Digital Pulse Pty Ltd v Harris

[2002] NSWSC 33

Reported Decision: 40 ACSR 487
(2002) 20 ACLC 365

New South Wales

Supreme Court

CITATION:	Digital Pulse Pty Limited v. Christopher Harris and Ors [2002] NSWSC 33
CURRENT JURISDICTION:	Equity Division Commercial List
FILE NUMBER(S):	SC 50032/00
HEARING DATE(S):	26 to 30 November, 2001
JUDGMENT DATE:	8 February 2002
PARTIES :	Digital Pulse Pty Limited [Plaintiff] Christopher Harris [First Defendant] Anthony Eden [Second Defendant] Juice-D Media Pty Limited [Third Defendant]
JUDGMENT OF:	Palmer J

COUNSEL :	Andrew Bulley [Plaintiff] Damien A. Allen [Defendants]
SOLICITORS:	Barker Gosling [Plaintiff] Catalyst Partners [Defendants]
CATCHWORDS:	EMPLOYMENT - FIDUCIARIES - CONTRACT - Breach by employees of fiduciary and contractual duties of loyalty - conflict of interest and duty - employees divert business opportunities of employer to themselves during employment - liability for damages, equitable compensation or for account of profits. - CORPORATIONS - EMPLOYEES - Fiduciary duties of employees of a corporation - duties imposed on employees of corporation under s.182(1) Corporations Act - liability of employees of corporation for fraudulent diversion of business opportunities of corporation under s.176A Crimes Act - principles discussed. - EXEMPLARY DAMAGES - Whether the law in Australia permits the award of exemplary damages for breach of fiduciary duty - principles discussed.
LEGISLATION CITED:	Corporations Act, 2001 - Pt.9.4B, s.180, s.182, s.184, s.185, s.1317GA, s.1317H, s.1317J Crimes Act, 1900 - s.176A
CASES CITED:	- AB v South West Water Services Ltd [1993] QB 507 - Aquaculture Corporation v New Zealand Green Mussel Co Ltd [1990] 3 NZLR 299 - ASC v AS Nominees Ltd (1995) 62 FCR 504 - Bailey v Namol Pty Ltd (1994) 53 FCR 102 - Barker v Ireland & Morris (1610-11) 21 ER 136 - Barker v Shepheard (1663) 21 ER at 136 - Baskervile v Guilliams (1545-46) 21 ER 153 - Broome v Cassell & Co Ltd [1972] AC 1027 - Broome v Cassell & Co Ltd [1971] 2 QB 354 - CAC v Bracht (1988) 14 ACLR 728 - Clegge v Waberton (1577-78) 21 ER 38 - Coloca v BP (Australia) Pty Ltd [1992] 2 VR 441 - Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373 - Dreyfus v Peruvian Guano Co (1889) 42 Ch.D 66 - Emblem v Myers (1860) 6 H&N 54 - Fay v Parker (1873) 16 Am.R 270 - Forkserv Pty Ltd v Pacchiarotta [2000] NSWSC 979 - Gray v Motor Accident Commission (1998) 196 CLR 1 - Green & Clara Pty Ltd v Bestobell Industries Pty Ltd (No.2) [1984] WAR 32 - Griffith v Jenkin (1579) 21 ER 40 - Hivac Ltd v Park Royal Scientific Instruments Ltd [1946] 1 Ch 169 - Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 - Hospitality Group Pty Ltd v Australian Rugby Union Ltd (2001) ATPR 43,235 - Kuddus v Chief Constable of Leicestershire [2001] 2 WLR 1789 - Lamb v. Cotogno (1987) 164 CLR 1 - Merest v Harvey (1814) 5 Taunt. 442 [128 ER 761] - Parker v McKenna (1874) LR 10 Ch.App. 96 - Peters v The Queen (1998) 192 CLR 493 - Phillips v Benson (1578-79) 21 ER 108 - Phipps v Boardman [1967] 2 AC 46 - R v Scott (1990) 20 NSWLR 72 - Re Imperial Hydropathic Hotel Co; Blackpool v - Hampson (1882) 23 ChD 1 - Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378 - Robb v Green [1895] 2 QB 315 - Rookes v Barnard [1964] AC 1129 - Sacheverell v Sacheverell (1621) 21 ER 116 - Smith v Streatfeild [1913] 3 KB 764 - Spies v The Queen (2000) 201 CLR 603 - The Amiable Nancy (1818) 3 Wheat. 546 - Timber Engineering Co Pty Ltd v Anderson [1980] 2 NSWLR 488 - Trend Management Ltd v Borg (1996) 40 NLWLR 500 - Uren v John Fairfax & Sons Pty Limited (1966) 117 CLR 118 - USSC v Hospital Products International Pty Ltd [1983] 2 NSWLR 157; (156 CLR 41) - Warman International Ltd v Dwyer (1995) 182 CLR 544 - Wessex Dairies Ltd v Green [1935] 2 KB 80 - Wilkes v Wood (1763) Lofft 1 [98 ER 489] - Willoughby Municipal Council v Halstead (1916) 22 CLR 352 - Woodcock v Woodcock (1576-77) 21 ER 34 - XL Petroleum (NSW) Pty Ltd v Caltex Oil (Australia) Pty Ltd (1985) 155 CLR 448 - UK Law Commission Report No.247 "Aggravated, Exemplary and Restitutionary Damages" (1997) - Dobbs "Handbook on the Law of Remedies: Damages, Equity, Restitution" West (1973) 212 note 99 - Mason & Carter "Restitution Law in Australia", para.1735 - Mayne & McGregor on Damages 12th Ed (1961) - Meagher, Gummow & Lehane "Equity: Doctrines and Remedies" 3rd Ed - Story on Equity (3rd Ed) para.697 - Spry in "Principles of Equitable Remedies" 3rd Ed note 12 - Winfield & Jolowicz on Tort 15th Ed (1998)
DECISION:	All Defendants liable to pay damages, equitable compensation or to account for profits; exemplary damages of $10,000 awarded against each of First and Second Defendants for breach of fiduciary duty.

Introduction

1    Were it not for one feature, this case would be unremarkable amongst the many of its type which come into the equity court: employees resolve to go into business for themselves in competition with their employer; they decide to give their new venture a head start by remaining in employment and diverting to themselves their employer’s business opportunities until they are economically secure enough to declare their hands, throw up their employment and compete openly. No one doubts that the employees have breached their contractual and fiduciary duties of loyalty to their employer and that they are liable for damages, an account of profits or equitable compensation. 2    What makes this case remarkable is that, in addition to the usual remedies, the Plaintiff seeks exemplary damages for the Defendants’ breaches of fiduciary duty. Whether exemplary damages can be awarded by a court of equity at all and whether they can be awarded for a breach of equitable duty in particular are issues which have caused great controversy in the common law world. Strangely, the question is undecided by authority in Australia. It must be decided in this case.

The issues

3    The Plaintiff (“Digital”) carries on the business of providing computer-based multi-media services to clients, including three-dimensional perspective services for developers, web design and video production. The First and Second Defendants (“Messrs Harris and Eden”) were its employees, the Third Defendant (“Juice”) is controlled by Mr Harris. 4    Digital sues Messrs Harris and Eden for breach of their contracts of employment, breach of fiduciary duty, breach of their duties under the Corporations Act, 2001 (“CA”), as officers or employees of Digital, misleading and deceptive conduct under the Fair Trading Act and the Trade Practices Act , breach of copyright and for delivery up of certain business records and equipment. Juice is sued as a knowing participant in the wrongful conduct of Messrs Harris and Eden. 5    All of these causes of action are said to flow from the circumstance that Messrs Harris and Eden, while still employees of Digital, established their own competing business, that of Juice, and carried out work for the benefit of that business which, Digital says, was diverted from it without its knowledge and consent. 6    Messrs Harris and Eden admit that Juice was incorporated prior to their leaving the employment of Digital; they admit that certain work was done for the benefit of Juice which came from clients or from opportunities which they were pursuing while employees of Digital. However, they say that the profits derived by Juice from that work were, in total, minimal. They deny wrongdoing in respect of other projects carried out by Juice which, the Plaintiff says, were diverted from it.

Background

7    The facts giving rise to the litigation may be stated quite briefly. 8    Digital was incorporated in 1996. Its controlling director is Mr Heil. By 1998 it was still a very small operation. It had one employee besides Mr Heil and sub-contracted out part of its work. It was run from Mr Heil’s apartment. Its annual turnover was in the order of $220,000. 9    In early 1998, Mr Harris, who worked for a competitor of Digital, approached Mr Heil and sought employment in marketing Digital’s services. By this time Mr Harris had had several years experience in marketing in this area. After some negotiations, Mr Heil agreed and Mr Harris commenced working for Digital in about April 1998. He signed an employment contract dated 24 April 1998, which contained an express term that Mr Harris not compete with Digital during his employment. 10    Mr Eden has been working in the information technology industry since 1991. He is experienced in web design and other multi-media technologies. He commenced working for Digital in July 1999 as a sub-contractor and in October 1999 he signed a contract of employment which, like Mr Harris’ contract, expressly prevented him from competing with Digital during his employment. 11    Both Mr Harris and Mr Eden occupied positions of responsibility within Digital. It is not in issue that, in addition to their contractual duty not to compete with Digital during their employment, they were subject to a fiduciary duty of loyalty. 12    By mid-1999 the business of Digital had grown to the point where it had some ten employees, including Messrs Heil, Harris and Eden, and had a turnover of some $600,000. 13    For various reasons which are not necessary to develop for the purpose of this judgment, Messrs Harris and Eden became dissatisfied with their employment. By some time in November 1999 they had decided to leave the employment of Digital and to start a business of their own. Needless to say, they did not divulge their intentions to Mr Heil. By December 1999 they were already doing work in secret for the benefit of that business, which they called Juice. 14    In an e-mail to Mr Eden on 14 January 2000 Mr Harris suggests that the timing for their departure from Digital’s employment would be “upon receipt of a large contract 20K or over” . He informs Mr Eden of developments with a firm called Ryan & Waldock, a prospective customer of Digital which Mr Harris had been pursuing in the course of his duties as Digital’s Marketing Manager. Mr Harris says: “Ryan & Waldock – secured the business today 10.5K – yayyeee – (large project to follow)” . The business had been secured, not for Digital, but for Juice. 15    Juice was incorporated on 27 January 2000, its directors including Messrs Harris and Eden. Mr Harris’ employment by Digital was terminated by Mr Heil on 4 February 2000 and Mr Eden resigned his employment on 5 February 2000. 16    Digital claims damages in respect of profits which it says it would have derived from ten projects subverted by Messrs Harris and Eden in breach of their duties. Alternatively, it claims equitable compensation or an accounting from the Defendants for the profits derived from those projects. The projects may be described briefly thus:

– the development of a web site for the 2000 Australian Jazz Festival;


– the development of a web site for a company referred to as Billbergia;

– the development of a web site for Ryan & Waldock Pty Ltd;

– the rebuilding of a web site for Marchese Partners;

– the development of a web site for Regional Health Care;

– the development of a web site for the liquor outlet divisions of Coles Myer, namely Vintage Cellars and Liquorland;

– the development of a web site for Leighton Properties;

– the development of a web site for Kor Image Systems;

– the development of a web site for Richardson & Wrench;

– the establishment of a venture to provide web sites for clubs, to be called Clubsnet.

