Morris v Hanley - [2003] NSWSC 42

No judgment structure available for this case.

CITATION: Morris v Hanley [2003] NSWSC 42

HEARING DATE(S): 17 June, 19 June - 4 July, 9 & 10 July, 15 August and 2 September 2002

JUDGMENT DATE:
13 February 2003

JURISDICTION:
Equity

JUDGMENT OF: Hamilton J

DECISION: Judgment for the defendants.

CATCHWORDS: EMPLOYMENT LAW [21] - The contract of service and rights, duties and liabilities as between employer and employee - Discharge and breach - Generally - Implied duty of mutual trust and confidence in employment contract - Whether gives rise to fiduciary duty - EQUITY [36] - General principles - Fiduciary obligations - Particular cases - Company - Articles of association - Right given to permanent employees to apply for and be allotted shares - Whether company, director or other shareholders owed any fiduciary duty in relation to that right to a permanent employee who did not have shares - EVIDENCE [24] - Admissibility and relevancy - Facts relevant to facts in issue - In general - Course of business - Whether what was said on a particular occasion may be proved by evidence of practice - TORTS [22], [ 238] - Negligence - Essentials of action for negligence - Duty of care - Relationship of proximity - Company - Articles of association - Right given to permanent employees to apply for and be allotted shares - Whether company owed any duty of care in relation to that right to a permanent employee who did not have shares - Conspiring to injure - Particular cases - Whether conspiracy among shareholders made out.

LEGISLATION CITED: Corporations Act 2001 (Cth) s 140
Limitation Act 1969 s 55

CASES CITED: Armstrong v Commonwealth Bank of Australia (1999) 9 BPR 17,035
Burazin v Blacktown City Guardian Pty Ltd (1996) 142 ALR 144
Connor v Blacktown District Hospital [1971] 1 NSWLR 713
Eley v Positive Government Security Life Assurance Co Ltd (1876) 1 ExD 88
Garcia v National Australia Bank Ltd (1993) 5 BPR 11,996
Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41
Johnson v Unisys Ltd [2001] 2 WLR 1076
Malik v Bank of Credit and Commerce International SA (In Compulsory Liquidation) [1998] AC 20
McKernan v Fraser (1931) 46 CLR 343
McWilliam v Penthouse Publications Ltd [2001] NSWCA 237
National Roads & Motorists' Association v Parker (1986) 6 NSWLR 517
News Limited v Australian Rugby Football League Limited (1996) 64 FCR 410
Nock v Austin (1918) 25 CLR 519
Perre v Apand Pty Limited (1999) 198 CLR 180
Pilmer v Duke Group Limited (In Liquidation) (2001) 207 CLR 165
Public Trustee v Permanent Trustee Co Ltd [1999] NSWSC 722
Scally v Southern Health and Social Services Board [1992] 1 AC 294
State Bank of NSW v Muir (1997) 8 BPR 15,483
Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd [1986] AC 80
The King and the Attorney-General of the Commonwealth v The Associated Northern Collieries (1911) 14 CLR 387
The Paul Dainty Corporation Pty Ltd v The National Centre Trust (1990) 22 FCR 495
Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107
Williams v Hursey (1959) 103 CLR 30
Ford's Principles of Corporations Law (10th ed, 2001) [6.050]
Macken and others, Law of Employment (5th ed, 2002) 113 - 117
1A Wigmore on Evidence (Tillers Rev) s 92
Adrian Brooks, "The Good and Considerate Employer: Developments in the Implied Duty of Mutual Trust and Confidence" (2001) 20 University of Tasmania Law Review 29
Greg McCarry, "Damages for the Employer's Implied Duty of Trust and Confidence" (1998) 26 ABLR 141

PARTIES :
Janine Morris (P)
Jack Norman Hanley (D1)
Geoffrey Donald Reid (D2)
Lynda Maree Cole (D3)
Christine Valmae Hayward (D4)
Anthony Bodycote (D5)
Robyn Janelle Haydon (D6)
Daphne Olive Boyd (D7)
Beverley Joy Armfield (D8)
Gayle Hanley (D9)
Cecil Bellchambers (D10)
Mariani Holdings Pty Limited (D11)

FILE NUMBER(S): SC 2650/97

COUNSEL: J J Priestley (P)
P T Taylor (D1-11)

SOLICITORS: Maxwell & Co (P)
Parker & Kissane (D1-11)

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

HAMILTON J

THURSDAY, 13 FEBRUARY 2003

2650/97 JANINE MORRIS v JACK NORMAN HANLEY & ORS

JUDGMENT

1 HIS HONOUR:

TABLE OF CONTENTS

Item
Paragraphs

Preliminary
2

The Facts
3 – 26

The Claims
27 – 40

The Defences
41

The Law: Fiduciary Relationships
42 – 47

The Law: Employer’s Duty Not to Destroy Mutual Trust and Confidence
48

The Law: Conspiracy
49 – 52

Contested Facts: The Knowledge of the First Ten Defendants
53 – 72

Contested Facts: Whether There Were Combinations or Agreements Which Would Found Conspiracies or Any Intention to Harm the Plaintiff
73 – 78

Conclusions: Preliminary
79 – 82

Conclusions: The First Ten Defendants: Fiduciary Duty and Conspiracy
83 – 86

Conclusions: The Company: Fiduciary Duty and Duty of Care
87 – 89

Conclusions: Fiduciary Duty: The Directors
90

Conclusions: Substantive Defences
91

Result
92

2 The plaintiff and the first ten defendants were all at material times shareholders of the eleventh defendant (“the company”). The plaintiff alleges that either the company or the first, second and eighth defendants as directors of the company or the first ten defendants as shareholders of the company owed her a fiduciary duty which they breached. Alternatively, she alleges that the first ten defendants were guilty of a conspiracy against her. Alternatively, she contends that the company owed her a duty of care which it breached. In each case she alleges that the wrongful acts of the defendants respectively mentioned caused her damage. By agreement, I am trying issues of liability, leaving issues of the relief to which the plaintiff is entitled if successful to appropriate inquiries before a Master or determination in some other appropriate fashion.

Facts

3 The facts from which the proceedings arise are as follows. The facts set out under this heading are either uncontested or, where there is some contest, may easily be found or inferred from the evidence. Facts which are seriously in dispute are dealt with under the heading “Contested Facts”.

4 For some years before November 1987 the company conducted in Casino a business of manufacturing beef jerky. The business was owned and conducted from at least as long ago as 1977 by the Mariani family. The family was in part in the United States and also in Adelaide. The family representative in Casino who attended to the business was Paul Mariani. According to the second defendant, Geoffrey Reid (“Reid”), who was general manager from 1980 onwards, the company struggled financially for a large part of the period between 1980 and 1987. During 1987 it was showing losses of about $1,000 per day. In 1987 Paul Mariani indicated that the family wished to dispose of the business and he wished to go and live in Adelaide.

5 As at November 1987 the first eight defendants were all permanent employees of the company. The first defendant (“Hanley”) was the accountant and Reid, as I have said, was the general manager. The ninth and tenth defendants were not at that stage employees of the company. Cecil Bellchambers, the tenth defendant (“Bellchambers”), was the father of the ninth defendant, Gayle Hanley (“Gayle Hanley”) and the father in law of Hanley. Gayle Hanley became an employee of the company in 1988 and remained so until 1998. Bellchambers became an employee of the company about 1988 and remained so until about 1992. There was some challenge during the course of the evidence as to whether or not Gayle Hanley and Bellchambers ever became employees, but in my view there is ample evidence to demonstrate that they did and really no evidence to the contrary.

6 In 1987 Hanley attended meetings in Sydney which Paul Mariani had with a prospective Japanese buyer of the company, but this came to nothing. In November 1987 two things of significance happened. Reid, who had been sent by the company on a trip to the USA, came back with the feeling that the business could be turned around and become profitable. A small group of employees, centring initially on Hanley, Reid, Daphne Olive Boyd, the seventh defendant (“Boyd”), and Lynda Maree Cole, the third defendant (“Cole”), decided to see whether they could put together an offer to purchase the company. At about the same time a small business group from the NSW Government was travelling by train around New South Wales. Cole went to the train and there saw and obtained information and written material concerning the Worker Enterprise Corporation (“WEC”), which she gave to some other interested staff.

7 WEC was an organisation set up by the NSW Government to foster the conduct of small businesses on what were called “workers cooperative principles”. By late 1987 Kevin Cheney (“Cheney”) was its executive director and Malcolm Rodgers (“Rodgers”) was its operations manager. WEC had at its disposal funds which could be lent to foster the setting up or development of businesses of the type it was concerned with. There is no dispute that in general terms what was required for a business to qualify for assistance by WEC was that all employees of the business should share in its ownership and that all owners of the business should be workers employed in it. As appeared from the evidence, the company was a much larger enterprise than any that WEC had previously assisted. It was in part for this reason that WEC became enthusiastic about participating in its purchase by a group of its employees.

