Fortron Automotive Treatments Pty Ltd v Jones & Ors (No.5)
[2013] FMCA 171
•15 March 2013
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| FORTRON AUTOMOTIVE TREATMENTS PTY LTD v JONES & ORS (NO.5) | [2013] FMCA 171 |
| CONSUMER LAW – Breach of fiduciary duty. |
| DAMAGES – Breach of fiduciary duty – equitable compensation. |
| Corporations Act 2001 (Cth), ss.182, 1317E, 1317J(4) Federal Magistrates Court Rules 2001 (Cth), rr.13.03A (2); 13.03B (2)(c)(i) |
| AMP Services Ltd v Manning [2006] FCA 256 AMP Services Ltd v Manning (No.2) [2007] FCA 82 Barton v Armstrong [1976] AC 104 Charles v Shepherd [1892] 2 QB 622 Fortron Automotive Treatments Pty Ltd v Jones & Ors (No.3) [2011] FMCA 467 Foyster v Foyster Holdings Pty Ltd [2002] NSWSC 768 Hill v Rose & Ors [1990] VR 129 Maguire & Anor v Makoronis& Anor (1996) 188 CLR 449 Monaco & Anor v Arnedo Pty Ltd & Anor (1994) 13 WAR 522 National Foods Milk Ltd v McMahon Milk Pty Ltd (No.2) [2009] VSC 150 Nescor Industries Group Pty Ltd & Ors v Miba Pty Ltd & Ors (1997) 150 ALR 633 O’Halloran v RT Thomas & Family Pty Ltd (1998) 45 NSWLR 262 One.Tel v Rich (2005) 190 FLR 443 [2005] NSWSC 226 Pantorno v The Queen (1989) 166 CLR 466 Primacy Underwriting Agency Pty Ltd (formerly Landmark Underwriting Agency Pty Ltd) v Kilborn [2007] NSWSC 158 Re Dawson [1966] 2 NSWLR 211 Termijtelen v Van Arkel [1974] 1 NSWLR 525 The Commonwealth of Australia v Amman Aviation Pty Limited (1991) 174 CLR 64 WA Fork Truck Distributors Pty Ltd v Jones & Ors [2003] WASC 102 |
| RP Meagher, JD Heydon and MJ Leeming, Meagher, Gummow and Lehane’s Equity Doctrines and Remedies (4th Edn) (Chatswood: LexisNexis Butterworths, 2002) |
| Applicant: | FORTRON AUTOMOTIVE TREATMENTS PTY LTD |
| First Respondent: | KENNETH JOHN JONES |
| Second Respondent: | TREBLEX AUTOMOTIVE PRODUCTS PTY LTD |
| Third Respondent: | SHEILA MARY JONES |
| Fourth Respondent: | WILLIAM PATRICK TULLY |
| Fifth Respondent: | HELEN GEORGINA TULLY |
| Sixth Respondent: | GAMMAR GROUPS (THAILAND) CO LTD |
| File Number: | PEG 172 of 2007 |
| Judgment of: | Lucev FM |
| Hearing date: | 3 November 2011 |
| Date of Last Submission: | 3 November 2011 |
| Delivered at: | Perth |
| Delivered on: | 15 March 2013 |
REPRESENTATION
| Counsel for the Applicant: | Mr M H Zilko SC and Mr G Rabe |
| Solicitors for the Applicant: | Stables Scott |
| Counsel for the Fourth Respondent: | Mr R L Hooker |
| Solicitors for the Fourth Respondent: | Robert Grayden Legal |
ORDERS
Parties to confer within 14 days with respect to:
(a)proposed orders to accord with the Reasons for Judgment published 15 March 2013; and
(b)costs.
If no agreement is reached within 14 days on proposed orders and costs, each party is to file and serve within 21 days:
(a)a minute of proposed orders; and
(b)an outline of submissions on costs,
and the matter is adjourned to not before 3.30pm on 18 April 2013 for further hearing on those issues.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT PERTH |
PEG 172 of 2007
| FORTRON AUTOMOTIVE TREATMENTS PTY LTD |
Applicant
And
| KENNETH JOHN JONES |
First Respondent
| TREBLEX AUTOMOTIVE PRODUCTS PTY LTD |
Second Respondent
| SHEILA MARY JONES |
Third Respondent
| WILLIAM PATRICK TULLY |
Fourth Respondent
| HELEN GEORGINA TULLY |
Fifth Respondent
| GAMMAR GROUPS (THAILAND) CO LTD |
Sixth Respondent
REASONS FOR JUDGMENT
Introduction
These Reasons for Judgment concern the claims of the applicant, Fortron Automotive Treatments Pty Ltd (“Fortron”), against:
a)the fourth respondent, William Patrick Tully (“Mr Tully”); and
b)the sixth respondent, Gammar Groups (Thailand) Co Ltd (“Gammar”),
and, in particular, the remedies to be awarded by the Court against Mr Tully and Gammar.
Fortron’s claim for damages against Gammar
Fortron’s submissions
Fortron’s claim for damages against Gammar is contained in paragraph 25 of the statement of claim.
Arguably standing in the way of judgment in favour of Fortron against Gammar are findings made by the Court in Fortron Automotive Treatments Pty Ltd v Jones & Ors (No. 3) [2011] FMCA 467 at paras.31-55 per Lucev FM (“Fortron (No. 3)”). Fortron concedes that in Fortron (No. 3) this Court may have found that the pleaded agreement between Fortron and Gammar was not breached in the manner pleaded: Fortron (No. 3) at para.50 per Lucev FM.
In Fortron (No. 3) the Court summarised its conclusions with respect to the so-called 2003 Distribution Agreement between Fortron and Gammar as follows:
a) the 2003 Distribution Agreement did not contain a term that it was of five years duration;
b) the 2003 Distribution Agreement did contain an implied term that it was terminable on a months notice by either party;
c) the products distributed under the 2003 Distribution Agreement were those Fortron products listed above;
d) Gammar did not agree to exclusively distribute Fortron’s products in Thailand under the 2003 Distribution Agreement; and
e) there was no exclusivity or non-compete provision obliging Gammar not to distribute competing products, or to maximise Fortron’s sales under the 2003 Distribution Agreement.