17    As I have noted, Digital claims damages for breach of contract, equitable compensation or an accounting for breach of fiduciary duty, compensation for breach of statutory duty under the Corporations Act , damages or an accounting for breach of the Trade Practices Act and Fair Trading Act , and damages or an accounting for breach of copyright. It also claims exemplary damages in respect of the alleged breaches of fiduciary duty, exemplary damages not being available for breach of contract: Gray v Motor Accident Commission (1998) 196 CLR 1, at 6. As I have observed earlier, whether exemplary damages may be awarded for breach of fiduciary duty is still undecided in Australia: Bailey v Namol Pty Ltd (1994) 53 FCR 102, at 112-3. 18 I do not propose to deal separately with the claims for breach of the Trade Practices Act and the Fair Trading Act . Those claims stand or fall with the claims for breach of contract and for breach of fiduciary duty, all such claims being founded on alleged breaches of an employee’s duty of loyalty to his or her employer. Further, Counsel for Digital could not suggest how, in the particular circumstances of this case, the remedy for the claims founded on the Trade Practices Act and Fair Trading Act could be more extensive than the remedy for breach of contract or for breach of fiduciary duty. This is so because the way in which Digital calculates its compensable loss is the same for all causes of action, whether the remedy sought is damages or equitable compensation for loss of profits.

Content of the general law duty of loyalty

19    There is no dispute between the parties as to the principles applicable under the general law to the determination of the question whether the Defendants have breached any legal duty to Digital. Those principles are well established and may be referred to very briefly. 20    An employee has a duty to act in the interests of the employer with good faith and fidelity. That duty is implied in every contract of employment if it is not otherwise imposed by an express term. In addition, the duty is imposed upon every employee by the law of fiduciaries, the relationship of employer and employee being recognised as a paradigmatic fiduciary relationship. 21    The obligations imposed by the duty are not coterminous with the employee’s normal working hours: they govern all the activities of the employee, whenever undertaken, which are within the sphere of the employer’s business operations and which could materially affect the employer’s business interests. Whether a particular activity could materially affect the employer’s business interests is a question of fact and degree. 22    The duty of loyalty requires that an employee not place himself or herself in a position in which the employee’s own interest in a transaction within the sphere of the employer’s business operations conflicts with the employee’s duty to act solely in the employer’s interest in relation to that transaction. A fortiori, an employee may not take for himself or herself an opportunity within the sphere of the employee’s business operations without the employer’s fully informed consent. 23    When the employment ceases, the employee is free to compete with the employer unless subject to a valid contractual restraint on competition. The employee may take away and utilise the benefit of personal relationships built up with particular customers of the former employer and may solicit any customer whom the employee can recall without the aid of a list taken from the former employer and without deliberate memorisation of a customer list. The employee may not, however, use for his or her own benefit confidential information of the former employer, whether to solicit business from the former employer’s customers or to carry out work for such customers even if unsolicited. 24    The remedy for breach of the contractual duty of loyalty is damages. The remedy for breach of the fiduciary duty of loyalty is either an account of the profits derived by the employee from the breach or equitable compensation. The employer need not elect between these remedies until the time at which judgment is to be entered. 25    Where the employee who is in breach of the fiduciary duty of loyalty incorporates a company in order to take the benefits of the breach, then the company itself will be held to have participated in the breach so that it will be liable to the employer to the same extent as the employee. 26    These familiar principles are established by cases such as: Robb v Green [1895] 2 QB 315; Wessex Dairies Ltd v Green [1935] 2 KB 80; Hivac Ltd v Park Royal Scientific Instruments Ltd [1946] 1 Ch 169; Phipps v Boardman [1967] 2 AC 46; Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41, at 96; Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373, at 397; Warman International Ltd v Dwyer (1995) 182 CLR 544; ASC v AS Nominees Ltd (1995) 62 FCR 504, at 523; Timber Engineering Co Pty Ltd v Anderson [1980] 2 NSWLR 488, at 495; Forkserv Pty Ltd v Pacchiarotta [2000] NSWSC 979.

Content of the statutory duty of loyalty

27    For many years legislatures in Australia, like those in other common law countries, have imposed duties and obligations upon the relationship between a director or officer of a corporation and the corporation itself. As first, these statutory duties were imposed only upon company directors and managers and reflected in fairly straightforward terms the fiduciary principles which had been developed by the equity courts in the law of trusts and the law of agency: see e.g. Re Imperial Hydropathic Hotel Co; Blackpool v Hampson (1882) 23 ChD 1, at 12 per Bowen LJ; Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378, at 387 per Lord Russell of Killowen. 28 Over time, the escalating complexity of commercial activity has been seen to produce a corresponding increase in the diversity and ingenuity of commercial wrongdoing, generating in response ever more complex statutory regulation, encompassing not only directors and managers but also, in certain cases, employees as well. Nevertheless, these increasingly detailed statutory duties continue to reflect the law of fiduciaries as developed by the Courts of Equity. That is why in jurisdictions which continue to maintain separate specialist divisions in the Court structure, such as New South Wales and the United Kingdom, the administration of the corporations legislation is assigned to the equity courts rather than to the common law courts. 29 As I have noted, in the present case Digital has invoked not only the fiduciary duty of loyalty imposed on an employee but the statutory duty imposed by s.236(6) of the Corporations Law , now s.182(1) of the Corporations Act (“CA”). That sub-section provides:

“A director, secretary, other officer or employee of a corporation must not improperly use their position to:

a) gain an advantage for themselves or someone else; or

b) cause detriment to the corporation.”
30    As is obvious, this section does no more than repeat one aspect of the law of fiduciaries as it relates to directors, officers and employees of a corporation. Section 185 CA makes it clear that the statutory duties imposed by s.180 to s.184 CA do not subsume the general law duties of fiduciaries; each is in aid of the other. The critical difference between the parallel duties imposed under the Corporations Act and under the general law of fiduciaries is that, while breach of both duties affords the injured corporation a remedy in compensation, whether equitable compensation or an account of profits or compensation including an account of profits under s.1317H(1) and (2) CA, breach of the statutory duty imposes, in addition, liability for a pecuniary penalty recoverable not for the benefit of the injured corporation but for the benefit of the state: s.1317GA. 31    That Parliament has thought it necessary to impose a penalty for breach of what are, in essence, fiduciary obligations, is of great significance in determining whether a Court awarding a remedy for breach of fiduciary duty under the general law should also be able to award exemplary damages – a matter to which I return in paragraph 172. 32    For the sake of brevity, in the following sections of this judgment which deal with the opportunities of Digital said to have been subverted, I will not distinguish between breach of the fiduciary duty of loyalty under the general law and breach of the duty of loyalty imposed by the Corporations Act : the content of both duties is the same.

Credit

33    Before making the necessary findings of fact, I should record that where there is a contest I have not accepted the evidence of Messrs Harris and Eden unless it is reliably corroborated or is inherently probable.

34    Mr Harris has demonstrated a capacity for extravagant falsehood. When applying for employment with Digital, he provided a curriculum vitae in which, by falsifying his birth date, he gave himself five more years experience in the IT industry than he possessed. In addition, he awarded himself three fictitious University Degrees, one of them being a Masters Degree. Further, he deliberately misrepresented to Mr Heil during the course of his employment the true status of two projects, the Australian Jazz Festival project and the Ryan & Waldock project, in order to conceal the fact that he had diverted those projects for the benefit of Juice. 35    Mr Eden was prepared, quite deliberately, to divert work from Digital’s customers to Juice during his employment. He said that he did not believe that they were Digital customers. In relation to the work done for Billbergia and Ryan & Waldock, that was an obviously false answer. Further, after his employment ceased he returned to Digital’s office, ostensibly to collect personal belongings. But for intervention by Mr Heil, he would have taken away a CD containing computer files which were clearly the confidential property of Digital. 36    For these reasons, I have relied essentially upon the evidence of Mr Heil and on the non-expert witnesses called by the Defendants. The latter witnesses were independent of the Defendants. They had no apparent reason for giving evidence slanted in the Defendants’ favour and they were not shaken in their cross examinations. Mr Heil’s evidence was corroborated by contemporaneous documents and was inherently probable.

Australian Jazz Festival

37    In October 1999 Mr Harris became aware of an opportunity to create a web site for the 2000 Australian Jazz Festival. He was introduced to the opportunity by a friend, Ms Gardner, who was the director of the Festival. Ms Gardner was interested in a web site for the Festival but had no funds to pay a commercial fee for its design and development. She suggested to Mr Harris that even though there would be no payment for the work, developing the web site would be a good opportunity for the developer to get exposure in the web design market. 38    The opportunity was discussed with Mr Heil on a number of occasions. It was certainly discussed at a marketing meeting between Mr Heil and Mr Harris on 29 November 1999. 39    Mr Harris says that Mr Heil was not interested in doing the web site for no fee. Mr Heil says that, on the contrary, he was interested in doing the web site because the jazz festival had “some great blue chip sponsors and this would be just the sort of opportunity that would help us get into the on-line markets” . 40    It is not necessary to resolve this dispute. Messrs Harris and Eden admit that, without informing Mr Heil, they worked on the creation of the web site with the assistance of Ms Hollie Bell (an independent contractor) in or about late January 2000 and that Juice completed the work for the Festival free of charge. Juice also created the web site for the 2001 Australian Jazz Festival. 41    During the course of final submissions, Counsel for Messrs Harris and Eden conceded that they had committed breaches of their contractual and fiduciary duties of loyalty to Digital in respect of the work done by Juice for the 2000 Australian Jazz Festival. Counsel submitted, however, that Digital had suffered no compensable loss as Juice received no fee for the work and the value of the opportunity for exposure of Juice in the marketplace equated with Juice’s cost of producing the web site. This submission is, in fact, supported by Digital’s expert accountant, Mr Horder, who values at nil the gross profit which would have been generated from the Australian Jazz Festival project. 42    I accept that the Australian Jazz Festival project was not one for which a fee would be paid to Digital and that it would have produced no profit for Digital.