8 Apart from Cole obtaining some literature from the train (the precise literature she obtained was never definitively identified), the first evidence of contact between WEC and the proposed purchasers of the company was that on 17 November 1987 Cole faxed an initial inquiry form to WEC, which on 19 November despatched an information kit, the precise contents of which are not entirely clear. It is equally not clear which of the defendants’ hands it came into or whether any of them read it. On 23 November 1987 there was a telephone conversation between Hanley and Rodgers (perhaps also Cheney). On 24 November 1987 Hanley wrote to WEC a letter marked for the attention of Cheney and Rodgers. He referred to the conversation of the previous day. He enclosed an offer which had by then been made to Paul Mariani but had failed because it provided only for the purchase of the business and not for the purchase of the land and other assets. Hanley’s letter continued:

“Following discussion with yourselves, we re-assessed our proposal and discussed the possibility of forming a Workers Co-Operative along the lines outlined in your literature. The intention being that the Co-Operative would offer to purchase the business as a whole including Land & Buildings, Fixtures & Fittings and Plant & Equipment. A statement setting out this offer is also enclosed as Statement ‘B’.

9 However, by 17 December 1987 it had been decided to proceed with the purchase if possible as a management buyout without finance from WEC. There is clear evidence to this effect in a file note made by Cheney on 17 December 1987 of a telephone conversation he had with Hanley on that day. That note in full was as follows:

“Received a call from Jack Hanley to say that:-

1. Deal with Japanese has fallen through.

2. Paul’s price is $700,000

3. Only six starters now – all ‘management’.

4. No longer interested in worker co-op but rather a management buyout.

(I think that Jack, Jeff (sic) and others think that the opportunity is too good to share with all employees).

10 However, a handwritten note made by Cheney on 11 January 1988 shows a reversal of attitude and a fresh approach by the group of prospective purchasers to WEC. There seems little doubt from the evidence that this was motivated by the fact that it was now clear that the price which Mariani would accept was $700,000 (including the land and buildings) and that no bank or other conventional lender would lend the prospective purchasers sufficient money to pay that price. At that stage the proposed purchasers were stated in the note to be “6 – 8 introducing $100,000 (min $10,000 each)”. It also indicated that the other employees, four to six in number, were not presently supportive of the cooperative concept. The note again recorded a telephone conversation with Hanley.

11 In the days following this fresh approach to WEC there was debate among the proposed venturers (or at least Hanley, Reid, Cole and Boyd) as to whether the adoption of the workers cooperative format would require that all employees be paid the same and perhaps have equal say in management of the business. By a handwritten memorandum dated 18 January 1988 Reid indicated that it was not part of the proposal that the “partners” should all receive the same income; they would continue to be employees as theretofore and work under the direction of a manager. This was both because that regime was in accordance with the requirements of WEC and because any other regime would be intolerable to Reid, who would not continue to be involved if such were implemented.

12 Various meetings were held of possible or prospective participants in the purchase. After 14 years the evidence concerning the date and nature of these is confused and inconclusive, except for those in 1988 which were minuted. The first of those was on 3 February. An early meeting is said to have been a meeting of permanent staff in the lunch room of the factory. Reid seems to place it between the beginning of January and 3 February 1988. I cannot determine whether it was in late 1987 or early 1988. Although the plaintiff was not at that time a permanent but only a casual staff member, there were some suggestions that she was present at this meeting. However, she denies it and there is no convincing evidence that she was present. I find that she was not present at the meeting. Equally, insofar as there is any suggestion that she was at a meeting addressed by Cheney or Rodgers (see [55] below), I find that she was not at that meeting. I also find that it is not established that any offer or invitation to take up shares was made to her, or that she ever assigned home renovations, as one piece of evidence suggested, as a reason for not taking up shares.

13 On 3 February 1988 a meeting was held of which there is a written record under the heading “Mariani Industries Pty Ltd” which describes it as a shareholders’ meeting. The people present were not and never became shareholders of Mariani Industries Pty Ltd. It was not until 9 March 1988 that Batoreep Pty Limited was incorporated. Its current name is Mariani Holdings Pty Limited and it is the eleventh defendant. However, this was obviously a meeting of the group of persons who intended to become shareholders in the new enterprise. By this time the group included not only Hanley, Reid, Cole and Boyd, but also Christine Valmae Hayward, the fourth defendant (“Hayward”), Anthony Bodycote, the fifth defendant (“Bodycote”), Robyn Janelle Haydon (formerly Cook), the sixth defendant (“Haydon”), Beverley Joy Armfield, the eighth defendant (“Armfield”) and Bellchambers. At that stage J Hanley Snr was noted as being a participant in the venture, although he did not ultimately participate. The shares that were to be taken by him were taken instead by Gayle Hanley. Bellchambers subscribed the money for her shares. The group was the same at further meetings held on 15 and 24 February 1988, the proceedings at which were similarly recorded. The minutes of 24 February 1988 are of some importance in that they record that “Malcolm Rodgers of WEC is coming up to explain the rules and to sign forms 2nd week of March”. This is important as helping to fix the time of Rodgers’ visit to Casino, which it may be inferred had not taken place at that stage.

14 Various negotiations proceeded in March and April 1988, as shown in various writings that are in evidence. It is not necessary to set those out in detail, but the following matters should be noted. By 13 April 1988 Gayle Hanley had become the tenth prospective shareholder. The financial contribution by WEC had been fixed at $400,000. This was to consist of a loan of $350,000 plus a subscription for shares in the sum of $50,000. These shares were to be held “in trust for present and future employees” of the company. Upon further employees taking up shares on workers cooperative principles, those shares were to be provided directly or indirectly out of the 50,000 shares to be held by WEC. Bellchambers agreed to take up a further 46,000 shares for a further capital contribution of $46,000. The additional loan funds necessary were to be provided at WEC’s instance by the NSW Investment Corporation (“the NSWIC”), which was to lend $350,000 (subsequently increased to $360,000). The finance to be provided was therefore employee shares (including Bellchambers’ additional 46,000) $146,000, WEC shares $50,000, total shares $196,000, WEC loan $350,000, NSWIC loan $350,000 or $360,000, total loans about $700,000. This was to provide a total fund in round figures of $900,000, which was deemed sufficient to pay the $700,000 purchase price and provide working capital. On 9 March 1988 the company was incorporated with conventional memorandum and articles of association. In the minutes of meeting of the group of 11 April 1988 there is a note, “Malcolm Rodgers next week start meeting after 3.15 pm into night”. This is a second written indication of when a meeting at which Rodgers was present may have taken place. It seems, despite the earlier note, that the meeting had still not taken place at that time. But there is no actual record of the meeting or meetings at which Rodgers did attend. The evidence of the witnesses shows that a meeting did definitely take place some time before 13 May 1988. The content of that evidence will be considered when I turn to the contested evidence.

15 Important events occurred on 13 May 1988. A deed of loan between WEC and the company (“the deed of loan”) was executed on that day (a general deed of charge by the company to WEC of its undertaking and all its assets had already been executed on 11 May). The deed of loan related to a fully drawn advance of $250,000 for the purchase of the business and the real estate. The term was to be six years. Repayment was to be by 71 consecutive monthly instalments of $4,663 each and a final payment of the balance. The deed of loan contained the following provisions:

“11 The Borrower shall at all times during the currency of the loan conduct its operations in accordance strictly with accepted principles of worker co-operation and shall comply in all respects with any directions which may be given in this regard by WEC to the Borrower from time to time.

16 On the same day there was a directors’ meeting of the company attended by Hanley, Reid and Armfield, who had by then become its directors. Pursuant to a resolution at that meeting, there was a general meeting of the ten members of the company, at which they passed special resolutions for the alteration of the articles of association to a form which had been agreed with WEC (“the 1988 articles”). The minutes of that meeting show that all ten members were present and consented to the resolutions being proposed and passed as special resolutions notwithstanding lack of due notice. The alterations to the articles of association were duly registered. The 1988 articles contained the following:

“Articles

2 (a) Subject to the Code, the memorandum and articles of the company have the effect of a written agreement:-

(i) between the company and each member;

(ii) between the company and each officer; and

(iii) between a member and each other member,

under which each of the above-mentioned persons agrees to observe and perform the provisions of the memorandum and articles as in force for the time being so far as those provisions are applicable to that person.

……

Qualification for Membership

9 Except for founder members and holders of A or B class shares:

(a) Every member shall hold at least one hundred (100) shares.

(b) Every member shall be an employee of the company.

(c) Except in the circumstances set out in articles 15(a) and 16 every employee of the company shall be a member.

