Klein v Mochkin
[2024] VSCA 174
•8 August 2024
| SUPREME COURT OF VICTORIA COURT OF APPEAL |
| S EAPCI 2022 0115 |
| YECHIEL KLEIN & ORS (ACCORDING TO THE ATTACHED SCHEDULE) | Applicants |
| v | |
| YOSEF MOCHKIN & ANOR (ACCORDING TO THE ATTACHED SCHEDULE) | Respondents |
---
| JUDGES: | KENNEDY, WALKER and MACAULAY JJA |
| WHERE HELD: | Melbourne |
| DATE OF HEARING: | 6 May 2024 |
| DATE OF JUDGMENT: | 8 August 2024 |
| MEDIUM NEUTRAL CITATION: | [2024] VSCA 174 |
| JUDGMENTS APPEALED FROM: | [2022] VCC 1385 (Judge Burchell); [2022] VCC 1835 (Judge Burchell). |
---
EQUITY – Account of profits – Where former partners had breached fiduciary duties by use of partnership property in new business – Where judge ordered errant fiduciaries to account for profits of new business – Where profits accounted for to diminish over time – Appropriate calculation of diminution – Diminution did not adequately reflect exertions of errant fiduciaries and change in nature of business – Account of profits re-calculated.
EQUITY – Account of profits – Where judge ordered errant fiduciaries to account for capital value of new business in addition to profits – Whether order to account for capital value appropriate – Order to account for ‘benefit’ under s 33(1) of Partnership Act1958 can include capital value – No error in judge’s conclusion that new business would not exist ‘but for’ breach of fiduciary duty – Whether share of capital value ordered appropriate – Share of capital value would result in ‘windfall’ to party seeking relief – Account of profits re-calculated.
EQUITY – Unclean hands – Whether party seeking relief had engaged in misconduct with ‘immediate and necessary relation’ to relief sought – Whether party who had engaged in disentitling conduct has ‘washed’ unclean hands – Relevance of misconduct of other party to exercise of discretion to refuse relief – Unclean hands defence not made out.
Partnership Act 1958, s 33.
Ancient Order of Foresters in Victoria Friendly Society Ltd v Lifeplan Australia Friendly Society Ltd (2018) 265 CLR 1; Warman International Ltd v Dwyer (1995) 182 CLR 544; Meyers v Casey (1913) 17 CLR 90, applied; Sang Lee Investment Co Ltd v Wing Kwai Investment Co Limited [1983] HKLR 197 (PC); Black Uhlans Incorporated v Crime Commission (NSW) [2002] NSWSC 1060; Zphere Pty Ltd v Pakis (2022) 69 VR 338; Karl Suleman Enterprizes Pty Ltd (in liq) v Babanour (2004) 49 ACSR 612, discussed.
---
| Counsel | |||
| Applicants: | Mr AL Ounapuu | ||
| Respondents: | Mr MI Ravech with Mr N Ainsworth | ||
Solicitors | |||
| Applicants: | Rosendorff Lawyers | ||
| Respondents: | Rotman & Morris | ||
TABLE OF CONTENTS
Introduction and summary of conclusions
Summary of key facts
Legislation and relevant legal principles
Ground 1 and the notice of contention: The unclean hands defence
The parties’ submissions on the unclean hands issue
Consideration of the unclean hands issue
Ground 2: The diminution of Mochkin’s share of the William Klein profits
The judge’s reasons
The parties’ submissions on ground 2
Consideration of ground 2
Ground 3: Whether Klein and Segman must account for the capital value of the William Klein business
The judge’s reasons
The parties’ submissions on ground 3
Consideration of ground 3
Ground 4: The quantum of Mochkin’s share in the William Klein capital
The judge’s reasons
The parties’ submissions on ground 4
Consideration of ground 4
Orders in lieu of paragraphs 2 and 4 of the judge’s declarations
What is just and equitable in the circumstances of this case?
Form of orders
Conclusion
SCHEDULE OF PARTIES
KENNEDY JA
WALKER JA
MACAULAY JA:
Introduction and summary of conclusions
Yosef Mochkin, Yechiel Klein and Menashe Segman formerly operated an online retailing business together, under the name ‘OzShopStore’. The business was operated through a partnership, which had commenced in December 2017. The relationship between the partners soured in the course of 2018, and by August 2018 the relationship between the three partners had broken down. From mid- to late-August 2018, Klein and Segman conducted an online retailing business under the name ‘William Klein’, using a corporate vehicle, Getafix Café Pty Ltd (‘Getafix’). From that same time, Mochkin conducted an online retailing business under the name ‘Augoods’, using a corporate vehicle, JMEC Retail Pty Ltd (‘JMEC’).
In September 2019, following the breakdown of the relationship, Mochkin commenced a proceeding in the Magistrates’ Court[1] seeking a declaration that the partnership was dissolved in August 2018, an accounting by Klein and Segman of the profits made by the William Klein business using the partnership’s property, and repayment of loans Mochkin had made to the partnership. In response Klein and Segman brought a counterclaim, alleging that on or about 9 August 2018 the parties had entered into a settlement agreement, pursuant to which Klein and Segman had acquired Mochkin’s interest in the partnership. They sought a declaration that the parties were bound by the settlement agreement, a declaration that the partnership was dissolved as at August 2018, and orders for damages and equitable compensation or an account of profits in relation to JMEC’s use of partnership property. They also contended that Mochkin was not entitled to relief by reason of his ‘unclean hands’.
[1]The proceeding was subsequently transferred to the County Court.
The trial judge delivered her first judgment in August 2022.[2] She relevantly found as follows.
[2]Mochkin v Klein [2022] VCC 1385 (‘First Reasons’).
(a)There was no concluded settlement agreement.
(b)The partnership should be dissolved under s 39(f) of the Partnership Act 1958 with an effective date of 11 August 2018.
(c)Certain assets constituted assets of the partnership on dissolution for the purposes of taking of accounts.
(d)Both of Klein and Segman, on the one hand, and Mochkin, on the other, had breached their respective fiduciary duties to the partnership, by using partnership property to derive an unauthorised profit. Those profits were a ‘benefit’ within the meaning of s 33(1) of the Partnership Act. As a consequence:
(i)Klein, Segman and Getafix were liable to account to Mochkin for the benefit they received; and
(ii)Mochkin and JMEC were liable to account to Klein and Segman for the benefit Mochkin and JMEC received.
The judge allowed for a reduction in the various shares of profits to reflect the ‘exertions’ of each side in developing their new business after the dissolution of the partnership.[3] However, she rejected the evidence of Klein and Segman’s expert, Mr Simonetti, who had opined that Mochkin’s entitlement to profits from the William Klein business diminished to zero per cent at the end of a 12 month period.[4]
[3]First Reasons, [228], [258].
[4]First Reasons, [231].
In dealing with Klein, Segman and Getafix’s argument that Mochkin was disentitled to relief by reason of his unclean hands, the judge found that there was insufficient evidence to support that equitable defence. Her Honour also said that the evidence before the Court was that there was conduct of both Mochkin, on the one hand, and Klein and Segman on the other hand, being improper against each other, so as to ‘wash their hands’, which negated any impropriety and rebutted the defence.[5]
[5]First Reasons, [232].
Following the first judgment, Mochkin contended that, in addition to an order concerning the profits generated by the William Klein business, a declaration should be made that Klein and Segman held the William Klein business on trust for the partnership. The trial judge accepted that argument, in her second judgment.[6] She also accepted that Mochkin held the Augoods business on trust for Klein and Segman. Her Honour thus made orders that:
(a)the total capital value of the William Klein business, including its assets, derived by Klein and Segman in partnership or through Getafix, are held on a constructive trust for the benefit of Mochkin, as to 37.5 per cent, and Klein and Segman, as to 62.5 per cent; and
(b)the total capital value of the Augoods business, including its assets, derived by Mochkin in partnership or through JMEC are held on a constructive trust for the benefit of Mochkin as to 62.5 per cent and Klein and Segman as to 37.5 per cent.
[6]Mochkin v Klein (No 2) [2022] VCC 1835 (‘Second Reasons’).
Klein, Segman and Getafix now seek leave to appeal the following aspects of the judge’s decision:
(a)her Honour’s rejection of their ‘unclean hands’ defence (ground 1);
(b)her Honour’s conclusion as to the extent of the diminution of Mochkin’s share of the profits from the William Klein business (ground 2);
(c)her Honour’s finding that Klein and Segman must account for the capital value of the William Klein business as well as for the profits generated by that business (ground 3); and
(d)her Honour’s rejection of Mr Simonetti’s evidence that by October 2022 Mochkin’s share of the capital value had reduced to nil or, alternatively, to a greater extent than the judge accepted (ground 4).
The orders sought, should leave be granted and the appeal allowed, vary according to the ground on which the applicants succeed.
Mochkin and JMEC filed a notice of contention in relation to the judge’s finding with respect to the unclean hands defence.
For the reasons that follow, we would grant leave to appeal and allow the appeal on grounds 2 and 4.
Summary of key facts[7]
[7]The facts are taken from the Agreed Summary provided by the parties to the Court, save where a separate reference is given.
As noted above, this proceeding concerns three online retailing businesses:
(a)OzShopStore, a business that was conducted between December 2017 and August 2018 by Mochkin, Klein and Segman in partnership;
(b)William Klein, a business that was conducted from mid-August 2018 by Klein and Segman through the vehicle of Getafix; and
(c)Augoods, a business that was conducted from mid-August 2018 by Mochkin through the vehicle of JMEC.
On 16 May 2017, Getafix was incorporated. Klein and Segman were its directors and equal shareholders.
In or about early December 2017 Mochkin decided to establish an online business on Amazon and eBay. Around that time he and Klein established the partnership, with equal shares between them. The business was to sell low-cost retail goods for domestic use (such as homeware and party goods, primarily imported from China) online, using Klein’s existing bank, eBay and PayPal accounts. On 6 December 2017 Klein applied for an Amazon account in the name ‘OzStore’, using the ABN of an unrelated business operated by Klein and a third party, Mr Rapp. On or about 19 December 2017 the partnership began selling products on Amazon under the name ‘OzStore’. On 5 March 2018 the partnership commenced selling on eBay under the name ‘OzShopStore’.
In or about March 2018 Segman joined the partnership, and the percentage shares in the partnership were changed so that Mochkin held 50 percent, Klein held 30 percent and Segman held 20 percent.
During the course of the partnership, Mochkin made loans to the partnership.
The partnership stock was kept at an apartment on McLeod Road in Patterson Lakes (the ‘McLeod Road apartment’). This was also where the partners worked to organise the shipping of products.[8]
[8]First Reasons, [54].
Between 25 June and 27 July 2018 Klein was in Israel. During this period relations between Klein and Mochkin were strained. After Klein returned to Australia, relations between the partners soured further. In late July and early-August 2018, there were a series of meetings at which the partners discussed their exit from the partnership.
On the evening of 8 August 2018 Klein changed the passwords to the partnership’s eBay, Amazon and Gmail accounts. However, he then changed them back. He sent Mochkin the following WhatsApp message:
Mate this crazyness was getting to me and definitely was wrong to change the passwords.
Sorry
Got ahead of myself.
On 9 August 2018 Klein, Segman and Mochkin, together with Mochkin’s brother, met and discussed a resolution to the dispute. The parties recorded their respective understandings of what was discussed in emails that afternoon and evening. Later that day Klein transferred $15,005.98 from his PayPal account to Mochkin, leaving $1,255.99 remaining in the account.
On 10 August 2018, a Friday, at around 9:00 pm, Mochkin:
(a)logged into Klein’s PayPal account and transferred the balance of $1,255.99 to his personal account;
(b)changed the passwords to Klein’s eBay and PayPal accounts and to the Amazon and Gmail accounts used by OzShopStore; and
(c)ended all of the product listings of OzShopStore on eBay and Amazon (comprising over 1,500 individual listings).
