Flanagan Sailmakers v Walker

[2002] NSWSC 1125

CITATION:	Flanagan Sailmakers v Walker [2002] NSWSC 1125
CURRENT JURISDICTION:	Equity
FILE NUMBER(S):	SC 2153/2001
HEARING DATE(S):	18 and 19 September 2002
JUDGMENT DATE:	27 November 2002
PARTIES :	C & KA Flanagan Sailmakers Pty Ltd v Brian Walker, Thomas Forde and Architectural Sails Pty Ltd
JUDGMENT OF:	Acting Justice Macready at 1

COUNSEL :	Mr D Flaherty for plaintiff Mr P Bolster for second defendant
SOLICITORS:	Derek Davelaar for plaintiff Cornwells Solicitors and Advocates for 2nd defendant
CATCHWORDS:	Equity - Fiduciary obligations - whether misuse of confidential information - whether breach of implied term of good faith and fidelity - whether breach of fiduciary duties by employees - extension beyond period of employment - damages for breach of fiduciary duty - causation - breach of sections 181, 182, 183 of Corporations Act.
CASES CITED:	Colour Control Centre Pty Ltd & Anor v TY and Others (1996) AILR 5-058) Canadian Aero Service Ltd v O'Malley (1973) 40 DLR (3d) 371 at 382 Mordecai v Mordecai (1988) 12 NSWLR 58 at 65, Lord Corporation Pty Ltd v Green (1991) 22 NSWLR 532 at 543-544 Pacifica Shipping Co Ltd v Anderson (1985) 2 NZCLC 96-040 Green and Clara Pty Ltd v Bestobell Industries Pty Ltd (1982) WAR 1. In Warman International Ltd v Dwyer (1995) 182 CLR 544 at 210 O’Halloran v RT Thomas & Family P/L (1998) 45 NSWLR 262 London Loan and Savings Co v Brickenden [1934] 3 DLR 465
DECISION:	Paragraph 77

- 1 -

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

Acting Justice Macready

Wednesday 27 November 2002

2153/2001 C & KA Flanagan Sailmakers Pty Ltd v Brian Walker, Thomas Forde and Architectural Sails (Australasia) Pty Ltd.

JUDGMENT

1 His Honour: This is a case in which the plaintiff sues to recover in respect of a lost business opportunity. The plaintiff had tendered for the design and supply of a fabric membrane shade structure for installation at Cumberland College campus of the University of Sydney. The first defendant was the plaintiff's sales and marketing manager. The second defendant was also an employee of the plaintiff his position, being described as a project manager and design draughtsman. The third defendant was a company that was awarded a contract for the erection of the shade shelter at the Cumberland College campus of the University of Sydney. The plaintiff’s tender was made while the first and second defendants were still employed by the plaintiff. The first and second defendants became directors of the third defendant shortly after its incorporation for the purposes of completing the work the subject of the plaintiff’s tender.

2 Counsel at the hearing before me represented the second defendant. There was no appearance at the hearing on behalf of the first defendant or the third defendant. These defendants were still represented by the solicitor who also acted for the second defendant and thus had notice of the hearing of the proceedings.

The background facts

3 During the 1990s the plaintiff was incorporated and carried on business as a sail maker in a number of different ways. A principal of the company was Mr Craig Flanagan. Mr Flanagan and his wife owned the company. The company's business was the design and installation of high-tension membrane structures or shade shelters using the name “Shade to Order". The business was conducted from a site in the Newcastle area. At the time of the relevant tenders the plaintiff company had six or seven employees. Three or four were people who were employed erecting the shade structures. The other employees were Mr Flanagan, the first and second defendants.

4 The second defendant had for several years prior to 2000 been employed by the plaintiff as a contract draughtsman to draw the plans for the supporting steel for the shade structures. On 12 January the second defendant commenced employment with the plaintiff. He was employed as a draughtsman and also as a project manager who was to supervise installation of the steel supports for the shade shelters on-site.

5 On 20 March 2000 the first defendant was employed as the company’s sales and marketing manager. His duties included submitting quotations for various jobs on behalf of the plaintiff.

6 In September 2000 the first defendant and a Mr Darmody met a Mr Ashwin from the Cumberland College in order to inspect the area of the proposed contract. Photographs were apparently taken of the site. On 23 October 2000 a quotation was submitted by the plaintiff for the job in the sum of $105,000. The quotation was accompanied by a series of 3D drawings illustrating a design, which provided for a single Polyedge sail covering the courtyard. Mr Craig Flanagan produced the 3D drawings for the purposes of that quotation by using a computer program called “FABDES" which he had purchased some years previously.

7 On 26 October the first and second defendant travelled to Sydney together. According the be second defendant this was for the purpose of attending at the site of another job that had been completed at Randwick racecourse.

8 On 13 November 2000 another company Shade Structures Pacific Pty Ltd gave a budget estimate for the job to Mr Ashwin in a range of $90,000 to $120,000. This company was another of the major companies operating in the area that had the ability to do a job of the size required by the University. The plaintiff also had the relevant expertise and ability to complete a job of this size.

9 On 16 November 2000 the first defendant visited the site and spoke to Mr Ashwin. He asked Mr Ashwin whether he would be interested in receiving a proposal from “us” on the job. He then handed to Mr Ashwin a letter of 16 November 2000, which was addressed to him and came from a firm “Architectural Sails Australasia”. It included a quotation to do the job for $90,000 plus GST and was signed by a person Wayne Dunne who is described as “director Architectural Sails Australasia. Mr Ashwin responded saying "$90,000 won't do it. I have already got an established company who have quoted that price." Thereupon Mr Walker the first defendant made a phone call and then offered to do the job for $80,000. The letter of 16 November was given back to him with the new price substituted in handwriting at $80,000.