……

Membership and Shares

10 (a) Except in the case of applications for membership received for the purpose of formation of the company, applications for ordinary shares shall only be accepted from persons who are permanently employed by the company.

(b) (i) Applications for membership, shares or additional shares should be filled in as required and lodged at the registered office together with an amount equivalent to the par value of each share applied for. The board will consider each application and shall either approve of reject same. The company will notify successful and unsuccessful applicants in writing of the result of their application for membership, and shall refund any money paid by an unsuccessful applicant. The company shall forward to each successful applicant for ordinary shares a Subordinated Loan agreement to be signed by that applicant.

……

(c) The board shall accept any application for shares required to admit to membership an employee who has completed six months employment with the company, and may accept such an application from an employee who has completed less than six months such employment. Providing that if the board has determined, no later than the date of considering the application, to terminate the person’s employment, it shall not accept the application for membership. The board may at its discretion refuse any application for shares additional to the minimum shareholding established in article 9(a) herein.

……

Conditions of Employment

15 (a) No person shall be employed whether permanent, part-time or casual for a period greater than twelve months unless that person becomes a member…….

(b) The company shall enter into a written contract of employment with every permanent employee other than an indentured apprentice in or to the effect of the form set out below:

CONTRACT OF EMPLOYMENT

EMPLOYER:

EMPLOYEE:

This contract incorporates …. articles 15 and 16 of the Articles of Association of the company and to the extent that this Contract is inconsistent therewith, the said provisions shall prevail.

1 (i) The employee shall not be entitled to become a member of the company in accordance with its articles until the expiration of a period of six months continuous service with the company or such lesser period as the board may determine.

(ii) This contract of employment is not for any fixed period of time, however, if the employment of a person receiving full adult wages continues for a period of one year and the employee is not then a member of the company the contract of employment shall immediately cease.

……

16 Notwithstanding any other article to the contrary:

(a) the employment of any person who is a member of the company shall be immediately terminated if that person ceases to be a member for any reason other than as a consequence of either the bankruptcy of that person or because that person has entered into an agreement with his or her creditors in accordance with Part X of the Bankruptcy Act (1966) (which agreement is in this article called a Part X Agreement).”

17 It was provided by article 30A of the 1988 articles that the company should have one million shares of $1 each divided into 800,000 ordinary shares, 100,000 “A” class shares and 100,000 “B” class shares. It was 50,000 “B” class shares which were issued to WEC and special provisions were contained in the articles relating to these shares in accordance with the agreement that had been reached concerning them. This included the right to appoint one director of the company. Each of the first ten defendants was issued with 10,000 ordinary shares and 46,000 “A” class shares were issued to Bellchambers in respect of his additional investment of $46,000.

18 Contracts for the purchase by the company of the business and real estate of Mariani Industries Pty Limited for a total of $700,000 were exchanged on 31 May 1988. Although the contract for the sale of land was not completed until later, the contract for the purchase of the business was completed contemporaneously with the exchange and the company began to conduct the business from 1 June 1988. On 17 June 1988, in view of the fact that the bank would not give the company overdraft accommodation, even with support by a guarantee from WEC, WEC agreed to advance an additional $75,000 to the company until 31 January 1989. On 1 July 1988 the company entered into a facility agreement with NSWIC under which NSWIC agreed to advance the company $360,000. The loan was of $360,000 for the term of four years with interest only payable during the term and the principal repayable at its expiry, ie, on 1 July 1992

19 Pursuant to WEC’s entitlement under article 30A, Rodgers was appointed a director and at a number of directors’ meetings in 1988 and 1989 participated in the affairs of the company. Rodgers attended a board meeting on 21 July 1988. On 17 August 1988 Cheney attended a board meeting in Rodgers’ stead. Rodgers attended further board meetings on 28 September, 19 October, 16 November and 21 December 1988 and 25 January, 15 February and 19 April 1989. By the board meeting of 17 May 1989 WEC had departed from the scene and it was clear that its successor (as to which, see below) would not appoint a nominee director to the board.

20 The company changed its name to Mariani Industries Pty Limited on 23 August 1988. The change of name was perfected on 16 November 1988. In January 1989 the additional $75,000 loan from WEC for working capital was extended and increased by a further $25,000. This fulfilled WEC’s original promise of loans totalling $350,000: see [14]. NSWIC was privatised in about September 1988, its business being transferred to the Australian Association of Co-operatives Limited (“AAC”). The privatisation was perfected in January 1989. At about that time the company approached AAC to increase its exposure in order to assist the company to raise a further overdraft facility. AAC replied by a letter of 7 June 1989 which contained the following:

“As you are aware, Australian Association of Co-operatives Limited (AAC) is committed, as was WEC, to the development of employee owned businesses following co-operative principles. These principles require that the employees own the businesses in which they work and that any employee who does not wish to take on the responsibility of ownership should seek employment elsewhere.

……

Mariani has seen employment grow from some 10 original members to a now permanent complement of 28 with additional casuals as required. The management is to be congratulated on this achievement. However, no additional members have come forward to purchase shares despite the increase in the employment base and the fact cannot be hidden that this is of concern to the AAC in its capacity as Trustees [sic] for the CDT.

At the same time AAC genuinely wishes to assist Mariani in any way it can and sees Mariani as an opportunity of proving that employee ownership works.

I hope you can see the dilemma that we, as Trustees of public funds, with a lending charger [sic] to follow, are placed in.

Accordingly AAC advances the following proposal:

……

That AAC provide a $140,000 overdraft facility with CDT as guarantor. Accordingly no Mariani directors will be required to give guarantees in order to secure this facility as I understand would be the case if the State Bank financing proposal were undertaken.

That all employees who have been employed by the company for more than 6 months be invited to take up shares in accordance with Article 15 of the company’s Articles of Association and the employees’ contract of employment. These employees should first be offered the B class shares held by WEC as trustee for CDT in lots of 10,000. Membership should commence (ie. the shares should be issued) immediately subsequent to 30th June, 1989 or such that the profits for the year ended 30th June, 1989 will, subject to the provision of the company’s Articles, be divisible between the founder members alone.

AAC will assist these employees to purchase the WEC shares by offering credit terms of upto [sic] 50% of the cost if necessary.”

21 On 12 March 1990 AAC wrote to Reid as general manager of the company as follows:

“I am writing to you with reference to the outstanding loan and investment made in your company by the Trust formerly administered by the Worker Enterprise Corporation which is now managed by the Australian Association of Co-operatives Limited.

On examination of the Deed of Loan signed by your … company, the WEC records and reports of Officers of AAC I am satisfied that your company has breached its loan agreement on several counts.

I am satisfied also that your company has failed to comply with the spirit of the agreement by which the Trust purchased preference shares in the company.

Consequently I have an obligation to recommend to the Board of AAC that the loan moneys advanced to your company be required to be repaid in full, forthwith.”

“Your statement that we have breached our loan agreement on several counts, surprises me and I would appreciate clarification on this point before taking any further action.”

“With reference to your facsimile received this day, I would point to four conditions of your loan agreement:

22 A loan was raised from the Commonwealth Development Bank and the borrowings from both AAC and NSWIC were paid out, settlement being effected at the end of September 1990. It is clear from the documentation (including a diary note of an AAC employee) that AAC accepted 75 per cent of the outstanding principal of the loan in satisfaction of the whole. This clearly effected a release of the company from liability for the balance. There was no formal release of the company (or the defendants) from any liability. Redemption of AAC’s shares was agreed to on the basis that $50,000 would be paid by instalments of $3,000 per month, commencing about October 1990. On payment out, the shares would be distributed equally among the other ten shareholders.

23 The company changed its name to Mariani Meats Pty Limited on 14 February 1991. On 5 March 1992, after the loans to AAC had been paid out and the redemption of AAC’s shares finalised, the company by special resolution replaced the 1988 articles with articles in conventional form. WEC’s 50,000 “B” class shares were distributed equally among the ten shareholders and became ordinary shares. At the same time the same process was carried out in respect of Bellchambers’ 46,000 “A” class shares. The ten shareholders accordingly received an additional 9,600 ordinary shares each.