At 11:32 pm on 10 August 2018 Mochkin sent a voicemail message to Klein stating, amongst other things:
Hey Yechiel, … I started this partnership with you, ush, your my mate you’re the person that I entered this venture with. When you’re able to, come down to Paterson. I’ve changed the locks and uh, Menashe is not really a part of this as far as I’m concerned. We started this partnership together, um. I’ve made some changes uh… I’m sorry. I’ve made some changes in the listings, and I think I’ve got a good solution, and a way that we can work this out together. So when you are ready to come down, come down and we’ll have a chat face to face. I don’t want to do this over the phone. Let me know when works for you.
Approximately three hours later, shortly after midnight, Klein, with Segman’s assistance:
(a)recovered his eBay and PayPal accounts, removed Mochkin’s email as the recovery email for the OzShopStore email account and took permanent control of all the partnership email, e-commerce and bank accounts, to the permanent exclusion of Mochkin; and
(b)took steps to reverse the $15,005.98 and $1,255.99 PayPal payments that had been made to Mochkin.
As at 10 August 2018, the partnership’s assets consisted of the following:
(a)a pallet of stock that was stored in Segman’s garage on Titcher Road, Noble Park (‘Titcher Road Stock’);
(b)stock held at Amazon FBA warehouse (‘FBA Stock’);
(c)stock Mochkin retained at the McLeod Road apartment (‘McLeod Stock’);
(d)$16,261.97 in a PayPal account;
(e)$4,626.31 in a bank account;
(f)a spreadsheet called the McLeod Spreadsheet (which showed the stock kept at the McLeod Road apartment, as well as containing intellectual property comprised of photography and description of products for listings, product prices and discount offers);[9]
(g)a spreadsheet called the Products Spreadsheet;
(h)a Google account associated with the OzShopStore email account;
(i)the eBay account and the information stored on it;
(j)the Amazon account and the information stored on it;
(k)stock images; and
(l)all property, including stock, bought with monies belonging to the partnership which is deemed, by operation of s 25 of the Partnership Act, to have been bought on account of the partnership, including but not limited to, the photo box, packaging supplies, label printer, printing supplies, shelving, trolleys and postal stamps located at the McLeod Road apartment at 11 August 2018.
[9]First Reasons, [226].
On 13 August 2018 Mochkin emailed Klein and Segman stating:
Hi Yechiel
Should you require any items to fill our orders for today for our eBay user ID Shopozstore.
Please let me know today so I can assess what is available and prepare accordingly.
Thank you
Joe Mochkin
On 15 August 2018 Klein recovered the $16,261.97 that had been paid from his PayPal account to Mochkin on 9 and 10 August 2018.
On 15 August 2018 Klein and Segman began selling products online under the William Klein name, using the partnership’s assets. The assets used were:
(a)the eBay account and the Amazon account (which were re-branded under the name ‘William Klein’);
(b)the $16,261.97 in the PayPal account;
(c)the $4,626.31 in the bank account;
(d)the FBA Stock and the proceeds of sale of that stock;
(e)the Titcher Road Stock and the proceeds of sale of that stock;
(f)the McLeod Spreadsheet and the Products Spreadsheet;
(g)the Google account; and
(h)the stock images.
Klein and Segman did not use the McLeod Stock.
Eventually Klein and Segman used Getafix to conduct the business. The products sold by the William Klein business consisted, initially, of the same products formerly sold by the partnership through OzShopStore. However, later, during the Covid-19 pandemic, the William Klein business sold different products, including personal protective equipment (‘PPE’). The judge appeared to accept that the market for PPE was a different market from that in which the partnership business had operated.[10]
[10]First Reasons, [228].
On 17 August 2018 Mochkin incorporated JMEC. In or about mid-August 2018 Mochkin and/or JMEC commenced selling products online under the name Augoods. The products sold by the Augoods business consisted of excess and unwanted stock, end of line stock and clearance stock.
Legislation and relevant legal principles
Mochkin’s claim against Klein and Segman was brought pursuant to s 33 of the Partnership Act, which relevantly provides as follows:
Accountability of partners for private profits
(1) Every partner must account to the firm for any benefit derived by him without the consent of the other partners from any transaction concerning the partnership or from any use by him of the partnership property name or business connexion.
As M Osborne J observed in Zphere Pty Ltd v Pakis,[11] the duty to account in s 33 is a duty to account ‘to the firm’. That
reflects the rationale for an account of profits against a defaulting partner: namely, that the profits retained by that partner are properly characterised as profits earned in the scope of the partnership business, to be held as partnership property and distributed in accordance with the profit-sharing arrangement which underpins all partnerships.[12]
[11](2022) 69 VR 338; [2022] VSC 496 (‘Zphere’).
[12]Zphere (2022) 69 VR 338, 380–1 [157]; [2022] VSC 496.
M Osborne J also observed that s 33 ‘is unlikely to differ in content from the rules of equity preserved by s 4 of the Partnership Act’.[13] We agree. The construction and application of s 33 is relevantly informed by the authorities concerning the equitable remedy of an account of profits — indeed, no party sought to contend otherwise. In that regard, it is appropriate to commence with an outline of the relevant principles, as distilled from the two key cases in this area: Ancient Order of Foresters in Victoria Friendly Society Ltd v Lifeplan Australia Friendly Society Ltd[14] and Warman International Ltd v Dwyer.[15] The following general principles may be extracted from those two cases.
[13]Zphere (2022) 69 VR 338, 380 [155]; [2022] VSC 496, referring to Birtchnell v Equity Trustees, Executors & Agency Co Ltd (1929) 42 CLR 384, 394 (Isaacs J); [1929] HCA 24.
[14](2018) 265 CLR 1; [2018] HCA 43 (‘Foresters’).
[15](1995) 182 CLR 544; [1995] HCA 18 (‘Warman’).
First, a fiduciary must account for a profit or benefit if it was obtained either:
(a)when there was a conflict or possible conflict between their fiduciary duty and their personal interest; or
(b)by reason of their fiduciary position or by reason of their taking advantage of opportunity or knowledge derived from their fiduciary position.[16]
The second of these is relevant in the present case.
[16]Warman (1995) 182 CLR 544, 557 (Mason CJ, Brennan, Deane, Dawson and Gaudron JJ); [1995] HCA 18.
Secondly, the remedies available for a breach of fiduciary duty, at the option of the person to whom the fiduciary obligation is owed, include an order for equitable compensation and an order for an account of profits.[17] A declaration of a constructive trust is also available, but is generally only warranted if other equitable orders are not sufficient to do justice in the particular case.[18] Where an account of profits is sought, a fiduciary must account for a benefit obtained by reason of their fiduciary position or by reason of their taking advantage of opportunity or knowledge derived from their fiduciary position.[19] Although the remedy is referred to as an ‘account of profits’, a benefit to be made the subject of an account need not answer the description of a ‘profit’ in conventional accounting terms.[20]
[17]Warman (1995) 182 CLR 544, 556 (Mason CJ, Brennan, Deane, Dawson and Gaudron JJ); [1995] HCA 18.
[18]Foresters (2018) 265 CLR 1, 32 [74] (Gageler J); [2018] HCA 43. See also John Alexander’s Clubs Pty Ltd v White City Tennis Club Ltd (2010) 241 CLR 1, 45 [128] (French CJ, Gummow, Hayne, Heydon and Kiefel JJ); [2010] HCA 19.
[19]Warman (1995) 182 CLR 544, 557 (Mason CJ, Brennan, Deane, Dawson and Gaudron JJ); [1995] HCA 18.
[20]Foresters (2018) 265 CLR 1, 32–3 [75] (Gageler J); [2018] HCA 43.
Thirdly, it is no defence that the person to whom the duty was owed was unwilling, unlikely or unable to obtain the benefit in question or that the fiduciary acted honestly and reasonably.[21]
[21]Warman (1995) 182 CLR 544, 558 (Mason CJ, Brennan, Deane, Dawson and Gaudron JJ); [1995] HCA 18.
Fourthly, as an equitable remedy, an account of profits is discretionary; however, it is granted or withheld according to settled principles. It will be defeated by equitable defences such as estoppel, acquiescence and delay. And it may be that the liability to account for a personal benefit obtained by reason of a breach of fiduciary duty ‘will not arise in circumstances where it would be unconscientious to assert it’.[22]
[22]Warman (1995) 182 CLR 544, 559 (Mason CJ, Brennan, Deane, Dawson and Gaudron JJ); [1995] HCA 18, quoting Chan v Zacharia (1984) 154 CLR 178, 204–5 (Deane J); [1984] HCA 36.
Fifthly, a liability to account for profits is not confined to profits that have been made, but may extend to unrealised profits.[23] The benefit the subject of an account can encompass an ongoing business. The benefit can extend to the whole of an ongoing business, or can be limited to a part of the business, identified by reference to a specified scope of commercial activities and/or a specified period of commercial activities. The time period may be a period which extends into the future, to capture unrealised profits.[24]
[23]Foresters (2018) 265 CLR 1, 18–19 [24] (Kiefel CJ, Keane and Edelman JJ), 32–3 [75] (Gageler J); [2018] HCA 43.
[24]Foresters (2018) 265 CLR 1, 32–3 [75] (Gageler J); [2018] HCA 43.
The quantification of the profit or benefit will often be extremely difficult in practice; thus it has been said that what is required is not ‘mathematical exactness but only a reasonable approximation’.[25] It is necessary to determine, as accurately as possible, ‘the true measure of the profit or benefit obtained by the fiduciary in breach of his duty’.[26]
[25]Warman (1995) 182 CLR 544, 558 (Mason CJ, Brennan, Deane, Dawson and Gaudron JJ); [1995] HCA 18, quoting My Kinda Town Ltd v Soll [1982] FSR 147, 159 (Slade J). See also Foresters (2018) 265 CLR 1, 35 [82] (Gageler J); 64 [179] (Nettle J); [2018] HCA 43.
[26]Warman (1995) 182 CLR 544, 558 (Mason CJ, Brennan, Deane, Dawson and Gaudron JJ); [1995] HCA 18.
Sixthly, the cardinal principle of equity is that the remedy must be fashioned to fit the nature of the case and the particular facts.[27]
[27]Warman (1995) 182 CLR 544, 559 (Mason CJ, Brennan, Deane, Dawson and Gaudron JJ); [1995] HCA 18. See also Foresters (2018) 265 CLR 1, 36 [83] (Gageler J), 72 [198] (Nettle J); [2018] HCA 43.
The judgments in Foresters also explain the proper approach to the question of whether a remedy is to be granted for breach of fiduciary duty and, if so, to what extent.
The first question to be addressed is causation: has a benefit been obtained by reason of the breach of fiduciary duty and/or any acts of knowing assistance?[28] Relevantly for present purposes, a sufficient causal connection will exist if the benefit has been obtained by reason of the fiduciary taking advantage of an opportunity or knowledge derived from the fiduciary position.[29] A causal connection between a breach of fiduciary obligation and a benefit sufficient for the fiduciary or knowing participant to be required to account for the benefit will exist if the benefit would not have been obtained ‘but for’ the breach.[30] The ‘but for’ connection will be sufficient even if other contributing causes may be in play. The causal connection must be judged using common sense and ‘with the full benefit of hindsight’.[31]
[28]Foresters (2018) 265 CLR 1, 12 [9] (Kiefel CJ, Keane and Edelman JJ), 36 [85] (Gageler J); [2018] HCA 43.
[29]Foresters (2018) 265 CLR 1, 36 [85] (Gageler J). See also 14 [12] (Kiefel CJ, Keane and Edelman JJ); [2018] HCA 43.
[30]Foresters (2018) 265 CLR 1, 12 [9] (Kiefel CJ, Keane and Edelman JJ), 37 [88] (Gageler J); [2018] HCA 43.
[31]Foresters (2018) 265 CLR 1, 37 [88]–[89] (Gageler J); [2018] HCA 43.
Once causation is established the whole benefit is to be accounted for, unless the errant fiduciary can demonstrate that such an outcome would be inequitable. That is, the onus is upon the errant fiduciary or participant[32] to show that they should not be required to account for the full value of the benefit received.[33] Thus the second question to be addressed is whether the errant fiduciary or participant has discharged that onus.