10 On 27 November 2000 the first defendant Mr Walker resigned his employment with the plaintiff. On 28 November Mr Ashwin accepted the quotation of Architectural Sails Australasia and sent a purchase order to that organisation.

11 On 29 November 2000 the first defendant organised the purchase of a shelf company to be known as Architectural Sails Australasia Pty Ltd. A company under this name was incorporated on 30 November 2000 and is the third defendant in these proceedings. The evidence is not clear as to who were the directors of the company on its incorporation. Probably it included the first and second defendants, a Mr Scott Hepburn and Mr Wayne Dunne. It seems clear that although the second defendant had supplied his place and date of birth for the purposes of obtaining incorporation of the company he did not consent to be a director until 20 December 2000. It appears that Mr Hepburn and Mr Dunne resigned on that date apparently with the collapse of their involvement in the third defendant. This occurred apparently because of the failure of their other business interests.

12 On 30 November 2000 Shade Structures Pacific Pty Ltd gave a firm quotation to do the job at $120,890. Also on that day a facsimile was sent on the letterhead that is the same as that used for the 16 November quotation under the name of Mr Forde, the second defendant.

13 On or about 1 December the second defendant resigned his employment with the plaintiff. From about 4 December 2000 until about May 2001 the three defendants performed work on the Cumberland College site. The job was completed and ultimately the purchase price of $80,000 paid. The third defendant carried out several other jobs during 2001 and then ceased business. The second defendant who had continued on the business of the third defendant during the year is now unemployed.

The plaintiff's claims.

14 In its statement of claim the plaintiff based its case upon a number of different matters. These included the misuse of confidential information, breach of contract of employment, breach of fiduciary relationship resulting from their employment and breaches of sections 181, 182 and 183 of the Corporations Act.

The second defendant’s role

15 The second defendant gave evidence that he was not involved in the preparation of the quotation of 16 November by the predecessor of the third defendant. His contact with Mr Dunne, a builder, began when the plaintiff was carrying out a job at the Star Hotel at Newcastle. Mr Dunne apparently asked the second defendant whether he would come on board as a consultant in business with him. According to the second defendant he indicated that Mr Dunne would have to have available appropriate work before he would consider moving.

16 Apparently, according to the second defendant, in a conversation with Mr Dunne at which Mr Walker was present on 28 November, Mr Dunne indicated that he would be pursuing the Cumberland College project and would be likely to pick it up. Mr Forde, the second defendant, said that if they did then he would come on board. He says that at that point in time he knew that the plaintiff was also tendering for the project and had put in a price. He said that Mr Walker had told him that the plaintiff’s price was too high and that there were four other bidders. Mr Forde said that he did not know the price in the plaintiff's tender for the job.

17 On or about 1 December Mr Dunne informed the second defendant that they had won the Cumberland College shade tender. He says that this was the first time he became aware of the existence of the third defendant. According to him at that stage Mr Dunne said, “Why don’t you and Brian come in as directors of Architectural Sails?” The second defendant then went to see Mr Flanagan and resigned from the plaintiff company.

18 In giving his evidence the second defendant appeared to me to be straightforward. However, there are a number of matters which are inconsistent with his story. It is probably useful to resolve the matter of the second defendant's involvement before moving to the more complex questions of liability.

19 One matter to note about the second defendant's evidence in this matter is that his affidavit, which was sworn on 15 November 2001, was prepared at a time when the plaintiff's case had not been fully exposed. This only occurred when the plaintiff filed further affidavits in August 2002 and in particular the affidavit of Mr Ashwin. Thus the second defendant did not have the benefit of the availability of other documents to fix times when he prepared his affidavit. He obviously endeavoured to prepare his affidavit carefully because from time to time he fixes occasions by reference to entries in his diary such as when he was attending a particular site. For example, his initial discussion with Mr Dunne on 2 November was fixed by reference to the date upon which he made a steel inspection. In particular I note that his reference to the final conversation with Mr Dunne was said, in his affidavit, to be "on or about" 1 December 2000. I turn to consider various items which were referred to as evidence of the second defendant’s involvement in the tendering process on behalf of the group that was later to become the third defendant.

20 Exhibit D is an order for the purchase of a shelf company “Architectural Sails Australasia Pty Ltd” which has obviously been completed by Mr Dunne's accountant once the decision to go ahead was made. A fax date on it shows 29 November 2002 and it contains particulars of the proposed directors of the third defendant including the second defendant with his address, his birthday and place of birth. The supply of this information is, of course, necessary in order to complete the details of directors. It is perfectly clear that there would have to be a conversation with the second defendant on or about 29 November for this information to be supplied. In cross-examination he, in effect, conceded that he must have given that information and so, clearly, there were other conversations about this time which he did not remember. It will be noted that this date is two days before the day on which he said he resigned and is a day after the actual awarding of the job to “Architectural Sails Australasia”.

21 The next document of importance is exhibit E. That is a facsimile addressed to the Cumberland Student Guild dated 30 November 2000. The copy came from subpoenaed material produced by that organisation. It is a fax copy of a letter and there is no evidence to indicate whose facsimile machine was used for the purpose of sending it to Cumberland College. It certainly did not come from the office which was being used by Mr Dunne at the Rex Hotel in Newcastle. The letter is in the following terms: --

“ SUBJECT Tension Structure Council Approval
Andrew,

Further to our telephone conversation on the 30/11/00.