Billbergia Pty Ltd

43    The project known as “Billbergia” came to the attention of Digital in about August 1998. It involved the creation of a web site for a real estate development at Lane Cove. 44    In December 1999 Messrs Harris and Eden began to work on the Billbergia project for the benefit of Juice, without telling Mr Heil. Eventually, Juice invoiced Billbergia for this work in a total of $6,250. 45    Counsel for Messrs Harris and Eden conceded that they had breached their contractual and fiduciary duties of loyalty to Digital in carrying out the Billbergia project for the benefit of Juice. However, the Defendants disputed the amount of equitable compensation claimed by Digital for this breach of duty.

Ryan & Waldock

46    Ryan & Waldock became a client of Digital in about September 1998. Without telling Mr Heil, Messrs HaHarris and Eden performed work on the design and construction of a web site for Ryan & Waldock with the assistance of Ms Bell. Juice was subsequently paid a total $8,359 for this work. 47    Again, Counsel for Messrs Harris and Eden conceded that they had breached their contractual and fiduciary duties of loyalty to Digital in carrying out this work for the benefit of Juice. However, the Defendants disputed the amount of equitable compensation claimed by Digital for this breach of duty.

Marchese Partners

48    Marchese Partners became a client of Digital in mid to late 1998. In December 1999 Messrs Harris and Eden carried out work for Marchese Partners relating to the design of Christmas cards. Juice was paid $300 for this work. Messrs Harris and Eden concede that this work was carried out by them in breach of their contractual and fiduciary duties of loyalty and that Juice is accountable to Digital for the sum of $300. 49    In 2000 Juice carried out the rebuilding of a web site for which it was paid a total of $2,905. Digital claims that this opportunity was diverted from it and that it would have charged a total of $16,560 for the project, resulting in a gross profit of $7,350. It seeks this amount by way of equitable compensation. Alternatively, it seeks an accounting for the profit actually derived by Juice from the project. 50    Mr Harris says that after he left Digital’s employment he was approached by Mr Marchese, who was a personal friend, to rebuild the web site that had developed by Digital. Mr Marchese has not been called to support this evidence. As I have said, I am not prepared to accept Mr Harris’ uncorroborated evidence. 51    However, Digital has adduced no evidence from which even an inference can properly be drawn that the rebuilding of the Marchese Partners’ web site by Juice was the result of an opportunity diverted from Digital by Messrs Harris and Eden during their employment. The Juice invoices for the Marchese date from April 2000 onwards. They are not inconsistent with Mr Harris’ evidence. There is no evidence that any confidential information of Digital was used in the rebuilding of the Marchese Partners’ web site. 52    In the absence of any contractual restraint upon competition after cessation of employment, I am not satisfied that Messrs Harris and Eden committed any wrongful act in securing the Marchese Partners’ project in 2000 for the benefit of Juice.

Regional Health Care

53    By January 2000 Mr Harris was pursuing on behalf of Digital an opportunity for the design and development of a web site for a company identified only as Henry Schein. The project was called “Regional Health Care”. Mr Harris had already had one meeting with the client and was proposing further meetings. 54    Without telling Mr Heil, Messrs Harris and Eden carried out work for Henry Schein in developing the web site in January and February 2000, before leaving their employment. Juice subsequently rendered four invoices to Henry Schein. The Defendants concede that the first and second invoices, rendered on 18 January and 13 February, relate to work done by Messrs Harris and Eden in breach of their contractual and fiduciary duties to Digital. The Defendants concede that they are liable for the amounts of these invoices, totalling $3,500. 55    The third and fourth invoices were rendered by Juice on 14 and 29 February 2000 in respect of work done on a CD-ROM Interactive Development project. The Defendants do not concede liability to account for the profits of this work. 56    The first of the Juice invoices for the CD-ROM work was rendered on the day following the rendering of the second invoice for the web site development for which the Defendants have admitted liability to account. In my opinion, the inference is overwhelming that this work arose out of and was directly related to the opportunity for the web site development which was diverted from Digital by Messrs Harris and Eden in breach of their duties of loyalty. This work was, I am satisfied, wrongfully diverted from Digital so that the Defendants are liable to account for the whole of the sums received by Juice from Henry Schein, i.e. $6,998.

Liquorland/Vintage Cellars

57    In November 1999 Mr Harris was endeavouring on behalf of Digital to interest Coles Myer in the development of a web site for Liquorland and Vintage Cellars, which are businesses carried on by Coles Myer. Mr Harris had ‘cold called’ Coles Myer and suggested that it might be interested in developing such a web site. 58    In December 1999 or January 2000 Ms Champion of Coles Myer had several meetings with Mr Harris to discuss the concept. Ms Champion has given evidence as to what occurred. She says that her discussions with Mr Harris at these meetings were in very general terms and that she always understood that Mr Harris was representing Digital. However, in early 2000 Mr Harris told her that he was leaving Digital and wanted to set up his own company. By that time Ms Champion had not made any commitment for work to be done by Digital and, indeed, she says that she was talking to a number of other web design consultants at that time about the possibility of a web site. Ms Champion was quite insistent that Mr Harris never attempted to solicit the Liquorland/Vintage Cellars project on behalf of Juice before he left Digital’s employment. 59    I accept that Coles Myer, through Ms Champion, had made no commitment with any web design consultant for a web site by the time that Messrs Harris and Eden left Digital’s employment. I accept that Mr Harris did not attempt to subvert for the benefit of Juice the opportunity for the Liquorland/Vintage Cellars project while he was still in the employment of Digital. 60    I accept Ms Champion’s evidence that later in February 2000 she decided to proceed with the web site and particularly wanted Mr Harris to do the project because she had built up a good relationship with him. She rang Digital to speak to Mr Harris but, on being told that he was no longer working there, she declined to discuss the project with Digital, because it was with Mr Harris himself that she wanted to deal. 61    It appears from a letter from Mr Harris to Ms Champion dated 15 February 2000 that by that time Coles Myer had agreed that work be done on the Liquorland/ Vintage Cellars web site by Juice. I am satisfied by the evidence of Ms Champion that the agreement was reached after Messrs Harris and Eden had left the employment of Digital and that Ms Champion’s reason for entering into that agreement was the confidence that she had in Mr Harris. 62    There is no evidence that, in securing this agreement from Coles Myer, Mr Harris made use of confidential information of Digital. As Ms Champion said, Coles Myer’s requirements for a web site were being discussed with a number of other web design consultants at this time. There is nothing to suggest that Digital had information about Coles Myer’s requirements which was not available to all of the other consultants. 63    Digital concedes that it is not entitled to rely upon a covenant in restraint of competition which appears in the employment contracts of Messrs Harris and Eden. That is so because the covenant contained a condition precedent which was never fulfilled. Accordingly, after 5 February 2000 Messrs Harris and Eden were both free to compete with Digital for the Liquorland/Vintage Cellars project, as long as they did not use confidential information of Digital in doing so. As I have said, there is no evidence that any confidential information of Digital was used. All that Mr Harris took with him from his employment which enabled him to secure the Liquorland/Vintage Cellars project for Juice was the personal relationship that he had built up with Ms Champion. This relationship he was free to use for the benefit of Juice. 64    Accordingly, I am not satisfied that Messrs Harris and Eden committed any wrongful act in securing the Liquorland/Vintage Cellars project for the benefit of Juice.

Leighton Properties Pty Limited

65    During 1999 Digital had created a web site for Leighton Properties Pty Ltd (“Leighton”). On 18 November 1999 Mr Harris submitted a proposal on behalf of Digital to Leighton to update that web site. The proposal appears to be in rather standard terms. The progress of the Leighton’s proposal was discussed in marketing meetings between Mr Heil and Mr Harris in January 2000.

66    On 27 January 2000 a proposal entitled “Interactive Multi-media and Visualisation – Marketing Production” was sent by Mr Harris to Leighton. The proposal, which is stated to be on behalf of Digital, is clearly the result of detailed discussions between Mr Harris and Leighton. It contains specific suggestions for the work to be done and quotes a total project fee of $44,000. 67    Mr Rayleigh of Leighton has given evidence on behalf of the Defendants. He says that he had a business relationship with Mr Harris prior to Mr Harris commencing employment with Digital and that that was how Leighton came to be a client of Digital in 1999. 68    Mr Rayleigh says that in late 1999 or early 2000 Mr Harris told him that he was leaving Digital’s employment. Mr Rayleigh was emphatic that Mr Harris did not solicit business from him on behalf of Juice before Mr Harris’ departure from Digital. He says that he only became aware of the existence of Juice after Mr Harris had left Digital. According to Mr Rayleigh, some time in February 2000 he received an e-mail from Mr Heil informing him that Mr Harris had left Digital’s employment. Subsequently, Mr Rayleigh rang and asked Mr Harris to come and see him with a view to giving him a price for certain web design services. 69    Mr Rayleigh says that Mr Harris suggested that it might be cheaper for Leighton to stay with Digital. Mr Rayleigh insisted that he did not want the Leighton’s work to remain with Digital because he was looking for new ideas for the web site. 70    Juice subsequently carried out work for Leighton on a screen saver, a web site and an intranet, for which it has been paid $9,350.50. This work does not appear to be the implementation of the detailed proposal provided to Leighton in the document sent on 27 January 2000. 71    I accept Mr Rayleigh’s evidence that Mr Harris did not solicit work for the benefit of Juice prior to his departure from Digital. I accept that it was Mr Rayleigh who approached Mr Harris later in February 2000 to do work of a general type for Leighton and that he did so because of his long-standing relationship with Mr Harris and because he was looking for new ideas. 72    There is insufficient evidence that, in carrying out the work for Leighton, Juice used confidential information of Digital. The images used in the web design were mostly supplied by Leighton itself. Mr Heil asserts that a computer file for the Leighton web design was created by Mr Eden before his departure from Digital and was transferred by him to Juice. Mr Heil says that that computer file was used by Mr Eden for carrying out the work to update the Leighton’s web site. Mr Heil does not have the expertise in computer programming and web design which Mr Eden has. Mr Heil’s evidence is largely conjecture and I am not satisfied that I can safely rely upon it. 73    In the absence of any contractual restraint upon competition after cessation of employment, I am not satisfied that Messrs Harris and Eden committed any wrongful act in securing and in carrying out the Leighton work for the benefit of Juice.

