.

37   The appellants submitted to me that the evidence did not support the Master's conclusion that Mr Karabalios used the rent roll to ascertain the addresses of 30 of the respondent's clients. They draw attention to the following matters:
(a) there was no direct evidence that Mr Karabalios used the rent roll to ascertain the address of any of the 30 clients;
(b) in the course of cross-examination, Mr Karabalios was able to recall the addresses of many of the 30 clients;
(c) he had a clear and accurate recollection of the addresses of a considerable number of the persons listed in the rent roll;
(d) he is of Greek extraction and many of the 30 clients were Greek;
(e) the address of at least one of the 30 clients was not listed in the rent roll;
(f) the rent roll included the names of two solicitors, including Mr Comino, who practised nearby;
(g) it was not put ‘squarely’ to Mr Karabalios that he used the rent roll to discover the addresses of any of the 30 clients; and
(h) the respondent did not call any evidence to rebut the material contained in the affidavit evidence of Mr Karabalios, which referred to his close association with many of the 30 clients.


38   In my view there is no adequate basis for this Court to interfere with the Master's findings of fact. To a substantial degree, his findings were based on his assessment of the witnesses and the quality of their evidence, and it is not suggested that he misused his advantage of observing and considering the witnesses. In such circumstances it is unlikely that a court of appeal will interfere with findings of fact at first instance: Paterson v Paterson (1953) 89 CLR 212; Abalos v Australian Postal Commission (1990) 171 CLR 167; Devries v Australian National Railways Commission (1993) 177 CLR 472.

39   The Master considered the affidavit evidence of Mr Karabalios relating to his close association with the respondent's clients (AB 491 and 495). He noted that it had not been put squarely to Mr Karabalios that he used the rent roll to discover the clients' addresses, but he observed that this was not a matter of importance given the way that Mr Karabalios had presented his case, namely that he could remember details from the former listing of clients (AB 492). I accept that reasoning.

40   It was obviously a concern for the Master that the plaintiff had not led evidence to show that there was no close association between Mr Karabalios and the clients (AB 492 and 493). It was also a concern that there was no direct evidence that Mr Karabalios had used the rent roll for the purpose of contacting clients (AB 472). The Master's response was to form a view as to the likelihood of what had happened by considering the logistics and timing of the approaches which Mr Karabalios made to the clients. Having decided that it would be reasonable, given those matters, to find that the letters of direction containing addresses would have facilitated the making of contact, he considered whether, in light of Mr Karabalios' own evidence, he should infer that Mr Karabalios used the information in the letters of direction rather than his own knowledge to make contact with each of the 60 clients who transferred their business.

41   The Master reasoned by inference in this manner precisely because of the absence of direct evidence. I have considered the transcript of Mr Karabalios' cross-examination but I have not identified anything in that material which would demonstrate that the Master failed to take into account relevant evidence. The fact that some of the clients in the Master's list of 30 clients were Greek does not dislodge the Master's reasoning, which was based on his assessment of the plausibility of remembering the addresses of business associates who were not friends or family. The fact that Mr Comino practised nearby does not render it implausible to say that Mr Karabalios would have used the rent roll to locate him. While it appears that the address of one of the clients, Mr and Mrs Seemund, did not appear on the rent roll, the Master’s conclusion implies that the rent roll was used at least as an aide memoire for preparing the direction letter to that client, and that the directions letter was then used as an aid in contacting the client.

42   The appellants submitted that the evidence established that each of the 30 clients had a close association with Mr Karabalios, and that Mr Lo Presti had unsuccessfully approached some of them seeking to retrieve their business. From this it should have been inferred, according to the appellants, that these clients would have transferred their properties to Eastside even if there had been no wrongful use of the rent roll. But the inference contended for by the appellants was far from irresistible. In fact, the Master reached a very different conclusion in the light of the evidence, specifically finding (AB 501) that he would not have been satisfied on the evidence that the clients in question would have changed to Eastside in any event. The appellants made detailed submissions drawing attention to the evidence in the case of each of the 30 clients. But the evidence to which they referred did not go beyond establishing strong or close business relationships, and was consistent with the Master’s reasoning and findings. I accept the Master’s reasoning and findings.