Councils can be like the weather, unpredictable. We have only encountered one other time that we had to put a Construction Certificate Application in to a council and the project was for them!

However, there is little change to the schedule, what I propose to do is basically as first discussed.

1: fast track. as per our original program. I will be down on Monday 4/12/00 to investigate the site for the type of footings required and measure up for the steelwork,

2: I now need to supply Architectural and Engineering Drawings and spec to comply with the council requirements. This will only hold us up a day or two.

3: I will endeavour to get steelwork done on time, given the Xmas break restrictions,

4: Demolition of the existing structure has no bearing on council so that will go ahead as scheduled.

The only fly in the ointment would be in the unlikely event that council would interfere in the Architectural design and insist on some changes. I have never had this problem in the past, there is always a first time which could lead to extra costs due to steel mods etc.

I feel confident if we take this approach there will be little delay.

Regards
Tom Forde
Director”

22 The letter was not signed.

23 In cross-examination the second defendant denied that he had sent this letter and suggested that it might have been done by a salesmen in order to sell the project. This, however, was unnecessary as a contract was awarded on 28 November. In fact Mr Forde did go down on Monday 4 December to investigate the footings as is referred to in the letter. It will be remembered that Mr Walker had left the employment of the plaintiff on 27 November. The contract was awarded by a letter 28 November and so no doubt Mr Walker was fully engaged in progressing the contract. I would have thought that there is a high likelihood that the actual letter might have been composed and sent by Mr Walker although it would be unlikely that this would be done without some discussion with Mr Forde, the second defendant. The letter tends to indicate to me that the discussion which led to the acceptance of Mr Dunne’s proposal by the second defendant would have occurred on or before 30 November rather than 1 December.

24 One other matter emphasised in submissions was that the second defendant's expertise and knowledge was vital to the success of the new project. Even assuming that this might be so it is apparent that a commitment for his support had been obtained in early November and this probably was sufficient for Mr Walker and Mr Dunne to proceed further with the matter.

25 Exhibit C is an architectural sketch plan of the Cumberland College with a shade sail in place. It also came from the files of Cumberland College. In cross-examination Mr Forde admitted that he was the author of the sketch. Counsel for the plaintiff fastened upon this and endeavoured to link it to the letter of 16 November which was the quote by the predecessor to the third defendant. It is in the following terms: --

“Dear. Andrew,

Thank you for allowing this late proposal for a new sail structure covering the courtyard area.

The illustration you outlined to me provides for a single sail attached to 4 positions just under the roof line and flowing down providing cover to the existing perimeter.

You also require the design of the structure to cover the stage area on the western side.

Accordingly, the proposal we offer meets your specification in each instance, the accompanying sketch drawn from photos taken during our visit will give you an appreciation of the size and shape of the sail.

Please let me remind you that final design and shape will be agreed at a site meeting with yourself.

At that time we will locate stub columns protruding from the roof and the positioning of the supporting columns in the courtyard area.

As discussed the fabric is Ferrari PVC PVDF and I confirm the manufacturers guarantee of 10 years. This guarantee is valid for only 2 colors, white or cream.

Steel fabrication will be designed and certified. The finish of the steelwork can either be H.D. Galvanised or 2 Pack Epoxy Architectural Paint finish, colour to be decided.

We are not able to confirm the design of footings without a site inspection which will then determine either Reinforced Concrete or a Rock Bolt design.

We note you require the installation to be completed by 24/1/01 and we confirm that we will be able to meet that schedule.

However, we must point out that inclement weather can severely disrupt the best laid plans. I should also point out that to confidently meet the installation date an order must be placed almost immediately.

Our firm price for the structure is $90,000 plus GST.

Further, removal of the existing shade cloth and the associated fittings needs to eventuate quite quickly.

Our cost for removal and disposal of the sails is $3,500.

Should you have any questions regarding our proposed design please feel free to contact me.

I look forward to your response and I will be available to meet with you at any time you may require.

Yours Faithfully

Wayne Dunn.

Director.
Architectural Sails Australasia”

26 The original has the figure $80,000 substituted for the $90,000 by the first defendant, Mr Walker.

27 It can be seen that the letter refers to the attachment of sketches. As no other sketches were produced it was suggested that this sketch had been produced by Mr Forde for the purposes of the 16 November letter. In support of this it was suggested that the sketch clearly shows that there are only eight points to the sail proposed. This was said to be conclusive because the plans upon which the plaintiff tendered involved eight points and the one which was dealt with by the third defendant and in fact constructed had a nine point sail. There is a difficulty with this because the drawing is only a representation and may well in fact incorporate an additional attachment point which point is out of view. That this can be so is easily observed if one looks at the three-dimensional marketing drawings which were submitted by the plaintiff with its quote.

28 Another matter which tends to support the second defendant's contention that he drew the plan after he had joined the third defendant is the angle shown at the extreme left of the plan. That angle is more consistent with the plan of the sail adopted by the third defendant rather than that of the plaintiff. What then would be the purpose of such a plan? Once the third defendant commenced work on the project it immediately commenced the drawing of the appropriate diagrams of the layout of the sail and the construction of the columns. The only possible purpose might be for the purpose of obtaining council approval which was one of the jobs which the second defendant did when he joined the project. However the second defendant himself did not suggest this reason for the preparation of the plan. Given the problems with the plan I consider it quite neutral in terms of any inference that I could draw.

