Schmidt v AHRKalimpa Pty Ltd

SUPREME COURT OF VICTORIA

COURT OF APPEAL

S APCI 2019 0049

ALAN HESSEL SCHMIDT	First Applicant
and
OTWAY LIVESTOCK EXPORTS PTY LTD (ACN 070 299 302)	Second Applicant
v
AHRKALIMPA PTY LTD (receiver appointed) (ACN 164 529 533)	First Respondent
and
KALIMPA PTY LTD (ACN 152 484 056)	Second Respondent

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JUDGES:	KYROU, HARGRAVE and EMERTON JJA
WHERE HELD:	MELBOURNE
DATE OF HEARING:	18 May 2020
DATE OF JUDGMENT:	31 July 2020
MEDIUM NEUTRAL CITATION:	[2020] VSCA 193
JUDGMENT APPEALED FROM:	[2017] VSC 701 (Elliott J) (Liability); [2019] VSC 197 (Elliott J) (Quantum)

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FIDUCIARY DUTY – Negotiations for joint venture for business of exporting live cattle – First respondent proposed joint venture vehicle – First applicant a director of first respondent – Second applicant first respondent’s private company – Some transactions undertaken whilst joint venture documents being negotiated – After negotiations broke down, business undertaken by second applicant to exclusion of first respondent – Whether judge erred in concluding applicants breached fiduciary duties and first applicant breached duties as director – Whether judge erred in finding that fiduciary duties continued after fiduciary relationship ended when first applicant resigned as director of first respondent – Application for leave to appeal granted – Appeal dismissed.

EQUITABLE COMPENSATION – Whether loss suffered by first respondent was loss of opportunity to engage in import business or loss of existing export business misappropriated by applicants – Value of business – Relevant date of valuation – Whether judge erred in quantifying respondents’ loss – Application for leave to appeal granted – Appeal dismissed.

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APPEARANCES:	Counsel	Solicitors
For the Applicants	Mr J P Moore QC with Mr C R Northrop and Mr J McComish	Harwood Andrews
For the First Respondent	Mr J W S Peters QC with Ms K A Brazenor	Mills Oakley
For the Second Respondent	Mr D Ruschin (with leave of the Court)

KYROU JA
HARGRAVE JA
EMERTON JA:

Introduction and summary

Since 1995, the first applicant, Alan Schmidt, has been involved in the export of live cattle to Japan through his family company, the second applicant, Otway Livestock Exports Pty Ltd (‘Otway’).[1] In 2008, Danny Ruschin and Haim Bzezinski commenced developing a business plan for the export of live cattle to Israel. In 2011, they incorporated Kalimpa Pty Ltd (‘Kalimpa’) to further their business plan. Bzezinski is the sole director of Kalimpa and its equal shareholders are Bzezinski and Ruschin’s wife.
[1]Otway was originally known as AH&R Schmidt Pty Ltd. The references to Otway in these reasons include periods during which it was known as AH&R Schmidt Pty Ltd.

In September 2012, Ruschin and Bzezinski invited Schmidt to join their proposed joint venture for the export of live cattle to Israel. On 27 June 2013, the first respondent, AHRKalimpa Pty Ltd (‘AHRKalimpa’), was incorporated as the corporate vehicle for the proposed joint venture.

From 27 August 2013, the directors of AHRKalimpa were Schmidt and Bzezinski. From around 9 July 2013, its nine shares were owned as follows:

(a)Three shares were owned by Schmidt.
(b)Three shares were owned by Ruschin’s company, Kalimpac Pty Ltd.
(c)Three shares were owned by Bzezinski’s company, Bzezinski Pty Ltd.

Ruschin, Bzezinski and Schmidt intended to enter into agreements, including a joint venture agreement, a shareholders’ agreement and a management agreement, to formalise the proposed joint venture. While negotiations continued, four shipments of live cattle to Israel (Voyages 1–4) were arranged on behalf of the proposed joint venture, utilising Otway’s export licence. The negotiations were ultimately unsuccessful and, on 25 November 2013, Schmidt resigned as a director of AHRKalimpa and divested his shares in that company.

On Saturday 14 December 2013, with the assistance of a locksmith and removalists, Schmidt broke into the premises where AHRKalimpa’s computer and hard copy files were located and took those items without the permission or knowledge of Ruschin or Bzezinski. From then up until the end of January 2018, Otway completed 15 further shipments of live cattle to Israel (Voyages 6–20) in its own right.[2]
[2]As discussed at [76] below, Voyage 5 did not take place.

On 16 December 2015, the respondents commenced proceedings in the Trial Division against the applicants, relevantly alleging that:

(a)Schmidt and Otway had breached duties of confidence they owed to the respondents;

(b) Schmidt had breached his duties as a director of AHRKalimpa;
(c)Schmidt and Otway had breached fiduciary duties they owed to the respondents, including by divesting to themselves the business of AHRKalimpa; and
(d)Schmidt and Otway were both liable as accessories to each other’s breaches of fiduciary duties.

Although the respondents pleaded that the parties had entered into a joint venture agreement, they did not persist with this contention at trial.