43   The appellants also submitted that there was no evidence to support the Master's conclusion that Mr Karabalios used the list to contact the 30 clients. It was submitted that the Master had reversed the onus of proof (or at least, he had shifted the evidenciary onus: Purkess v Crittenden (1965) 114 CLR 164, 168) by identifying those clients who were contacted by Mr Karabalios without using the rent roll, and then concluding by inference that he used the rent roll to contact the remainder. In my opinion, while it is true that the Master proceeded by inference in the manner that I have described, it would be inaccurate to say that he reversed the legal or evidenciary onus of proof. Rather, he appears to have examined the evidence closely, especially the evidence of Mr Karabalios regarding his association with the clients, making inferences from the evidence without any presumption either way.

44   Finally on this ground, the appellants submitted that there is a contrast between the question referred to the Master, and his finding. The Master was asked to make an assessment of damages suffered by the plaintiff as a result of the use of the lists. The Master found that the loss of the 30 clients would not have happened unless there had been an approach by Mr Karabalios using the rent roll. The answer is formulated differently from the question, but the reasoning that led the Master to reformulate the question is clearly set out in his reasons for judgment.

45   In this case, mere discrepancy between the question and the answer is not a good ground of appeal unless the Master’s reasoning about the principles of causation is successfully impugned. The order which referred the proceedings to the Master required him to assess damages suffered ‘as a result of’ the use of the rent roll. In my opinion the words ‘as a result of’ are general words of causation which did not restrict the Master to the application of the common law principles of causation. His finding that the loss of the 30 clients would not have happened unless Mr Karabalios had used the rent roll to approach the clients is a finding that, in light of the applicable equitable principles, there was a sufficient causal connection between the conduct of Mr Karabalios and the respondent's loss. That, in substance, was the matter that Cohen J referred to him for decision.

Error in assessment of loss

46   The ground of appeal is that:
‘The trial judge having found that it was open to the First Appellant to approach the Respondent's clients after leaving the employ of the Respondent, the Master's finding that the loss suffered by the Respondent should be calculated without regard to that right was wrong in law’.

47   The Master heard expert evidence about the value of a rent roll (or more precisely, the value of the management contracts listed in a rent roll). Since there is a market for rent rolls, the value of a rent roll will normally be the market price that would be paid for it by a willing but not over-anxious purchaser.

48   The respondent's experts included Mr Toohey, who calculated the market price and hence the value of a rent roll by applying a capitalisation rate of 2.9 to each $1 of annual management fee income. The Master accepted Mr Toohey's evidence and applied a capitalisation rate of 2.9 to the estimated fee income with respect to the 30 clients whom he had identified. Mr Toohey said in cross-examination that the sale of a rent roll would exclude clients who did not sign a new management agreement with the purchaser within one month.

49   The appellants' expert, Mr Keen, said that the usual contract of sale of a rent roll includes a clause to the effect that any loss of clients within three months is allowed as a deduction from the price. He then made certain estimates having regard to the fact that Mr Karabalios was free to approach any clients after he left employment with the respondent. The Master held that this evidence was not relevant to the circumstances of the case before him, because ‘here we are concerned with determining the value of the loss to the plaintiff where that loss occurs as a consequence of breach’.

50   The appellants contended that the Master erred in failing to discount the value of a rent roll comprising the 30 clients, by the probability that the respondent would have lost those clients even if Mr Karabalios had not used the rent roll to contact them and lure them away. They relied on the decision of Santow J in Colour Control Centre Pty Ltd v Ty (unreported, 24 July 1995).