24 The plaintiff’s employment with the company had become permanent on 1 June 1988. The plaintiff says that at “some time during the period from late 1988 to 1991” her husband expressed interest to Reid in the plaintiff and him buying shares in the company if they “ever become available again”. I am not prepared to find on the balance of probabilities on this vague evidence that any such indication was made by Mr Morris to Reid prior to the change of the articles of association in March 1992. However, there is no doubt that from about June 1993 the plaintiff and her husband attempted to purchase shares in the company from other shareholders. There were negotiations by the Morrises with Bellchambers and with Peter Hayward and Wayne Armfield which did not come to fruition. There were discussions with Reid in mid 1994 which led to the purchase by the plaintiff and her husband of some 11,000 shares in the company for about $80,000. This represented a price of between $7 and $8 per share, rather than the $1 per share which was originally paid in respect of their issue. After the purchase of these shares the plaintiff and her husband sought assurance that they would receive the same additional benefits from the company as other shareholders had been receiving and they were given this assurance. They were given a list of benefits that is in evidence. That list is as follows:

“Janine Morris
Total Package:	$28,158.00 52 =	541.50	($14.25/hr)
124.10	Tax
417.40
Days off 20 days/year	2,280.00
Profit Bonus (150.00 x 10 mths)	1,500.00)	Approx.
Cash envelopes ($84.44/wk)	4,390.88)	Only
Production Bonus (300.00 x 10 mths	3,000.00)
11,170.88 52 =	$214.82	Extra/wk
Total earnings	$39,328.88
Suggestion	$35,000.00 52 =	$675.08	Gross
176.10	Tax
496.98	Net
(25,842.96/year)”

25 There is no doubt that the shareholders had from 1988 onwards been receiving various benefits that other permanent employees of the company did not receive. These included increased wages. The evidence indicates that the increases were perhaps in the order of 20 to 25 per cent. The benefits undoubtedly diminished the profits of the company, but appear to have been reasonably equitably distributed among the shareholders. There was some element of dishonesty in the manner in which some of the benefits were taken, in that they were taken in the form of cash which was not recorded as income in the shareholders’ income tax returns. Furthermore, in some cases it appears there was misrepresentation in the company’s income tax returns as to the nature of the deductions claimed by the company.

26 From the time of the plaintiff and her husband becoming shareholders she received additional benefits in much the same way as other shareholders. The plaintiff claims, and I accept, that she was unaware of the terms of the deed of loan and the 1988 articles set out in [15] and [16] above until about 1995. At that time, at her request, Reid made the records and papers of the company available to her. The plaintiff sought legal advice concerning her rights in about May 1996. Later in 1996 she made a claim against the company. At this time there were negotiations in progress for the sale of the business or the company. A notice was put upon the factory notice board concerning the plaintiff’s claim and stating that the making of the claim would jeopardise the prospective sale. After this the plaintiff was ostracised by her fellow shareholders. The assets and enterprise of the company were ultimately sold for about $1,000,000 and the sale completed on 16 January 1998.

The Claims

27 As has already been stated in [2], the plaintiff claims that there have been breaches of fiduciary duties owed to her respectively by the first ten defendants as members of the company; the second, third and eighth defendants as directors of the company; and the company itself. In addition, it is alleged that the first ten defendants were guilty of a conspiracy against her which caused her damage and that the company was in breach of a duty of care owed to her. The precise terms of the pleading allegations by which these claims are propounded are of more than ordinary importance in determining this case.

28 Fiduciary Duty Claim against Shareholders. The allegations against the first ten defendants relating to their alleged breach of fiduciary duty as members of the company commence at par 2 in the fifth further amended statement of claim (“the statement of claim”). In pars 2, 3 and 4 there are alleged the adoption of the 1988 articles, the acquisition by the company of the Mariani business, the deed of loan, that the articles required that all permanent employees be members of the company and that financial assistance was provided to the company by WEC dependent upon the adoption of the 1988 articles. Paragraph 5 of the statement of claim is as follows:

29 Paragraphs 8 to 10 of the statement of claim alleged the existence of fiduciary duties in the first to tenth defendants as follows:

9 Further, the first to the tenth defendants owed a fiduciary duty to the plaintiff not to alter the Articles of Association of the Company so as to change the basis on which the affairs of the Company were conducted and regulated without first ensuring that all permanent employees entitled to become members of the Company were in a position to participate in any such proposed alteration in accordance with the rights and entitlements given to them by the Articles of Association.

30 Breaches of those fiduciary duties were alleged as follows in par 11 of the statement of claim.

“11 In breach of their fiduciary duties referred to in paragraphs 8, 9 and 10, the first to the tenth defendants:

31 Furthermore, in par 12 breaches of fiduciary duty were alleged in that the first to tenth defendants “derived benefits or profits without providing the plaintiff and all permanent employees with the same opportunity contrary to the intention of the original articles before they were altered”. In sub paragraphs lettered (a) to (q) inclusive were set out various benefits said to have been taken by all or some of the first to tenth defendants. It was alleged by par 13 that the first to tenth defendants had by those breaches “made improper gains at the expenses [sic] of the plaintiff, for which they are liable to account, and the plaintiff has suffered loss and damage”. The damage particularised included the suffering of “distress, anxiety and inconvenience, compensable in damages”. This is said to refer to the effect upon the plaintiff of her ostracism mentioned in [26] above.

32 Breaches of Fiduciary Duty and Duty of Care by Company. So far as the company is concerned, breach of fiduciary duty is alleged as follows. It is alleged in par 17 of the statement of claim that the company knew or ought to have known of the matters pleaded in pars 2, 3 and 4: see [28]. The statement of claim continues to allege:

19 By reason of the matters set out in paragraph 17 and 18, the Company had a special opportunity to affect the interests of permanent employees in a legal or practical sense and to exercise a power (or omit to do so) to their detriment.

33 As to the cause of action in negligence, the plaintiff in par 21 of the statement of claim alleges that by reason of the terms of the articles of association and other matters pleaded the company by employing the plaintiff “assumed a responsibility to the plaintiff to advise and/or notify her of her rights pursuant to the said Articles of Association including in relation to becoming a member of the company”. It alleges in par 22 that “[i]n the premises” the company came under a duty of care to the plaintiff to ensure that the affairs of the company were conducted in accordance with its articles and that permanent employees of the company such as the plaintiff were made aware of their entitlement to be issued shares in the company.

34 The statement of claim alleges in pars 23 and 23A that the company committed the following breaches of its fiduciary duty pleaded in par 20 and its duty of care pleaded in par 22:

35 Furthermore, in pars 23A and 24, further allegations of breaches of fiduciary duty and/or of a duty of care and allegations of loss or damage were made in much the same terms as made in pars 12 and 13 in respect of the first ten defendants as shareholders: see [31] above.

36 Breach of Fiduciary Duty by Directors. So far as the directors are concerned, they are alleged by par 25 of the statement of claim to have been directors. The statement of claim alleges by par 26 that they knew or ought to have known of the matters pleaded in pars 1-6: see [26]. It continues to allege:

“27 By reason of the matters pleaded in paragraphs 25 and 26 above, the first, second and eighth Defendants in their capacity as directors of the Company owed a fiduciary duty to the Plaintiff in her capacity as a permanent employee as and from 1 June, 1988.

37 The statement of claim in par 30 in substance repeats the allegations of breach of fiduciary duty made in par 11(a) to (h) in relation to the ten shareholders. Paragraphs 31 and 32 make further allegations of breach and allegations of loss or damage in much the same terms as made against the shareholders and the company: see [31] and [35] above.

38 Conspiracy by First to Tenth Defendants. The conspiracy is alleged as follows in the statement of claim:

“14 Further, or in the alternative, each of the first to tenth defendants in combination with each other and/or each of them, thereby entered into an agreement, combination, understanding or concert to the effect that:

Particulars

The agreement was oral. Further and alternatively, it arose by the first to tenth defendants engaging in the conduct referred to in circumstances where each of them were aware of that conduct and expressly agreed with it and/or did not object to it or express any disagreement with such conduct being undertaking. Further and in the alternative, the agreement is to be inferred from the totality of the conduct and actions as referred to in paragraph 11 and 12 which give effect to the agreement, with the result that the first to tenth defendants made the gains referred to in paragraph 13.

The agreement in relation to (a) - (e) and (h) - (i) was entered into at or about the time at which the said Articles of Association were adopted for the Company, and was subsequently continued to be agreed. The agreement in relation to (f) was entered into in or about October 1990. The agreement in relation (g) was entered into at (sic) or about March 1992. The agreement in relation to (j) - (k) was entered into in or about November/December 1997.”

39 In par 14A of the statement of claim were set out the various acts alleged to have been carried out in furtherance of “the aforesaid combination, agreement, understanding or concert”. The paragraph is as follows:

“14A Pursuant to the aforesaid combination, agreement, understanding or concert:

Particulars

The Plaintiff relies upon the same conduct as pleaded in paragraph 5 hereof as comprising the overt acts from which the agreement arrangement and/or concert is to be inferred.”