Kor Image Systems

74    In about September 1999 Kor Image Systems (“Kor”) engaged Digital to develop a web site. Mr Eden was primarily responsible for doing the work. Mr Harris reported to Mr Heil on the progress of the work in September and October.

75    The principal of Kor, Ms Conlon, has given evidence that at some point in time – probably late November 1999 – she decided to call a halt to the work which Digital was doing on the web site. There were two reasons for her decision, she says. The first was that she had become unclear in her own mind about how she wanted the site to look. The second was that, although she had been happy with the initial work on the site done by Mr Eden, she was not so happy with the later work done by another employee of Digital. By the time that she asked Mr Harris to cease work on the site she had paid Digital a considerable sum. 76    Ms Conlon says that some time in February 2000 she felt that her ideas about the web site had clarified and that she wanted to proceed. She called Mr Harris on his mobile phone and told him that she was ready to go ahead. Mr Harris informed her that he and Mr Eden had left Digital. He suggested that she contact Digital to finish the job. Ms Conlon says that she preferred that Messrs Harris and Eden finish the job: she liked Mr Eden’s work and was “really interested in getting together with Anthony and proceeding with the original creative vision” . 77    Ms Conlon says that she would not have engaged Digital to finish developing the site because she no longer had confidence that it could do the work satisfactorily without Mr Eden. 78    There is no evidence that Messrs Harris or Eden diverted the Kor project for the benefit of Juice during their employment by Digital. Ms Conlon was free to engage Juice to complete the project if she wished. In the absence of a contractual restraint on competition after cessation of employment, Messrs Harris and Eden and Juice were free to accept that engagement. 79    I am not satisfied that Juice used any confidential information or copyright material of Digital in taking over and completing the project on the Kor site. There is a dispute as to whether Mr Eden inserted in the Kor web site produced by Juice a puzzle which he is said to have designed while employed by Digital. Ms Conlon says that the puzzle was inserted in the web site after Mr Eden had left Digital’s employment. Whether Mr Eden had devised the puzzle design while employed at Digital is a matter of conjecture. In any event, it appears that the puzzle design is a very minor element in the web site. 80    Accordingly, I am not satisfied that Messrs Harris and Eden committed any wrongful act in securing the Kor project for the benefit of Juice.

Richardson & Wrench

81    The evidence relating to this project is extremely scant. It seems that Digital was engaged to produce a web site for Richardson & Wrench Double Bay. Mr Harris says that Richardson & Wrench paid $14,000 to Digital for this work but that no work was actually done by Digital on the site. 82    By two invoices dated 24 February 2000 Juice charged Richardson & Wrench a total of $5,765, in part payment for work done in producing a web site. Mr Harris says that after he left Digital he was telephoned by an employee of Richardson & Wrench who expressed dissatisfaction with Digital and requested that Juice produce the web site. Mr Harris says that Juice will suffer a loss for doing this work because Richardson & Wrench will deduct from its fee the sum of $14,000 which it has paid to Digital. 83    As I have said, I do not regard the uncorroborated evidence of Mr Harris as reliable. No one from Richardson & Wrench was called by the Defendants to support his evidence and I do not accept it. In an e-mail to Mr Eden on 14 January 2000 referring to a number of projects which Mr Harris was pursuing for the benefit of Juice, Mr Harris said: “I will be following up more Richardson & Wrench agencies soon …” . I infer that Mr Harris did pursue the Richardson & Wrench Double Bay agency in January in accordance with this promise and that the work invoiced to Richardson & Wrench by Juice in February 2000 was the result of those efforts. 84    I am satisfied that the Richardson & Wrench project was wrongfully diverted from Digital so that the Defendants are liable to account for the whole of the sums received by Juice, namely $5,765.

Clubsnet

85    In about August 1999 Mr Harris informed Mr Heil of a possible project which came to be called Clubsnet. The concept had been developed by a Ms Buchanan, who was Mr Harris’ accountant. It involved creating a portal specifically for registered clubs and having the clubs install computers and access terminals to allow entry to that portal. The portal would have a number of services and links relevant to club members, such as on-line education, on-line banking, travel bookings and shopping.

86    Messrs Heil, Harris and Eden became involved with discussions concerning this project over the following months. Eventually, according to Ms Buchanan, she proposed a joint venture for the project, a 25% share of which was to be taken by Messrs Heil, Harris and Eden. 87    Ms Buchanan, who has given evidence, was adamant that she made it clear to Mr Heil from the start that she would not contemplate an arrangement in which she would be paying a fee to Digital for any work done by its staff; her proposal was that all concerned in the project should share both in the risks and the profit. 88    The Clubsnet project came to nothing. For a variety of reasons, principally due to inability to obtain substantial funding, the concept simply died in late November or early December 1999. There were subsequent sporadic expressions of interest in reviving the project between some of those concerned but these, likewise, came to nothing. 89    Accordingly, there can be no suggestion that Messrs Harris and Eden took any benefit from the Clubsnet project for Juice. Mr Heil says, however, that Digital staff had done considerable work on the project for which Digital was entitled to be paid. Ms Buchanan has refused to pay Digital’s invoice for that work. Digital says that Messrs Harris and Eden are responsible, in some way unexplained, for its loss in doing work on the Clubsnet project. 90    I do not need to decide whether participation in the Clubsnet project was for the benefit of Digital or for the benefit of a partnership between Messrs Heil, Harris and Eden. Even if participation was for the benefit of Digital, there is no evidence that Messrs Harris and Eden subverted that project or were responsible for Digital’s participation coming to an end. If anything, it was disagreement between Ms Buchanan and Mr Heil which led Ms Buchanan to decide that she did not wish Digital or Mr Heil to be involved any further. 91    In relation to the Clubsnet project, Digital’s loss, if any, is not attributable to any wrongdoing of Messrs Harris and Eden.

Misuse of confidential information

92    In November 1999 Digital prepared a very detailed document called “On-line Advertising Strategy”. It sets out a plan for approaching advertising agencies with the intent of marketing Digital as a content producer for interactive agency material. The document is some 41 pages in length and contains a great deal of specific information about particular potential clients and about the market generally. It was prepared by Digital staff, principally Messrs Heil and Bassi and a Ms Cassim. Mr Heil has estimated the cost of producing the document at $11,000, based on the fact that it took more than three weeks and some 240 hours to produce. That estimate seems reasonable. It is beyond question that the “On-line Advertising Strategy” document was confidential to Digital.

93    On 24 January 2000 Mr Harris e-mailed the Advertising Strategy document to Juice’s e-mail address. He did so without Mr Heil’s knowledge and consent, in clear breach of his duty of loyalty and in breach of his duty not to misuse his employer’s confidential information. 94    On 5 February 2000, after Mr Harris had left Digital’s employment, Mr Heil investigated the contents of his computer and discovered that Mr Harris had e-mailed the Advertising Strategy document to Juice. Mr Heil believed that the whole of the benefit of that document had been lost to Digital: he regarded it as a ‘blueprint’, a business plan for 2000, which had now been given away to Juice, a direct competitor. He believed that it was not worthwhile for Digital any longer to pursue the strategy which had been developed in the document. 95    In view of the intensely competitive nature of the industry in which Digital operates and in view of the importance which Mr Harris appeared to attach to the document in securing it for Juice, this was a reasonable attitude on Mr Heil’s part. The consequence was that Digital’s time, effort and expense in producing the document were completely wasted. 96    I am satisfied that the loss of confidentiality in the Advertising Strategy document caused by Mr Harris’ breach of his contractual and fiduciary duty of loyalty and by his misuse of Digital’s confidential information has caused damage to Digital for which it is entitled to compensation in the amount of $11,000, that being the estimated cost of producing the document. 97    There is no evidence that Mr Eden participated in Mr Harris’ wrongful acts in sending the document to Juice. There is no evidence that Mr Eden or Juice later made use of the document in such a way as to render them liable to Digital as knowing participants in Mr Harris’ wrongful conduct. Accordingly, liability for Digital’s loss arising from breach of confidentiality in the Advertising Strategy document rests upon Mr Harris alone.

Quantum of compensation

98    It will be seen that breaches of contract and fiduciary duty on the part of Messrs Harris and Eden have been found, or conceded, in respect of the following projects: – Australian Jazz Festival, which would have generated no profit for Digital;

– Billbergia in respect of work invoiced by Juice in the sum of $6,250;

– Ryan & Waldock in respect of work invoiced by Juice in the sum of $8,359;

– Marchese Partners in respect of work invoiced by Juice in the sum of $300;

– Regional Health Care in respect of work invoiced by Juice in the sum of $6,998

– Richardson & Wrench in respect of work invoiced by Juice in the sum of $5,765.