29 In the letter of 16 November there is reference in the fourth paragraph to "photos taken during a visit". That letter is from Mr Dunne and I accept Mr Ashwin’s evidence that he never met or discussed anything with Mr Dunne. He said that he had only ever discussed the project with the first and second defendants. Mr Ashwin was uncertain as to whether he had had any discussions with the second defendant before 1 December.

30 Annexure C to the affidavit of Mr Flanagan of 12 September 2001 is a copy of an email dated 18 November 2000. It is from Andrew Ashwin addressed, "Dear Brian and Tom". It encloses copies of some photographs of the site. The plaintiff’s system allows emails to be received by Mr Flanagan both at work and at home. He found the email at his home address and found that it had been deleted from the system at work. Clearly Mr Ashwin was communicating with Brian and Tom on 18 November 2000. There is a copy of the plaintiff’s quote on which he had noted that the second defendant was the project manager. He made this note in his own handwriting on the letter. Given the commitment that had been made by the second defendant in early November the appearance of his name on these documents is just as likely to have come from information supplied by the first defendant rather than the second defendant. Accordingly I do not find the documents of assistance.

31 An employee of the plaintiff, Mr Harris, gave evidence. Mr Harris was a labourer who had been employed by the plaintiff for some years but was not so employed at the time of the hearing. He gave evidence that in November 2000 the first defendant came out of the office and told Mr Flanagan that they had the job at Cumberland College and he was going down to pick up the deposit cheque from Andy. He then said that the second defendant came out of the office and said that he would go with him. The second defendant denied that he went to pick up a deposit cheque and relied on the fact that there would be no reason to do so. This evidence of Mr Harris is somewhat inconsistent with the evidence of Mr Flanagan who thought that it might have been Mr Forde who said they had won the contract. The evidence only shows the second defendant going to Sydney with the first defendant in October. This is before the awarding of the contract to the third defendant which contract did not provide for a deposit. Given that Mr Ashwin did not meet Mr Forde until after 1 December I am not satisfied that what Mr Harris suggested occurred. It may be a reference to the earlier October visit or be based on his recollection of statements made by the first defendant which were not made in the presence of Mr Forde.

32 A consideration of the foregoing matters indicates that the documentary evidence prior to 28 November is not of assistance in determining the involvement of Mr Forde in the preparation of the quotation. It was clearly prepared by Mr Walker and Mr Dunne. On Mr Forde's evidence he clearly knew that the plaintiff was tendering for the project. He gave an indication in November that he was prepared to change and become a consultant with Mr Dunne. On his own case he knew that the project Mr Dunne hoped to get was for the Cumberland College and he gave a commitment that if that was successful he would come onboard.

33 The contract was awarded on 28 November and my view is that the second defendant was thereafter involved in the steps for the formation of the company, to takeover that contract and for him to join and work on the project. These steps were taken by him while he was still employed by the plaintiff although he resigned almost immediately thereafter. Given the view that I have taken in respect of Mr Forde’s evidence I accept that he did not know the price in the tender that had been made by the plaintiff. His involvement in the preparation of the quotation was minimal and restricted to looking at some of the 3-D graphics designs as they were being done by Mr Flanagan. There is no other evidence of his involvement in the quotation process and in the nature of his role in the company he would be unlikely to have an input.

The different claims made by the plaintiff in the proceedings

Misuse of confidential information

34 In its final submissions the plaintiff had little to say on this aspect of its case and concentrated on other matters. However, given that they are in the statement of claim I should briefly refer to them. The statement of claim pleads that the plaintiff was the owner of certain confidential information and that this was known to the first and second defendant. It contains pleadings that the first and second defendants unlawfully made use of the confidential information otherwise than for the purpose for which it was supplied to them, namely, the business of the plaintiff. It is alleged that as a result they have caused the third defendant to unlawfully make profits as a result of the misuse of the information by the first and second defendants.

35 The information which is said to be confidential is as follows:-

1. The three-dimensional drawings annexed to the plaintiff's quotation of 23 October 2000.

2. A software program used by the plaintiff to design and supply large tension membrane structures.

3. The quotation of 23 October 2000 and in particular the price at which the plaintiff tendered for the job.

36 The software programme used by the plaintiff was known as "FABDES”. It is a commercially available software programme which had been purchased by the plaintiff in 1992. So far as this case is concerned it seems to have been used to prepare the three dimensional drawings which accompanied the plaintiff's quotation letter. At a later stage various plans of the sail are prepared and these are normally prepared by using a drawing program such as “AutoCad”. That also is a commercially available program. In the circumstances the program itself would not be confidential information of the plaintiff.

37 The three-dimensional drawings which were attached to the plaintiff's quotation no doubt could be considered confidential in the sense that the quotation itself was a confidential part of its business. The evidence does not suggest that either the first or second defendant ever used the three-dimensional drawings that were attached to the quotation. The second defendant did not use the “FABDES” software and he had no need to use the drawings. His task was to design the structure using an “AutoCad” program. It is apparent from the evidence that the three-dimensional drawings were used for the purposes of marketing as they provided to the customer three-dimensional representations of layouts of the sail. They were not used for the purposes of production of the finished product because this occurred in a separate process after there had been a survey of the site. In the present case the plaintiff did not carry out a survey. It was the third defendant who surveyed the site and subsequently prepared the drawings for the steelwork and the sail pattern.