40 Paragraph 15 of the statement of claim contains the following allegations:

“15 The conduct of the first to tenth defendants in giving effect to the agreement, combination, understanding or concert referred to in paragraph 14.;

Particulars

The Defences

41 The defence on file is in answer to the fourth further amended statement of claim. Under the provisions of Part 20 r 2A of the Supreme Court Rules 1970, it operates as a defence to the subsequently filed fifth further amended statement of claim (the statement of claim). In any event it was not suggested in argument that failure to traverse any new allegations in the most recent statement of claim resulted in any admission significant in the determination of the case. In answer to par 5 of the statement of claim the defendants in their defence admitted that they were members of the company between 13 May 1988 and 5 March 1992; attended the meeting on 13 May 1988 whereby the WEC articles of association were adopted; were for some period employed by and worked for the company; and lived and worked for some period in proximity to one another. The balance of the allegations in par 5 were substantially traversed. In answer to pars 6 and 18 they admitted that the articles contained the provisions alleged between 13 May 1988 and 5 March 1992. In answer to par 25 they admitted that the first defendant, the second defendant and the third defendant (it would seem that “third” is a clerical error for “eighth”) were directors of the company at relevant times. Save as aforesaid, the allegations in the statement of claim were substantially traversed. By pars 14 to 37 of the defence the defendants alleged the deed of loan, the adoption of the 1988 articles, the assignment of WEC’s rights to AAC, the pay out of the loan and the settlement associated with that. It was alleged (par 29(e)) that by the terms of that settlement the defendants were released from “all liability arising under the Loan, the Deed of Loan and the Loan Conditions including, but not limited to the WEC Memorandum and Articles and the WEC Shares”. It was further alleged (pars 35 and 36) that AAC was entitled to release the defendants from such liability and (par 37) that the defendants were released accordingly. By pars 38 to 45 it was alleged that the plaintiff in late 1987 or early 1988 was aware of the proposed borrowing from WEC and was in or about January 1988 invited to take up 10,000 shares but refused. It was alleged that “any entitlement which the Plaintiff may have had under the WEC … Articles has been lost” by reason of the Limitation Act 1969 (“the Limitation Act”) or laches. In relation to the Limitation Act, the plaintiff filed a reply of fraudulent concealment under s 55.

The Law: Fiduciary Relationships

42 Despite the fact that his Honour was in the minority on the question of whether a fiduciary relationship arose in that case, what was said by Mason J in Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 96 - 97 about the circumstances in which fiduciary relationships arise has since become the locus classicus on the subject. That passage was recently discussed as follows in the High Court in the majority judgment of McHugh, Gummow, Hayne and Callinan JJ in Pilmer v Duke Group Limited (In Liquidation) (2001) 207 CLR 165:

Hospital Products Ltd v United States Surgical Corporation

Daly v Sydney Stock Exchange Ltd

Breen v Williams

Hospital Products

‘The relationship between the parties is therefore one which gives the fiduciary a special opportunity to exercise the power or discretion to the detriment of that other person who is accordingly vulnerable to abuse by the fiduciary of his position ...…

It is partly because the fiduciary's exercise of the power or discretion can adversely affect the interests of the person to whom the duty is owed and because the latter is at the mercy of the former that the fiduciary comes under a duty to exercise his power or discretion in the interests of the person to whom it is owed.’

Norberg v Wynrib

‘The foundation and ambit of the fiduciary obligation are conceptually distinct from the foundation and ambit of contract and tort. Sometimes the doctrines may overlap in their application, but that does not destroy their conceptual and functional uniqueness. In negligence and contract the parties are taken to be independent and equal actors, concerned primarily with their own self-interest.

Consequently, the law seeks a balance between enforcing obligations by awarding compensation when those obligations are breached, and preserving optimum freedom for those involved in the relationship in question. The essence of a fiduciary relationship, by contrast, is that one party exercises power on behalf of another and pledges himself or herself to act in the best interests of the other.’

In the same case, Sopinka J observed (at 312):

‘Fiduciary duties should not be superimposed on these common law duties simply to improve the nature or extent of the remedy.’

43 Their Honours also said, in relation to the obligations imposed on a fiduciary:

Breen v Williams

‘In this country, fiduciary obligations arise because a person has come under an obligation to act in another's interests. As a result, equity imposes on the fiduciary proscriptive obligations -- not to obtain any unauthorised benefit from the relationship and not to be in a position of conflict. If these obligations are breached, the fiduciary must account for any profits and make good any losses arising from the breach. But the law of this country does not otherwise impose positive legal duties on the fiduciary to act in the interests of the person to whom the duty is owed.’”

44 In the Hospital Products case supra it was also said by Dawson J at 149:

Weinberger v Kendrick

Barnes v Addy

‘It is equally important to maintain the doctrine of trusts which is established in this court, and not to strain it by unreasonable construction beyond its due and proper limits. There would be no better mode of undermining the sound doctrines of equity than to make unreasonable and inequitable applications of them.’”

45 Mason J also in Hospital Products dealt with the relationship between contractual and fiduciary obligations. As was said in the joint judgment of the Full Federal Court (Woodward, Northrop and Sheppard JJ) in The Paul Dainty Corporation Pty Ltd v The National Centre Trust (1990) 22 FCR 495 at 516:

46 The extent of fiduciary duties was usefully discussed as follows in the judgment of the Full Court of the Federal Court (Lockhart, von Doussa and Sackville JJ) in News Limited v Australian Rugby Football League Limited (1996) 64 FCR 410 at 539:

Coomber; Coomber v Coomber

Hospital Products v USSC

Mabo v Queensland (No 2)

Kelly v [CA & L] Bell Commodities [Corporation Pty Ltd

Hospital Products v USSC

Noranda Australia Ltd v Lachlan Resources NL

Birtchnell v Equity Trustees, Executors & Agency Co Ltd

47 These passages emphasise five pertinent aspects of the law of fiduciary relationships:

(1) At the heart of the existence of a fiduciary relationship is the “undertaking or agreement by the fiduciary to act for or on behalf of or in the interests of” the relevant other person or the “pledge” by the fiduciary “to act in the best interests of the other”. That undertaking, agreement or pledge need not be express but the facts of the matter must rise to yielding the inference that there is such an undertaking, agreement or pledge.

(2) Fiduciary obligations in Australian law are proscriptive rather than prescriptive in nature. They prohibit the fiduciary from obtaining an unauthorised benefit or placing himself in a position of conflict but do not impose positive legal duties to act.

(3) The content of the duties owed by the fiduciary are not determined by the existence of the fiduciary relationship but by the circumstances surrounding the relationship upon the facts of the particular case.

(4) Where the relevant transactions occur in a commercial context between parties dealing at arm’s length the Court is more reluctant to find the existence of a fiduciary relationship.

The Law: Employer’s Duty Not to Destroy Mutual Trust and Confidence

48 The plaintiff also in relation to the company refers to the employer’s obligation not to engage in conduct likely to undermine the trust and confidence required by the employer/employee relationship to allow it to continue. That there is such a duty has of late years been recognised by the law: see generally Macken and others, Law of Employment (5th ed, 2002) 113 – 117. The plaintiff relies on recent decisions of the House of Lords. She points to what was said by Lord Steyn concerning the existence of this duty in Malik v Bank of Credit and Commerce International SA(In Compulsory Liquidation) [1998] AC 20 at 45. Two things need to be said about that decision. The first is that the claim in that case was based on contract; what was relied on was treated as an implied term of the contract. Whilst a fiduciary duty may arise out of contractual relations, there was no suggestion that the obligation in that case arose out of a fiduciary relationship. The breach complained of by the appellants in that case was that their employer company had conducted itself dishonestly which led not only to its collapse and the loss of their jobs, but to them having difficulties in finding fresh employment because they were stigmatised by their association with the employer. A case, however, where the breach complained of was non-disclosure of a potential benefit to an employee was Scally v Southern Health and Social Services Board [1992] 1 AC 294. In that case the obligation found to have been breached was an obligation of the employer to inform the employee of the terms of a pension scheme. However, again, the action brought by the employee was cast in contract. The obligation was found as an implied term of the contract of employment and the pension scheme of which the employer failed to advise the employee was a scheme available by the terms of the same contract. The principle has received some judicial consideration and at least some adoption in Australia, but its ambit continues to be unclear. The following statement appears in the judgment of the Full Court of the Industrial Relations Court of Australia (Wilcox CJ, von Doussa and Marshall JJ) in Burazin v Blacktown City Guardian Pty Ltd (1996) 142 ALR 144 at 151:

“Turning to the implied term pressed in argument, we agree with Madgwick J that there is ample English authority for the implication of the suggested term: see Post Office v Roberts [1980] IRLR 347; Woods v WM Car Services (Peterborough) Ltd [1981] IRLR 347 (affirmed on appeal [1982] ICR 693); Bliss v South East Thames Regional Health Authority [1985] IRLR 308; United Bank v Akhtar [1989] IRLR 507; and Malik v Bank of Credit & Commerce International SA [1995] IRLR 375. Roberts , Woods and Akhtar are decisions of the United Kingdom Employment Appeals Tribunal, presided over in each case by a High Court judge. Bliss and Malik are decisions of the English Court of Appeal.