99    In addition, Digital has suffered compensable loss in the sum of $11,000 in respect of Mr Harris’ breach of duty and misuse of confidential information in disclosing the Advertising Strategy document to Juice. 100    Digital’s expert accountant, Mr Horder, has calculated the compensation which Digital claims on alternative bases. The first is the value of opportunities lost to Digital, calculated by reference to the estimated profit before tax expected to have been earned by Digital from the projects diverted by the Defendants. This basis of valuation focuses on the damage caused to Digital by the wrongful conduct of the Defendants. 101    The alternative basis of valuation is focused upon the amounts and benefits received by the Defendants from the projects diverted to Juice; in other words: an accounting for the profits derived by Juice from the breaches of fiduciary duty committed by Messrs Harris and Eden. 102    A further loss is claimed by way of equitable compensation. It is said that if Digital had earned the profits from the diverted projects which Juice in fact carried out, Digital would have been able to reduce its bank overdraft and would have saved interest on that overdraft of between $15,800 and $18,300. 103    Mr Bulley, in his able and thorough submissions on behalf of Digital, properly concedes that the valuation of the opportunities lost to Digital is a necessarily imprecise exercise and that Digital’s proffered values are no more than broad estimates. 104    Mr Horder explained in cross examination that, although he could verify from Digital’s records the appropriate figures to arrive at a profit margin for work undertaken by Digital, he was not able to verify in any way Mr Heil’s estimate of the gross value of a diverted project, even by reference to Juice’s records for that project. This was because there was no way of knowing what the content of the project would have been had it been carried out by Digital, as compared with the content of the project which was in fact carried out by Juice. 105    In these circumstances, there is no reliable basis for the estimates of the values of the projects to Digital, as given by Mr Heil. The only evidence which provides any assistance either as to the content of the projects, if they had been carried out by Digital, and as to their value is the amounts actually charged by Juice. In other words, there is no better way of giving equitable compensation to Digital for the value of the opportunities lost than to take the gross amounts charged by Juice for the project diverted to it and to apply the profit margins that Digital would have realised had it carried out the work which Juice carried out. 106    Calculation of the equitable compensation to which Digital is entitled in respect of the projects diverted to Juice commences with the amounts charged by Juice for the Billbergia project, the Ryan & Waldock project, the Richardson & Wrench project, the Marchese project to the extent of $300, and the Regional Health Care project to the extent of $6,998. To these amounts Digital’s profit margin of 41.13%, is applied. Both Mr Horder and the Defendants’ expert, Mr Tolcher, accept that this is the appropriate profit margin rate for Digital. By this calculation the gross profits of the projects are derived. 107    The next step in the calculation produces a divergence in the approach taken by the parties’ experts: they disagree whether tax should be deducted from the gross profits. Mr Tolcher has deducted tax from gross profits whereas Mr Horder has not. Mr Tolcher says that good accounting practice and the accounting standard for the filing of income tax returns require that tax be treated as an expense, rather than as an appropriation of profit. Mr Horder is of the view that it is too difficult to say whether tax would have been payable by Digital in respect of the profits from the diverted projects without knowing all relevant information as to its taxation position – he did not have all such information. In those circumstances, I do not think that it is proper to assume that Digital would not have been liable for tax on any profits generated from the diverted projects. I agree with Mr Tolcher’s approach. Accordingly, a provision for tax at the rate of 34% should be deducted from the gross profits of the projects diverted from Digital. 108    As to the loss claimed for interest which Digital would have saved by reducing its bank overdraft, the evidence shows that in the second half of 1999 and in early 2000 Digital was experiencing considerable liquidity shortage. It was also trying to expand its business. Its overdraft was kept close to its limit of $195,000. The projects which were wrongfully diverted from Digital by Messrs Harris and Eden did not produce substantial profits for Juice. In view of Digital’s liquidity difficulties and its obvious need for the working capital provided by its overdraft, it is highly improbable that the rather small profits from the diverted projects would have reduced Digital’s overdraft to any significant degree for any significant length of time. Accordingly, I do not think that it is proper to allow compensation for overdraft interest which Digital says it would have saved but for the wrongful conduct of the Defendants. 109    As to Digital’s claims for an accounting of the profits received by Juice from the diverted projects, the only projects involved are Billbergia, Ryan & Waldock, Richardson & Wrench, Marchese Partners for $300, and Regional Health Care. The only evidence as to the gross profit derived by Juice from these projects is summarised in Annexure 4 of Mr Tolcher’s second witness statement. The gross profit for Billbergia is $4,758.75, for Ryan & Waldock $7,603, for Richardson & Wrench $1,707.89, and for Regional Health Care $5,808.40. A further calculation will have to be made for the Marchese Partners’ project. Provision for tax must be deducted from the total of gross profits. 110    Messrs Harris and Eden and Juice will be liable to pay equitable compensation or to give an accounting in respect of the projects diverted from Digital in accordance with the above reasons. Digital may elect which remedy it seeks prior to the entry of judgment. In addition, Mr Harris is liable to pay equitable compensation to Digital in the amount of $11,000 for his breach of duty and for his misuse of confidential information in respect of the Advertising Strategy document. 111    Finally, Digital claims that Mr Harris has detained and converted to his own use certain of its property, namely, a Kodak Dc 323 digital camera and a Dell Dimension V350 personal computer with monitor, keyboard and mouse. Mr Harris does not dispute that these items were originally the property of Digital, but he says that Mr Heil on behalf of Digital made a gift of them to him. The only evidence on the issue is the uncorroborated evidence of Messrs Heil and Harris. Mr Harris bears the onus of proving that the items were gifts to him. For the reasons I have given, I cannot accept the evidence of Mr Harris as reliable. Further, the evidence suggests that from the beginning of Mr Harris’ employment his relationship with Mr Heil was not so amicable as to make it likely that Mr Heil would present him with gifts. I prefer the evidence of Mr Heil on this issue. Mr Harris will be ordered to deliver up the property and to pay damages for their conversion, if any, since 6 March 2000, when their return was demanded. The damages, if any, are likely to be minimal. If the parties cannot agree on the amount of damages, I will refer the matter under Pt 72 of the Rules. The cost of the reference would, I imagine, vastly exceed the amount of damages involved.

Whether exemplary damages appropriate

112    I defer for the moment the novel question whether a Court in New South Wales can award exemplary damages for breach of fiduciary duty. There is no point in considering that question if exemplary damages would not be appropriate in the circumstances of this case, even if they were available as a matter of law. 113    The distinction between compensatory damages and exemplary, or punitive, damages is clear. Compensatory damages are given to place the plaintiff in as good a position, so far as money can do it, as if the wrong had not occurred. Exemplary damages are in quite a different category and serve quite different purposes: to punish the wrongdoer for reprehensible conduct; to deter not only the wrongdoer but others of like mind in the community from similar conduct; to ameliorate the victim’s sense of grievance and thereby to abate the urge for self help or violent retribution, to the danger of the public peace: see e.g. Uren v John Fairfax & Sons Pty Limited (1966) 117 CLR 118, at 149 per Windeyer J; Lamb v Cotogno (1987) 164 CLR 1, at 9. 114 That exemplary damages are awarded by civil courts in appropriate cases partly to vindicate the feelings of a victim has been recognised at least since the eighteenth century: see, for example, Wilkes v Wood (1763) Lofft 1, at 18 [98 ER 489, at 498]; Merest v Harvey (1814) 5 Taunt. 442 per Gibbs CJ and Heath J [128 ER 761]; The Amiable Nancy (1818) 3 Wheat. 546, 558 per Story J. Pollock CB had no hesitation in calling such damages “vindictive” ( Emblem v Myers (1860) 6 H&N 54, at 58), an epithet repeated in many cases: see e.g. Dreyfus v Peruvian Guano Co (1889) 42 Ch.D 66, at 77; Smith v Streatfeild [1913] 3 KB 764, at 769; and Willoughby Municipal Council v Halstead (1916) 22 CLR 352, at 358. 115 Exemplary damages are awarded where the defendant’s conduct is “wanton, as where it discloses fraud, malice, violence, cruelty, insolence or the like, or, as it is sometimes put, where [the defendant] acts in contumelious disregard of the plaintiff’s rights” : Mayne & McGregor on Damages 12th Ed (1961) p.196, cited with approval in Lamb v Cotogno at 8; see also Hospitality Group Pty Ltd v Australian Rugby Union Ltd (2001) ATPR 43,235, at 43,264. 116 Fraud is always included as a factor attracting exemplary damages because it is the hallmark of fraud that the wrongdoer acts consciously, deliberately and dishonestly in disregard of the rights and interests of others. 117 I am of the opinion that if the law permits an award of exemplary damages for breach of fiduciary duty then this is a case in which such an award should be made. I have reached this conclusion for the following reasons. 118 First, the wrongdoing of Messrs Harris and Eden was calculated both to produce profit for themselves and to cause harm to a vulnerable employer. Both Messrs Harris and Eden occupied positions of trust and responsibility within Digital. Mr Harris was entirely responsible for marketing and Mr Eden was responsible for web design, an expanding area of the company’s activities. Digital was a small company, vulnerable to the abuse of the positions of trust occupied by Messrs Harris and Eden, as both must have realised. Diversion of opportunities producing even relatively modest profits was capable of doing great harm to Digital at a critical stage in its early life. 119 Second, their wrongdoing was consciously dishonest. This is evident from the fact that not only did they not seek Mr Heil’s permission to take business opportunities for themselves, not only did they keep Juice and its operations secret from Mr Heil, but Mr Harris lied to Mr Heil on a number of occasions in reporting to him the position of certain projects. In January 2000 Mr Harris told Mr Heil that there was no time for Digital to do anything for the Australian Jazz Festival web site for the 2000 jazz festival. Mr Eden and Mr Harris were at that very time working on the site for the benefit of Juice. On 18 January 2000 Mr Harris told Mr Heil that Ryan & Waldock had decided not to go ahead with the web site at that stage, whereas on the previous day Mr Harris had sent an e-mail to Mr Eden confirming that he had secured the Ryan & Waldock business for Juice. 120 Third, the subversion of Digital’s business opportunities for the benefit of Juice was not haphazard or serendipitous – it was carefully planned. On 16 December 1999 Mr Harris sent an e-mail to Mr Eden the subject of which was “cash flow” . In this e-mail Mr Harris gave details of “projects on the go” , obviously for the benefit of Juice. He referred to three projects, involving Billbergia, Marchese Partners and another project, the three projects having a “total project value of $14,000” . 121    Messrs Harris and Eden had clearly conceived a plan of lying in wait, as it were, in the employment of Digital, clandestinely and systematically diverting business opportunities from Digital to Juice until Juice was self-supporting. In an e-mail to Mr Eden on 14 January 2000, Mr Harris said

“Okay – Here is the squeeze on the JUICE today.

Timing for CCH (i.e. Mr Harris) & @NT (Mr Eden) to depart – upon receipt of large contract 20K or over …”

A number of possible projects or potential opportunities were referred to, including Ryan & Waldock, in respect of which project Mr Harris said:
“RYAN & WALDOCK – Secured the business today 10.5K – Yayyeee. (large project to follow)”

After referring to further possible projects Mr Harris concluded:
“Generally things are looking good at the moment with quite a few good projects about to come off.”

The “large contract 20K or over” and the “good prospects about to come off” were, of course, all opportunities which Messrs Harris and Eden, as employees of Digital, were obliged to secure for their employer.

122    Mr Eden responded to this e-mail on 17 January 2000. He said:
“Timing for Ant (Mr Eden) to leave is still dependent on written agreements. I will need to see all paperwork first. Has Juice been incorporated and if so wouldn’t I need to sign. Can we have this sorted by end of week.”

He then refers to a number of potential projects for Juice – again, projects which he should have been pursuing for Digital.