[32]As Gageler J explained in Foresters, ‘there is no reason why the principles by which the knowing participant’s liability to account is assessed should be different from those by which the dishonest and fraudulent fiduciary’s liability to account is assessed. Notably, no distinction was drawn … in Warman International Ltd v Dwyer’: 34 [80].
[33]Warman (1995) 182 CLR 544, 561–2 (Mason CJ, Brennan, Deane, Dawson and Gaudron JJ); [1995] HCA 18; Foresters (2018) 265 CLR 1, 14 [13] (Kiefel CJ, Keane and Edelman JJ); 38 [91] (Gageler J); 65 [182] (Nettle J); [2018] HCA 43.
It is well-established that an errant fiduciary’s liability to account for the full value of the benefit that they have received may be reduced if they establish that they are entitled to an allowance for costs incurred, or for the skill and efforts they have contributed to the generation of the profit or benefit.[34]
[34]Warman (1995) 182 CLR 544, 561–2 (Mason CJ, Brennan, Deane, Dawson and Gaudron JJ); [1995] HCA 18; Foresters (2018) 265 CLR 1, 14–15 [14] (Kiefel CJ, Keane and Edelman JJ), 39 [94] (Gageler J), 65 [182] (Nettle J); [2018] HCA 43.
The Court in Warman observed that a distinction is to be drawn ‘between cases in which a specific asset is acquired and cases in which a business is acquired and operated’.[35] In relation to the latter, the Court said this:
In the case of a business it may well be inappropriate and inequitable to compel the errant fiduciary to account for the whole of the profit of his conduct of the business or his exploitation of the principal’s goodwill over an indefinite period of time. In such a case, it may be appropriate to allow the fiduciary a proportion of the profits, depending upon the particular circumstances. That may well be the case when it appears that a significant proportion of an increase in profits has been generated by the skill, efforts, property and resources of the fiduciary, the capital which he has introduced and the risks he has taken, so long as they are not risks to which the principal’s property has been exposed. Then it may be said that the relevant proportion of the increased profits is not the product or consequence of the plaintiff’s property but the product of the fiduciary’s skill, efforts, property and resources. … [T]he stringent rule requiring a fiduciary to account for profits can be carried to extremes and … in cases outside the realm of specific assets, the liability of the fiduciary should not be transformed into a vehicle for the unjust enrichment of the plaintiff.[36]
[35]Warman (1995) 182 CLR 544, 560 (Mason CJ, Brennan, Deane, Dawson and Gaudron JJ); [1995] HCA 18.
[36]Warman (1995) 182 CLR 544, 561 (Mason CJ, Brennan, Deane, Dawson and Gaudron JJ) (emphasis added); [1995] HCA 18. See also Foresters (2018) 265 CLR 1, 64–5 [180] (Nettle J); [2018] HCA 43.
An amount subject to the order may also be reduced if the errant fiduciary demonstrates that some of the profit or benefit is beyond the scope of the liability for which they should account, in the sense that is has ‘no reasonable connection’ with the wrongdoing.[37] There is no bright line test for determining when a benefit will lack a reasonable connection with wrongdoing. All of the circumstances must be considered, including the nature of the errant fiduciary’s conduct. But the onus is on the errant fiduciary to show that it would be inequitable to require them to account for the whole of the benefit acquired by reason of the breach of fiduciary duty.[38]
[37]Foresters (2018) 265 CLR 1, 15 [15] (Kiefel CJ, Keane and Edelman JJ); [2018] HCA 43.
[38]Foresters (2018) 265 CLR 1, 15–16 [15]–[16] (Kiefel CJ, Keane and Edelman JJ); [2018] HCA 43.
Drawing on a similar dichotomy, Gageler J said in Foresters that, to demonstrate that it will be inequitable to order an account of the whole of the benefit, the errant fiduciary must prove:
(a)that the benefit is attributable in part to another contributing cause, so that it is ‘practically just’ that the benefit be apportioned or that some allowance be made in their favour; or
(b)that there is some other reason why accounting for the whole of the benefit would amount to a windfall to the plaintiff of such a nature or degree that an order for an account would fail to vindicate the purposes underlying equity’s imposition of the fiduciary obligation that has been breached.[39]
[39]Foresters (2018) 265 CLR 1, 38–9 [92]–[93] (Gageler J); [2018] HCA 43.
His Honour said that ‘the judgment ultimately to be made by the court from which the order to account is sought is correspondingly not only factual; fundamentally, it is evaluative’.[40] This might involve an assessment of other causes that might have contributed to the benefit such as the ‘skill and industry of the defendant’; the extent to which the fiduciary’s gain reflects uncompensated loss on the part of the plaintiff; and the nature and severity of the breach of fiduciary duty.[41] It is the outcome of that ultimate evaluative judgment, not merely the outcome of the initial inquiry into causation, ‘which yields the “true measure” of the benefit’ to be reflected in the order for an account of profits.[42]
[40]Foresters (2018) 265 CLR 1, 39 [93] (Gageler J); [2018] HCA 43.
[41]Foresters (2018) 265 CLR 1, 39 [94] (Gageler J); [2018] HCA 43.
[42]Foresters (2018) 265 CLR 1, 39 [95] (Gageler J); [2018] HCA 43.
Finally, it is relevant to observe that both Warman and Foresters concerned an account of profits in relation to the conduct of a business by an errant fiduciary, which is also what occurred in this case. Warman provides an illustration of circumstances in which the Court limited the scope of the profits to be disgorged to a period of two years. In contrast, Foresters provides an illustration of circumstances in which the errant fiduciaries were required to account for the totality of the business they conducted, including by accounting for its capital value.
It is unnecessary to set out in detail the facts of those two cases. Rather, what emerges from a consideration of those cases is that the scope of the remedy is fact specific: it turns on what is just and equitable in the particular circumstances.
Ground 1 and the notice of contention: The unclean hands defence
Ground 1 concerns the judge’s rejection of Klein’s and Segman’s unclean hands defence. It is framed as follows:
1(a)The learned trial judge, after finding that both Mochkin, on the one hand, and Klein and Segman, on the other hand, had engaged in conduct that was “improper against each other”, erred in finding that the effect of the parties’ each having “unclean hands” was to offset or ‘wash’ their hands and thus negate the impropriety and rebut the defence: First Reasons [232].
1(b) The learned trial judge ought to have found that, by reason of his unclean hands, Mochkin was not entitled to the equitable relief sought by him.
By the notice of contention, Mochkin seeks to affirm her Honour’s conclusion on the ground that ‘the misconduct complained of’ by Klein and Segman ‘did not have an immediate relation to the wrong in respect of which the first respondent sued them’.
In relation to this issue, the judge said as follows:
[I]n respect of submissions in relation to equitable doctrines of ‘laches’ and ‘unclean hands’, I am of the view that there does not exist sufficient evidence or submissions to support the equitable defences. Any mere delay in initiating proceedings in the Magistrates Court, approximately 12 months after the Partnership broke up, is not sufficient to engage the defence of ‘laches’. Indeed, given the attempt to finalise the dispute through the Jewish Court, at which the defendants did not appear, there must be something more that is prejudicial to the defendants than is the case here. Further, in respect of ‘unclean hands’, the evidence before the Court is that there is conduct of both the plaintiff and defendants respectively, being improper against each other, so as to ‘wash their hands’ and thus negating the impropriety and rebutting the defence.[43]
The parties’ submissions on the unclean hands issue
[43]First Reasons, [232].
Klein, Segman and Getafix relied upon the following conduct on 10 August 2018 as comprising Mochkin’s unclean hands:
(a)Mochkin logged into Klein’s Paypal account and caused the balance of the funds held ($1,255.99) to be transferred to his personal account;
(b)Mochkin changed the passwords to the partnership’s various online accounts;
(c)Mochkin deleted or ‘ended’ all of the partnership’s 1,500 online listings on eBay and Amazon, thereby permanently losing all product feedback/reviews on eBay;[44] and
(d)Mochkin took possession of approximately $19,318.61 in stock at the McLeod Road apartment and retained other assets of the partnership valued at $5,000.
[44]Klein and Segman accept that there was a dispute between the parties about the effects of the deletion of the online listings. We refer later to the way in which the trial judge dealt with this dispute.
Klein and Segman submitted that by reason of the passwords having been changed, the listings taken offline, virtually all of the stock being in Mochkin’s possession and the Paypal balance emptied out, the partnership business ‘was stripped and left as an empty shell’. The consequence was that ‘Klein and Segman had to spend their own money to rebuild the business and purchase products just to fulfil orders that had already been placed’. They also observed that Mochkin had changed the locks at the McLeod Road apartment.[45] (Klein and Segman also contended that Mochin had refused to release the stock unless he was paid $40,000, but there was no finding to that effect by the judge.)
[45]First Reasons [128].
Klein and Segman submitted that the trial judge found: first, that there was no sufficient evidence to support the unclean hands defence; and secondly, that the evidence was that both the plaintiff and the defendants had behaved improperly towards each other, so as to ‘wash their hands’, thus negating any impropriety and rebutting the defence. They submitted that two errors are revealed in this part of the trial judge’s reasons:
(a)First, both propositions cannot be correct: either there was insufficient evidence to support the defence, or there was sufficient evidence to conclude that both sides had behaved improperly.
(b)Secondly, the trial judge proceeded on a misapprehension as to the notion of ‘washing’ of hands in the context of the unclean hands defence.
As to the second matter, they relied upon the following passage from a decision of the Privy Council, Sang Lee Investment Co Ltd v Wing Kwai Investment Co Ltd:
… their Lordships do not accept that in a case of this sort, where there are alleged improprieties on each side, the proper approach of the court in exercising its discretion is to compare the misconduct on the one side with the misconduct on the other side. The court should first decide whether there has been any relevant want of faith, honesty or righteous dealing on the part of the person seeking relief, and the court should then decide whether, as a matter of discretion and in all the circumstances, which may include any relevant misconduct of the part of the person resisting equitable relief, if it is right to grant or refuse specific performance. There is no balancing exercise which falls to be performed.[46]
[46][1983] HKLR 197 (PC), 209 (Lord Brightman) (‘Sang Lee Investment’). They also referred to Black Uhlans Incorporated v Crime Commission (NSW) [2002] NSWSC 1060, [159]ff (‘Black Uhlans’).
Klein and Segman submitted that, had the trial judge correctly applied the relevant principles, her Honour ought to have found that:
(a)Mochkin’s conduct was sufficiently depraved, and connected to the relief he sought, so as to disentitle him to that relief;
(b)that disentitlement operated irrespective of any conduct amounting to unclean hands by Klein, Segman and Getafix because unclean hands on both sides is not how a ‘washing’ of unclean hands occurs; and
(c)Mochkin had done nothing to ‘wash’ his hands in the relevant sense.
In response, Mochkin and JMEC submitted that the evidence established, as her Honour had found, that there had been misconduct on both sides. This, they submitted, justified the judge’s conclusion that there was insufficient evidence to support the defence of unclean hands. Nor did the judge engage in any comparison of misconduct, ‘so as to perform a balancing act’. Further, Mochkin and JMEC submitted that Klein, Segman and Getafix had mischaracterised Mochkin’s conduct (although they did not explain what description constituted a mischaracterisation).
Mochkin and JMEC also, by their notice of contention, submitted that Mochkin’s entitlement to relief in respect of his claim for an account of profits for breach of fiduciary duty was independent of any misconduct by him. Because the question of any misconduct by Mochkin was not in issue in his action for an account of private profits and bore no relation to it, the trial judge made no error in the exercise of her discretion to disallow the defence of unclean hands.