See Fortron (No. 3) at para.55 per Lucev FM (footnote omitted). The reference to distribution of products at para.55(c) of Fortron (No. 3) cited above is a reference to the Court’s conclusion with respect to the evidence concerning distribution of products, which appears at Fortron (No. 3) at para.53 per Lucev FM (footnote omitted), but which it is not necessary to set out.
The difficulty in Fortron obtaining judgment against Gammar is said to arise because the Court made the findings above as a consequence of the submissions made at paragraphs 3-16 of the First to Fifth Respondents’ Written Submissions filed 1 February 2008, which were made in anticipation of Fortron’s motion for judgment against Gammar. Those submissions were as follows:
3.The Respondents are unaware as to whether the Applicant intends seeking judgment against Gammar in default of appearance.
4.“…Even if the statement of claim is perfectly clear on its face, the Court has a discretion to refuse to give judgment if there is reason to think that injustice will result”: Charles v Shepherd [1892] QB 622 at 624, 625 [(“Charles”)].
5.On a motion for judgment on deemed admissions on the pleadings whether in default of appearance or defence, the Court will not give judgment which is contrary to the true facts or where it will create difficulty in relation to issues yet to be tried as where the facts in relation to the party in default are substantially interwoven with the case of parties who have appeared or defended: Termijtelen v Van Arkel [1974] 1 NSWLR 525 at 533, 534 [(“Termijtelen”)].
6.The defence of the Respondents is intrinsically interwoven with the claim bought by the Applicant against Gammar.
7.Should the Applicant seek to file judgment against Gammar, significant injustice will result against the Respondents.
The Contract Claim.
8.Where there is ambiguity, the terms of a contract cannot be inferred by subsequent conduct: Brambles Holdings v Bathhurst City Council [2001] NSWCA 61 per Hayden [sic] J at p.26
9.The claim by the Applicants for breach of contract by the Sixth Respondent is reliant on the existence of the Third Distribution Agreement.
10.The First Distribution Agreement pleaded at paragraph 16 of the Claim expired in August 1998.
11.The Second Distribution Agreement pleaded at paragraph 17 of the Claim expired on 30 August 2003.
12.It is common cause that no new written Distribution Agreement was entered into by the Applicant and the Sixth Respondent.
13.The Applicant contends that a Third Distribution Agreement can be implied from the subsequent conduct of the parties in continuing to trade with each other.
14.If a contract is to be implied from subsequent conduct of the parties following the expiry of the Second Distribution Agreement, the terms of any Third Distribution Agreement are unclear and ambiguous.
15.It cannot be construed that each and every term of the Second Distribution Agreement, including a term of 5 years, can be imported into a Third Distribution Agreement. In any event, the Second Distribution Agreement contained Clause 8.2, which provides that in the event of either party breaching the terms of the Agreement and failing to remedy such breach within 30 days of written notice being given, neither party shall be liable to pay the other compensation for loss of product, goodwill or otherwise howsoever arising.
16.It was clearly contemplated by the parties that in the event of termination of the contract neither party would seek damages from the other.
Fortron says that those submissions ought to be rejected because:
a)no such case was pleaded on behalf of Gammar;
b)Fortron was not required to respond to, nor did it respond to, a case such as set out in the written submissions; and
c)the hearing was conducted on the basis that there was no contested issue between Fortron and Gammar on Fortron’s pleaded case.
Fortron says that:
a)The First to Fifth Respondents’ Written Submissions made prior to the commencement of the hearing dealt with points thereafter not raised on behalf of Gammar at the hearing, and which were therefore not responded to by Fortron at the hearing;
b)there was uncontested evidence of Mr Breck Hoffman that Fortron had a contract with Gammar which Gammar had breached, and as a result of the breach Fortron suffered loss and damage;
c)the evidence adduced at the hearing by Fortron as to the contractual arrangements it had with Gammar at all material times, and how Gammar breached that arrangement, is within the ambit of Fortron’s pleaded case against Gammar;
d)it is not uncommon for judgment to be entered based on findings not made strictly in accordance with the pleadings, but within the ambit of the pleaded case where that case was supported by evidence at hearing; and
e)any attempt to submit that it is not within the ambit of Fortron’s pleaded case must be futile in circumstances where Gammar was not before the Court, and would therefore not have been in a position to respond to any attempt to amend the pleaded claim to meet the objections made by the other respondents.
Fortron says that having regard to the manner in which the hearing was permitted to be conducted by the first to fifth respondents the prejudice to Fortron in having its motion for judgment against Gammar rejected, for reasons advanced by any respondent other than Gammar, would be significant. Fortron also says that it was never required to meet a case:
a)which disputed the relevant parts of Mr Breck Hoffman’s witness statement;
b)that in the event of the termination of the contract it asserted, neither party would seek damages from the other; and
c)that had the above matters been raised the hearing may have been conducted differently from Fortron’s perspective.
Paragraph 25(a) of the statement of claim particularises Fortron’s claim for breach of contract against Gammar, and on the basis of the evidence of Mr Breck Hoffman is as follows:
a)Annexure 30 to Mr Breck Hoffman’s witness statement comprises 11 invoices that Treblex rendered to Gammar between December 2003 and February 2005. Fortron says that the product there referred to would have been sold to Gammar by Fortron during that period had its contract with Gammar not been breached by Gammar acquiring those products from Treblex;
b)Exhibit A18 comprises 11 bundles of documents, each bundle having as its first page one of the Treblex invoices comprising Annexure 30 to Mr Breck Hoffman's witness statement. The remaining pages in each bundle comprise documentation evidencing Fortron’s costs associated with supplying the same product in the same quantities as sold by Treblex to Gammar during the period in question; and
c)there was a total loss of profit of $125,584 in the amount claimed in paragraph 25(a) of the statement of claim. Mr Breck Hoffman was not cross-examined on his evidence of Fortron’s damages.
Where a party sustains loss by reason of a breach of contract, that party is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed: The Commonwealth of Australia v Amman Aviation Pty Limited (1991) 174 CLR 64 at 80 per Mason CJ and Dawson J.
The evidence to support the loss and damage claimed in paragraph 25(b) of the statement of claim is the evidence of Mr Breck Hoffman at paragraph 162 of his witness statement and the documents at annexure 33 to his witness statement. There is an undisputed claim of monies due and payable on invoices rendered by Fortron to Gammar in the sum of $37,201.