Johnson v Unisys Ltd

The Law: Conspiracy

49 The tort of conspiracy is established if two or more persons agree or combine:

(i) to effect an unlawful purpose;

(ii) to effect a purpose which is lawful by unlawful means;

(iii) to effect a purpose which is lawful by lawful means but for the predominant purpose of doing harm to another

Williams v Hursey

McKernan v Fraser

50 The answer to the question of whether in cases (i) and (ii), where unlawfulness is established, the proof of any intention to harm the plaintiff is necessary, was long in doubt. However, there is now clear authority that such an intent is necessary: see per Mason P in the Court of Appeal in McWilliam v Penthouse Publications Ltd [2001] NSWCA 237 as follows:

“[12] An agreement to do an unlawful act, such as a tort or breach of contract, will be an actionable conspiracy if carried into effect and causative of damage. It is no defence that the agreement was for the primary or predominant purpose of furthering or protecting the defendants' own legitimate interests if the plaintiff proves that each defendant in such a conspiracy acted with intent to injure the plaintiff. These propositions are taken from Lonrho plc v Fayed [1992] 1 AC 448. Legal commentators agree that this brought English law into line with that in Australia (see eg Fleming, The Law of Torts 9th ed p 777. See also Ansett Transport Industries (Operations) Pty Ltd v Australian Federation of Air Pilots [1991] 1 VR 637). I do not understand anything established in Williams v Hursey (1959) 103 CLR 30 to be to the contrary of these propositions.

Crofter Hand Woven Harris Tweed Co Ltd v Veitch

McKellar v Container Terminal Management Services Ltd

51 It should be added that, to make out a cause of action, where as here a combination or agreement among ten people has been alleged, they must all be demonstrated to have been party to the combination or agreement; it is not sufficient if a combination or agreement among some of them is proved: see McKernan v Fraser supra per Evatt J at 402.

52 And it should also be remembered that the combination or agreement can not only be proved by direct evidence, but may be inferred from the actions of the defendants, if there is “such a concurrence of time, character, direction and result as naturally to lead to the inference that these separate acts were the outcome of pre-concert, or some mutual contemporaneous engagement, or that they were themselves the manifestations of mutual consent to carry out a common purpose”: per Isaacs J in The King and the Attorney-General of the Commonwealth v The Associated Northern Collieries (1911) 14 CLR 387 at 400; and see per Taylor J in Williams v Hursey supra at 107.

Contested Facts: The Knowledge of the First Ten Defendants

53 One of the issues that was heavily in contest at the trial was the degree of knowledge of each of the first to tenth defendants of the basis upon which WEC lent money to enterprises conducted on workers cooperative principles, the terms of the loans to the company which were made and arranged by WEC and the content of the 1988 articles relating to the principle that all shareholders should be employees and all permanent employees should be shareholders of the company. These matters were more particularly alleged in some of the subparagraphs of par 5 of the statement of claim set out in [28] above: see particularly (c) to (i) and (m). The way in which the plaintiff sought to make out her case in relation to these allegations was as follows. She alleged that each of the ten defendants was supplied with a copy of the WEC information kit and draft workers cooperative rules as a result of Boyd’s visit to the train. She called as witnesses Cheney and Rodgers, both of whom attended a meeting or meetings of the management group in Casino before the articles were adopted. It was said to be their universal practice to explain to groups setting up an enterprise which was applying for financial assistance from WEC the workers cooperative principles upon which WEC proceeded. They could not recall conveying this information in this case but stated it to be their invariable practice. The plaintiff alleged that each of the first ten defendants must have had notice of the meeting of 13 May 1988 including a copy of the proposed articles and must have read those articles. Central pieces of evidence concerning these matters were as follows.

54 So far as the WEC kit or other material from the train is concerned, there is really no doubt that Boyd did bring some material back to the factory. There would seem to be no doubt that it was seen by Hanley. At this distance of time, not surprisingly, there was difficulty even in identifying what the material was that she brought back from the train. Most of the first to tenth defendants deny having received or read any of that material.

55 The evidence of Rodgers is that he attended at one meeting of members or prospective members at Casino and that in accordance with his universal practice he would have said words to the following effect:

“New employees must enter into a contract of employment with the co-operative in the form set out in the rules. This contract is designed to inform employees of their entitlement to apply for membership after completing 6 months service.

If any employee does not apply for membership within 12 months after they commenced their employment with the co-operative, then their employment is required to be terminated.

75 The agreement in terms of par 14(g), to replace the articles, is alleged to have arisen at the time of the March 1992 meeting at which those articles were replaced (“the second agreement”). Other than the fact of their replacement at that meeting, at which all ten defendants are recorded as attending, there is no evidence of discussion or agreement among them in this regard. I find that that second agreement is not established. In any event, there was not at that time any unlawful element in what was done.

76 The agreement in terms of par 14(j) and (k), to call a meeting to approve the sale of the enterprise, is alleged to have arisen at the time of the November/December 1997 meeting at which the sale was approved (“the third agreement”). There seems no doubt that a resolution of approval was passed, but there is no evidence of discussion or agreement among the ten defendants. I find that that second agreement is not established. In any event, there was not at that time any unlawful element in what was done.

77 I should add that, there being no positive evidence establishing any of these agreements, there is no evidence of coinciding actions by the different defendants which could be attributed to or could found an inference of the existence of the first agreement, the second agreement or the third agreement: see [52].

78 As to the question of an intention to harm the plaintiff, I decline to find that any of the first ten defendants had any such intention at any material time, much less that anything was done with the predominant intention of harming the plaintiff. Many of the defendants did not think of the plaintiff at all at any material time. The most that was conceded was some awareness that, if a certain course was followed, she would not come to share in certain benefits. But there was not in any event any certainty at any time that, if she received 100 shares, she would receive the same benefits as original shareholders who held 10,000 shares. Those benefits were not provided for by the 1988 articles. I do not conclude that any of those defendants formed or harboured any intention to harm the plaintiff, much less acted with a predominant intention to harm the plaintiff.

Conclusions: Preliminary

79 There is no doubt that the first ten defendants did come under some obligations in relation to the articles of association. The provisions of the companies legislation at all material times contained a provision substantially the same in relevant ways as the provision now contained in the Corporations Act 2001 (Cth) s 140. The effect of the relevant provision is to the effect that the articles have effect as a contract between the company and each member and between a member and each other member under which each person agrees to observe and perform the articles of association so far as they apply to that person. However, in the present state of the law that is not a contract that could be enforced (were it sought to be enforced) by an outsider: Eley v Positive Government Security Life Assurance Co Ltd (1876) 1 ExD 88. Despite the modification by the High Court of the doctrine of privity of contract in Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107 there is no authority to date which would justify the enforcement of the contract constituted by the articles by an outsider: see generally Ford’s Principles of Corporations Law (10th ed, 2001) [6.050].

80 Whilst logically the existence of a fiduciary duty is a question that comes before the question of the content of the duty, in my view the possible ambit of the duty is one of the general circumstances as against which the situation needs to be considered. It is obvious that the plaintiff in this case is aggrieved that after she and her husband came to acquire some 11,000 shares at a price of $7 to $8 per share in 1993 or 1994 she discovered what she took to be an entitlement for her, on becoming a permanent employee, to acquire shares, it would seem she thought 10,000 shares at $1 per share. In any event, it is clear that she is deeply aggrieved at what she considers to be the injustice of her situation. From the time that she acquired her shares she was given additional benefits in generally the same way as other shareholders received them. Although it does not appear expressly from the evidence, it may be inferred that the sense of grievance arises from the difference in price and from the fact that she did not receive the additional benefits earlier, although as I have said, it is not clear at what point of time she actually did commence to seek shares and I am unable to find on the evidence that it was before about mid 1993. Despite all these things, what in this context it is important to note is that the obligation under article 10 was not to issue to any employee who applied a shareholding equivalent to the holding of any other shareholder, but only 100 shares. This was the condition imposed by WEC and adopted in the 1988 articles. The imposition and adoption were both at a time when the shareholding of the company was already set, so that it was in a context where the ordinary shares were otherwise held in parcels of no less than 10,000 that the provision of the articles as to the issue of shares to permanent employees stipulated the number at 100. Of course, more could be applied for and could be issued if the company chose, but the only obligation that arose under the article upon an application by a permanent employee was to issue 100 shares and, if there were an enforceable duty on any of the defendants in relation to the issue of shares to permanent employees, that in my view would have been the ambit of the duty. I do not conclude that it is demonstrated on the evidence that at any time after May 1988 more than 100 shares would have been issued to any permanent employee who applied for them.