51   In that case a manager who was held to occupy a fiduciary position diverted a business opportunity from her employer to her new company. The business opportunity came to her in the course of her employment. Having found that the manager had acted in breach of her fiduciary duty, Santow J considered the question of compensation. He found that it was by no means certain that the business opportunity would have gone to the plaintiff in the absence of the defendant's breach. There was a chance that the business would have gone to the plaintiff, which he assessed at 30 percent. The plaintiff's damages were therefore 30 percent of the profit which it would have made had it secured the business.

52   The appellants say that if Santow J's approach is applied to the present case, the value of the rent roll assessed by the Master should be reduced. Adopting the expert evidence of Mr Toohey, the Master valued the rent roll at the market price that would be paid for it by a willing but not over-anxious purchaser. Such a purchaser would acquire a rent roll by means of a contract providing for a reduction in the purchase price in respect of clients who did not sign a new management agreement with the purchaser within one or three months. According to the appellants, if the respondent had attempted to sell the rent roll of 30 clients to a third party, there would be a high probability that some or all of the 30 clients would move across to Mr Karabalios, and the purchase price payable by the third party would be reduced accordingly. That probability should have been taken into account by the Master when he assessed the value of the rent roll of 30 clients.

53   Santow J's judgment was delivered before the decisions of the High Court of Australia in Maguire's case and the Court of Appeal of New South Wales in O'Halloran's case, and also before the decision of the House of Lords in Target Holdings Ltd v Redferns [1996] 1 AC 421. Not surprisingly, his Honour did not expressly address the question of causation in the manner required in light of those cases, although interestingly enough, he articulated a ‘but for’ test of causation by questioning the plaintiff's assumption that ‘but for the breaches by the defendants’ it would have secured the business opportunity for itself.

54   For the purposes of this case, I am prepared to accept that Santow J's judgment reflects the current law. Nevertheless, the case is distinguishable from the present facts. In the Colour Control Centre case the plaintiff did not lose something that it previously owned, or even something that it was certain to acquire. The question was whether it should be compensated because it had not obtained the business opportunity that was developed and acquired by the defendant. The plaintiff had lost an opportunity rather than an asset, and it was relevant for Santow J to assess the strength of the probability that the opportunity would have been realised but for the defendant's breach.

55   Assume for the moment that the Master was correct in finding that the breach of duty by Mr Karabalios caused 30 of the clients to transfer their business (the appellants' contentions with respect to causation will be considered later). In this case there were existing assets in the form of management contracts between the clients and the respondent, and the respondent lost these assets because of the wrongful conduct of Mr Karabalios. The Court's task was to assess the amount to be paid to the respondent in compensation for the loss of these assets. In contrast with the Colour Control Centre case, the Court was not required in the present case to assess the likelihood that the respondent would have obtained assets in future but for the breach.

56   Although the Colour Control Centre case is distinguishable, in my opinion there is some substance to the appellants' submission. The assessment of damages depended upon the value of the assets lost by the respondent, those assets being the management contracts with clients. I infer from the evidence given by the valuation experts that the likelihood of clients transferring their business within a short time was a relevant consideration in the valuation of the management contracts as assets. Immediately prior to the breach of duty by Mr Karabalios, the position was that: the clients were at liberty to transfer their business away from the respondent; Mr Karabalios was an employee who had given notice of his intention to resign and start up a competing business; and once he had done so, he would be at liberty to accept transfers from the respondent's clients. It seems to me that all these matters were relevant to the assessment of whether it was more likely than not that existing clients of the respondent would transfer their business away within a short time. Therefore these matters were also relevant to the value of the assets at the time of the breach.

57   It follows, in my respectful opinion, that the learned Master was wrong to the extent that he treated one or more of those matters as irrelevant to the assessment of damages.

58   However, that does not mean that the appeal succeeds on this ground. The Master found that he would not be satisfied that ‘the lessors in question would have changed to the second defendant in any event’. Counsel for the appellants queried the meaning of this finding, but in my view it is clear enough. The Master had in mind the contrast between the equitable and common law principles of causation. Having reached a conclusion by applying the equitable ‘but for’ test, he was pointing out that the result would have been the same, on the evidence, had he taken the common law approach to causation. The loss of the clients flowed from the breach because the breach caused clients to transfer who would not otherwise have done so.