In response, Klein, Segman and Getafix submitted that Mochkin’s conduct ‘was the primary, if not the only, cause’ of their subsequent conduct that gave rise to Mochkin’s alleged entitlement to an account of profits. They further submitted that ‘there is every reason to believe’ that had Mochkin not behaved as he did, Klein and Segman would have continued to operate the partnership, rather than setting up the William Klein business. Thus, they submitted, there was a sufficiently immediate and necessary relationship between Mochkin’s conduct and the wrong of which he complained.
Consideration of the unclean hands issue
The first step in the consideration of ground 1 is to identify with some care precisely what her Honour’s reason was, or reasons were, for rejecting the unclean hands defence. Her Honour dealt with this defence together with the laches defence. She opened the paragraph in question with the proposition that the evidence was insufficient to make good either defence. She then dealt with the laches defence, stating that the delay in initiating the Magistrates’ Court proceeding was not sufficient to engage that defence. That is, she explained how her general opening statement operated in relation to the laches defence. She then turned to the unclean hands defence, and observed that the evidence was that both sides had behaved improperly towards each other, so as to ‘wash their hands’, thereby negating the impropriety and rebutting the defence.
In our opinion, when this passage is properly understood, the judge found that the unclean hands defence was not made out for the sole reason that both sides had behaved improperly towards each other, so as to ‘wash their hands’. She did not first find that there was insufficient evidence of unclean hands, and then go on to deal with the improper conduct on both sides. The applicants accepted that her Honour’s judgment could be read in that way. In our opinion, where it is contended that a judge made two inconsistent findings, but there is a reading of the relevant passage that is open and that does not involve inconsistent findings, then that reading ought to be adopted. This disposes of the first complaint the applicant makes — that the judge had reached inconsistent conclusions.
The real gravamen of this ground of appeal is that the judge misunderstood, and thus misapplied, the doctrine of ‘washing of hands’ in the context of the unclean hands defence.
It is helpful first to understand the doctrine of ‘unclean hands’, to which ‘washing the hands’ is said to be an answer. The doctrine was helpfully summarised by Campbell J in Black Uhlans as follows:
That someone who comes to equity must have clean hands is an equitable maxim. Such a maxim provides an explanation for the circumstances in which equity recognises rights, and confers remedies, across a broad range of equity’s jurisdiction. …
The unclean hands maxim requires the Court to look at the conduct of the litigant who seeks the assistance of equity, rather than the conduct of the defendant. Further, it is conduct which the litigant who seeks the assistance of equity has engaged in in the past which is required to be looked at. In this way it differs from the maxim that he who seeks equity must do equity, which looks at the conduct which a litigant who seeks the assistance of equity undertakes to engage in in the future.[47]
[47]Black Uhlans [2002] NSWSC 1060, [158]–[159].
However, the operation of the doctrine is not triggered by simply any act of wrongful conduct by a defendant. Rather, the wrongful conduct must have an ‘immediate and necessary relation to the equity sued for’.[48] As Young J observed in FAI Insurances Ltd v Pioneer Concrete Services Ltd, ‘general naughtiness or the desire of the court to censor the plaintiff’s conduct’ is not a basis to refuse relief.[49]
[48]Dering v Earl of Winchelsea (1787) 1 Cox 318; 29 ER 1184, 1185 (Eyre CB), quoted in Meyers v Casey (1913) 17 CLR 90, 123 (Isaacs J); [1913] HCA 50.
[49](1987) 15 NSWLR 552, 554.
Furthermore, a party who comes to equity with unclean hands may ‘wash their hands’ of the impropriety.[50] However, it is the party who ‘washes’ their own unclean hands. It might do so by showing that its misconduct has ceased, or that the misconduct occurred by accident and will not recur.[51] Action by the other party to the litigation will not, in our view, result in the washing of the first party’s hands so as to defeat a defence of unclean hands.[52]
[50]Karl Suleman Enterprizes Pty Ltd (in liq) v Babanour (2004) 49 ACSR 612, 622 [54] (Beazley JA, Spiegelman CJ agreeing at 613 [1], Santow JA agreeing at 627 [75]); [2004] NSWCA 214 (‘Karl Suleman Enterprizes’).
[51]Kettles & Gas Appliances Ltd v Anthony Hordern & Sons Ltd (1934) 35 SR (NSW) 108, 129–31 (Long Innes J); Karl Suleman Enterprizes (2009) 49 ACSR 612, 622 [55] (Beazley JA, Spiegelman CJ agreeing at 613 [1], Santow JA agreeing at 627 [75]); [2004] NSWCA 214; D Capital 2 Pty Ltd v Western [2022] NSWSC 1064, [899] (Meek J).
[52]We note that the notion of washing unclean hands has specific application in the context of a corporate plaintiff, where the directors or those otherwise in control of the corporate entity have changed, and have discontinued or attempted to rectify the misconduct of the previous controllers. The plaintiff as a legal entity does not change, but the ‘hands’ controlling it might be said to no longer be unclean. See, eg, Karl Suleman Enterprizes (2009) 49 ACSR 612, 623 [57] (Beazley JA, Spiegelman CJ agreeing at 613 [1], Santow JA agreeing at 627 [75]); [2004] NSWCA 214; Marshall Futures Ltd v Marshall [1992] 1 NZLR 316, 330–1 (Tipping J). That application has no relevance to the present case.
The doctrine of ‘washing hands’ is a little more nuanced in circumstances where the court concludes that both parties have engaged in improper conduct. Whether or not the court concludes that the first party’s unclean hands have been ‘washed’, any relevant misconduct of the party resisting the grant of equitable relief will remain potentially relevant. As the Privy Council said in Sang Lee Investment, after deciding whether the party seeking relief has unclean hands, the court should then consider whether to grant relief as a matter of discretion, taking into account any relevant misconduct on the part of the person resisting relief.[53]
[53][1983] HKLR 197 (PC), 209 (Lord Brightman).
It is important to recognise that the discretion whether to grant or refuse the relief applies whether or not there is relevant misconduct on the part of the person resisting equitable relief. The relief is always discretionary. If, however, there is misconduct by the party resisting relief, the court will take that misconduct into account in the overall exercise of its discretion. Where there is also a claim by the party seeking the relief that they had cleansed their unclean hands in respect of their misconduct — a claim not made in Sang Lee Investment — the totality of the circumstances in which the court would exercise its discretion would include the court’s conclusion on that claim as well as any relevant misconduct on the part of the party resisting the relief. In no case, however, does the court balance or compare the ‘relative’ misconduct of the parties.
In the present case, we accept that the judge erred in the manner identified by Klein, Segman and Getafix. Her Honour in effect concluded that both sides had engaged in improper conduct, and then concluded that this resulted in the ‘washing’ of Mochkin’s hands. That is not a correct mode of analysis. Having concluded that Mochkin had engaged in improper conduct, her Honour ought to have then considered whether that conduct had an ‘immediate and necessary relation to the equity sued for’. If she concluded that it did, she then would have had to consider whether Mochkin had, by his own conduct, washed his hands of his improper conduct. Finally, she would then have had to consider whether to decline relief to Mochkin in the exercise of her discretion, taking into account all the circumstances, including her ultimate conclusion on Mochkin’s conduct and Klein’s and Segman’s improper conduct.
Given that the judge erred, it now falls to this Court to engage in the relevant analysis, on the basis of the judge’s factual findings of improper conduct. In that regard, although the judge did not state precisely what improper conduct she considered had been demonstrated on the evidence before her, that conduct is, in our view, as follows:
(a)In so far as Mochkin is concerned, the improper conduct was the conduct that occurred on 10 August 2018, namely:
(i)logging into Klein’s Paypal account and transferring funds from it to his personal account;
(ii)changing the passwords of the partnership’s various online accounts, so as to prevent Klein and Segman from accessing those accounts;
(iii)deleting the partnership’s online listings on eBay and Amazon; and
(iv)taking possession of the McLeod Stock.
(b)In so far as Klein, Segman and Getafix are concerned, their improper conduct was as follows:
(i)on 8 August 2018 Klein changed the passwords to the eBay, Amazon and OzStore accounts, preventing Mochkin from accessing those accounts; and
(ii)on 9 August 2018, Getafix began purchasing stock from partnership suppliers;[54] that conduct is to be sheeted home to Segman as well as Klein, because Segman was a director of Getafix.[55]
[54]First Reasons, [30].
[55]The judge concluded that Getafix was the ‘alter ego’ of both Klein and Segman: First Reasons, [234].
Our conclusions on the relevant issues are as follows:
(a)Mochkin’s improper conduct lacked an immediate and necessary connection to the equity sued for, namely an account of profits for Klein’s and Segman’s breach of their fiduciary duties. That breach was occasioned by their use of partnership assets for the conduct of the William Klein business. Contrary to Klein’s and Segman’s submissions, we do not accept that that conduct was caused by Mochkin’s behaviour on 10 August 2018. There were various options open to Klein and Segman in response to Mochkin’s conduct that did not involve breaching their fiduciary duties. They chose to conduct themselves in such a way as to breach those duties, but they did not have to do so. Their conduct was not a necessary consequence of Mochkin’s conduct. In that sense, his conduct was independent of Klein’s and Segman’s breach of their fiduciary duties. Thus we would uphold the notice of contention.
(b)If we are wrong about that first issue, we would conclude that Mochkin had not, by his own conduct, washed his hands of his improper conduct. Although some of the conduct in question had ceased by the time of trial, that was a consequence of Klein’s actions. It was not a consequence of Mochkin ceasing his conduct or reversing the transactions in question.
(c)Finally, it would be necessary to consider whether to decline the relief sought by Mochkin in the exercise of the discretion, taking into account all the circumstances. Those circumstances include Mochkin’s improper conduct, not alleviated by him having ‘washed’ his unclean hands, and Klein’s and Segman’s improper conduct. In the circumstances of this case, we would not have declined the relief to Mochkin. There are two reasons that, in combination, lead us to that conclusion.
(i)First, some of Mochkin’s improper conduct — the changing of passwords and deletion of accounts — was fairly swiftly reversed. To the extent that some eBay data was lost, Klein’s evidence was that this was ‘not a big deal’.[56] While it seems that Mochkin’s possession of the McLeod Stock was not reversed, Mochkin offered by email to make that stock available to fulfill orders.[57]
(ii)Secondly, Klein changed the passwords to the eBay, Amazon and Ozstore accounts, although he later gave Mochkin the new passwords and apologised for his conduct. And Getafix had commenced dealing with the partnership suppliers prior to the date at which the partnership was ultimately dissolved. This conduct is reflective of Klein’s, Segman’s and Getafix’s willingness to behave improperly in relation to the partnership assets.
[56]First Reasons, [54].
[57]First Reasons, [52].
For these reasons ground 1 is not made out. Although the trial judge erred, her Honour’s ultimate conclusion — that the unclean hands defence was not made out — was correct.
Ground 2: The diminution of Mochkin’s share of the William Klein profits
Ground 2 is as follows:
2(a)The learned trial judge, after finding that the profits that Klein, Segman and Mochkin were required to account for should diminish over time consistent with the principles in Warman, erred in finding that the diminution to be applied was as follows:
(i)for the first 12 months after 11 August 2018, they must account for the full benefit they obtained and Mochkin was entitled to his full 50% share: First Reasons [225](a);
(ii)for “same product, same supplier” and “same product, new supplier” goods, they must account for the full benefit they obtained and Mochkin was entitled to his full 50% share: First Reasons [225](b); and
(iii)for “new product, same supplier” and “new product, new supplier” goods, they must account for the full benefit they obtained and Mochkin was entitled to 50% of his share of 50% of the profits: First Reasons [225](c).
2(b) The learned trial judge ought to have found that:
(i)in the period 11 August 2018 to 11 August 2019 (ie, the first 12 months), Mochkin’s interest profits derived from “same product, same supplier” and “same product, new supplier” goods reduced from the full 50% share to 0%; and
(ii)at all times after 11 August 2018, Mochkin had no interest in profits derived from “new product, same supplier” and “new product, new supplier” goods, which were separate and distinct from the business of the former partnership and arose from Klein’s and Segman’s sole efforts.