123    Fourth, it is evident from the tone of Mr Harris’ reference to securing the business opportunity from Ryan & Waldock that he and Mr Eden were both exulting in their success at having diverted that project from Digital. One may infer that they were equally delighted with the other successes which they achieved at their employer’s expense. Their exultation demonstrates a contumelious disregard for Digital’s rights. 124    Fifth, the inference is very strong that the efforts of Messrs Harris and Eden to divert opportunities from Digital to Juice were even more successful than is revealed by the evidence which Digital has been able to uncover. On 16 February 2000, less than two weeks after his departure from Digital, Mr Eden sent to a friend an e-mail which stated:
“I have started a new company ‘Juice-d media’. I have hooked up with a sales guy and we are getting shit load of good contracts. Enough to keep everything paid for for the first twelve months at least. Having a few problems with my old company ‘Digital Pulse’ and it looks like I will have to take official action. Don’t know why they are playing the game. The stupid bastards have no idea what’s in store for them if they proceed. They owe me a few $K and if they don’t sort me out I go them for everything.”
125    It is highly improbable that between 5 February and 16 February 2000 Messrs Harris and Eden could have secured enough projects to warrant Mr Eden’s confidence that Juice’s operating expenses were “paid for for the first twelve months at least” by finding and developing opportunities which arose only after they had left Digital. It is highly probable that after 5 February they developed and secured opportunities which they had been pursuing while employed by Digital – opportunities which they should have secured for the benefit of Digital but which Digital knew nothing about, either then or now, because Messrs Harris and Eden kept those opportunities to themselves. 126    Sixth, to further Juice’s interests Messrs Harris and Eden were prepared to misappropriate confidential information of Digital. Mr Harris e-mailed the Advertising Strategy document to Juice. Mr Eden sent the computer files for Billbergia and Ryan & Waldock to Ms Bell and was only prevented by Mr Heil from removing a CD from Digital’s office which also contained confidential information of Digital. 127    Seventh, it is obvious that Messrs Harris and Eden spent a great deal of the time for which they were being paid by Digital in attending to the affairs of Juice, as evidenced by the times and dates appearing on the e-mails passing between them concerning Juice’s affairs. They used Digital’s own e-mail and office facilities during business hours to subvert Digital’s business, under Mr Heil’s nose. They had procured Henry Schein to sign a formal agreement dated 2 February 2000 on the letterhead of Juice, which contained specifications and Conditions of Engagement. The document shows that by that time Juice had set up its offices at Cammeray, with facsimile, telephone and e-mail facilities and had prepared stationery, including standard contractual terms of engagement. All of this work for the establishment of Juice as a trading business was completed before Messrs Harris and Eden left Digital’s employment. 128    All of these circumstances, taken together, demonstrate deliberate wrongdoing for profit, in contumelious disregard of Digital’s rights, deserving of special condemnation and punishment. To call a spade a spade, what Messrs Harris and Eden did was to defraud their employer of its valuable business opportunities and its confidential information. In Peters v The Queen (1998) 192 CLR 493, the Court held that “to defraud” meant to deprive someone of something which is his or to which he would or might, but for the fraud, be entitled, by dishonest means. Toohey and Gaudron JJ said, at 508:
“Ordinarily, however, fraud involves the intentional creation of a situation in which one person deprives another of money or property or puts the money or property of that other person at risk or prejudicially affects that person in relation to ‘some lawful right, interest, opportunity or advantage ’, knowing that he or she has no right to deprive that person of that money or property or to prejudice his or her interests.” [Emphasis added.]

McHugh J said (at 529) that “dishonest means” included concealing facts which a defendant had a duty to disclose or engaging in conduct in which the defendant had no right to engage. These passages were approved in Spies v The Queen (2000) 201 CLR 603, at 630-631. By concealing facts which they had a duty to disclose, namely, the business opportunities which should have been Digital’s, and by engaging in conduct in which they had no right to engage, namely, taking those opportunities for Juice in breach of their fiduciary and contractual duties of loyalty, Messrs Harris and Eden deprived Digital of its lawful rights, opportunities or advantages to derive business from the diverted projects. Both in a criminal court and in an equity court, the conduct of Messrs Harris and Eden bears the stigma of fraud.

129 As employees of a corporation, the actions of Messrs Harris and Eden were in clear breach of s.232(6) Corporations Law (now s.182(1) CA), so that if the Australian Securities & Investments Commission had applied for a pecuniary penalty order under s.1317J(1) CA they would be liable to a penalty under s.1317G(1) of up to $200,000. 130 If they were officers of Digital, then, for the reasons given in paragraph 128, they would be guilty of an offence under s.176A Crimes Act, 1900 . That section provides:
“Whosoever, being a director, officer or member of any body corporate or public company, cheats or defrauds, or does or omits to do any act with intent to cheat or defraud, the body corporate or company … shall be liable to imprisonment for ten years.”
131    Of course, Messrs Harris and Eden say that they were not “officers” of Digital because they did not participate in the management or administration of the company: R v Scott (1990) 20 NSWLR 72; CAC v Bracht (1988) 14 ACLR 728, at 734. Mr Heil disputes that assertion. However, it is not necessary to determine the issue for the purposes of this case. What is important is that the type of conduct engaged in by Messrs Harris and Eden – fraudulent diversion of opportunity by a person in a fiduciary relationship with a corporation – attracts the disapprobation of the community to such a degree that it is visited with substantial sanctions both under the Corporations Act and under the criminal law. 132    It is often said that the award of exemplary damages is “unusual and rare”: Coloca v BP (Australia) Pty Ltd [1992] 2 VR 441, at 448; Trend Management Ltd v Borg (1996) 40 NLWLR 500, at 509. But that is so because in the general run of cases it is unusual and rare to find that a defendant has been guilty of conscious wrongdoing in contumelious disregard of the plaintiff’s rights. It is in that sense alone that the remedy is exceptional: Gray v Motor Accident Commission at 9. Where the Court encounters a case of conscious wrongdoing in contumelious disregard of the plaintiff’s rights it must not shrink from expressing the community’s disapprobation of the wrongdoer’s conduct “in an emphatic and public way” : Gray at 34, per Kirby J. The Court must award exemplary damages to punish the wrongdoer, to deter others of like mind from similar behaviour, and to vindicate the plaintiff’s outraged sense of injustice. 133 If exemplary damages are to fulfil their threefold purpose, they must not merely irritate, they must sting. It is the gravity and character of the Defendants’ conduct which guides the Court’s discretion as to the proper amount to award by way of exemplary damages. That is why there is “no necessary proportionality” between the amount awarded as compensation for the damage suffered by the plaintiff and the amount of exemplary damages awarded against the defendant: XL Petroleum (NSW) Pty Ltd v Caltex Oil (Australia) Pty Ltd (1985) 155 CLR 448, at 471; Lamb v Cotogno at 9. A minimal amount of damage inflicted on a plaintiff may, if the wrongdoing was outrageous, nevertheless require heavy exemplary damages to be visited upon the defendant. In Merest v Harvey the jury gave exemplary damages of five hundred pounds for knocking a man’s hat off. And the need for the deterrence of exemplary damages is especially strong where the defendant’s wrongdoing is calculated to profit. As Lord Diplock said in Broome v Cassell & Co Ltd [1972] AC 1027, at 1130:
“To restrict the damages recoverable to the actual gain made by the defendant if it exceeded the loss caused to the plaintiff, would leave a defendant contemplating an unlawful act with the certainty that he had nothing to lose to balance against the chance that the plaintiff might never sue him or, if he did, might fail in the hazards of litigation. It is only if there is a prospect that the damages may exceed the defendant’s gain that the social purpose of this category is achieved – to teach a wrongdoer that tort does not pay.”
134    In this case, although the damage inflicted on the Plaintiff is relatively modest in monetary terms, the character of the Defendants’ dishonest conduct strikes at the heart of commercial integrity, upon which the business community, and ultimately the community as a whole, depends. Employers should feel able to entrust their business confidences to their employees with security. Employees should know that deliberate and dishonest breach of their fiduciary duties of loyalty, calculated to produce profit for themselves, will not go unpunished and that, at the end of the day, breach of those duties does not pay. 135    There is no doubt that the wrongdoing of Messrs Harris and Eden caused Mr Heil great distress. He says that when he discovered that his trusted employees had lied to him and had diverted business opportunities to Juice, he felt betrayed. The toll on his business and personal life was such that he considered closing Digital down after five years of hard work. I accept that evidence. Mr Heil’s sense of injustice and outrage at the wrongdoing of Messrs Harris and Eden requires vindication by punishment of the wrongdoers. 136    An important discretionary consideration in the award of exemplary damages has been whether wrongdoing deserving of punishment would go unpunished but for an award of exemplary damages. If the wrongdoer has received a substantial punishment at the hands of the criminal law, exemplary damages cannot be awarded in a subsequent proceeding for what is essentially the same conduct, since the demands of justice for punishment and deterrence will have already been satisfied. Exemplary damages in such a case would have the effect of a double punishment: Gray at 14, paras 42, 43. On the other hand, it will be a factor weighing in favour of an award of exemplary damages that wrongdoing deserving of punishment will otherwise go unpunished: UK Law Commission Report No.247 “Aggravated, Exemplary and Restitutionary Damages” (1997) para.1.17; Gray at 14 para.39, 15 para.48. 137 In the present case, as I have said, the wrongdoing of Messrs Harris and Eden would render them liable to punishment by a pecuniary penalty order if ASIC brought such proceedings under s.1317J(1) CA. There is no suggestion in the evidence that such proceedings by ASIC have been, or will be, brought. Neither is there any suggestion of prosecutions under s.176A Crimes Act . The mere possibility that such proceedings will be brought is not, in my opinion, sufficient reason to refrain from awarding exemplary damages in a proper case: Gray at 15 para.48. If such proceedings are later brought, any penalties imposed by the Court will doubtless take account of punishment already suffered by the Defendants as a result of these proceedings. 138 For these reasons, I consider that, if the law so permits, exemplary damages for breach of fiduciary duty should be awarded against Messrs Harris and Eden. Juice, as the creature of Messrs Harris and Eden, was merely the recipient of the benefits of their wrongdoing and, accordingly, it will be liable to pay equitable compensation or to account for the profits which it received. But Juice has no mind independent of the minds of Messrs Harris and Eden. There is no point in punishing a corporation “to teach it a lesson” if its mind is that of a controller who has already been sufficiently punished in exemplary damages. An award of exemplary damages against Juice would merely inflict further punishment indirectly upon Messrs Harris and Eden. The award of exemplary damages against them directly and personally should represent the full measure of the Court’s disapprobation of their conduct. Further, the punishment of Juice, as distinct from Messrs Harris and Eden personally, may prejudice the interests of Juice’s creditors. Accordingly, I do not think that it is appropriate to award exemplary damages against Juice. 139 In fixing the amount of exemplary damages to be awarded against Messrs Harris and Eden I should have regard to their means and circumstances. Exemplary damages in a sum which might bankrupt a person of modest means might be a trifle to a person of wealth, so as to afford no punishment or deterrence. On the other hand, it would be wrong to award even a modest sum of exemplary damages if the effect of such an award would be to punish the defendant with disproportionate severity having regard to his or her slender means. 140 The evidence does not reveal a great deal about the personal circumstances of Messrs Harris and Eden. They are in their late 20s or early 30s, they have obviously worked for a considerable time in the computer industry, and they have established an apparently successful business in Juice. There is nothing to suggest that they are of slender means but the financial accounts of Juice do not suggest that they are wealthy. I think that an award of exemplary damages in the sum of $10,000 against each of them would inflict a punishment which, while severe, would not be ruinous. That is the amount which I propose to award.