59   This finding also has an implication for the assessment of the value of the management contracts. If it was more likely than not that the 30 management contracts would remain with the respondent, each of those contracts would have a value undiminished by the right of Mr Karabalios to approach the respondent's clients after he had left his employment. In that sense, having found himself not satisfied that the 30 clients would have changed over had there been no breach, the Master was correct to treat the right of Mr Karabalios to approach the clients as irrelevant to the assessment of the value of the management contracts.

60   The appellants advanced a second argument in support of this ground of appeal. Referring to Schindler Lifts Australia Pty Ltd v Debelak (1989) 89 ALR 275, they submitted that even if there was a sufficient connection between the wrongful act and the loss, the Court must still assess the extent to which the loss was attributable to the wrongful conduct. In my opinion this proposition is wrong in law. The very distinction between the equitable ‘but for’ test which the Master applied, and the common law test of causation, is that when the equitable standard is applied and satisfied, it is unnecessary to ascertain the extent to which the loss is attributable to the breach of duty. If the loss would not have occurred but for the breach of duty, then the wrongdoer must compensate for that loss. Schindler's case is not authority for the proposition asserted by the appellants, since in that case the Court applied the common law of causation to the breach of an implied contractual term.

61   In the result, this ground of appeal fails.

Causation

62   The ground of appeal is that:
‘The finding that the Respondent suffered loss from the use by the First Appellant of a confidential list was contrary to the evidence’.

63   In their submissions the appellants took a somewhat wider approach to the Master's reasoning on the question of causation.

64   First, they drew attention to an apparent discrepancy between the question referred to the Master and the question which he answered. The question referred to the Master was the assessment of any damages that arose as a result of the use of the list. The Master answered a different question, by deciding that the loss of the 30 clients would not have occurred but for the use of the list. However, the Master's reasoning explains why he reformulated the question and answered it in terms of the ‘but for’ test. He did so because, in his view, Mr Karabalios breach an equitable fiduciary duty. That being so, the equitable principles concerning causation were to be applied, including the ‘but for’ test rather than the common law approach to causation. If the Master was correct in treating the issue as one of equitable compensation for breach of a fiduciary duty (a matter which I shall consider below), the rest of his reasoning is a proper application of the modern case law.

65   Next, the appellants submitted that if the correct question was whether the loss of the 30 clients would have occurred if there had been no breach, the Master's negative answer was not supported by the evidence. In their submission, the loss of the 30 clients occurred because they were approached by Mr Karabalios to transfer their properties to his company. According to the appellants, there was no evidence that any of the suppliers would have remained with the respondent if Mr Karabalios had not used the information in the rent roll. The appellants said that it was the approaches by Mr Karabalios to these clients that caused the loss, rather than his use of the rent roll for that purpose. Cohen J had already held that Mr Karabalios was entitled to make those approaches. The appellants said that there was no evidence to support the proposition that if he had not used the rent roll, Mr Karabalios would not been able to make those approaches; nor that the approaches would have been less successful if the rent roll had not been used; nor that any time advantage that Mr Karabalios might have derived from the use of the rent roll resulted in the respondent's loss; nor that the use of the list was a ‘material’ cause of the respondent's loss.

66   It is true that there was very little evidence of these matters, as the Master's judgment makes plain. But as I have been at pains to explain, the Master found adequate grounds for inferences after carefully considering the evidence as a whole, and in particular the evidence of Mr Karabalios. His conclusion was that on the basis of the evidence, it was unlikely that Mr Karabalios would have known the addresses of the 30 clients without using the rent roll (AB 495-496), and that as the clients in question were not personal friends or family, the respondent's loss of those clients would not have happened unless Mr Karabalios had approached them. I accept the Master's findings, and his conclusion that the loss of the 30 clients would not have occurred but for the breach of duty by Mr Karabalios.