38 There is no evidence before me to suggest that the first or second defendant used the three-dimensional drawings in any way.

39 The plaintiff’s tender price was obviously confidential information. On the findings that I have made the second defendant did not know the price and thus there has been no misuse of confidential information by him. On the other hand the first defendant was certainly aware of the price and he has misused his knowledge in order to undercut the plaintiff.

40 The plaintiff is entitled to succeed against the first defendant on this ground but not against the second defendant.

The contractual claim

41 There was no written agreement covering the employment of the first and second defendant by the plaintiff. Accordingly, the plaintiff relied upon an implied term of their contracts of employment that they are subject to a duty of good faith and fidelity for the period of their employment.

42 In Colour Control Centre Pty Ltd & Anor v TY and Others (1996) AILR 5-058) Santow J referred to this duty in these terms:-

“RESOLUTION OF LEGAL ISSUES MS RANDO'S IMPLIED DUTY OF FIDELITY AND GOOD FAITH IN CONTRACT Implicit in every contract of employment is an implied term under which employees are subject to a duty of good faith and fidelity for the period of their employment. The scope and content of that duty will vary according to the nature and circumstances of the contract of employment: Wessex Dairies Ltd v Smith [1935] 2 KB 80 at 84-85; Hivac Led v Park Royal Scientific Instruments Ltd [1946] 1 Ch 169, 1 All ER 350; Timber Engineering Co Pty Ltd v Anderson [1980] 2 NSWLR 488; Schindler Lifts Australia Pty Ltd v Debelak (1989) 89 ALR 275 at 300
While the full scope of the implied duty of fidelity is not clearly defined, such duty does give rise to certain clear obligations relevant to the present circumstances. First, an employee may not retain, without approval, any profit or property the opportunity for the acquisition of which was furnished by the employment: Willey v Syan (1937) 57 CLR 200; London Corporation v Appleyard [1963] 2 All ER 834; 1 WLR 982; Reading v The King [1948] 2 All ER 27 at 28; Reading v A-G [1951] AC 507 at 518 per Lord Oaksey.
Second, although in general employees are entitled to work in competition with their employer in their own time, special circumstances may give rise to an implied duty not to compete: Hivac Ltd v Park Royal Scientific Instruments Ltd (supra). In particular, a director or senior employee who takes up a business opportunity within the scope of the company's actual or potential line of business, without the consent of the company upon full disclosure of the facts, may be required to account to the company for any profit made or to compensate it for any loss suffered: Cook v Deeks [1916] 1 AC 554 at 563-564; [1916-1917] All ER 285; Pacifica Shipping Co Ltd v Anderson (1985) 2 NZCLC 96-040; [1986] 2 NZLR 328; Green and Cara Pty Ltd v Bestobell Industries Pty Ltd [1982] WAR 1. The employee may be liable to account for such profit even where its acquisition did not adversely effect the employer: Boston Deep Sea Fishing and Ice Co v Ansell (1888) 39 Ch D 339.”

43 There would be little doubt that the first defendant has breached his duties to the plaintiff by profiting from the opportunity furnished by his employment. The situation with the second defendant is somewhat more complex and is better considered under the next claim which is an extension of the implied term depending upon the circumstances of the particular employment relationship.

Breach of fiduciary duty

44 The present case has many similarities in a factual sense with the situation that confronted Santow J in the Colour Control case. The analysis of the legal issues in respect of fiduciary obligations which appears at paragraph 48 to 61 of His Honour’s judgment is equally applicable to the present case. As His Honour pointed out the relationship of employer and employee is commonly included as an exemplar of the fiduciary relationship. Whether or not a particular employee will be subject to fiduciary duties will obviously depend upon their situation and responsibility in the company. His Honour referred to the article by Austin on “Fiduciary Accountability for Business Opportunities”. That demonstrated at 171-172 that there was authority for the view that senior executives are subject to the same fiduciary duties as executive directors. In this case neither the first Nor second defendants are directors of the plaintiff.

45 It is necessary to look at the circumstances of this case to see whether in fact the first and second defendants are in a situation which gives rise to fiduciary obligations on their part. The plaintiff company is a small one which was commenced by Mr Flanagan in the early 1900s. At the time of the events in question the company had few employees. It was put at six or seven employees three of whom were Mr Flanagan, Mr Walker and Mr Forde. The remaining employees appear to be engaged in the manual work of erecting or manufacturing structures which the company sold.

46 The company had employed a marketing manager for sometime. Tony Mowbray was a manager in early 2000 and he resigned to sail around the world. At that stage the first defendant was employed. He was tutored by Mr Mowbray about the role that he would take over from him. On the departure of Mr Mowbray the first defendant, Mr Walker, took over the position of company sales and marketing manager. His duties included preparing and submitting quotations for various jobs on behalf of the plaintiff. He was clearly the only person other than perhaps Mr Flanagan who was involved in this area and it was his specific responsibility. The company was thus very dependent upon him in respect of his expertise in obtaining sales.

47 The second defendant had for some years prior to the year 2000 been employed as a subcontractor to draw the various designs of steelwork involved in the structures. He was engaged by the company in January 2000 and his role was expanded so that he acted as project manager to supervise installation of the steel supports on the various sites. It is apparent that the second defendant was the only one involved in that role apart from Mr Flanagan. He had a number of jobs during the year 2000 which he supervised in his role as project manager and no doubt he obtained experience in the practical construction of the structures.