81 It should also at all times be remembered that the articles required all employees to be employed under a specific form of contract. Not only was the plaintiff not employed under that form of contract, but on the evidence, no employee of the company, whether a shareholder or not, was employed under that form of contract. That form of contract contained, of course, a disadvantage as well as an advantage for any permanent employee. The advantage was that 100 shares could be obtained. The disadvantage was that, if they were not obtained, then the company was bound to dismiss the employee. I do not think that I transgress the permissible bounds of judicial knowledge if I take into account that the employment market in regional towns in New South Wales in the 1990s was not buoyant. Indeed, one of the reasons why Hanley, who was aware of the WEC scheme, did not wish to implement it was that he said that he was simply not prepared to dismiss any employee because the employee would or did not become a shareholder. I have no reason to doubt his word in that regard.

82 It is put against the company that it came under a fiduciary duty towards the plaintiff. It is undoubted that the company was under a contractual duty to WEC or WEC’s successor as the lender under the deed of loan to implement the provisions of the 1988 articles. There is no doubt that that is an obligation that WEC could enforce. The lender did in fact make efforts to have that condition enforced. I accept Rodgers’ evidence that he raised the subject matter at the directors’ meeting on 25 January 1989. His recollection was triggered and corroborated by a note in the minutes, “We need to look at longer term plans and include additional members in the plans.” In oral evidence, his recollection was that he said words to the effect of “the time has come to contemplate whether …. other offers of membership should be made to other employees.” I do not doubt that he said something with the intention of raising that subject matter. In his case I do not doubt that, he being committed to the WEC philosophy, that was done with the intention of having that philosophy put into action to the extent that the company had undertaken it by the deed of loan and by the adoption of the 1988 articles. He left the board shortly after. Attempts were made in 1990 and 1991 by AAC to enforce the article. In this case, I have some doubts from the context in which the matter arose as to whether there was a philosophical desire on the part of the lender to enforce the provisions or whether it was simply part of an effort to bring to an end a loan which it regarded as unsatisfactory. Its motive does not matter. It was perfectly entitled to call for the contract to be complied with and it did so. The efforts in fact had the result of bringing the loan, the relationship and ultimately the 1988 articles to an end.

Conclusions: The First Ten Defendants: Fiduciary Duty and Conspiracy

83 In my view it is quite clear on the evidence in this case that it is impossible to draw an inference that there was an undertaking, agreement or pledge by the first ten defendants as shareholders in the company to assume any duty towards the plaintiff. The agreement among members contained in the 1988 articles is not sufficient for that purpose. The degree of individuals’ knowledge of the possible rights of the plaintiff is discussed above. I have accepted that in the case of a number of the ten there was no knowledge of the plaintiff’s supposed rights before those rights were changed by the 1992 replacement of the 1988 articles. Even in the case of those who knew, an inference could not be drawn that, by having that knowledge, those defendants undertook an obligation to the plaintiff. Nor is there any other basis on which in my view the conclusion could be drawn that they together or individually gave such an undertaking.

84 Furthermore, if a fiduciary duty were to be imposed upon the group of members constituted by the first ten defendants, it would have to be on the basis that they had such control over the subject matter of the relevant articles that a fiduciary duty to the plaintiff was imposed. The difficulties of the imposition of such a duty in the case of the defendants who did have control over the subject matter, namely, the company and the directors, will be considered below. But, in the case of the first ten defendants as members, it cannot even be concluded that they had control over the relevant subject matter. The case sought to be made against them rests not simply on the fact that all were members of the company at relevant times. Reliance is also placed on the fact that they played a more active role in the affairs of the company than is usually played by members. Between 1988 and 1992 they met regularly. In the earlier part of this period it would seem that the meetings were as frequent as weekly. There is little doubt that at those meetings the affairs of the company and its business were discussed. However, it is not possible to conclude on the evidence that they took decisions that bound or purported to bind the directors as to the governance or management of the company. There is no record of what passed at these meetings after the 1988 articles were adopted on 13 May and the business acquired on 31 May 1988, but it is apparent from minutes of directors’ meetings during 1988 and 1989 that the directors conducted the business of the company without explicit reference to the shareholders and much in the way that any board of directors of a company conducting a small to medium sized business would conduct themselves. When I say that the members did not purport to bind the directors in the management of their company, I bear in mind the principle stated in National Roads & Motorists’ Association v Parker (1986) 6 NSWLR 517. The meetings I take it were for discussion of the general progress of the company and of ideas for the conduct of the business. There is no evidence that those meetings purported to make decisions or that what occurred at them dictated or governed what was done by the directors or that the members in those meetings or in any other way exercised or purported to exercise any control over whether or not shares in the company might be issued.

85 I conclude that the first ten defendants as members of the company were not under any fiduciary duty towards the plaintiff.

86 It will be apparent from my findings in [74] to [78] above that in my view no cause of action in conspiracy is made out against the first ten defendants.

Conclusions: The Company: Fiduciary Duty and Duty of Care

87 The situation was different as to whether in the circumstances there was created a fiduciary duty owed to and enforceable by the plaintiff against the company. The company did have the power to solicit applications for shares from the plaintiff and other permanent employees and a duty to deal with those applications in specified ways. Whether or not a fiduciary duty to the plaintiff arose must be considered in this context. In considering whether the relevant “undertaking or agreement” or “pledge” by the company could be inferred in the circumstances, I bear in mind the exhortations to caution in the imposition of fiduciary duties in commercial contexts. This was a dealing involving employees and a specialised State agency designed to provide them and their enterprise aid in certain circumstances. Nonetheless, the contractual arrangements that were entered into were essentially commercial and the negotiations that led to those arrangements were conducted at arm’s length. I also bear in mind that, whilst it is not impossible that fiduciary duties may be created towards persons who are not parties to the transaction that creates them, the plaintiff was not a party in this case to any of the relevant transactions, ie, the borrowing of moneys, the acquisition of the business, the subscription for shares or the adoption of the articles of association. I also bear in mind the commercial and transitory nature of the central transaction. The transaction was a borrowing of $250,000 from WEC which was for a term of six years; it would in any event come to an end at that time and would not necessarily be renewed. The borrowing might come to an end before the expiry of the term, because the borrower was able to bring the transaction to an end by paying out the loan. There always was a possibility that that might happen, as, indeed, it did. The money was borrowed from WEC because, with a small group of shareholders buying a considerable enterprise, no bank or financial institution would lend the money. However, if the company’s loss making situation were turned around within a year or two, as it was by the new group that invested in and took over the company, the possibility of borrowing through normal financial channels would obviously be increased. I also bear in mind that the ambit of the contractual promises that were made and what was to be done to carry them out were clearly spelt out in the contract. As I have already said, the lender, as the other contracting party, was at liberty to enforce the relevant obligations in the deed of loan if it chose, as, indeed, it sought to. In all the circumstances I do not infer that the company by entering into the transaction could be taken as making an undertaking or giving a pledge in favour of the plaintiff or other persons who might become permanent employees such as would give rise to a fiduciary duty and I draw the conclusion that there was no fiduciary duty imposed on the company towards such persons, including the plaintiff.

88 There is one aspect of the plaintiff’s contention that the company was under a relevant fiduciary duty towards her that merits particular mention. It is said that one of the recognised categories of fiduciaries mentioned by Mason J in the Hospital Products case supra at 96 is employer and employee. It is clear that not all obligations created by this relationship are fiduciary in nature, but some are. The employee’s duty to keep the employer’s secrets partakes of a fiduciary nature. It arises no doubt from the employer’s vulnerability to misuse by an employee of information with which he or she is necessarily invested in the course of duty. This vulnerability clearly exists despite the fact that the employer is in many respects in a position of dominance or power in the relationship. The plaintiff refers to the employer’s implied obligation not to engage in conduct likely to undermine the trust and confidence required by the employer/employee relationship to allow it to continue and submits that that obligation gives rise to a fiduciary duty. There is no case I have discovered in which it has been held that the existence of that obligation gives rise to a fiduciary, as opposed to a contractual, duty and I hold that no fiduciary duty arises from the implication of that obligation in the plaintiff’s contract of employment with the company. I have concluded for the reasons set out in [87] that there was no fiduciary duty imposed on the company towards the plaintiff. In my view, the principle discussed in [48], considered alone or in conjunction with the other considerations set out in [87], does not make any difference to that conclusion.