As is apparent from its terms, this ground turns in part on a distinction between different aspects of the William Klein business in relation to the partnership’s business. That is, at trial the parties accepted that the William Klein business involved three distinct categories:
(a)selling products that the partnership had sold, obtained from suppliers from whom the partnership had purchased products (‘same product, same supplier’);
(b)selling products that the partnership had sold, obtained from a different suppliers, from whom the partnership had not purchased products (‘same product, new supplier’);
(c)selling products that the partnership had never sold, obtained from suppliers from whom the partnership had purchased products (‘new product, same supplier’); and
(d)selling products that the partnership had never sold, from suppliers from whom the partnership had not purchased products (‘new product, new supplier’).
At trial, Klein and Segman had provided the judge with a table that set out the division of William Klein’s total revenue between these different categories:[58]
[58]First Reasons, [206].
Category
Total SKUs[59]
Revenue
Per Cent of Total Revenue
Same Product Same Supplier
492
$1,450,115.00
16.86%
Same Product New Supplier
15
$336,890.00
3.92%
New Product Same Supplier
565
$1,600,500.00
18.61%
New Product New Supplier
1222
$5,211,639.00
60.61%
Totals
2294
$8,599,144.00
100.00%
[59]The Court was informed that ‘SKUs’ is shorthand for stockkeeping unit.
Klein and Segman also relied upon the expert evidence of Mr Simonetti, whose supplementary report opined that Mochkin’s entitlement to profits of the Amazon business diminished over 12 months from 50 per cent to zero per cent, and to the profits of the eBay business from 10 per cent to zero per cent.[60] They submitted that Mr Simonetti’s conclusion was consistent with the principles of equity, which permit an errant fiduciary to retain a portion of profits obtained in breach of duty where those profits are derived from the errant fiduciary’s contribution, skill and industry.[61]
[60]First Reasons [207].
[61]First Reasons, [208].
In contrast, Mochkin’s primary position was that the profits generated from new products (in particular the PPE) were caught under s 33(1) of the Partnership Act, because they were derived from the use of partnership property without which they would never have been realised. His submission was that he was entitled to a share of the William Klein profits because Klein, Segman and Getafix had used partnership assets to establish and conduct that business.[62] Alternatively, he submitted that the PPE was not properly characterised as ‘new product’, because it fell within the scope of the partnership’s business, namely selling low-cost retail goods for domestic use, such as homeware and party goods, primarily imported from China.[63]
The judge’s reasons
[62]First Reasons, [223].
[63]First Reasons, [224].
The judge considered that there was force in considering the goods by reference to the categories identified by Klein and Segman. She held as follows:
(a)For the 12 months after 11 August 2018,[64] Klein, Segman and Getafix must account for the full benefit they obtained from use of the partnership assets, regardless of category. For this period, Mochkin is entitled to 50 per cent[65] of the entire profits made by the new business.
(b)For the period from 11 August 2019 to the final settlement of the accounts of the partnership, Klein, Segman and Getafix must account for the full benefit they obtained in relation to ‘same product, same supplier’ and ‘same product, new supplier’ goods. Mochkin is entitled to 50 per cent[66] of the entire profits for those goods for that period.
(c)For the period from 11 August 2019 to the final settlement of the accounts of the partnership, Klein, Segman and Getafix must account for the full benefit they obtained in relation to ‘new product, same supplier’ and ‘new product, new supplier’ goods, but that Mochkin is only entitled to 25 per cent[67] of the profits made for those goods for that period.[68]
[64]Being the date on which the judge held the partnership was dissolved: order 1.
[65]Reflecting his share of the partnership.
[66]Reflecting his share of the partnership.
[67]Being 50 per cent of his share of 50 per cent of the partnership.
[68]First Reasons, [225].
Her Honour explained these conclusions as follows:
… Klein, Segman and Getafix used the Partnership Property, such as the rolling profits from Mochkin’s initial financial contributions, stock, and the McLeod Spreadsheet, which had intellectual property and know-how in the form of product price, discount offers, photography and description of products for listings and to maximise priority position on eBay and Amazon.
For categories (a) and (b) above, I find that Klein and Segman and Getafix utilised the same approach, language, key words, and photo setup as the Partnership Business. There was a rolling profit, and knowledge of approach with the listings, which is directly derived from the Partnership.
For category (c), I find that these products are new products, but an allowance must be made for the new business’ fortune which arose from Mochkin’s initial financial contribution to the Partnership and the derived intellectual property to enter into the market. In my view, there would be a diminished return from the McLeod Spreadsheet intellectual property … The WilliamKlein business was facilitated by the funds and labour of Mochkin’s contribution to the Partnership such that the WilliamKlein business could exist. I accept that, where Mochkin provided the foundation, Klein and Segman built the walls of the new business. The WilliamKlein business does not exist in isolation. It benefitted from the knowledge, intellectual property and funds from the Partnership to enter into the PPE market. However, I further find that the profits derived from the “new product, same supplier” and “new product, new supplier” goods arose from factors other than just the Partnership assets. The Court recognises the exertions of Klein and Segman in developing their new business by adding new products, running the business, reinvesting in the current platforms, adding new marketplace platforms and generally applying and adapting the intellectual property over time in relation to category (c). In those circumstances, I find that Mochkin is entitled to 50% of his entitlement.[69]
[69]First Reasons, [226]–[228].
The judge explained that she had considered whether there ought to be a distinction in the treatment of ‘new product, same supplier’ and ‘new product, new supplier’. However, she concluded that although the conceptual distinction had merit, ‘assessing the quantum and outcome of the contribution’ was ‘too remote’.[70]
[70]First Reasons, [229].
The judge expressly rejected Mr Simonetti’s opinion that Mochkin’s entitlement to profits of the William Klein business ought to diminish from 50 per cent to zero per cent over 12 months. Her Honour took into account her conclusion that the value of the intellectual property and data files of the partnership would diminish by 5 to 10 per cent per year. It would not decline by 100 per cent in 12 months.[71]
The parties’ submissions on ground 2
[71]First Reasons, [231].
In relation to ground 2, Klein, Segman and Getafix submitted that, although an errant partner is required to account for any benefit derived from use of partnership property, name or business connection, they were not required to account for any benefits that arose otherwise than from the use of the partnership property, name or business connection. In particular, they submitted that they were not required to account for a benefit that is ‘more properly regarded as flowing from their own exertions, effort and skill’. Furthermore, they submitted that it may be inequitable to require an errant fiduciary to account for the whole of the profit for an indefinite period.[72]
[72]Referring to Warman (1995) 182 CLR 544, 560–1 (Mason CJ, Brennan, Deane, Dawson and Gaudron JJ); [1995] HCA 18.
Klein, Segman and Getafix did not, in their written submissions, contend that the judge had misunderstood these principles or made some legal error. Rather, they contended that the judge had ignored, or not satisfactorily addressed, the contribution of the various categories to William Klein’s revenue.
For example, by awarding Mochkin 25% of categories (iii) and (iv), when those categories represent revenue of $6,812,139 or nearly 80% of the business, Mochkin will disproportionately benefit from aspects of the new business where the trial judge accepted he had a far lesser, if any, contribution. In fact, 25% of those categories ($1,703,034) represents nearly twice as much as Mochkin’s entire 50% of categories (i) and (ii) ($893,502).
They further submitted that there was no basis for the judge to have rejected Mr Simonetti’s evidence, given his evidence was ‘uncontradicted’.
Finally, they submitted that the judge ‘did not appreciate the extent of differentiation between the two businesses, which was due to Klein’s and Segman’s sole efforts and exertion’.
Klein, Segman and Getafix submitted that, if the trial judge had correctly approached the evidence, and applied the principles in Warman, her Honour ought to have found that:
(a)in the period 11 August 2018 to 11 August 2019 (ie, the first 12 months), Mochkin’s interest in categories (a) and (b) (as set out in [72]) reduced from the full 50 per cent share to zero per cent; and
(b)at all times after 11 August 2018, Mochkin had no interest in categories (c) and (d) (as set out in [72]), which were separate and distinct from the business of the partnership and arose from Klein’s and Segman’s sole efforts.
In response, Mochkin and JMEC submitted as follows:
(a)The fact that as a consequence of the judge’s decision, Mochkin will derive a greater pecuniary benefit from sales of products of the William Klein business that had a remoter connection to the partnership than he will from sales of products that had a more proximate connection to the partnership provides no basis to impugn the judge’s decision. That, they submitted, ‘is simply a function of the value of the particular products involved in the equation, the number sold, and the categories into which they fall. It does not, of itself, demonstrate that the decision was affected by error’.
(b)The trial judge’s rejection of Mr Simonetti’s evidence and her adoption of a different rate and timeframe of diminution (of 5-10 per cent per year) is not a justification for setting aside her Honour’s decision. It was for the trial judge to decide whether Mr Simonetti’s opinion was credible and what weight should be given to it. The judge was not bound by Mr Simonetti’s expert opinion and it was for her to determine the ultimate issue about which he gave evidence.
(c)The fact that the trial judge did not entirely accept the submission advanced by Klein, Segman and Getafix concerning the differentiation between the two businesses, which they said was due to Klein’s and Segman’s sole efforts and exertion, and the consequences of that differentiation, does not demonstrate error by the judge. In particular, it does not demonstrate that the judge failed to ‘appreciate’ the extent of the differentiation.
Consideration of ground 2
In our opinion, the judge erred in her conclusion as to the appropriate diminution of Mochkin’s entitlement to profits from the William Klein business.[73] Our reasons for so concluding are as follows.
[73]We note that there is some uncertainty about the standard of review applicable to an appeal on a question of this kind. In Foresters (2018) 265 CLR 1; [2018] HCA 43, Gageler J took the view that the applicable standard is the correctness standard (at 36 [83]). However, Nettle J approached the matter by considering whether it was open to the Full Court to reach the conclusion it reached (at 66 [183]), thus applying judicial restraint. And the plurality did not address this issue. As will become apparent, it is not necessary to deal with this issue in the present matter because we have concluded that the judge made a specific error.
Klein, Segman and Getafix contended that the judge erred in rejecting Mr Simonetti’s expert opinion concerning the diminution of the value of the partnership’s intellectual property and concerning Mochkin’s entitlement to profits. Mr Simonetti’s evidence on this issue was uncontradicted by other expert evidence. Her Honour gave reasons for declining to accept Mr Simonetti’s analysis, as follows:
I do not accept Mr Simonetti’s analysis that in a 12-month period, Mochkin’s entitlement to profits of the WilliamKlein business diminished from 50% to 0% and eBay from 10% to 0%. In my view, it is not sufficient justification that the intellectual property needs iterative development to conclude that the initial intellectual property value is 0% after 12 months. This is because not all the intellectual property can be replaced 100% by iterative developments, otherwise it would be a completely different category of intellectual property. Taking into account the maintenance of business and product data, it is more likely that the value of the intellectual property and data files, with respect to the original Partnership Business, would diminish by 5 to 10% per year. It would not decline by 100% in 12 months. This discounting has been taken into account in the above analysis.[74]
[74]First Reasons, [231].
It may be accepted that the fact that Mr Simonetti’s evidence on this issue was ‘uncontradicted’ by other expert evidence did not require the judge to accept his opinion. However, the difficulty is that, having said that she did not accept Mr Simonetti’s opinion, her Honour then concluded that the value of the intellectual property and data files would diminish by 5 to 10 per cent per year. But there was simply no evidence to support those figures. The judge was not entitled to form a view of this kind in the absence of any evidence to support it. Furthermore, the figures relied upon — 5 to 10 per cent per year — would have the effect that the intellectual property retained its value over a period of 10 to 20 years. Recalling that the intellectual property in question, built up in a mere matter of months, was the McLeod Spreadsheet and the photographs of various products, used for the purposes of the online sale of goods to consumers, that proposition seems to us to be inherently implausible, as well as lacking any evidentiary basis. We thus consider that the judge erred in her treatment of Mr Simonetti’s evidence and the conclusion she reached on the issue of the decline in value of the intellectual property and of Mochkin’s share of the business over time.