48 It is clear that Mr Flanagan was the ultimate person in charge of the company. He and his wife were the only shareholders and directors. The plaintiff was a small company dependent on a continual flow of work in order to survive and towards the end of 2000 the company and Mr Flanagan in particular, was anxious to obtain further work.

49 In the circumstances of this particular company it is necessary to consider whether there was any vulnerability to actions taken either by Mr Walker or Mr Forde. Mr Walker in particular was in the situation where he appears to be the only person in the company responsible for marketing and obtaining sales. He was rarely in the office as his duties took him out of the office to obtain sales. It would be difficult for Mr Flanagan to supervise him to any degree and clearly the company was vulnerable to any misuse by Mr Walker of his position. So far as Mr Forde is concerned he also fulfilled a role that was not carried on by anyone else in the company. He obtained in the course of that role knowledge of the practical application of his designs for the steelwork and he could see how the whole business of the plaintiff company was run. His departure from the company would mean that the company would have to find someone else to replace him or Mr Flanagan would have to step back into the project management role that Mr Forde occupied. The company was not as vulnerable to actions by Mr Forde as it was in respect of Mr Walker. Mr Forde had a body of acquired knowledge which presumably he could use elsewhere to his advantage after he left the employ of the plaintiff. The type of knowledge he had would not normally be protected as confidential information.

50 As was pointed out by Santow J in the Colour Control case the question of the existence and scope of fiduciary obligations must be assessed in the particular context in which they are claimed to arise. His Honour referred to Canadian Aero Service Ltd v O'Malley (1973) 40 DLR (3d) 371 at 382 where Laskin J of the Supreme Court of Canada delineated the position as follows: --

“It follows that O’Malley and Zarzychi stood in a fiduciary relationship to Canaero, which in its generality betokens loyalty, good faith and avoidance of a conflict of duty and self-interest. Descending from the generality, the fiduciary relationship goes at least this far: a director or a senior officer ... is precluded from obtaining for himself either secretly or without the approval of the company (which would have to be properly manifested upon full disclosure of the facts), any property or business advantage either belonging to the company or for which it has been negotiating; and especially is this so where the director or officer is a participant in the negotiations on behalf of the company.
An examination of the case law in this Court and in the Courts of other like jurisdictions on the fiduciary duties of directors and senior officers shows the pervasiveness of a strict ethic in this area of the law. In my opinion the ethic disqualifies a director or senior officer from usurping for himself or diverting to another person or company with whom or with which he is associated a maturing business opportunity which his company is actively pursuing; he is also precluded from so acting even after his resignation where the resignation may fairly be said to have been prompted or influenced by a wish to acquire for himself the opportunity sought by the company or where it was his position with the company rather than a fresh initiative that lead him to the opportunity which he later acquired.”

51 Santow J adopted these views which have also been approved in Mordecai v Mordecai (1988) 12 NSWLR 58 at 65, Lord Corporation Pty Ltd v Green (1991) 22 NSWLR 532 at 543-544; Pacifica Shipping Co Ltd v Anderson (1985) 2 NZCLC 96-040; Green and Clara Pty Ltd v Bestobell Industries Pty Ltd (1982) WAR 1.

52 In the circumstances of the present case I am prepared to find that there were fiduciary duties owed by the first and second defendants to the plaintiff.

Breach of fiduciary duty

53 In respect of the first defendant it is quite clear that he went out during the course of his employment with a deliberate intention of seeking to acquire the business opportunity which was available to the plaintiff. He succeeded in doing so and accordingly clearly breached his fiduciary duties.

54 So far as Mr Forde is concerned on the findings that I have made it is clear that his involvement prior to his resignation was substantially less than that of Mr Walker. Clearly the proposal for a new company to win the tender was thought up by Mr Walker and Mr Dunne.

55 On the evidence before me the second defendant, Mr Forde, did nothing in connection with the quotation by Mr Walker and the predecessor to the third defendant. He knew that Mr Dunne was pursuing a number of jobs including the Cumberland College project but he did not discuss the project with Mr Dunne. Mr Walker’s tender and the predecessor, the third defendant, was accepted and the first Mr Forde knew of the acceptance was after the event. In these circumstances he took no active steps either before or after his resignation to “usurp for himself or divert to another…company with …which he is associated a maturing business opportunity”.

56 As was pointed out by Laskin J the principle can apply to preclude an employee from acting in relation to a business opportunity even after termination of employment where the resignation may fairly be said to be prompted or influenced by a wish to appropriate the opportunity sought by the company or where it was his position within the company rather than a fresh initiative that led him to the opportunity which he later acquired.

57 The evidence shows that the initial discussions between Mr Forde and Mr Dunne envisaged that he would come aboard as a consultant and go into business with Mr Walker and Mr Dunne. There was no further discussion of terms of payment or how the business was to be set up. After being told by Mr Dunne that the tender had been won Mr Dunne went on to say, “Why don’t you and Brian come in as directors of Architectural Sails”. Without any further discussion Mr Forde went to see Mr Flanagan and resigned. After resigning he then went back to the Newcastle Hotel and had further discussions on the structure of the new arrangement. It was agreed that the first and second defendants would have 50 percent of the property and that Mr Dunne and his partner would have the other 50 percent. It was probably then that Mr Forde gave the necessary details of his birth and this would fix the date of these discussions at 29 November rather than on or about 1 December.