Errors as to fiduciary duty

67   The ground of appeal is that:
‘The trial judge held that, while the list referred to in the proceedings was confidential, the information it contained did not fall within the category of confidential information. The Master erred in holding that the employee was precluded, after termination of his employment from using information contained in the list if such information was derived during the course of his employment by the Respondent.’

68   Cohen J's reasoning, summarised earlier in this judgment, was based on breach of contract. He found that the rent roll was a confidential document of the respondent, which had a value to the respondent. It was not suggested that the rent roll contained trade secrets, but it was a document not available to the public, and more importantly, would not have been released to competitors. While it may have been possible to compile a comparable list, considerable research would have been needed.

69   Cohen J also found that Mr Karabalios took the rent roll and used it for the purpose of approaching the respondent's clients. He held that by doing so, Mr Karabalios breached his implied contractual undertaking to act faithfully to his employer.

70   Some of the respondent's submissions to the Master appear to have treated the case as one of breach of the equitable duty that protects confidential information from wrongful disclosure. Reliance was placed on Seager v Copydex Ltd (No 2) [1969] 1 WLR 809 (a leading case on the assessment of compensation for breach of the equitable duty) and Aquaculture Corp v New Zealand Green Mussel Co Ltd [1990] 3 NZLR 299 (in which the New Zealand Court of Appeal held that in principle, exemplary damages may be awarded for breach of confidence). Additionally, however, the respondent submitted that Cohen J's findings amounted to a breach of fiduciary duty by Mr Karabalios, and sought equitable compensation upon principles which flow from Nocton v Lord Ashburton [1914] AC 932.

71   The equitable doctrines relating to confidential information and fiduciary relationships are conceptually distinct, though overlapping in their factual applications. The former fixes upon the confidential nature of the information, and imposes a duty without necessarily having regard to the relationship between the parties prior to the wrongful misuse of the information. It has been argued that there is no room for the operation of the equitable doctrine where the parties stand in a contractual relationship and the contract expressly or impliedly deals with the duty of confidentiality: Meagher Gummow & Lehane, Equity Doctrines & Remedies (3rd ed, 1992), para [4104]. The latter mentioned doctrine focuses upon the relationship between the parties, considering whether there is any implied undertaking by one of them to act in the interests of the other, and perhaps whether that other party is in a position of vulnerability (some of the many authorities were referred to and discussed by Spigelman CJ in O'Halloran ). A breach of fiduciary duty may involve misuse of confidential information, but breaches of that duty can occur through the use of information which is not confidential, as in Green v Bestobell Industries Pty Ltd [1982] WAR 1. Unquestionably fiduciary duties can (and often do) coexist with contractual duties, though the terms of the contract may attenuate the fiduciary duty.

72   These distinctions between the legal doctrines are important to maintain, in aid of clarity of thinking in a case such as the present. In insisting upon the distinctions, I do not mean to deny that the two doctrines are referrable to an underlying common concern about enforcing and protecting trusted confidences: see, for example, the passage from Professor P D Finn (as his Honour then was) in Equity Fiduciaries and Trusts (T G Youdan ed, 1989), p 36, cited by the Master.

73   Cohen J found that Mr Karabalios was in breach of contract. He did not deal with fiduciary duties, nor the equitable duty with respect to confidential information. The appellants submitted that it was impermissible for the Master to assess damages on an equitable basis, having regard to Cohen J's findings. I disagree. The cited passage from Equity Doctrines & Remedies above, if it is correct, is an obstacle to the application of the equitable doctrine about confidential information, since Cohen J found that there was an applicable implied term in the contract between the parties. However, the facts found by his Honour imply that Mr Karabalios and the respondent stood in a fiduciary relationship, and that by taking and using the rent roll as he did, Mr Karabalios breached his fiduciary duty.