Klein, Segman and Getafix also contended that her Honour failed to ‘satisfactorily address’ the contribution of each category of the William Klein business to the revenue of that business. That is, that the ‘new product, same supplier’ and ‘new product, new supplier’ categories contributed around 80 per cent of the William Klein revenue. Implicit in this submission was the proposition that because these categories involved the exertions of Klein and Segman, Mochkin ought receive none of the profits from those categories (as reflected in appeal ground 2(b)(ii)). Relatedly, Klein, Segman and Getafix contended that the trial judge ‘did not appreciate the extent of differentiation between the two businesses, which was due to Klein’s and Segman’s sole efforts and exertion’.
These submissions, too, have force. Although the judge understood the differentiation between the William Klein business and the partnership, and found that, for the new product categories, the profits arose from factors other than just the partnership assets, thus recognising the exertions of Klein and Segman, she applied almost no discount in relation to those exertions, giving Mochkin 25 per cent of the profits from the ‘new product’ categories in the William Klein business. That was so in circumstances where the vast bulk — 80 per cent — of the William Klein business’s profit over the four years in question was the result of the sale of new products. In our view it was not open to the judge to give so little weight to the exertions of Klein and Segman in changing the character of the William Klein business and to the overwhelming contribution those exertions made to the profits of the new business.
For these reasons, ground 2 is made out. Thus paragraph 4 of the judge’s declarations ought to be vacated.
Before turning to consider what orders ought to be made in lieu of paragraph 4 of the judge’s declarations, it is necessary to consider grounds 3 and 4, which are directed to paragraph 2 of the judge’s declarations.
Ground 3: Whether Klein and Segman must account for the capital value of the William Klein business
Ground 3 is as follows:
3(a)The learned trial judge, having found that Mochkin was entitled to an account of profits under s 33(1) of the Partnership Act 1958 (Vic), erred in finding that the “benefit” that the Applicants must account for also included the capital value of the William Klein business: Second Reasons [51]-[69].
3(b)The learned trial judge ought to have found that the “benefit” for which the Applicants must account under s 33(1) of the Partnership Act 1958 (Vic) was limited to the profits of the William Klein business as contended for in paragraph 2(b) above.
The judge’s reasons
In her initial reasons, the judge did not address the question whether the relief in respect of Klein’s and Segman’s breach of fiduciary duty ought to include a share of the capital of the William Klein business, in addition to a share in its profits. Rather, after delivering her initial reasons, the judge invited the parties to make submissions on the appropriate orders; and at that time, Mochkin and JMEC submitted that the judge ought to order that Klein, Segman and Getafix account to the partnership for the total capital value of the William Klein business. The basis for that submission was that the William Klein business was a ‘benefit’ within the meaning of s 33(1) of the Partnership Act, such that there was a constructive trust over the assets of that business.
Klein, Segman and Getafix opposed such relief on several bases. The basis relevant to this application for leave to appeal was that, properly construed, the meaning of ‘benefit’ in s 33(1) of the Partnership Act did not permit the Court to make a declaration encompassing all of the property of the William Klein business. They argued that ‘the word “benefit” should be limited to profits realisable from assets rather than including those assets themselves’. In contrast, Mochkin and JMEC submitted that what Klein, Segman and Getafix obtained as a result of their breach of fiduciary duty was both the profits, and the ongoing William Klein business.[75]
[75]Second Reasons, [38]–[39].
The judge held that the William Klein business was a ‘benefit’ obtained by Klein, Segman and Getafix as a result of their breach of fiduciary duty. Her Honour said this:
The unrealised profits of the WilliamKlein Business will be realised because of the contributions of Mochkin, otherwise there would be no profits to realise. “Benefit” is profit which is the value of the net assets of the WilliamKlein Business. Net assets includes the intellectual property and goodwill which is used to generate profit. As such, it is not a stretch to broaden the conclusion that the “benefit” under s33(1) of the Partnership Act means historical profit and the present value of the WilliamKlein Business.[76]
[76]Second Reasons, [51].
Her Honour held that Klein’s, Segman’s and Getafix’s gain was Mochkin’s and JMEC’s loss in circumstances where:
(a)The benefit obtained by [Klein, Segman and Getafix], in breach of their fiduciary duties and through a misappropriation of Partnership Property, was the Partnership Business which they grew into the WilliamKlein Business.
(b)That benefit represents Mochkin’s loss because, but for the Partnership Business, which was funded by Mochkin and misappropriated by the [Klein, Segman and Getafix], the WilliamKlein Business would not exist.
(c)[Klein, Segman and Getafix] ought to account to the Partnership in equity for the total capital value of the WilliamKlein Business because only an order to that effect will reflect the true measure of the benefit derived by the defendants and the uncompensated loss suffered by Mochkin.[77]
[77]Second Reasons, [52].
In support of that conclusion, the judge found the decision in Foresters to be of assistance. Her Honour observed that the majority in that case had rejected a submission that the liability to account for profits for breach of fiduciary duty is limited to the profits that had already been made.[78]
The parties’ submissions on ground 3
[78]Second Reasons, [55].
Klein, Segman and Getafix contended that ‘it would appear that the trial judge’s application of the “but for” test’, articulated in Foresters, ‘miscarried’. In relation to the ‘new product, same supplier’ and ‘new product, new supplier’ goods, which accounted for the significant majority of the revenue of the William Klein business, the judge found that the profits derived from those categories arose from ‘factors other than just the Partnership assets.’[79] In that sense, they submitted, the analogy to Foresters was inapt. In Foresters, the plurality found that the ‘benefit that Foresters stood to gain, and in fact acquired, from its participation in the various acts of disloyalty … was … the business connections of Lifeplan and FPM.’[80] Here, through Klein’s and Segman’s efforts — including raising capital and funding the William Klein business beyond the partnership loans owing to Mochkin — the William Klein business was profiting from the sale of new products, sold on new platforms, sourced from new business connections. ‘In almost every respect it was a new, distinct and separate business.’
[79]First Reasons, [228].
[80]Foresters (2018) 265 CLR 1, 12 [7] (Kiefel CJ, Keane and Edelman JJ); [2018] HCA 43.
In light of that conclusion, Klein, Segman and Getafix submitted that if the judge had correctly applied the ‘but for’ test, her Honour ought to have found that, ‘but for’ the partnership business, the William Klein business would still have existed. In particular that was so in respect of the ‘new product, same supplier’ and ‘new product, new supplier’ categories.
In response, Mochkin and JMEC submitted that the above submissions ought to be rejected because they are inconsistent with the trial judge’s ‘unchallenged finding of fact’ that ‘but for the funds and labour which Mochkin contributed to the Partnership, the William Klein Business could not exist’.[81] The effect of that finding is that ‘but for’ the partnership business, which was funded by Mochkin, there would be no William Klein business because ‘it could not have got off the ground to begin with’.
Consideration of ground 3
[81]The judge expressed her finding as follows: ‘but for the Partnership Business, which was funded by Mochkin and misappropriated by the defendants, the WilliamKlein Business would not exist’: see Second Reasons, [52].
Ground 3, as developed in oral argument, was directed first to a question of construction of the term ‘benefit’ in s 33(1) of the Partnership Act. This argument was only faintly pressed and must, in our view, fail. Read literally, that term is sufficiently broad to encompass the capital value of a business. There is no warrant to read down that term so that it only includes ‘profits’ in an accounting sense. In that regard, we do not consider that the heading to the section requires it to be read down in that manner.
In any event, even if it were appropriate to confine the term ‘benefit’ to ‘profits’, there is no warrant for confining such profits to profits already reaped by the errant fiduciary. Rather, ‘profits’ would encompass unrealised profits, reflected in the capital of the business.
In that regard, the decision in Foresters is instructive. We refer to the same passages to which the judge referred:[82]
It is well established that a liability to account for profits will include profits that have been made. However, Foresterssubmitted that this was the limit of the profits for which it could be called to account. In particular, Foresterssubmitted that the net present value of funeral bond contracts was an assessment of anticipated future profits rather than actual profits, and was therefore irrecoverable.
This submission is not consistent with principle or authority. As to principle, to confine the account in this way would sever the process of accounting for, and disgorgement of, profit from its rationale in the principle of ensuring that the wrongdoer should not be permitted to gain from the wrongdoing. As to authority, the liability to account for a profit was described in Warman as concerned with ‘a profit or benefit’ in language divorced from a confined conception of benefit as accrued profit in narrow accounting terms. In any event, it is artificial to require disgorgement of realised profits but not to allow unrealised profits that will be realised upon performance of the relevant contract where there is no reason to expect that performance will not occur. As Millett LJ said in Potton Ltd v Yorkclose Ltd:
Unrealised profits are actual profits. Profits are made when they are earned, recognised when they are brought into the accounts, and realised when they accrue, that is to say when a legal right arises to receive payment. As a matter of ordinary accounting practice, profits are seldom recognised before they accrue, but this is a matter of prudence only; in a proper case they may be recognised before they accrue. Whether or not recognised, however, they are not profits which could or should have been made or which are merely capable of being made, but profits which have actually been made though not yet realised.[83]
[82]Foresters (2018) 265 CLR 1, 18–19 [23]–[24] (Kiefel CJ, Keane and Edelman JJ); [2018] HCA 43 (citations omitted).
[83][1990] FSR 11, 15.
Similarly, Gageler J said as follows:
Although commonly referred to as an ‘account of profits’, there is no reason why a benefit or gain to be made the subject of an account must answer the description of a ‘profit’ in conventional accounting terms. Nor is there any reason why that benefit or gain must answer the description of ‘property’ or must have sufficient certainty as to be capable of forming the subject matter of a trust. The benefit or gain can be expectant or contingent. Indeed, it is commonplace that a benefit or gain the subject of an account might encompass an ongoing business. And it is commonplace that the benefit or gain to be made the subject of an order to account might extend to the whole of the ongoing business or be limited to a part of the business identified by reference to both a specified scope of commercial activities and a specified period of commercial activities which need not be confined to a past period but may be a period which extends into the future.[84]
[84]Foresters (2018) 265 CLR 1, 32–3 [75]; [2018] HCA 43.
In light of those passages, the construction of s 33 of the Partnership Act for which Klein, Segman and Getafix contended is unsustainable. Although Foresters was a case in equity, and did not concern s 33 of the Partnership Act, there is simply no reason to think that the legislature intended any narrower scope for recovery against an errant fiduciary than would have been the case in equity.
We note that Klein, Segman and Getafix sought to suggest that the judge’s analogy to Foresters was inapt. That submission misunderstands the relevance of Foresters. Its relevance is at the level of principle — that is, in the identification of the scope of the ‘benefit’ that must be accounted for. The judge quite properly used it in that way.[85]
[85]Second Reasons, [66].
To the extent that ground 3 may be understood as directed to the judge’s application of the ‘but for’ test to the facts in issue — that is, her conclusion that the William Klein business would not have existed were it not for Klein’s and Segman’s breach of fiduciary duty — that conclusion stemmed from the judge’s factual findings, based on the evidence of Mochkin, Klein and Segman. Her Honour heard that evidence over the course of the trial and was likely to have been influenced by matters of credibility and reliability. A degree of judicial restraint in relation to fact finding of this kind is appropriate.[86] In our view her Honour’s conclusion was open to her, and no legal error has been demonstrated. For completeness, following our own review of the material before this Court, we consider her Honour’s conclusion to have been correct.
[86]Fox v Percy (2003) 214 CLR 118, 127–8 [27] (Gleeson CJ, Gummow and Kirby JJ); [2003] HCA 22; Lee v Lee (2019) 266 CLR 129, 148–9 [55] (Bell, Gageler, Nettle and Edelman JJ); [2019] HCA 28.
Klein, Segman and Getafix relied upon the fact that Klein’s and Segman’s efforts had contributed to the William Klein business in relation to ‘new products, sold on new platforms, sourced from new business connections’. Even if that were to be accepted, it remained the case that some of the William Klein business involved the continuation of the partnership business. Thus this submission goes to the question of the appropriate share of, and diminution of, capital value (which is the subject of ground 4) — not to whether any share ought to be permitted at all.