58 It can be seen that at the time of Mr Forde’s resignation he was being offered a position as a consultant. His motives for resigning included the fact that he was unhappy working for Mr Flanagan as a result of personal and safety reasons. Given this and his limited offer of a consultancy (which was a position he had previously occupied with the plaintiff) I am not satisfied that his resignation was prompted or influenced by a wish to appropriate the opportunity. All he wanted was alternative and secure employment.

59 It can be seen from the recounting of the conversations whereby Mr Forde was brought into the proposal that Mr Dunne wanted him as a consultant and then later as a participant in the company. Mr Dunne had been investigating tendering for this type of work instead of subcontracting as in the case of the Star Hotel. He clearly saw Mr Forde as a useful person because of his abilities which may have been told to him by Mr Walker or he had observed them during the course of the project at the Star Hotel. There certainly is a situation where the skills Mr Forde had gained in the employ of the plaintiff company were important for the new venture. These skills are ones which are not protected by any covenant in restraint of trade and Mr Forde was free to use them whenever he wished.

60 The question is whether it was his position with the plaintiff company rather than a fresh initiative that led him to the opportunity that he later acquired. The opportunity to which Laskin J was referring was a business opportunity maturing after resignation. In this case there was no such opportunity as Mr Walker and Mr Dunne had secured it prior to Mr Forde’s resignation.

61 I am thus not satisfied that there has been any breach of fiduciary duty by the second defendant nor has there been any breach of any of the implied terms of his contract of employment.

62 So far as the third defendant is concerned it may be made liable for a breach of fiduciary duty where it is a recipient of the relevant property or as an accessory dishonestly procuring or assisting in a breach of the fiduciary obligations. See the cases referred to by Santow J in Colour Control, para 60. Given the role played by Mr Walker in acquiring the contract by the third defendant it is clear that the third defendant had knowledge of the relevant breaches of fiduciary duty. In these circumstances it is also liable to the plaintiff.

Damages for breach of fiduciary duty

63 In Warman International Ltd v Dwyer (1995) 182 CLR 544 at 210 the High Court, when considering the remedies available for breach of fiduciary duty, said the following: --

“Ordinarily a fiduciary will be ordered to render an account of the profits made within the scope and ambit of his duty ( Phipps v Boardman [1967] 2 AC at 127 per Lord Upjohn). Of course, if the loss suffered by the plaintiff exceeds the profits made by the fiduciary, the plaintiff may elect to have a compensatory remedy against the fiduciary. That election will bind the plaintiff ( Kendall v Marsters (1860) 2 De G F & J 200; 45 ER 598)."

64 In the present case the third defendant tendered for $80,000 and completed the job. The evidence of Mr Forde was that in the end the profit that it made was the sum of $9,000. Mr Flanagan, with the benefit of the third defendant's documents and drawings for the job, costed out the work required to be done with a view to establishing the profit that would be available to the plaintiff at a quoted price $105,000. His conclusion was that after allowing for payments to outside contractors and suppliers of approximately $29,000 and costs of the plaintiff's employees’ labour approximately $7,500 the plaintiff would have derived a gross profit of approximately $68,500 for the construction of the shade structure at a price of $105,000.

65 It is apparent that the plaintiff had acquired over the years items of equipment such as trucks and cherry pickers which it had available to use in the construction process. The third defendant did not have this equipment and had to hire out such items or sub contract such work. There was some challenge to this estimate and it seems that the excavation work on the project was more expensive than that allowed by Mr Flanagan. The actual costs amounted to $5,300 whereas Mr Flanagan estimated a cost of $1,750. No other items need adjustment. I will thus reduce the amount of the profit by the difference of $3,550. The profit which is sought by the plaintiff is, of course, dependent on whether it would have achieved a contract at its tender price of $105,000.

66 It is necessary to see whether the first and third defendants as non trustee fiduciaries should be liable for the loss of the opportunity by the plaintiff. The question of causation in this area has recently been much debated and the present law has been referred to by the New South Wales Court of Appeal in O’Halloran v RT Thomas & Family P/L (1998) 45 NSWLR 262. In the case of trustees the true enquiry is whether the loss would have happened had there been no breach, not whether the loss was caused by or flowed from the breach.

67 At page 276 of O’Halloran Chief Justice Spigelman referred to the debate concerning London Loan and Savings Co v Brickenden [1934] 3 DLR 465 but pointed out that it was not necessary to resolve that dispute. He went on to identify the relevant connection in these words:-

“To adopt the words of the High Court in Maguire v Makaronis (at 473), the court must identify "... the criteria which supply an adequate or sufficient connection between the equitable compensation claimed and the breach of fiduciary duty". In the case of a trustee dealing with trust property, the law has proceeded beyond the invocation of the formulaic "common sense" approach to causation, by adopting a stringent test to the selection of those events preceding loss which are to be taken as causing the loss. There is a sufficient connection, irrespective of the identification of a separate and concurrent cause, when the loss would not have occurred if there had been no breach of duty As in the case of a disposition induced by fraud or duress: "... in this field the court does not allow an examination into the relative importance of contributory causes" ( Barton v Armstrong [1976] AC 104 at 118). The issue is whether, in the circumstances of this case, an "adequate or sufficient connection" is established by applying the test appropriate in the case of breach by the trustee of a traditional trust or by some other, less stringent, test. As McLachlin J said in Canson Enterprises v Boughton (at 155):
“..the better approach, in my view, is to look to the policy behind compensation for breach of fiduciary duty and to determine what remedies will best further that policy.”
The strict standard applicable to a trustee of a traditional trust with respect to improper application of trust property is based on the vulnerability of beneficiaries with respect to the disposition of property by a trustee who has control over such disposition.”