The basis of the quantification of the loss of profit on freight claims is set out in National Foods Milk Ltd v McMahon Milk Pty Ltd (No. 2) [2009] VSC 150 (“National Foods”). The evidence to support the loss and damage of $29,318 claimed in paragraph 25(d) of the statement of claim is the evidence of Mr Breck Hoffman at paragraphs 118 to 120 of his witness statement and the documentation being annexure 21 to his witness statement.
In its component parts Fortron’s claim is therefore as follows:
a)a claim for breach of contract in the sum of $125,584;
b)a claim for monies due of $37,201; and
c)a claim for freight costs of $29,318.
Fortron therefore claims judgment against Gammar under the statement of claim in the sum of $192,103 as a consequence of Gammar not having entered an appearance: Federal Magistrates Court Rules2001 (Cth), rr.13.03A(2) and 13.03B(2)(c)(i) after having been served with the application: Exhibits A10 and A11.
Fortron says that by failing to enter an appearance to the action there is a deemed admission by Gammar of the claimed breach of contract with Fortron because:
a)the claim is a common law claim;
b)there is no evidence that a judgment against Gammar would affect any other person, including all other respondents in the action;
c)there is no evidence that such a judgment would cause any injustice to any other respondent in the action; and
d)this is an ordinary case in which there is no reason for the Court on a motion for judgment in respect of purely common law rights against Gammar to look into the facts at all insofar as Fortron’s claim against Gammar is concerned.
Fortron also argued that the Court’s conclusions with respect to the 2003 Distribution Agreement, and in particular the finding that the agreement was terminable on one month’s notice, were findings made on the basis of legal propositions not advanced by any party. Fortron argues that it has not been given the opportunity to make submissions on those legal propositions: see Monaco & Anor v Arnedo Pty Ltd & Anor (1994) 13 WAR 522 at 523 per Malcolm CJ (with Kennedy J agreeing at 524).
Fortron argued even if these matters arose in respect of other respondents, they did not arise in respect of its case against Gammar, because Gammar did not appear, and that therefore the Court should revert to the pleaded case of Fortron against Gammar because that was the basis on which Fortron’s case was run. Fortron submitted that:
a)the case may have been differently run if Gammar had appeared;
b)steps may have been taken to address these issues by calling other evidence and making further submissions;
c)it was not sufficient to make the findings without isolating them to respondents other than Gammar; and
d)it cannot be prejudiced in its case by Gammar having accepted Fortron’s pleaded case by failing to appear and be heard simply because the Court needed to make the findings concerned in relation to the case involving the other respondents.
Fortron also submitted that the Court must inform the parties before deciding the case on a different basis, that is, one that departed from the proposition of law on which the case was conducted: Pantorno v The Queen (1989) 166 CLR 466 at 473-374 per Mason CJ and Brennan J (“Pantorno”), and had not done so in these proceedings.
Consideration of Fortron’s claim for damages against Gammar
Authority of the Full Court of the Federal Court of Australia, binding on this Court, indicates that the proper approach in a matter such as this in deciding whether or not a point was raised at hearing is not to take a narrow or technical view, and to look at the actual conduct of the proceedings to see whether the point was taken or not. Whilst pleadings and particulars are of assistance, they are not determinative: see Nescor Industries Group Pty Ltd & Ors v Miba Pty Ltd & Ors (1997) 150 ALR 633 at 640 per Davies J and 647 per RD Nicholson J (“Nescor”). Colloquially, the question is whether the relevant issue was “in the ring”: Nescor at 647 per RD Nicholson J.
The issue of the terms and conditions of the 2003 Distribution Agreement were in contest in these proceedings. The first to fifth respondents submitted that their defence was “intrinsically interwoven with” Fortron’s claim against Gammar. That was not really disputed by Fortron, but it said that it was still entitled to judgment against Gammar on its pleaded case because Gammar had not appeared.
The Court had to determine the terms and conditions of the 2003 Distribution Agreement. Again, the necessity to do so is not disputed. The ambit of the dispute about the terms and conditions of the 2003 Distribution Agreement ranged from Fortron’s claim that there was a further five year Distribution Agreement on the same terms and conditions as the 1998 Distribution Agreement, to the first to fifth respondents claim that there was no agreement, or that the 2003 Distribution Agreement was terminable without a specific period of notice, and without payment of any compensation for loss.
The Court determined, on the facts as it found them, that there was as a matter of law an implied term of reasonable notice which would have entitled Gammar to terminate the 2003 Distribution Agreement on one month’s notice. Significant facts upon which this determination was reached included Mr Breck Hoffman’s evidence that the relationship between Fortron and Gammar, which the Court found constituted the 2003 Distribution Agreement, was a “month by month” relationship, and that there had been a 30 day breach rectification provision in the 1998 Distribution Agreement: Fortron (No. 3) at paras.46-50 per Lucev FM.
To grant judgment for Fortron against Gammar in the terms sought would, therefore, on the face of it be inconsistent with the fact that the 2003 Distribution Agreement was terminable on one month’s notice, which is a matter of fact found as a result of the application of the law to the circumstances as they existed between Fortron and Gammar.
In this case, Fortron were manifestly on notice that the first to fifth respondents considered that the terms and conditions of the 2003 Distribution Agreement were in issue, and that was the case prior to the hearing commencing.
The terms and conditions of the 2003 Distribution Agreement were the subject of evidence from Mr Hoffman, and the subject of argument by the parties who did appear, as to relevant matters including the term of the 2003 Distribution Agreement. It was necessary to determine the terms and conditions of the 2003 Distribution Agreement to determine not only whether Gammar had breached its contract with Fortron, but whether and if so to what extent, for example, the first respondent, Mr Jones, had induced Gammar’s breach of contract, and to what extent Mr Tully had aided or abetted Mr Jones’ alleged misleading or deceptive conduct by reason of his knowledge of the 2003 Distribution Agreement. Each of those matters was the subject of written submissions by the applicant in the Applicant’s Outline of Closing Submissions: see paras.1, 2, 3, 36, 37 and 41. In final oral submissions Senior Counsel for Fortron referred to the fact that there was a contract in place when Gammar terminated the 2003 Distribution Agreement, and that that was in the terms of the previously expired, that is, the 1998 Distribution Agreement, propositions which were said to be resisted by “the respondents”, that is, all of the respondents who appeared at hearing, and in the context of a dispute as to whether the 2003 Distribution Agreement existed and as to whether the Court was “entitled … to identify its subject matter”: Second Transcript, page 252. Significantly, it was, in large part, on the basis of Mr Breck Hoffman’s evidence, that the Court determined that there was a 2003 Distribution Agreement, and that the implied term of reasonable notice ought, as a matter of fact, be one month. It is fair to observe that the issue of the terms and conditions of the 2003 Distribution Agreement, and the effect of those terms and conditions in relation to the case of the first to fifth respondents was in issue, or “in the ring”, between the first to fifth respondents and Fortron throughout these proceedings. The Court found, as a matter of law (and not fact) that a term of reasonable notice was to be implied, and then determined that that reasonable notice was one month, based on all the facts (including the facts given by Mr Breck Hoffman in evidence).