For these reasons ground 3 is not made out.
Ground 4: The quantum of Mochkin’s share in the William Klein capital
Ground 4, which arises only if ground 3 fails, is as follows:
4(a)The learned trial judge, after finding that Mochkin was entitled to, in effect, a constructive trust over the capital value of the William Klein business, erred in finding that Mochkin’s proportionate share of that capital value was 37.5%: Second Reasons [74].
4(b)The learned trial judge ought to have found that, like his entitlement to historical profits, it was appropriate for Mochkin’s share of the capital value to diminish over time. The learned trial judge ought to have accepted the Applicant’s expert’s evidence and applied a rate of progressive diminution of capital value accordingly, such that, by no later than 28 October 2022, Mochkin’s share of the capital value if any had reduced to nil.
Alternatively, consistent with the Court’s finding that the contribution of the former partnership’s intellectual property would diminish by 5‑10% per year (of which Mochkin’s share was 2.5-5%), the learned trial judge ought to have found that Mochkin’s share of the capital value as at 28 October 2022 (almost four years after the dissolution of the partnership) had diminished to a far greater extent than to 37.5%, a mere 12.5% reduction.
This ground concerns a similar issue to ground 2 — the question of the quantum of Mochkin’s share of the capital of the William Klein business (assuming he is entitled to any) and whether, and to what extent, that share should diminish over time.
The judge’s reasons
In considering the appropriate allocation to Mochkin of the capital of the William Klein business, the judge observed that, in relation to the historical profits, she had allocated an entitlement on a diminishing scale, based on the ‘new product, new supplier’ and ‘new product, old supplier’ categories and on the conclusion that the value of relevant intellectual property and data files would diminish by 5 to 10 per cent per year. This produced a diminishing proportion, not a fixed and constant 50 per cent in relation to the historical profits. Her Honour said that this analysis ‘does not apply to the calculation of Mochkin’s share in the valuation’ of the William Klein business.[87]
[87]Second Reasons, [73].
However, her Honour went on to take those matters into account:
Given my previous findings that the contribution of the Partnership’s intellectual property would diminish by 5-10% per year as the defendants revitalised and adapted the Business, the intellectual property, the photographs and the descriptions of the goods and where there is a diminishing historical profit over time for the new categories of products and suppliers, on the evidence at trial and in applying the principles set out in Foresters and Warman, the defendants have shown that the full profit or total capital should not be disgorged due to an allowance for their skill and effort. Further, in my view, to argue for an account of the total profit would be beyond the scope of wrongdoing and would be inequitable for the defendants to account. In those circumstances , Mochkin’s entitlement to the unrealised profit ought to be fixed at 37.5%, being the mid-point between the 50% share (and same product categories) and the 25% discount on historical profits for the new categories of products and not a fixed and constant 50%.[88]
The parties’ submissions on ground 4
[88]Second Reasons, [74].
Klein, Segman and Getafix submitted that, although the judge said that the analysis undertaken in relation to the categories of profits did not apply to the calculation of Mochkin’s share in the valuation of the William Klein business, her Honour in fact had applied such an analysis. They submitted that the judge had effectively ‘split the difference’ between Mochkin’s 50 per cent share in respect of the ‘same product’ categories, and his 25 per cent share in respect of the ‘new product’ categories, to arrive at 37.5 per cent as the appropriate share of the capital of the William Klein business. They contended that this approach was flawed for the following reasons:
(a)first, the judge did precisely what she said she would not do, namely, calculate Mochkin’s share of the William Klein business by using the percentages of 50 and 25 per cent as the starting point;
(b)secondly, even accepting (contrary to Mr Simonetti’s evidence) that the contribution of the partnership’s intellectual property would diminish by 5-10 per cent per year, and there having been more than four full years since dissolution of the partnership, it is unclear why the judge appeared not to consider that the starting point of any assessment was that the William Klein business contained somewhere between 80 per cent (5 per cent per annum) and 60 per cent (10 per cent per annum) of the value of the intellectual property of the partnership; and
(c)thirdly, as with the calculation of Mochkin’s share of the profits, her Honour ought to have taken into account each of the matters discussed under ground 2, namely:
(i)the contributions of the various categories of product to the revenue of the William Klein business;
(ii)Mr Simonetti’s uncontradicted evidence; and
(iii)the extent of the differentiation between the partnership business and the William Klein business, which was due to Klein’s and Segman’s sole exertions.
Klein, Segman and Getafix submitted that, had the trial judge applied the correct approach, her Honour would have determined that, by 28 October 2022, Mochkin’s share of the capital value had reduced to nil or, alternatively, to a far greater extent than to 37.5 per cent.
In response, Mochkin and JMEC submitted that the trial judge did not err and was entitled, for the reasons her Honour gave, to allocate that share to Mochkin.
Consideration of ground 4
In our opinion, ground 4 must succeed. For the reasons given in relation to ground 2, we consider that the judge erred in her assessment of the diminution of the value of the partnership’s intellectual property over time. That is sufficient to make out error in relation to paragraph 2 of the judge’s declarations.
In addition, bearing in mind the principles derived from Warman and Foresters, in our opinion an award of a share of the capital value of the William Klein business, into the future, would constitute a windfall to Mochkin that would not be just and equitable. In short, we consider that the William Klein business was, after four years, sufficiently differentiated from the partnership business, by reason of the skill and exertion of Klein and Segman.
(a)The partnership business operated for only eight months. It was operated on two platforms only (eBay and Amazon). It sold homewares and party goods on a retail basis. It created some intellectual property, in particular the McLeod Spreadsheet. In its eight months of operation it generated around $90,000 in revenue.
(b)In contrast, the William Klein business operated for around four years before judgment. It operated on several platforms in addition to eBay and Amazon. It also developed its own website. It sold a greater range of products, including products that were quite different from those that the partnership business has sold. It engaged in wholesaling of products, which the partnership business had not. In the first year after the breakdown of the partners’ relationship it generated $650,000 revenue; and over the four years prior to trial it had generated more than $11,000,000 in revenue.
In these circumstances, we consider that a requirement that Klein, Segman and Getafix account for 37.5 per cent of the William Klein business would result in a windfall to Mochkin, and that such an order for an account would fail to vindicate the purposes underlying the fiduciary obligation that Klein, Segman and Getafix breached. The orders made by the judge, in our opinion, transformed the remedy into a vehicle for the unjust enrichment of Mochkin.
For these reasons ground 4 is made out. It follows that paragraph 2 of the declarations made by the judge should be vacated.
Orders in lieu of paragraphs 2 and 4 of the judge’s declarations
The question then arises as to what orders ought to be made in lieu of paragraphs 2 and 4 of the judge’s declarations. That requires this Court to consider for itself what orders are just and equitable in the circumstances. In order to do so, it is necessary for this Court to apply the principles derived from Warman and Foresters, set out earlier in these reasons,[89] to the present case. Even though there was no real dispute about the application of some of the relevant principles on the appeal, it is useful to work through all of the principles, although those that were the subject of dispute will require greater depth of analysis.
What is just and equitable in the circumstances of this case?
[89]See [31] and following.
First, there was no dispute on the appeal that Klein and Segman breached their fiduciary duty to Mochkin and that Getafix was a knowing participant in the breach. Thus, Klein, Segman and Getafix must account to Mochkin for the benefit they obtained by reason of their taking advantage of the opportunity and knowledge derived from their fiduciary position.
Given that, the authorities support the proposition that, as a starting point, the benefits obtained constitute the William Klein business, including both the profits derived from it and the profits to be derived from it in the future. The establishment of that business was relevantly caused by Klein’s and Segman’s breaches of fiduciary duty and Getafix’s acts of knowing assistance. That is, the business was started and developed ‘by reason of’ Klein and Segman taking advantage of:
(a)business connections, such as with the suppliers of goods;
(b)knowledge derived from their work in the partnership; and
(c)the use of partnership property, such as goods and the intellectual property contained in the McLeod Spreadsheet.
As observed above, we consider that the trial judge was correct to conclude that the benefit of the William Klein business would not have been obtained ‘but for’ the breach of fiduciary duty by Klein and Segman. That is sufficient to require, as a starting point, that they and Getafix account to Mochkin for the entirety of that benefit, even if other contributing causes may be in play. Any other contributing causes will be brought into the analysis later.
The benefit for which Klein, Segman and Getafix may be required to account is not limited to things that answer the description of a ‘profit’ in conventional accounting terms. The order may extend to unrealised profits, including the ongoing William Klein business itself.
The real question in the present case is whether Klein, Segman and Getafix have discharged their onus to show that they should not be required to account for the full value of the benefit received. The judge concluded that they had discharged that onus to some extent, because her Honour did not order that they account to Mochkin for his share of the entire value of the William Klein business. Rather, her Honour ordered that he receive his full share in the first year, but thereafter a lesser share in so far as new products were concerned and a lesser share of the capital value of the business. Mochkin did not challenge those orders. Thus there was no real dispute on the appeal that Klein and Segman had discharged their onus to some extent. The real dispute concerned the extent of the diminution of Mochkin’s entitlement to a full share of the William Klein business over time.
In our opinion, Klein, Segman and Getafix showed that the benefit they received — that is, the William Klein business — is attributable in part to another contributing cause, so that it is ‘practically just’ that the benefit be apportioned or that some allowance be made in their favour.
First, Klein, Segman and Getafix demonstrated that Mochkin had significantly damaged the partnership’s business on the eBay platform, to such an extent that it took Klein and Segman six months to build that part of the business back to where it was before Mochkin’s behaviour.[90] That was because Mochkin had caused the eBay account to lose all of its sales history. The evidence was that the sales history is a very significant factor in the successful operation of an eBay business.[91] Indeed, the trial judge observed that
the sales history is tied directly to the listing and once deleted, there is no value that can be passed onto a new business. The new business would need to rebuild the sales history and recreate the description of the item from knowledge. Experience can be used to speed up the process of recovery, which is different from restarting at zero with no understanding of sales and what customers are searching for. There are ways that are available to eBay vendors to increase the priority of listings or improve the search result priority that was held prior to the ending of the listing. eBay also has product reviews which is attached to the seller and product rather than the listing.
Mr Simonetti said that, in order to establish a similar revenue and ranking as the Partnership Business on eBay, every product would need to be relisted and the history of the product sales would need to be built up again. This includes providing good customer service, answering customer questions, handling shipping and returns, dealing with suppliers. Mr Simonetti said that it took about 6 months from August 2018 to January 2019 for Klein and Segman to return to comparable revenue and rankings on eBay.[92]
[90]First Reasons, [70].
[91]Mr Simonetti’s opinion was that it is the most significant factor. He explained its relevance as follows:
The History of a product is essentially the number of times a product has been purchased. These platforms use search results algorithms to give higher relevance to products that have sold more by unit volume. Similar to how, on social media, content that engages more people subsequently gets more views. Successful marketplaces like eBay and Amazon are built around data and statistics that promote success. Therefore products that sell more frequently get more user traffic pushed to them. In short, traffic builds traffic. The secret sauce of successful marketplace sellers is being able to land a product at or near the top of search results.
[92]First Reasons, [69]–[70].
So, although the eBay account retained its product feedback reviews, nonetheless the eBay business would have been close to worthless unless it was built up again over time. It was in fact built up again over time, by the skill and industry of Klein and Segman. Although they used the partnership assets in order to do so, we consider that it is equitable to reduce Mochkin’s entitlement to the William Klein business by excluding any amounts attributable to the eBay platform.
Secondly, Klein, Segman and Getafix demonstrated that their skill and industry had contributed more generally to the development of the William Klein business such that it was just and equitable to make an allowance for that contribution in determining the extent of the account of profits. In that regard, they demonstrated that, over time, the nature of the business changed sufficiently so that in large measure it no longer reflected the partnership business. That change was a result of Klein’s and Segman’s efforts in:
(a)sourcing new products (in particular PPE);
(b)obtaining new suppliers for both old and new products;
(c)selling products as a wholesaler, rather than a retailer;
(d)developing a William Klein website; and
(e)obtaining approval for the listing of William Klein products on different online platforms such as Catch, Kogan, Dick Smith, and MyDeal.