74   It is well recognised that the employer/employee relationship may have fiduciary incidents. As Santow J said in the Colour Control Centre case (at page 12):
‘The relationship of employer and employee is commonly included as an exemplar of fiduciary relationships: see, for example, Hospital Products Ltd v US Surgical Corporation (1984) 156 CLR 41 per Gibbs CJ at 68, per Mason J at 96, per Dawson J at 141. Fiduciary obligations in the employment context are not limited to senior executives and officers, and may in appropriate circumstances extend to other employees: Timber Engineering Co Pty Ltd v Anderson [1980] 2 NSWLR 488; Angus & Coote Pty Ltd v Render (1989) 16 IPR 387. However, the fiduciary obligations of junior employees, who do not hold positions of decision-making discretion and responsibility in matters of management, may tend to be narrower than those of more senior executives and directors: Austin, ‘Fiduciary accountability for business opportunities’ in Equity and Commercial Relationships (Sydney, LBC, 1987) at 171-172; and see generally State Rail Authority of New South Wales v Earthline Constructions Pty Ltd (O'Keefe CJ Coml Divn, Supreme Court of New South Wales, 14 September 1994, unreported).’

75   In the present case the Master held that Mr Karabalios was in a fiduciary relationship with the respondent. To a degree, his reasoning (at AB 483-485) was influenced by considerations which, in my respectful opinion, are more appropriate to the equitable doctrine with respect to confidential information than the fiduciary doctrine. Nevertheless, I agree with his conclusion.

76   Mr Karabalios held a position of responsibility and seniority. His position gave him access to the rent roll, which Cohen J found to be a confidential document of some value, and one that the respondent would keep away from its competitors. He was obliged to use the rent roll in the course of his employment for the benefit of the respondent. He must have been aware of the confidential nature of the rent roll and the damage which could be done to the respondent's business if it were to be misused. In these circumstances he was under a fiduciary duty to the respondent not to place his personal interest in conflict with his duty to his employer, by using the rent roll for the purposes of the new business in which he had a significant stake, without the fully informed consent of his employer. He was also under a fiduciary duty not to exploit any profit-making opportunity which arose in connection with his fiduciary office, without that fully informed consent. The fact that he did not use the rent roll to approach clients until after leaving his employment does not exonerate him from breach of duty, since both the opportunity to misuse the rent roll, and the actual taking of it, occurred during the course of his occupation of a fiduciary office.

77   It is true, as Santow J pointed out in the Colour Control Centre case (at page 12), that not all duties imposed on a person who stands in a fiduciary relationship to another will be fiduciary in their nature, and in this case Cohen J found that the use of the rent roll by Mr Karabalios was governed by the implied contractual duty of fidelity. It seems to me, however, that Mr Karabalios was subject to fiduciary duties in addition to and not identical with his contractual duty. The contractual and fiduciary duties were probably coextensive in scope and consequences, on the facts of this case. Neither his contractual nor his fiduciary duties prevented him from approaching his former employer's clients after leaving employment, nor from making certain limited preparations for establishing his new business. But they were by nature different duties. The fiduciary duties, which prevent the fiduciary from placing himself in a position where there is any real, sensible possibility of conflict between interest and duty and require strict accountability for the exploitation of profit-making opportunities, may be wider than the implied contractual duty of fidelity, although that distinction need not be developed in the present case.

78   Since, in my view, the findings of fact by Cohen J implied that Mr Karabalios was a fiduciary in breach of his equitable duties, it was open to the respondent to submit to the Master, as it did, that the compensation to be assessed pursuant to Cohen J's orders was equitable compensation rather than damages. Cohen J’s order for the assessment of damages was not, in its terms, limited to the assessment of damages flowing from breach of contract. It required the Master to assess the damages, if any, suffered by the plaintiff ‘as a result of’ the use of the rent roll. As I have already observed, the words ‘as a result of’ are general words of causation which are apt to encompass either a ‘but for’ test or a test which requires a closer connection between the wrongdoing and the loss. The evidence presented to Master Macready made it pertinent for him to consider whether it was appropriate to apply the ‘but for’ test, and his decision to do so was, in my opinion, within the ambit of the reference which had been made to him.