The reference to Pantorno does not avail Fortron in this case as there was not a departure from a question of law agreed between the parties, or a case argued on a different basis, given that there was clearly a dispute as to the terms and conditions of the 2003 Distribution Agreement which was in issue between Fortron and the first to fifth respondents (including Mr Tully) throughout these proceedings.
In the circumstances it would be unjust, and not in the interests of justice, for the Court to make an order in favour of Fortron which was contrary to the Court’s determination as to the proper terms and conditions of the 2003 Distribution Agreement, found following consideration of the arguments with respect to that issue, and the facts. The terms of the 2003 Distribution Agreement found by the Court were within the ambit of the overall dispute between Fortron and the first to fifth respondents as to the terms and conditions of the 2003 Distribution Agreement.
In the circumstances, Fortron’s claim against Gammar for breach of contract, that is of the 2003 Distribution Agreement, is made out, but only to the extent of a one month notice period. Damages in that respect ought to be assessed on the monthly average of the lost profits on the Treblex invoices from December 2003 to February 2005, plus interest.
On the basis of the undisputed evidence, and the failure of Gammar to appear, and there being no other cause for dispute, Fortron’s claims with respect to monies due of $37,201 and freight costs of $29,318, plus interest, have been made out.
Fortron’s claim for damages against Mr Tully
Conclusion in Fortron (No. 3)
In Fortron (No. 3) the Court concluded that the claim of breach of duty, both fiduciary and under s.182(1) of the Corporations Act 2001 (Cth) (“Corporations Act”), against Mr Tully was to be upheld: Fortron (No. 3) at para.181 per Lucev FM.
Fortron’s submissions
Fortron’s claim against Mr Tully is for:
a)damages for breach of fiduciary duty; and
b)a declaration under s.1317E of the Corporations Act that Mr Tully has contravened s.182(1) of the Corporations Act.
Fortron has elected to claim compensation, in this case damages, from Mr Tully, rather than an account of profits, and says that it is entitled to be placed in the position it would have been in had Mr Tully’s breach not occurred. The loss of profit damages claimed are in the amount of $125,584, and based on the uncontradicted evidence of Mr Breck Hoffman at pages 105 and 106 of the transcript and exhibit A18, as set out above: see para.9 above.
Citing Re Dawson [1966] 2 NSWLR 211 at 215 per Street J (“Re Dawson”) Fortron submits that:
a)the accepted rule is that if the fiduciary fails to discharge fully the duty which the fiduciary owes to beneficiaries then the fiduciary will be liable to such beneficiaries who suffer any loss as a consequence; and
b)the measure of relief is the amount necessary to restore the beneficiaries to the position enjoyed prior to the breach of fiduciary duty occurring, so that the cost of achieving that restoration at the date of hearing will quantify the compensation award.
By reference to Hill v Rose & Ors [1990] VR 129 at 144 per Tadgell J Fortron submits that:
a)the fiduciary has a personal obligation to make restitution to the beneficiary; and
b)the obligation imposed in equity upon defaulting trustees “and other fiduciaries is of a more absolute nature than the common law obligation to pay damages for tort or breach of contract” (underlining added) and is not limited or influenced by common law principles concerning remoteness of damage, foreseeability or causation.
Further, it was submitted that liability cannot be avoided by apportioning loss to other possible contributory causes, that is, the breach of fiduciary duty does not have to be “the” cause of the loss, simply “a” cause: Barton v Armstrong [1976] AC 104 at 118 per Lord Cross of Chelsea.
Mr Tully’s submissions
Mr Tully does not challenge the factual findings made by the Court in Fortron (No. 3) for the purposes of the present submissions as to damages, but observes that it is important to identify with precision the factual basis upon which Fortron’s case concerning breach of duty by Mr Tully was made out. Those findings appear in Fortron (No. 3) at paras.169-179 generally, and in particular at paras.173-175 and 177-179 per Lucev FM.
Mr Tully submits that there is no evidentiary basis on which the Court can be satisfied that the loss claimed by Fortron was caused by the breaches of fiduciary duty on the part of Mr Tully and that that is broadly for four reasons:
a)firstly, by reason of the paucity of facts found, or the evidence otherwise, to establish the causal link between the breach and the loss;
b)the context in which Mr Tully’s conduct occurred, namely the fracturing of the relationship between Fortron and Mr Ivan Hoffman and Mr Breck Hoffman, and Gammar, such that the relationship was damaged, meant that there would have been inevitable detriment to Fortron’s entire commercial relationship with Gammar;
c)that Fortron’s application of the principle in Re Dawson is too broad for three reasons:
i)the nature of the fiduciary concerned, namely an employee, and what he is found to have done, cannot be the subject of a sweeping application of the broad principle in Re Dawson;
ii)practicality and common sense are critical to the approach that ought to be taken in the attribution of any causative link; and
iii)the suggestion that the onus shifts at some point to the respondent to show the absence of any operative cause is not consistent with modern authority;
d)a common sense approach does not justify a broad application of the Re Dawson line of authority, and when the contemporary application of the principle in Australian jurisdictions is considered there are significant qualifications that need to be made.