In addition, the partnership property that Klein, Segman and Getafix used in the conduct of the William Klein business was limited and declined in value over time. The only partnership stock they sold as part of the new business was limited to the Titcher Road Stock (stored in Segman’s garage), valued at approximately $1000, and the Amazon FBA stock (stored in the Amazon FBA warehouse), valued at around $5000. And the value of the intellectual property declined over time.
In relation to the value of the intellectual property, according to Mr Simonetti’s uncontradicted evidence it would diminish to zero over the course of the first 12 months after the breakdown of the relationship. In the absence of any other evidence concerning this issue, we accept his evidence about this.[93] But it does not follow that his views about Mochkin’s entitlement to a share of the profits of the William Klein business over time, expressed in his supplementary report, must also be accepted. The value of the intellectual property was but one aspect of the partnership assets that was used by Klein, Segman and Getafix in the conduct of the William Klein business. They also used:
(a)partnership property;[94]
(b)the eBay, Amazon and Paypal accounts, which were partnership assets;[95] and
(c)the partnership funds generated by partnership sales which, in turn, had been facilitated by the provision of funds by Mochkin.[96]
[93]We have explained above why we considered that the judge erred in relation to Mr Simonetti’s evidence.
[94]Mr Simonetti expressly said that he had not taken stock on hand into account in calculating the value of the partnership business after 10 August 2018.
[95]Mr Simonetti expressly said that he had excluded from his analysis the value of the marketplace accounts, such as Amazon and eBay, which he put at $2,000, in calculating the value of the partnership business after 10 August 2018.
[96]Ie the amounts held in various partnership bank accounts (for example at 6(b), (c), (d) of the judge’s Declarations).
These matters mean that it cannot be said that, as soon as the value of the intellectual property had declined to zero, Mochkin was no longer entitled to any share of the William Klein profits. Rather, Mochkin’s entitlement to a share of the William Klein profits ought to diminish more slowly over time.
Had the William Klein business simply continued to conduct the same business that the partnership had previously conducted, then it might be that Mochkin would have been entitled to a significant share of the new business (albeit still with some recognition of the damage caused to the eBay business and of the exertions of the errant fiduciaries). But that was not what occurred. Rather, what occurred was that, over time, not only did Klein and Segman exert themselves in the William Klein business, but that exertion caused the William Klein business to change over time, so that by the time of judgment it was no longer properly regarded as simply a continuation of the partnership business.
In these circumstances, we consider that a requirement that Klein, Segman and Getafix account for any of the capital value of the William Klein business (as opposed to accounting for profits received in the first four years) would result in a windfall to Mochkin such that an order for an account would fail to vindicate the purposes underlying the fiduciary obligations that Klein, Segman and Getafix breached.
Form of orders
The final question is what form of orders ought to be made by this Court to reflect the above analysis. As the High Court said in Warman, the basis upon which an account of profits should be taken is often extremely difficult to determine in practice, and what is required is a ‘judicial estimation of the available indications’.[97]
[97]Warman (1995) 182 CLR 544, 567 (Mason CJ, Brennan, Deane, Dawson and Gaudron JJ); [1995] HCA 18, citing General Tire & Rubber Co v Firestone Tyre & Rubber Co Ltd [1975] 1 WLR 819, 826 (Lord Wilberforce).
Although the applicants discharged their onus to show that it would be inequitable to require them to account for all of the benefits they obtained, the evidence put before this Court was lacking in some respects. It provided only a limited basis on which the Court might quantify the contribution of Klein’s and Segman’s skill and efforts to the William Klein business, or the transformation of the business over time such that some of the profits generated by the business might be said to have no ‘reasonable connection’ to the breaches of fiduciary duty.
It is convenient to deal first with the issue of the capital value of the William Klein business. It is clear that the relative contribution of the old and new products, and old and new suppliers, to the profits of the William Klein business changed in the period between August 2018 and 2022. Furthermore, the fact that almost 80 per cent of the profits of the William Klein business (aside from profits made on Amazon[98]) were attributable to new products over the course of the period from 2018 to 2022, coupled with the factual matters discussed above, demonstrates that the nature of that business had, over time, changed sufficiently so that by 2022 it no longer reflected the partnership business. We therefore consider August 2022 — being some four years after the breakdown in the relationship of the parties — to be an appropriate date on which to order that Mochkin was no longer entitled to any share of the profits generated by the partnership.
[98]The 80 per cent figure, on which Klein, Segman and Getafix relied, did not take into account sales on Amazon. They adduced evidence that, between 8 May 2020 and 8 May 2022, sales of new products accounted for approximately 92 per cent of sales on Amazon.
As we said above, we consider that it would constitute a windfall for Mochkin to be entitled to a share in the capital of the William Klein business. In that regard, we consider that Klein, Segman and Getafix have discharged their persuasive onus to demonstrate that an order in relation to the capital of the William Klein business would not be just and equitable in all the circumstances.
In relation to the question of Mochkin’s entitlement to an account of profits prior to August 2022, the position is more difficult. There were no findings, and no precise evidence, about the percentage of revenue in each year that was properly attributable to Klein’s and Segman’s skill and exertions. The best evidence in that regard was the evidence they adduced that, between August 2018 and May 2022,[99] almost 80 per cent of the revenue of the William Klein business was derived from new product sales. However, there was no evidence about when the contribution of new products to the revenue of the business overtook the contribution of the old products to revenue.
[99]The relevant end-date is somewhat unclear. The figures appear in a witness statement dated May 2022.
As the High Court said in Warman, quantification of the profit or benefit an errant fiduciary has derived from their breach will often be extremely difficult in practice. Thus what is required is not ‘mathematical exactness but only a reasonable approximation’[100] — the goal is to determine, as accurately as possible, ‘the true measure of the profit or benefit obtained by the fiduciary in breach of his duty’.[101] That involves an evaluative exercise, to which may be relevant matters such as the skill and industry of the errant fiduciary and the nature and severity of the breach of fiduciary duty. As Gageler J observed in Foresters, it is the outcome of that evaluative judgment that ‘yields the “true measure” of the benefit’ to be reflected in the order for an account of profits.[102]
[100]Warman (1995) 182 CLR 544, 558 (Mason CJ, Brennan, Deane, Dawson and Gaudron JJ); [1995] HCA 18, quoting My Kinda Town Ltd v Soll [1982] FSR 147, 159 (Slade J). See also Foresters (2018) 265 CLR 1, 35 [82] (Gageler J); 64 [179] (Nettle J); [2018] HCA 43.
[101]Warman (1995) 182 CLR 544, 558 (Mason CJ, Brennan, Deane, Dawson and Gaudron JJ); [1995] HCA 18.
[102]Foresters (2018) 265 CLR 1, 39 [95]; [2018] HCA 43.
In light of the above matters, we consider it appropriate to adopt the following approach to Mochkin’s entitlement to an account of profits.
(a)First, we would remove from the profits to be subject to the orders any profits derived from the William Klein business on the eBay platform, in recognition of the fact that that business was, in large measure, required to be rebuilt after Mochkin’s removal of the listings caused the loss of sales history, and that rebuilding was done by the exertions of Klein and Segman.
(b)Secondly, Mochkin’s share of the remaining profits of the William Klein business should vary over the years that follow the breach of fiduciary duty, reaching 20 per cent in the fourth year (ie the year ending August 2022). That is in recognition of the loss of any value in the intellectual property by the end of the first 12 months and the skill and industry of Klein and Segman in transforming the business.
(c)Thirdly, the variation in Mochkin’s share referred to in (b), above, ought to occur in a gradual manner to reflect what we infer from the evidence was a gradual (albeit perhaps not linear) shift from sale of old products to the sale of new products by the William Klein business.
(d)Fourthly, as already noted, Mochkin is not to receive any share in the capital of the William Klein business. Thus, after the fourth year, ending in August 2022, Mochkin is not entitled to any share of the William Klein business.
To achieve the above, we would make the following orders in relation to the profits of the William Klein business, in lieu of paragraph 4 of the judge’s declarations:
(a)That the profits of the William Klein Business derived by Klein and Segman in partnership or through Getafix in the period 11 August 2018 to 11 August 2019 (ie, the first 12 months), less the amount of such profits as are attributable to the eBay business, are held on constructive trust for the benefit of:
(i)Mochkin as to 50 per cent;
(ii)Klein and Segman as to 50 per cent, of which three-fifths are held for the benefit of Klein (30 per cent) and two-fifths are held for the benefit of Segman (20 per cent).[103]
[103]The percentages in this paragraph and the following paragraphs reflect the parties’ original share in the partnership.
(b)That the profits of the William Klein Business derived by Klein and Segman in partnership or through Getafix in the period 11 August 2019 to 11 August 2020 (ie, the second 12 months), less the amount of such profits as are attributable to the eBay business, are held on constructive trust for the benefit of:
(i)Mochkin as to 40 per cent;
(ii)Klein and Segman as to 60 per cent, of which three-fifths are held for the benefit of Klein (36 per cent) and two-fifths are held for the benefit of Segman (24 per cent).
(c)That the profits of the William Klein Business derived by Klein and Segman in partnership or through Getafix in the period 11 August 2020 to 11 August 2021 (ie, the third 12 months), less the amount of such profits as are attributable to the eBay business, are held on constructive trust for the benefit of:
(i)Mochkin as to 30 per cent;
(ii)Klein and Segman as to 70 per cent, of which three-fifths are held for the benefit of Klein (42 per cent) and two-fifths are held for the benefit of Segman (28 per cent).
(d)That the profits of the William Klein Business derived by Klein and Segman in partnership or through Getafix in the period 11 August 2021 to 11 August 2022 (ie, the fourth 12 months), less the amount of such profits as are attributable to the eBay business, are held on constructive trust for the benefit of:
(i)Mochkin as to 20 per cent;
(ii)Klein and Segman as to 80 per cent, of which three-fifths are held for the benefit of Klein (48 per cent) and two-fifths are held for the benefit of Segman (32 per cent).
(e)That the profits of the William Klein Business derived by Klein and Segman in partnership or through Getafix in the period after 11 August 2022 (ie, the fifth 12 months) and thereafter, are not subject to any constructive trust but are held by Klein and Segman for their own benefit.
In adopting this approach to the diminution of Mochkin’s share of the William Klein profits over time we have done the best we can with the material available to us. The orders we propose reflect a reasonable approximation of the benefit gained by Klein, Segman and Getafix as a consequence of their breach of fiduciary duty, following our evaluation of the profits generated by William Klein, the contribution of Klein and Segman to those profits by their skill and industry, the severity of their breach of fiduciary duty and Mochkin’s own breach of fiduciary duty in relation to the eBay platform.
Conclusion
For the reasons given above, we would grant leave to appeal and allow the appeal on grounds 2 and 4. We thus propose to:
(a)set aside declaration 2 of the order made by the trial judge on 28 October 2022 (concerning the capital value of the William Klein business); and
(b)set aside declaration 4 of the order made by the trial on 28 October 2022 and in lieu thereof make orders to the effect set out in paragraph 144, above.
In light of the applicants’ success on grounds 2 and 4, and subject to hearing from the parties, our preliminary view is that costs should follow the event.
We also observe that further orders may be required as a consequence of our decision.
We will hear from the parties as to the appropriate orders to give effect to this Court’s reasons for judgment, including any consequential orders that might be required.
---
SCHEDULE OF PARTIES
YECHIEL KLEIN First applicant MENASHE SEGMAN Second applicant GETAFIX CAFÉ PTY LTD (ACN 619 126 582) Third applicant and YOSEF MOCHKIN First respondent JMEC RETAIL PTY LTD (ACN 628 234 953) Second respondent
20
1