79   The appellants had the opportunity to meet the respondent’s submission. There was no procedural unfairness in the Master accepting the submission and proceeding to assess compensation on the equitable basis.

80   It follows, in my view, that this ground of appeal fails.

Other matters

81   The ground of appeal is that:
‘His Honour having [found that it was open to the First Appellant to approach the Respondent's clients after leaving the employ of the Respondent], the Master erred in law in taking into account the following matters:
1. That the First Appellant was not simply an employee but managed the Respondent's rent roll as property manager;
2. The First Appellant knew that a number of rent rolls were acquired during the course of his employment for substantial value;
3. The First Respondent [semble, Appellant] was in the unique position where the Respondent relied upon him to protect his interests in the business and to obtain and service the clients;
4. The special position of the First Respondent [semble, Appellant] where he was continually in touch with the Respondent's clients; and
5. The concealment by the First Respondent [semble, Appellant] of his intentions prior to leaving the employ of the Respondent.’


82   As I indicated in my summary of the Master's judgment, he took into account these factors in deciding that this was an appropriate case for applying the equitable principles of causation which are applicable to the trustee of a traditional trust, including the ‘but for’ test. He also took into account the fact that Mr Karabalios took the rent roll with the intention of using it.

83   The appellants submitted that none of the five listed factors imposed upon Mr Karabalios any duty that survived the termination of his employment. They contended that the Master's reasoning was inconsistent with Cohen J's statement of the law. The Master regarded the five factors as indications of the vulnerability of the respondent, because they were circumstances which made the respondent very reliant upon the integrity of Mr Karabalios to maintain confidentiality of the information. The appellants said that this reasoning is inconsistent with the proposition that an ex-employee is free to approach his former employer's clients once he leaves the employment.

84   In my opinion the Master was right to take the five factors into account. I regard them as factors supporting his decision that in the circumstances, Mr Karabalios owed fiduciary duties and not merely a contractual duty to the respondent. Once he concluded, as he did, that Mr Karabalios was in breach of his fiduciary duty, it was open to him to apply the principle as to causation enunciated in Re Dawson [1966] 2 NSWR 211 and expounded in Maguire's case and O'Halloran's case.

85   Consequently my view is that this ground of appeal also fails.

Cross-appeal


86   By its cross-appeal the respondent contended that the damages found by the Master were inadequate. The respondent submitted that having found that there was a sufficient causal nexus between the wrongful conduct of Mr Karabalios and the loss suffered by the respondent, the Master should have found that the respondent's loss was its inability to deal with the rent roll as an asset. The measure of that loss should have been, according to the respondent, the value of the asset that the respondent lost. The respondent said that the value of that asset was $293,689 plus interest, instead of the amount of $120,858.66 plus interest that the Master awarded.

87   I disagree. In my opinion the respondent's assertion that Mr Karabalios' breach of duty made it unable to deal with the rent roll as an asset is not supported by the evidence. The rent roll was simply a list of names and addresses and other information. Each component of it was separately useful. The list was a record of information relating to services provided by the respondent to its clients, and the respondent earned income from providing those services rather than from the list itself.

88   Mr Karabalios' wrongful conduct deprived the respondent of the management contracts for 30 clients but did not, on the Master's findings, prevent the respondent from continuing to do business with other clients. His conduct did not sterilise the rent roll as a whole, or render the information in it less useful with respect to clients, other than the 30 clients whose business was diverted to the second appellant.

89   Given the Master’s factual conclusions, it is not necessary for me to consider whether the various judgments in Magquire and O’Halloran might occasionally produce different assessments of compensation. It may well be that in an appropriate case, where a breach of duty has neutralised the value of an asset, equity will simply see to it that the value of the asset is restored (see O’Halloran at 281, per Meagher JA). But this has not occurred in the present case.

Conclusions

90   It follows, in my view, that both the appeal and the cross-appeal have been unsuccessful and should be dismissed. I shall hear submissions from the parties on the question of costs.
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Last Modified: 09/26/2000