Mr Tully submits that:
a)a finding was made as to his conduct giving rise to the presence of reasonably foreseeable harm to the interests of Fortron, as opposed to actual harm having been caused: citing Fortron (No. 3) at paras.176-177 per Lucev FM;
b)there was a finding that he conducted himself in a manner, and made arrangements with Treblex, Fortron’s competitor in Thailand, which diverted a commercial opportunity from Fortron, but that there are no findings as to the extent of the commercial opportunity lost by Fortron, and whether (and if so how) if it was specifically the conduct of Mr Tully which gave rise to such a loss in opportunity as so detailed;
c)it would not have been feasible for this Court to embark on such a level of specificity in its factual findings because the evidence simply did not enable the Court to do so;
d)the loss recoverable is that actually caused by the breach of duty as found, but that there must be a causal connection between the loss and the breach;
e)the loss of profit as conceptualised and quantified by Fortron cannot be tied to the conduct of Mr Tully giving rise to the conclusions as to breach of duty, as there is no evidence of any causal connection before the Court; and
f)the central thesis or overriding proposition behind Fortron’s case was that there was a substituted product scheme, and that the Treblex invoices now relied upon as evidence of lost profit in relation to the breach of fiduciary duty, were invoices led as part of a schedule of losses representing what were, on Fortron’s case, substituted products. The Court found, however, that there was in fact no product substitution scheme in place as alleged by Fortron: see Fortron (No. 3) at paras.116 and 127 per Lucev FM.
A central theme in the submissions of Mr Tully was that Fortron would have lost profit in any event because of the souring of the relationship between Fortron and Gammar. Mr Tully does go on to say that there is no cogent evidence as to precisely what it was that gave rise to the decision by Gammar in February 2005 to terminate the 2003 Distribution Agreement. Further, and critically, Mr Tully also says that there is no evidence as to what Mr Tully’s conduct, found to have been in breach of his fiduciary duty, caused by way of lost profit or otherwise. Mr Tully argues that the mere finding that whilst an employee of Fortron he saw a business opportunity, and diverted that business opportunity from Fortron, does not go any distance to establishing any causative link so as to demonstrate that there was a relationship between that business opportunity and the claimed lost profit. Also, Mr Tully submits that the finding that he was effectively endeavouring to contribute to the foreshadowed financial failure of Fortron by conducting himself in a manner and making arrangements with Treblex which diverted a commercial opportunity, does not in and of itself establish any necessary causative link to the claimed loss of profit. Mr Tully therefore submits that there is no basis for the Court to conclude that Fortron had met its burden of proving, on the balance of probabilities, that lost profit can be tied to the findings of breach on the part of Mr Tully as found. Mr Tully therefore argues that Fortron is entitled to merely nominal damages.
With respect to the quantum of damages Fortron submitted that account must be taken of the fact that the damages should be limited to those products that Fortron supplied to Gammar, and that if damages were to be awarded a more realistic basis for the quantum was the difference between Fortron’s 2003 and 2004 profit, as derived from Annexure A20 to Mr Breck Hoffman’s witness statement, namely $85,000.
Mr Tully submitted that Re Dawson ought not be applied without discrimination, and that there were variations and nuances within the principles established by Re Dawson: see the possibilities adverted to in RP Meagher, JD Heydon and MJ Leeming, Meagher, Gummow and Haynes Lehane’s Equity Doctrines and Remedies (4th Edn) (Chatswood: LexisNexis Butterworths, 2002) at pages 835-836, as part of a broader discussion of Re Dawson at 834-841 (“Meagher, Gummow and Lehane’s Equity”). The essence of this submission by Mr Tully is that there is a need for a more flexible approach where the errant fiduciary is not a trustee or a director and does not have actual constructive access to the actual trust assets or property that are the subject of dispute: citing O’Halloran v RT Thomas & Family Pty Ltd (1998) 45 NSWLR 262 at 274-278 per Spigelman CJ (with whom Priestly and Meagher JJA agreed at 280 and 281 respectively) (“O’Halloran”). Mr Tully argued that the strict standards applicable to a trustee of a traditional trust, or a director vested with the power to deal with the assets of a company as fiduciary agents, did not apply to a senior employee who was not in the traditional class of fiduciaries and who did not have the degree of control or capacity to control trust property.
Mr Tully submitted that common sense was part of the assessment process, and referred to the judgment of the Supreme Court of Western Australia in WA Fork Truck Distributors Pty Ltd v Jones & Ors [2003] WASC 102 (“WA Fork Truck Distributors”) where at para.105, having referred to O’Halloran, Pullin JA said that O’Halloran had “concluded that in assessing equitable compensation, while foreseeability is not a relevant consideration, it is essential the losses made good are only those which, from a common sense point of view, were caused by the breach of duty … I respectfully agree.” See O’Halloran at 273 per Spigelman CJ and 281 per Meagher JA.
Mr Tully also referred to AMP Services Ltd v Manning [2006] FCA 256 (“Manning (No. 1)”) and AMP Services Ltd v Manning (No. 2) [2007] FCA 82 (“Manning (No. 2)”). The Court was referred to those parts of Manning (No. 1) which dealt with the decision of clients of the second plaintiff, Arrive Wealth Management Ltd, to follow the defendant to subsequent employment at Goldman Sachs, which are as follows:
[67] Here common sense requires me to take note of the fact that each client lost to GSJBW [Goldman Sachs] made an independent decision to follow Ms Manning. This was inevitable given the close relationship between Ms Manning and her clients. Indeed, had Ms Manning waited out the notice period before speaking with her clients, I am sure that most would have followed her just as they had followed her from PwC.
[68] The actual loss that Arrive has suffered is not the broad “total loss of clients” as Arrive would have it but the loss of the “value” of keeping those clients between 20 January and 16 February (being the day Ms Manning’s employment terminated) together with, perhaps, the loss of the opportunity to take steps in that period to retain the lost clients: Southern Real Estate Pty Ltd v Dellow and Arnold (2003) 87 SASR 1 at 12–15; Charles Lo Presti Pty Ltd v Karabalios [2000] NSWSC 395 at [31], [49], and [56]. On this latter aspect, however, given the history and the close relationship between Ms Manning and her clients, I am not at this point persuaded that “but for” her breach of fiduciary duty the clients would have remained with Arrive. On the contrary, the evidence so far suggests that regardless of Ms Manning’s breach of duty the clients would have remained with Arrive only until her move to GSJBW and they would then have followed her.
Manning (No. 1) at paras.67-68 per Finkelstein J.
Mr Tully argued that there would inevitably have been a business competitor that would have arisen that would have legitimately exploited the fact that the relationship between Fortron and Gammar had dramatically soured.