68 I have earlier referred to the position of Mr Walker and the fact that this small company was particularly vulnerable to the misuse by Mr Walker of his position as sales and marketing manager. The factual result in this case demonstrates the company’s vulnerability to misuse his position. In these circumstances I am satisfied that it is appropriate to apply the strict standard to the first defendant even though he was not a director of the company.

69 In the tender process there were three parties involved. It is clear that leaving aside the third defendant the only other company involved was Shade Structures Pacific Pty Ltd. It submitted a tender of $120,890. It had submitted a budget estimate on 13 November 2000 in the range of $90,000 and $120,000. It is apparent from the evidence of Mr Ashwin that he used the lower of these two figures to force down Mr Walker's tender to $80,000. What is involved is a consideration of the likelihood of the plaintiff being awarded the contract rather than Shade Structures Pacific Pty Ltd.

70 Mr Flanagan was cross-examined on whether he would have reduced his quoted price. He conceded that at least he would have to think long and hard about it. Given the sworn evidence of the plaintiff and Mr Flanagan, namely, that they were anxious to obtain work as it was required at the time, it seems fairly likely that he would have reduced his tender price. It contained a substantial profit element. In addition there was some evidence from Mr Ashwin about what he was likely to accept. The situation was that he was calling for tenders in an informal way without adopting full procedures required when contracts had a value of more than $100,000. He also made it clear that he had a budget to which he was working. His desire was to have the work done over the Christmas period so that it would be complete by the beginning of March when the students came back to the university. It was thus impossible for him to do that at a price of more than $100,000. The plaintiff had put in a costed quote of $105,000 and the real quote of Shade Structures Pacific Pty Ltd turned out to be $15,980 higher. In these circumstances the reduction in order to secure the job was for less for the plaintiff than its competitor. As I accept that the plaintiff would have reduced its tender I am satisfied that its tender would have been accepted and thus its loss would not have occurred if there had been no breach.

71 The next question is what is its loss. Given the constraints of Mr Ashwin and the clear desire of Mr Flanagan to obtain some work it seems very likely that the plaintiff’s tender would have been accepted at a figure of or slightly lower than $100,000. It is thus appropriate to assess the loss of profit by reference to a tender price of $95,000.

72 This fixes the loss of the profit suffered by the plaintiff at $54,950. The plaintiff is thus entitled to verdict against the first and third defendants in this amount.

Breach of sections 181, 182 and 183 of the Corporations Act

73 Section 181 imposes an obligation of good faith on directors or other officers of a corporation. Section 182 prohibits the use of that position to (a) gain an advantage for themselves or someone else; or (b) cause detriment to the corporation. Section 183 prohibits the use of information acquired by directors or other officers to improperly gain such advantage or cause detriment. Neither the first or second defendant were directors and they would only be liable if they fell within the definition of officers. The sections lead to a right to recover profit or damage under section 1317 H.

74 Officer of a corporation is defined in section 9 to be: --

"officer" of a corporation means:
(a) a director or secretary of the corporation; or
(b) a person:
(i) who makes, or participates in making, decisions that affect the whole, or a substantial part, of the business of the corporation; or
(ii) who has the capacity to affect significantly the corporation's financial standing; or
(iii) in accordance with whose instructions or wishes the directors of the corporation are accustomed to act (excluding advice given by the person in the proper performance of functions attaching to the person's professional capacity or their business relationship with the directors or the corporation); or
(c) a receiver, or receiver and manager, of the property of the corporation; or
(d) an administrator of the corporation; or
(e) an administrator of a deed of company arrangement executed by the corporation; or
(f) a liquidator of the corporation; or
(g) a trustee or other person administering a compromise or arrangement made between the corporation and someone else.

75 It was submitted that Mr Forde did not fall within the definition of “officer”. Mr Forde did not have a role in quoting jobs but he had a role and responsibility as project manager. He was trusted to make decisions as project manager on the erection of structures. Sometimes Mr Flanagan did not accept how Mr Forde carried out his duties in this regard and imposed his own decisions. Clearly Mr Forde did not make decisions that affected of the whole of the business of the corporation. Arguably he made decisions concerning a substantial part of the plaintiff's business. On any view the business of quoting for and erecting shade structures was a substantial part of the plaintiff's business. It certainly did not affect whether the company carried out any particular job and at what price it did the work. He had no role in that part of the business. The question however is whether his decisions affected that substantial part of the business. In my view, given the small nature of the company and the degree of the agreed supervision exercised by Mr Flanagan over the construction work, I would not have thought he would have been an officer. Given his role Mr Forde would not have the capacity to affect significantly the plaintiff's financial standing.

76 Mr Walker was the marking manager. His job was to obtain business and prepare quotes. The evidence does not address the degree of control exercised by Mr Flanagan over Mr Walker with regard to the price to be quoted for jobs. In these circumstances I am not satisfied that Mr Walker would fall within the definition of an officer.

Conclusions

77 The plaintiff is entitled to judgment against the first and third defendants in the sum of $54,950. Subject to submissions the plaintiff should also be entitled to costs against the first and third defendants and the plaintiff should pay the second defendant’s costs. As the project is complete and there is no breach of any confidential information the plaintiff would appear not to be entitled to an injunction.

78 I direct the parties to bring in short minutes and argue any question of costs.

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Last Modified: 12/04/2002