Changing attitudes to exemplary damages

141    The question whether a court should be entitled to punish a defendant in any civil proceeding by the award of exemplary damages has, for more than two centuries, fuelled incessant and excoriating disputation amongst the jurisprudes. Speaking of “the pernicious doctrine” of exemplary damages, “a doctrine so repugnant to social sympathy that it would be monstrous if it were not, instead, ridiculous” , Foster J of the New Hampshire Supreme Court concluded a 69 page diatribe thus:
“It was once said, ‘if thy right eye offend thee, pluck it out; …and if thy right hand offend thee, cut it off’. Wherefor, not reluctantly should we apply the knife to the deformity, concerning which every true member of the sound and healthy body of the law may well exclaim, ‘I have no need of thee’. As to so much of the verdict as relates to the exemplary or vindictive damages, it must be set aside …” : Fay v Parker (1873) 16 Am.R 270, at 339.
142    The controversy and the passion have by no means been confined to the United States. As observed by Lord Hailsham LC in Broome at 1070, the law in the United Kingdom as to exemplary damages prior to the decision in Rookes v Barnard ([1964] AC 1129) was chaotic. One may respectfully query whether their Lordships in Rookes left the law in better case than they found it. 143    The Court of Appeal in Broome v Cassell & Co Ltd ([1971] 2 QB 354) thought that Rookes was not binding because it was inconsistent with previous House of Lords authority and had been decided per incuriam. The House of Lords in Broome , while rebuking the Court of Appeal for its presumption, nevertheless found it very difficult to say whether or not Rookes had decided that the award of exemplary damages was confined strictly to those causes of action in which they had been awarded before 1964. Their Lordships said different things about what they thought Lord Devlin really meant to say in Rookes . 144    What their Lordships in Broome really meant to say, in turn, has caused difficulty to several eminent English Judges: see e.g. AB v South West Water Services Ltd [1993] QB 507, at 530 per Sir Thomas Bingham MR; Kuddus v Chief Constable of Leicestershire [2001] 2 WLR 1789, at 1793 per Lord Slynn of Hadley, 1801 per Lord Mackay of Clashfern, 1804-1805 per Lord Nicholls of Birkenhead, 1812 per Lord Hutton. 145 It is quite clear that some of their Lordships in Rookes and in Broome found distasteful the notion that exemplary, or punitive, damages could be awarded by a civil court in a civil proceeding. Lord Devlin regarded exemplary damages as a confusion between the civil and criminal functions of the law and, therefore, as an anomaly: at 1221. Lord Reid’s views as to exemplary damages were no less strong than those of Foster J in Fay v Parker . In Broome , his Lordship said that he regarded exemplary damages as “palm tree justice” : at 1087. Lord Hailsham expressed the hope that the speeches in Broome might bring Commonwealth courts and perhaps even United States Courts into line with Rookes : Broome at 1083. 146 Ironically, what has happened is that the tide of opinion in the United Kingdom has begun to turn so that the House of Lords has now gone some distance towards bringing itself into line with the Courts of the Commonwealth and the United States. 147 In Kuddus v Chief Constable of Leistershire the House of Lords has overruled AB v South West Water Services Ltd and has declined to follow Broome in so far as those cases hold that Rookes established a rule that an award of exemplary damages can be made only in causes of action in which exemplary damages were awarded before 1964. 148    Lord Slynn of Hadley said, at 1796 para.22: “To adopt such a rigid rule seems to me to limit the future development of the law even within the restrictive categories adopted by Lord Devlin in a way which is contrary to the normal practice of the Courts …” . 149    Lord Slynn was of the view that what Lord Devlin really meant in Rookes was that exemplary damages could be awarded in two categories of cases, namely, cases of oppressive, arbitrary or unconstitutional action by servants of the Government and cases where the defendant’s conduct had been calculated to make a profit which may exceed the compensation payable to the plaintiff. According to his Lordship, Rookes and Broome establish that “it is the features of the behaviour rather than the cause of action which must be looked at in order to decide” whether the facts bring the case into one or other of these two categories: at 1797 paras.26-27. 150    One may pause here to observe that Lord Slynn’s view that it is categories of conduct, not causes of action, which determine entitlement to exemplary damages leads to the consequence that the Court, in deciding whether exemplary damages should be awarded in any particular case, should pay no attention to whether the plaintiff sues on a cause of action at law or a cause of action in equity. So, for example, if conduct bringing the case into Lord Devlin’s second category – that is, conduct by the defendant calculated to make a profit which may well exceed the compensation payable to the plaintiff – arises from the defendant’s breach of a fiduciary duty to the plaintiff, as in the present case, then Lord Slynn, it seems, would hold that exemplary damages might be awarded. 151    As the law in Australia presently stands, Lord Slynn’s view is open for acceptance, save only for this qualification: if the cause of action is breach of contract, exemplary damages are not available: Gray at 6. 152 Lord Mackay of Clashfern was of the same view as Lord Slynn as to whether the particular cause of action sued upon was determinative of entitlement to exemplary damages. His Lordship said at 1800 para.38:

“In the forefront of the defendant’s argument is the proposition that the power to award exemplary damages in tort depends upon the tort upon which the action is based and that, while a number of torts carry with them the power in the court to award exemplary damages in cases falling within these torts, for example false imprisonment, assault and battery, trespass to land or goods, there are others, for example, negligence, public nuisance and deceit, which do not. On a reading of Lord Devlin’s speech in Rookes v Barnard which was concerned not to set out a code but to state the principles upon which in the light of the previous authorities the power to award exemplary damages should be based I find no trace of the idea that the precise form of the cause of action should determine the matter, although that position had been clearly put in argument. Rather what Lord Devlin was indicating were situations in fact which would justify the court having power to award exemplary damages rather than determining this matter by reference to the cause of action. There is no mention whatever in Lord Devlin’s speech of a cause of action test and surely when he was setting out principles if that was part of the essential qualification for the existence of the power he would have mentioned it. Indeed one of the difficulties of apply the pre-1964 decisions is to provide rational grounds for distinguishing between torts in which the power was and was not available.”
153    Again, one may pause to observe that his Lordship’s remarks are made in the context of a case in which the cause of action pleaded was in tort, namely, misfeasance in public office. So also in Rookes and in Broome the causes of action were in tort. It may be said that Lord Devlin’s second category – cases where the wrongful conduct was calculated to produce a profit which might be in excess of compensation – should therefore be understood as confined to cases where the cause of action is pleaded in tort. But there is no logical reason to acknowledge the power of the court to award exemplary damages for wrongful conduct calculated to produce profit in cases where the cause of action is pleaded in tort, for example deceit, but to deny that power when the same conduct is pleaded as a breach of an equitable duty. Such a limitation “commits the law to an irrational position in which the result depends not on principle but upon the accidents of litigation” : Winfield & Jolowicz on Tort 15th Ed (1998) p.746. 154    Lord Nicholls of Birkenhead agreed with the essential proposition advanced by Lords Slynn and Mackay, that the cause of action pleaded was not determinative of whether exemplary damages could be awarded. In this regard his Lordship said at 1807 para.68:
“For the purposes of the present appeal it is sufficient, first, to express the view that the House should now depart from its decision in Broome v Cassel & Co Ltd …, in so far as that decision confirmed the continuing existence of what has subsequently been described as the ‘cause of action’ condition and, secondly, to note that the essence of the conduct constituting the court’s discretionary jurisdiction to award exemplary damages is conduct which was an outrageous disregard of the plaintiff’s rights.”
155    Lord Nicholls emphasised the rationale for exemplary damages thus:

“From time to time cases do arise where awards of compensatory damages are perceived as inadequate to achieve a just result between the parties. The nature of the defendant’s conduct calls for a further response from the courts. On occasion conscious wrongdoing by a defendant is so outrageous, his disregard of the plaintiff’s rights so contumelious, that something more is needed to show that the law will not tolerate such behaviour. Without an award of exemplary damages, justice will not have been done.

…

Stated in its broadest form, the relevant principle is tolerably clear: the availability of exemplary damages should be coextensive with its rationale. As already indicated, the underlying rationale lies in the sense of outrage which a defendant’s conduct sometimes evokes, a sense which is not always assuaged fully by a compensatory award of damages, even when the damages are increased to reflect emotional distress.” : at 1806-1807 paras.63, 65.
156    If, as Lord Nicholls suggests, the availability of exemplary damages should be coextensive with its rationale, it is difficult to see why the remedy should be confined to causes of action in tort. Can it seriously be suggested that if my solicitor grossly deceives me in the course of his professional dealing with me and decamps with my life’s savings, the law regards my sense of outrage as demonstrably greater if I sue him in a common law court for deceit than if I sue him in an equity court for breach of fiduciary duty? Is there any rational basis for believing the policy of the law in such a case will permit the common law court to vindicate my outrage by an award of exemplary damages but will prevent the equity court from doing so? My answer to both these questions would be in the negative. 157    To return to Kuddus : Lord Hutton was of the same view as Lords Slynn, Mackay and Nicholls, i.e., that rightly interpreted, Rookes laid down a “category test” not a “cause of action test”: at 1815 para.89. His Lordship shared Lord Nicholls’ view that exemplary damages served a valuable purpose in the law: at 1809 para.75, 1811 para.79. 158    On the other hand, Lord Scott of Foscote was strongly of the opinion that there was no longer any need for exemplary damages in the civil law: at 1819 paras.109, 110. His Lordship accepted that he was in the minority in this respect and expressed regret that removal of the “cause of action test” would expand the cases in which exemplary damages could be claimed: at 1821 paras.120, 121, 122. His Lordship nevertheless recognised that the “cause of action test” was not founded upon principle and had serious practical difficulties. His preferred solution was to remove the “cause of action test” but expressly declare that exemplary damages would not be available in specified causes of action: at 1821 para.122. 159    The controversies as to whether exemplary damages can be awarded in any civil case at all and as to what was decided in Rookes and in Broome have bypassed Australia. Rookes was rejected by the High Court in Uren v John Fairfax & Sons Pty Ltd (affirmed on appeal by the Privy Council [1969] 1 AC 590) and exemplary damages have frequently been awarded in various causes of action in tort. It is fair to say, however, that the traditional view in Australia is that exemplary damages are available only in tort or where expressly permitted by statute and that they cannot be awarded by a court of equity. There is no decided case upon that point, however, and it is that point which I must now consider.