Mr Tully submitted that in circumstances where:
a)he had been found to be remarkably naïve;
b)he set up a business opportunity by establishing Treblex;
c)there is freedom of choice as to how the market operates; and
d)there was considerable pre-existing damage to the relationship between Fortron and Gammar,
it is not a case in which the strict equitable compensation principles ought to be applied. It is submitted that Fortron’s loss was inevitable in any event, and that Treblex was merely accessing a market that had already been substantially lost by Fortron because of the souring of the relationship with Gammar.
Fortron’s submissions in reply
Fortron submits in reply that it has established that:
a)there was a breach of fiduciary duty by Mr Tully;
b)there was demonstrated loss to Fortron;
c)the question is whether the loss would have happened if there had been no breach; and
d)Mr Tully’s conduct need not be the sole cause of its loss or damage, and that it would have been sufficient if it had played some part, even if only a minor part, in contributing to the loss. Thus, even if there were other reasons for the loss (which Fortron does not accept) those reasons do not preclude it from an entitlement to equitable compensation, so long as the Court is satisfied that the loss suffered by the applicant would not have happened if there had been no breach by Mr Tully.
In relation to the causal link between loss and the breach of fiduciary duty by Mr Tully Senior Counsel for Fortron submitted that Fortron would not have suffered the loss had Mr Tully not breached his fiduciary obligations. This was said to be established by four basic propositions, as follows:
a)if Mr Tully had not breached his fiduciary duties, Treblex would not have been incorporated, and Mr Tully was a participant in the incorporation, and the subsequent submitting of corporate documentation such as BAS statements for Treblex;
b)if Treblex had not been incorporated, Treblex would not have gone about getting the appropriate export licences, getting the product, known where to source the product and what product was required to meet the market in Thailand, and most importantly, the price to charge for that product. All of that knowledge came from Mr Tully as a consequence of his being a senior employee of Fortron, as found by the Court in Fortron (No. 3) at para.174 per Lucev FM;
c)Treblex would not have commenced selling the product in competition with Fortron if Treblex had not been incorporated, and thus once Treblex was incorporated, and gained all the necessary information to get the product and market it and price it, it was then able to sell the product to Gammar; and
d)Gammar would not have ceased buying its product from Fortron, and instead purchased it from Treblex, unless all of these arrangements had been put in place by Mr Tully, amongst others.
Fortron says that the loss which flowed from the chain of events described by the above four propositions was the loss of sales which in turn resulted in a loss of profits of $125,584, as set out above: see paras.9 and 32 above.
In relation to the strictness of the application of the Re Dawson principles Fortron submits that:
a)as company secretary Mr Tully was privy to everything that directors knew;
b)Mr Tully’s role was to record the Board minutes and sit in on Board meetings; and
c)as company secretary and senior accountant Mr Tully prepared the company’s statements of accounts.
Thus, Mr Tully knew what the directors discussed at Board meetings, minuted those meetings, but also knew Fortron’s profit and loss, what it charged for its product, what its profit margin was, and what its expenses were. Fortron submits that it was that information that Mr Tully used to set up Treblex to compete against Fortron.
Fortron says that:
a)as company secretary Mr Tully was effectively in the same position as a director; and
b)it is the manner in which the information is used by a person in a position of responsibility, in this case a company secretary and senior accountant, which is analogous to the use of information by a trustee or director in this case.
Fortron says that the authorities clearly establish that once the breach of a fiduciary duty has been established then the evidential onus shifts to the fiduciary, in this case, Mr Tully, to show that the loss would not have occurred even if there had been no breach of the fiduciary duty.
In relation to WA Fork Truck Distributors Fortron says that the Court ought to apply the common sense approach adopted by the Western Australian Supreme Court. In WA Fork Truck Distributors it concluded that breaches of fiduciary duty by the general manager of WA Fork Truck Distributors, who established a new business and brought it to market with a large section of WA Fork Truck Distributors’ sales staff earlier than would have been the case if he had complied with his contract of employment by giving notice, caused loss to WA Fork Truck Distributors: see WA Fork Truck Distributors at paras.106 and 108 per Pullin J.
Consideration of Fortron’s claim for damages against Mr Tully
The Court’s conclusion that Mr Tully breached:
a)his fiduciary duty to Fortron; and
b)his duty under s.182(1) of the Corporations Act,
was based upon the following findings, which it is useful to set out:
173. On the facts, there can be no doubt that whilst Treblex was engaged in marketing and distributing a range of industrial and/or automotive products in Thailand, it was a direct competitor with Fortron, particularly in the automotive products, including Engine Flush, market in Thailand. In that regard, and in respect of a major product range for both Treblex and Fortron, there was direct competition between them in the market in Thailand.
174. Mr Tully was a senior employee at Fortron. Seniority of itself is not sufficient to found a fiduciary duty. However, he undertook duties at that senior level in relation to matters of significant importance and in respect of which significant trust was reposed in him as a senior employee. Setting aside his role with the Fortron Group as a whole, his role as a Senior Accountant and Company Secretary with Fortron meant that he had access to all of Fortron’s confidential information in relation to its product ranges and costs. Mr Tully …, as Company Secretary, was responsible, together with others, for the financial and regulatory health of Fortron. Fortron paid him for this, relied upon him to carry out his duties, and to conduct himself in a manner appropriate to the level of trust reposed in him. That level of trust, and the nature of his duties and responsibilities, was such as to give rise to a fiduciary relationship between Mr Tully and Fortron.
175. In circumstances where Mr Tully was a director of a company which competed in exactly the same market as Fortron there can be little doubt that he had, in relation to a matter within the scope of his service, a personal interest or inconsistent engagement with a third party, namely Treblex. Mr Tully was in a position where his interest in Treblex and his duty to Fortron conflicted, which was a position that he was not allowed to put himself into. As a fiduciary Mr Tully was not in a position to promote his personal interests in Treblex by making or pursuing a gain through Treblex in circumstances where there was a conflict or a real or substantial conflict between his interests in Treblex and those interests in Fortron which he was required to protect. In the circumstances, it is plain that Mr Tully was an employee of Fortron who owed them a fiduciary duty, but saw a business opportunity arising, and diverted that business opportunity from Fortron. This is not a case, as Senior Counsel for Mr Tully endeavoured to persuade the Court, of a person engaging in a business outside of the scope of the business to which the fiduciary obligation was owed. This was not a new or separate business. The business of Treblex was, in relevant part, the business of Fortron in the Thailand market. This is a clear case of a breach of fiduciary duty by Mr Tully.