89 So far as the duty of care is concerned, I am of the view that no duty of care was imposed on the company as alleged in the statement of claim. The plaintiff relied particularly on the decision of the High Court in Perre v Apand Pty Limited (1999) 198 CLR 180. It is important to note that the averment that is central to the imposition of the duty of care contended for is the employment by the company of the plaintiff, ie, their entry into a contract of employment. However, no case is maintained by the plaintiff against the company for breach of this contract. Despite the plaintiff’s adversion to the implied term referred in [48] above, the only way in which the contract of employment is relied on (apart from any significance it may have in relation to the existence of a fiduciary duty, as to which see [48] and [88] above) is as founding the duty of care alleged. Whilst it is clear that the same conduct may give rise to both tortious and contractual liability, authority suggests that the principles of contract are to be preferred when considering an employment relationship. In Scally v Southern Health and Social Services Board supra, a case concerning an alleged duty to inform, Lord Bridge of Harwich said at 303, “If a duty of the kind in question was not inherent in the contractual relationship, I do not see how it could possibly be derived from the tort of negligence.” His Lordship cited the observation of Lord Scarman in Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd [1986] AC 80 at 107:

“Their Lordships do not believe there is anything to the advantage of the law’s development in searching for liability in tort where the parties are in a contractual relationship. This is particularly so in a commercial context.”

Conclusions: Fiduciary Duty: The Directors

90 Directors in general terms by virtue of their office come under fiduciary obligations towards the company, which they are bound to govern in the interests of the members as a whole. They do not generally come under fiduciary obligations towards individual members. The plaintiff, of course, did not even become a member of the company while the 1988 articles were in operation, or the deed of loan. The basis on which it is contended that the directors in this case came under a fiduciary duty towards the plaintiff is that they knew at least in general terms of the existence of the obligations created under the articles in relation to the issue of shares to permanent employees. Even if the shareholders did not, they had the power to issue shares, it is said; they controlled the subject matter and exercised that control to the plaintiff’s disadvantage and their advantage. However, it seems to me that essentially the same considerations apply in determining whether a fiduciary duty of the type alleged was imposed on them as directors as apply in the case of the company. Those considerations are set out in [87] above. I conclude that no fiduciary duty was imposed on the directors as alleged by the plaintiff.

Conclusions: The Substantive Defences

91 In view of my conclusions concerning the plaintiff’s claims, I do not propose to deal with the substantive defences at length. As to the defence of release, on the facts as they appear from [22], it does not seem to me that there could be any release binding the plaintiff in respect of her rights, if any accrued to her, which I have held they did not. The Limitation Act defence, though pleaded in general terms, was pressed, as the defendants’ written submissions show, in relation only to the common law causes of action in conspiracy and negligence. It seems to me that the defence would probably be made out in relation to the conspiracy alleged to arise from the first agreement (but not from the second agreement and the third agreement) and to negligence, if those causes of action were themselves made out. Damage would have been suffered from those wrongs from 1988 on, so that proceedings were commenced outside the limitation period. On the facts as I have found them, I do not think the plaintiff would fulfil the requirements of s 55 of the Limitation Act. But those matters do not arise. I am not certain that the defence of laches was pressed. It could apply only to equitable causes of action. It could not, if relevant, be made out on the facts of this matter.

Result

92 For the foregoing reasons the plaintiff fails in respect of each of the claims which she has propounded and there should be judgment for the defendants in the proceedings generally. As at present advised, it seems to me that the order for costs should simply be that the plaintiff pay the defendants’ costs of the proceedings, but I shall hear any submissions the parties desire to put.

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Last Modified: 02/24/2003

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Citations

Morris v Hanley [2003] NSWSC 42

Most Recent Citation

Mantech Systems Pty Ltd v Alpha Nursing Pty Ltd [2004] FCA 754

Cases Citing This Decision

12

WJT v Trustees of the Marist Brothers; WXC3 v Trustees of the Marist Brothers; GAC v Trustees of the Marist Brothers (No 4) [2025] NSWSC 1017

Williams v Fraser [2021] NSWSC 416

Cases Cited

26

Statutory Material Cited

2

Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64

CITATION:	Morris v Hanley [2003] NSWSC 42
HEARING DATE(S):	17 June, 19 June - 4 July, 9 & 10 July, 15 August and 2 September 2002
JUDGMENT DATE:	13 February 2003
JURISDICTION:	Equity
JUDGMENT OF:	Hamilton J
DECISION:	Judgment for the defendants.
CATCHWORDS:	EMPLOYMENT LAW [21] - The contract of service and rights, duties and liabilities as between employer and employee - Discharge and breach - Generally - Implied duty of mutual trust and confidence in employment contract - Whether gives rise to fiduciary duty - EQUITY [36] - General principles - Fiduciary obligations - Particular cases - Company - Articles of association - Right given to permanent employees to apply for and be allotted shares - Whether company, director or other shareholders owed any fiduciary duty in relation to that right to a permanent employee who did not have shares - EVIDENCE [24] - Admissibility and relevancy - Facts relevant to facts in issue - In general - Course of business - Whether what was said on a particular occasion may be proved by evidence of practice - TORTS [22], [ 238] - Negligence - Essentials of action for negligence - Duty of care - Relationship of proximity - Company - Articles of association - Right given to permanent employees to apply for and be allotted shares - Whether company owed any duty of care in relation to that right to a permanent employee who did not have shares - Conspiring to injure - Particular cases - Whether conspiracy among shareholders made out.
LEGISLATION CITED:	Corporations Act 2001 (Cth) s 140 Limitation Act 1969 s 55
CASES CITED:	Armstrong v Commonwealth Bank of Australia (1999) 9 BPR 17,035 Burazin v Blacktown City Guardian Pty Ltd (1996) 142 ALR 144 Connor v Blacktown District Hospital [1971] 1 NSWLR 713 Eley v Positive Government Security Life Assurance Co Ltd (1876) 1 ExD 88 Garcia v National Australia Bank Ltd (1993) 5 BPR 11,996 Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 Johnson v Unisys Ltd [2001] 2 WLR 1076 Malik v Bank of Credit and Commerce International SA (In Compulsory Liquidation) [1998] AC 20 McKernan v Fraser (1931) 46 CLR 343 McWilliam v Penthouse Publications Ltd [2001] NSWCA 237 National Roads & Motorists' Association v Parker (1986) 6 NSWLR 517 News Limited v Australian Rugby Football League Limited (1996) 64 FCR 410 Nock v Austin (1918) 25 CLR 519 Perre v Apand Pty Limited (1999) 198 CLR 180 Pilmer v Duke Group Limited (In Liquidation) (2001) 207 CLR 165 Public Trustee v Permanent Trustee Co Ltd [1999] NSWSC 722 Scally v Southern Health and Social Services Board [1992] 1 AC 294 State Bank of NSW v Muir (1997) 8 BPR 15,483 Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd [1986] AC 80 The King and the Attorney-General of the Commonwealth v The Associated Northern Collieries (1911) 14 CLR 387 The Paul Dainty Corporation Pty Ltd v The National Centre Trust (1990) 22 FCR 495 Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107 Williams v Hursey (1959) 103 CLR 30 Ford's Principles of Corporations Law (10th ed, 2001) [6.050] Macken and others, Law of Employment (5th ed, 2002) 113 - 117 1A Wigmore on Evidence (Tillers Rev) s 92 Adrian Brooks, "The Good and Considerate Employer: Developments in the Implied Duty of Mutual Trust and Confidence" (2001) 20 University of Tasmania Law Review 29 Greg McCarry, "Damages for the Employer's Implied Duty of Trust and Confidence" (1998) 26 ABLR 141
PARTIES :	Janine Morris (P) Jack Norman Hanley (D1) Geoffrey Donald Reid (D2) Lynda Maree Cole (D3) Christine Valmae Hayward (D4) Anthony Bodycote (D5) Robyn Janelle Haydon (D6) Daphne Olive Boyd (D7) Beverley Joy Armfield (D8) Gayle Hanley (D9) Cecil Bellchambers (D10) Mariani Holdings Pty Limited (D11)
FILE NUMBER(S):	SC 2650/97
COUNSEL:	J J Priestley (P) P T Taylor (D1-11)
SOLICITORS:	Maxwell & Co (P) Parker & Kissane (D1-11)

Item	Paragraphs
Preliminary	2
The Facts	3 – 26
The Claims	27 – 40
The Defences	41
The Law: Fiduciary Relationships	42 – 47
The Law: Employer’s Duty Not to Destroy Mutual Trust and Confidence	48
The Law: Conspiracy	49 – 52
Contested Facts: The Knowledge of the First Ten Defendants	53 – 72
Contested Facts: Whether There Were Combinations or Agreements Which Would Found Conspiracies or Any Intention to Harm the Plaintiff	73 – 78
Conclusions: Preliminary	79 – 82
Conclusions: The First Ten Defendants: Fiduciary Duty and Conspiracy	83 – 86
Conclusions: The Company: Fiduciary Duty and Duty of Care	87 – 89
Conclusions: Fiduciary Duty: The Directors	90
Conclusions: Substantive Defences	91
Result	92