Whether exemplary damages available in equity

160    In Bailey v Namol at 112, the Full Federal Court (Burchett, Gummow and O’Loughlin JJ) observed that there were authorities in Canada and New Zealand which suggested that as a general proposition exemplary damages could be awarded for breach of fiduciary duty. The court found it unnecessary to decide the point but remarked that “there is much to be said for the contrary view … that ‘equity and penalty are strangers’.” : at 112-113. 161    Extra-curial comment on the question is not wanting. The learned authors of Meagher, Gummow & Lehane “Equity: Doctrines and Remedies” 3rd Ed, para.259, castigate the majority of the New Zealand Court of Appeal in Aquaculture Corporation v New Zealand Green Mussel Co Ltd ([1990] 3 NZLR 299) for deciding that exemplary damages may be awarded for breach of confidence, citing the case as an illustration of the errors produced by the fallacy that equity and the common law have been fused by the Judicature Acts. The authors quote with approval the statement of Somers J in that case that “equity and penalty are strangers” . 162    On the other hand, Dr I.C.F. Spry in “Principles of Equitable Remedies” (3rd Ed note 12) says that there is no reason in principle why a court of equity should not award exemplary damages. 163    The delphic remark of Somers J. in Aquaculture that “equity and penalty are strangers” was not explained by his Honour nor was authority cited in support. The remark seems to be an evocation of a view, long held by some, that the concept of punishment was always foreign to the nature of the equity jurisdiction and that equity never gave a plaintiff more than that to which he or she was strictly entitled: D.B. Dobbs “Handbook on the Law of Remedies: Damages, Equity, Restitution” West (1973) 212 note 99. 164    However, the concept of punishment was by no means always foreign to the Chancery courts. Numerous decisions in the 16th and 17th centuries may be found which show that Chancery judges exercised a jurisdiction encompassing wrongs such as forgery and perjury, and that defendants were sometimes punished with imprisonment, fines, the pillory and irons: see, for example, in 21 ER the following cases reported by Tothill and by Cary: Barker v Ireland & Morris at 136 (1610-11); Baskervile v Guilliams at 153 (1545-46); Phillips v Benson at 108 (1578-79); Sacheverell v Sacheverell 116 (1621); Barker v Shepheard at 136 (1663); Woodcock v Woodcock 34 (1576-77); Clegge v Waberton at 38 (1577-78); Griffith v Jenkin at 40 (1579). 165    But even in modern times it cannot be right to say that equity never gives a plaintiff more than his or her strict entitlement and never exacts a punishment from a defendant. When a fiduciary has derived profit by reason of his or her breach of duty, an account of profits is awarded in favour of the plaintiff. Allowances for the work and skill of the fiduciary in producing the profits are given in the accounting. If there has been no actual dishonesty on the part of the fiduciary in deriving the profit, the allowances are said to be on a liberal scale, but if there has been dishonesty then the Court, in its discretion, may stipulate that the scale of allowances will not be liberal and will reflect the degree of the fiduciary’s dishonesty: see e.g. Phipps v Boardman at 104, 112; Green & Clara Pty Ltd v Bestobell Industries Pty Ltd (No.2) [1984] WAR 32; Bailey v Namol at 112. A grossly dishonest fiduciary may even be deprived of his or her allowances altogether: see, e.g., Mason & Carter Restitution Law in Australia , para.1735. 166    In USSC v Hospital Products International Pty Ltd [1983] 2 NSWLR 157 (reversed on appeal (156 CLR 41) without affecting the present point), the Court of Appeal would have deprived the dishonest fiduciary defendant of any allowance at all for its skill and effort in building the business over which the plaintiff claimed a constructive trust. The Court, at 242, adopted as applicable to the determination of what allowance should be made to a defaulting fiduciary the following passage from Story on Equity (3rd Ed) para.697:
“On the other hand, where the party seeking relief is the sole guilty party, or where he has participated equally and deliberately in the fraud; or where the agreement which he seeks to set aside, is founded in illegality, immorality, or base and unconscionable conduct on his own part; in such cases courts of equity will leave him to the consequences of his own iniquity; and will decline to assist him to escape from the toils which he has studiously prepared to entangle others, or whereby he has sought to violate with impunity the best interests and morals of social life. And if acts of this sort have been deliberately done under circumstances in which innocence has been betrayed, or confidence seduced, or falsehood or concealment systematically practised, a fortiori, courts of equity could not, without straining the administration of justice, interfere to save the party from the just results of his own gross misconduct, when the failure of success in the scheme would manifestly be the sole cause of his praying relief.”
167    Again, it is difficult to suggest that there is no element of deterrence underlying the often-cited statement of James LJ in Parker v McKenna ( (1874) LR 10 Ch.App. 96, at 124 ) that the rule that a fiduciary cannot make any profit without the knowledge of his principal is “an inflexible rule, and must be applied inexorably by this Court, which is not entitled, in my judgment, to receive evidence, or suggestion, or argument as to whether the principal did or did not suffer any injury in fact by reason of the dealing of the agent; for the safety of mankind requires that no agent shall be able to put his principal to the danger of such an inquiry as that.” That statement recognises that an honest fiduciary who has, by unwitting breach of duty, made a profit that the principal would never have obtained by his or her own efforts must, nevertheless, account to the principal in order that the standards of integrity required of fiduciaries may be kept up and fiduciaries may not succumb to the temptation to stray. 168    In proposing that exemplary damages be available for breach of fiduciary duty, breach of confidence and procuring or assisting in a breach of fiduciary duty, the United Kingdom Law Commission, in its Report No.247 “Aggravated, Exemplary and Restitutionary Damages” said at para.5.55:
“But despite the absence of English authorities for awarding exemplary damages for an equitable wrong, we can ultimately see no reason of principle or practicality for excluding equitable wrongs from any rational statutory expansion of the law of exemplary damages. We consider it unsatisfactory to perpetuate the historical divide between common law and equity, unless there is a very good reason to do so. Professor Waddams argues,
… the availability of exemplary damages should not be determined by classification of the wrong as a common law tort or as a breach of an equitable obligation …
Indeed, we can see good reason for allowing punitive damages to be recovered against, for example, the dishonest trustee who acts in breach of his fiduciary duty or the person who dishonestly abuses another’s confidence. Thus if, as we propose, punitive damages are awardable in respect of the (common law) tort of deceit, it would be anomalous if analogously wrongful conduct could not also give rise to an award, just because the cause of action originated in equity. Moreover, ‘deterrence’ is an aim that is not alien to courts of equity. For example it is a clear aim of the commonplace equitable remedy of an account of profits awarded for breach of fiduciary duty or breach of confidence.”
169    In my opinion, the present position in Australia can be summarised thus. There is no authority which decides that exemplary damages cannot, as a matter of principle, be given by a court of equity for breach of fiduciary duty. Accordingly, to hold that wrongful conduct which would attract an award of exemplary damages in an action in tort cannot attract exemplary damages if the cause of action is equitable creates an anomaly which, in this country, is not justifiable either by precedent or by principle. 170    Consistency in the law requires that the availability of exemplary damages should be coextensive with its rationale. Where wrongful and reprehensible conduct calls for the manifest disapprobation of the community, where a punishment is called for to deter the wrongdoer and others of like mind from similar conduct and where something more than compensation is felt necessary to ameliorate the plaintiff’s sense of outrage, then it should make no difference in the availability of exemplary damages that the court to which the plaintiff comes is a court of equity rather than a court of common law. 171    There is no need to appeal to any perceived fusion between the principles of equity and those of the common law in order to invest the equity court with jurisdiction to award exemplary damages. Such jurisdiction is already inherent in the court. It is, and always has been, a court of conscience; at least until the early seventeenth century, it frequently inflicted punishments in aid of its ordinary and traditional jurisdiction. Since then the exercise of the jurisdiction to punish has been muted, manifesting itself in the manner in which dishonest fiduciaries, as distinct from honest fiduciaries, will be called to account for profits and in the higher rate of interest imposed upon dishonest defaulting trustees, as distinct from honest defaulting trustees. The jurisdiction of the equity court to punish and deter may have been muted for many years but it is by no means dead. 172    Finally, as has been pointed out by the High Court, it is no longer appropriate to think in terms of a “sharp cleavage” between the criminal law and the civil law. The equity court, which at least in NSW administers the Corporations Act , is empowered to inflict punishment under the civil penalty provisions on those who breach duties under the Corporations Act which in former times were cognisable only in equity: Pt.9.4B Corporations Act . Likewise, criminal courts are increasingly invested with jurisdiction to award compensation to victims of crime, a jurisdiction formerly exercised only by civil courts: see Gray at 7-8. Whatever the views of Chancery lawyers in former times might have been as to the place of punishment and deterrence in the jurisdiction of equity, the rationale for depriving the equity court of such a jurisdiction has now disappeared. As the New Zealand Court of Appeal said in Aquaculture at 301:
“The practicality of the matter is that in the circumstances of the dealings between the parties the law imposes a duty of confidence. For its breach a full range of remedies should be available as appropriate, no matter whether they originated in common law, equity or statute.”
173    For the above reasons, I am of the opinion that the law in Australia permits the award of exemplary damages for breach of fiduciary duty. As I have said, this is a case in which such an award is required.


Conclusion

174    Because Digital will need to make an election as to whether it will receive equitable compensation or an account of profits and because calculation of the relevant amounts with interest will be required, I will stand these proceedings over for a time to enable the parties to bring in short minutes of order which reflect these reasons. 175    The short minutes will provide that:


– Digital is entitled to equitable compensation in respect of the projects diverted to Juice, calculated in accordance with these reasons;

– in the alternative, Digital is entitled to an account of profits from the Defendants in respect of the projects diverted to Juice, calculated in accordance with these reasons;

– in addition, Digital is entitled to equitable compensation from Mr Harris in the sum of $11,000 in respect of misappropriated confidential information;

– in addition, there will be an award of exemplary damages in the sum of $10,000 against each of Messrs Harris and Eden.

176    When the matter is returned, I will hear argument as to costs.
– oOo –

Last Modified: 02/11/2002