177. For all of his years of experience Mr Tully, although in the Court’s view not dishonest, was remarkably naïve about the scope of his duties and responsibilities, and perhaps also his accounting competency. The test however is an objective one involving an ordinary person of ordinary prudence with the knowledge and experience that Mr Tully had as a senior employee of Fortron. For reasons set out above there can be no doubt that his being a director of Treblex, and engaging in financial and marketing activities for Treblex as he did, involved reasonably foreseeable harm to the interests of Fortron, and an outright conflict between his duties as a senior employee, and Company Secretary, of Fortron, and his personal interest as a director of Treblex. Mr Tully simply could not travel both the Fortron and Treblex paths at once, as he endeavoured to do for approximately a year. By going down the Treblex path he breached his duty under s.182(1) of the Corporations Act to Fortron by gaining an advantage for himself (various remuneration was paid to him by Treblex in relation to his duties as a director), and arguably providing for an advantage to be gained by Mr Jones and Gammar in relation to the provision of Treblex product.
178. At the same time that Mr Tully was telling other employees that Fortron was going to fail financially, he was effectively endeavouring to contribute to that financial failure by conducting himself in a manner, and making arrangements with Treblex, Fortron’s competitor in Thailand, which diverted a commercial opportunity from Fortron. Even if, as Mr Tully believed, Fortron was in financial difficulties it was still his duty not to do anything contrary to his duty of loyalty.
See Fortron (No. 3) at paras.173-175 and 177-178 per Lucev FM (footnotes omitted).
The above extract sufficiently asserts the fundamental propositions, but it is perhaps worth reiterating one those propositions more pithily:
… a senior and responsible employee, may not engage in a business which directly competes with that of his employer”: Meagher, Gummow and Lehane’s Equity, page 185 at [5-150].
Mr Tully’s position as company secretary meant, as the Court found, that he was “a senior employee” with “access to all of Fortron’s confidential information in relation to its product ranges and costs.”: Fortron (No. 3) at para.174 per Lucev FM. Mr Tully had knowledge and information of the most confidential kind about the conduct of Fortron’s business, and an intimate understanding of Fortron’s business from his attendance and preparation at Board meetings and his preparation of Fortron’s accounts. That information and understanding was of such a kind that on a day-to-day basis his access to knowledge and information about, and understanding of, Fortron’s business, and the level of trust reposed in him by Fortron, and the level of loyalty to be reciprocated by Mr Tully as an employee, was, if not the same as a trustee or director, equivalent to that of at least a director of a company such as Fortron. In those circumstances, if there is a causative link between Mr Tully’s breach of fiduciary duty and the loss occasioned to Fortron by reason of that breach, equitable compensation must be assessed at more than a nominal level.
The analysis of the causative link between Mr Tully’s breach of fiduciary duty and the loss suffered by Fortron put forward by Senior Counsel for Fortron in Fortron’s submissions in reply is compelling: see para.46 above. Mr Tully was involved in the incorporation and operation of Treblex, including its marketing and pricing in relation to products directly competitive with Fortron. Treblex was invoicing for goods which would otherwise have been supplied to Gammar by Fortron, or which, Fortron might have elected to supply to Gammar if afforded the opportunity by Treblex via Mr Tully. Further, Fortron may (and on the evidence probably would) have forbidden Mr Tully from becoming involved in Treblex at all, or at least in relation to Gammar, had he made the full and frank disclosure to Fortron in relation to his Treblex activities, which it was his duty to do. Mr Tully’s conduct in breach of his fiduciary duty enabled Treblex to take advantage in supplying product to an established customer of Fortron, to the detriment of Fortron. It is not to the point that someone else might have taken over the supply of those goods from Fortron at some stage as a consequence of Gammar’s dissatisfaction with Fortron. At a time of instability and trouble in the relationship between Fortron and Gammar a senior employee’s fiduciary duty becomes all the more important, and a breach of that fiduciary duty becomes all the more heinous because the senior employee is disloyal and exploits the position to his own advantage. In any event, this particular loss was not inevitable. The cause of the loss was the making, marketing and selling of the product by Treblex to Gammar, a process in which Mr Tully played a central part. There is no, or no sufficient, evidence to support a finding, and no finding in any event, in Fortron (No. 3), that but for the sale of product to Gammar by Treblex, someone other than Treblex (but not Fortron) would have supplied the product to Gammar. This particular loss to Fortron would not have been incurred, but for the activities of Treblex, in which Mr Tully was a central participant.
Mr Tully’s reliance upon Manning (No. 1) and Manning (No. 2) is misplaced. It is clear from the extracts from Manning (No. 1) set out above: see para.42 above, that the employee concerned brought established customers with her to Arrive Wealth Management, and after she left Arrive Wealth Management, those customers elected to follow her. That is significantly different to a situation where a senior employee, in breach of his fiduciary duty, establishes a company whose purpose is to supply a product in competition with the employer of the senior employee, who otherwise, that is apart from his employment, has no prior connection with the customer or market that that senior employee now seeks to exploit, contrary to the senior employee’s fiduciary duty.
This matter bears some similarities to WA Fork Truck Distributors where the Western Australian Supreme Court observed at paras.92-94 per Pullin J:
[92] The plaintiff alleges that the work of Mr Jones carried out in the plaintiff's time resulted in the establishment of Mr Jones' business in much shorter time than would have been the case had he not breached his contract and his fiduciary duties. This gave Mr Jones and his companies a "headstart", a "springboard"; that is, an early start into his new business.
[93] The expressions "headstart" or "springboard" have been used as a tag in other cases to refer to the advantage gained by persons who have misused confidential information. Those cases do not apply here. In United States Surgical Corp v Hospital Products International [1983] 2 NSWLR 157, many "headstart" or "springboard" cases were considered. Following the reference to those cases, the Court then said at p233:
"This review shows that the headstart approach to damages or other relief is not based on some artificial or arbitrary doctrine, to be applied regardless of the facts of the case. It is a principle applied in conformity with the more general principle that a person misusing confidentially information must answer for his default according to his gain."
[94] In my view, the "headstart" cases are no more than a collection of cases dealing with circumstances where a person has gained an advantage which is measured by reference to the advantage which has followed the misuse of the information. By analogy, that approach can be applied here. The plaintiff, instead of waiting until he terminated his employment, by giving proper notice, and then taking the considerable time which was necessary to set up his competing business - which he was entitled to do - took the time of his employer and established the business so that he was in a position to start in competition almost immediately after he left his employment. If he had not breached his duties and contract, he would not have been able to start in business straight away. He therefore gained a "headstart" as a result of his breach of contract and breach of fiduciary duty.
The position in this matter is, however, worse in relation to Mr Tully’s conduct, as Mr Tully has run the Treblex business for his own gain whilst still employed in a senior position with Fortron.
In WA Fork Truck Distributors the Western Australian Supreme Court went on to deal with equitable compensation, observing as follows:
[104] In this case, the plaintiff has elected to claim only equitable compensation for the breach of fiduciary duties. The assessment of equitable compensation is not fettered by many of the common law notions which have to be considered in an assessment of the quantum of an award of damages at common law: Re Dawson (deceased) [1966] 2 NSWR 211; Hill v Rose [1990] VR 129 at 144. Issues of foreseeability, remoteness and contributory causes do not have to be considered. The subject is well covered in Meagher, Gummow and Lehane "Equity Doctrines and Remedies" 4th ed, 23-015 to 23-020.
[105] In Re Dawson (above), Street J said that issues of causation do not readily enter into consideration when considering the remedy of restitution. This does not, however, mean that the loss leading to the claimed compensation does not have to have any link at all to the breach of fiduciary duties. In O'Halloran v RT Thomas & Family Pty Ltd (1998) 45 NSWLR 262, Spigelman CJ and Meagher JA concluded that in assessing equitable compensation, while foreseeability is not a relevant consideration, it is essential that losses made good are only those which, from a commonsense point of view, were caused by the breach of duty (see p273 and p281). I respectfully agree.
[106] Viewed from a commonsense point of view, I conclude that breaches of fiduciary duty by Mr Jones caused the plaintiff a loss of sales in the "headstart" period and the other loss I refer to below.
See WA Fork Truck Distributors at paras.104-106 per Pullin J.
In the circumstances set above there is an adequate or sufficient connection between the equitable compensation claimed by Fortron and the breach committed by Mr Tully: Maguire & Anor v Makoronis& Anor (1996) 188 CLR 449 at 473 per Brennan CJ, Gaudron, McHugh and Gummow JJ, and it follows, for essentially the same reasons, that it is not appropriate that any equitable compensation be merely nominal.
The question now arises as to the quantum of equitable compensation in this matter.
Fortron argued that its equitable compensation ought to be the loss of profit of $125,584. Mr Tully argued that if equitable compensation was to be more than a nominal amount then a more realistic basis for quantum was the difference between Fortron’s profit in 2003 and 2004, being approximately $85,000, and further that equitable compensation should be limited to those products that Fortron ordinarily supplied to Gammar.
Mr Breck Hoffman’s evidence that the loss of profit as a result of the Treblex invoices was $125,584 is unchallenged. The Court can, and does, make a finding that this is the loss suffered by Fortron as a result of Mr Tully’s breach of fiduciary duty. It should also be the amount of equitable compensation which Mr Tully is obliged to pay to Fortron. The amount should not be reduced to the $85,000 difference between the 2003 and 2004 profit of Fortron, because that amount:
a)does not reflect the unchallenged evidence as to the actual loss of profit to Fortron as a consequence of the rendering of the Treblex invoices; and
b)as a total profit amount it would undoubtedly have been affected by other factors affecting Fortron’s overall profit, and an amount of equitable compensation ought not be reduced by unrelated, or even contributory, factors: Meagher, Gummow and Lehane’s Equity, page 209 at [5-265].
The amount of equitable compensation also ought not be reduced by reference to the products Fortron ordinarily supplied to Gammar, because the breach of fiduciary duty encompasses the loss of opportunity to Fortron to supply other products to Gammar, which opportunity it may or may not have taken advantage of had Mr Tully made the full and frank disclosure of his conflict of duty and interest in breach of his fiduciary duty. But, in any event, the undisputed evidence is that Fortron’s loss of profit was $125,584 in relation to the Treblex invoices, and the Court so finds.
It follows that there will be an order that Mr Tully pay Fortron equitable compensation in the total amount of $125,584, plus interest with interest calculated from the date of each of the separate invoiced amounts.
Declaration under s.1317E of the Corporations Act
Section 1317E(1)(a) of the Corporations Act provides that if a court is satisfied that a person has contravened s.182(1) of the Corporations Act it must make a declaration of contravention.
A declaration under s.1317E(1) of the Corporations Act can only issue in proceedings in which the relief is sought by the Australian Securities and Investments Commission: Corporations Act, s.1317J(4); Primacy Underwriting Agency Pty Ltd (formerly Landmark Underwriting Agency Pty Ltd) v Kilborn [2007] NSWSC 158 at paras.6-8 per Young CJ in Eq citing One.Tel v Rich (2005) 190 FLR 443 at 462-463 per Bergin J; [2005] NSWSC 226 at paras.69-70 per Bergin J; Foyster v Foyster Holdings Pty Ltd [2002] NSWSC 768 at para.9 per Barrett J. Accordingly, no declaration will be made in this matter.
Conclusions and orders
The Court has concluded that:
a)Fortron’s claim for damages against Gammar has been made out as to:
i)damages for breach of contract in a sum equivalent to the average monthly profit lost (based on the Treblex invoices) for the period from December 2003 to February 2005 for a period of one month;
ii)the claim for monies due of $37,201; and
iii)the claim for freight costs of $29,318,
plus interest; and
b)Fortron’s claim for equitable compensation against Mr Tully has been made out in the total amount of $125,584, plus interest with interest calculated from the date of each of the separate amounts invoiced by Treblex.
The Court makes the following orders:
(1)Parties to confer within 14 days with respect to:
a)proposed orders to accord with the Reasons for Judgment published 15 March 2013; and
b)costs.
(2)If no agreement is reached within 14 days on proposed orders and costs, each party is to file and serve within 21 days:
a)a minute of proposed orders; and
b)an outline of submissions on costs,
and the matter is adjourned to not before 3.30pm on 18 April 2013 for further hearing on those issues, if necessary.
I certify that the preceding sixty-nine (69) paragraphs are a true copy of the reasons for judgment of Lucev FM
Date: 15 March 2013
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