On 22 November 2017, the judge published his reasons on liability.[3] He found that the applicants had made unauthorised use of confidential information that the respondents had provided to them, that the applicants owed to the respondents fiduciary duties which were breached and that Schmidt had breached his duties as a director of AHRKalimpa.
[3]AHRKalimpa Pty Ltd v Schmidt [2017] VSC 701 (‘Liability Judgment’).

On 2 April 2019, the judge published his reasons for awarding equitable compensation in the amount of $2,774,803 to AHRKalimpa.[4] His reasons explained why it was not necessary for him to address Kalimpa’s entitlement to compensation.[5] He made orders that same day entering judgment for AHRKalimpa in the amount of $2,744,803 — which was later increased to $2,774,803 under the slip rule — and requiring the applicants to pay the respondents’ costs.
[4]AHRKalimpa Pty Ltd v Schmidt [No 3] [2019] VSC 197 (‘Quantum Judgment’).
[5]That explanation is set out at [204] below.

On 29 April 2019, the judge published his reasons for awarding AHRKalimpa interest in the amount of $899,606.34 pursuant to s 60 of the Supreme Court Act 1986.[6]
[6]AHRKalimpa Pty Ltd v Schmidt [No 4] [2019] VSC 246 (‘Interest Judgment’).

The applicants seek leave to appeal against the Liability Judgment on the grounds set out at [126] below and the Quantum Judgment on the grounds set out at [206] below.

Prior to the hearing of the application for leave to appeal, a receiver was appointed over AHRKalimpa. The Court was not provided with any information concerning the receiver or the instrument under which the receiver was appointed. The receiver had the conduct of the application. Kalimpa did not file a written case and was not legally represented at the hearing of the application. Ruschin applied for leave to represent Kalimpa. The Court granted him leave solely for the purpose of addressing the grounds of appeal. However, he said that he did not have anything to add to the submissions made on behalf of AHRKalimpa in relation to the grounds.

For the reasons that follow, the application for leave to appeal will be granted but the appeal will be dismissed.

Facts
Initial dealings between Ruschin, Bzezinski and Schmidt

Schmidt and his wife have been directors of Otway since its incorporation in 1995. Otway’s business involved the export of live cattle to Japan. In 2010–2011, the business was sold to another export company, Elders International Australia Ltd (‘Elders’).

Ruschin and Bzezinski met in 2003. In 2008, Ruschin spoke with Bzezinski about the possibility of being involved in the export of cattle to Israel. Ruschin and Bzezinski agreed that Ruschin would investigate the Israeli cattle market, with Bzezinski providing support, including financial assistance.

Over a period of approximately three years, Ruschin made inquiries of contacts in Israel and established relationships with importers, quarantine officials, veterinary officers and the managing director of the Beef Association in Israel. During this period, Ruschin also investigated the Australian export market to ascertain appropriate suppliers of live cattle to Israel.

As a result of the investigations and discussions, Ruschin and Bzezinski conceived a strategy for exporting cattle to Israel. Broadly, this strategy involved the two largest Israeli importers, Bakar Tnuva Limited Partnership (‘Tnuva’) and Dabach Slaughterhouse Ltd (‘Dabach’), agreeing to coordinate their shipments so that they were able to use the same vessel. By 2011, Ruschin and Bzezinski considered that they were in a position to find a business partner or co-venturer with experience in exporting live cattle from Australia.

Ruschin and Bzezinski incorporated Kalimpa on 4 August 2011 to further their business plan. Around this time, Kalimpa commenced discussions with Elders regarding arrangements for the export of cattle to Israel. At this time, having sold his export business to Elders, Schmidt was employed by Elders as marketing manager for international live exports to Turkey, Russia and China. He also oversaw the purchase of cattle from Australia, New Zealand, Uruguay, Paraguay and the United States. However, Schmidt had no experience in exporting live cattle to Israel.

On 17 October 2011, a deed was executed by Bzezinski on behalf of Kalimpa and by Schmidt on behalf of Elders (‘Elders Agreement’). The Elders Agreement contained the following terms:

Background
AElders is in the business of exporting Australian livestock sheep and cattle to overseas markets and for this purpose holds export licence number: L007.
BKalimpa has customers sources and contacts for the purchase of Australian livestock sheep and cattle in Israel.

…
Operative Provisions
…
2.1 Livestock sales to Israel
As from the date of this deed:
2.1.1Kalimpa will market and manage orders for the sale of Australian livestock to Israel and will exclusively use the services of Elders.

…
2.3 Orders
2.3.1Kalimpa will provide orders directly or will provide initial contact details between Elders and Israeli customers.

…
3.2 Non circumvention and non-disclosure
…
3.2.2In case of termination under Clause 4.1 (Non-performance) of this agreement, then Elders may, with the exception of those customers introduced by Kalimpa to whom the provisions of clause 4.3.2 shall apply, pursue other opportunities with other parties in Israel.
3.2.3Each of Elders and Kalimpa will maintain complete confidentiality regarding each other’s business, customers business and sources and will not disclose any such details to any other parties without the explicit written authorisation of the other.

…
3.2.5Elders agrees that in the event of circumvention of this directly or indirectly, Kalimpa shall be entitled to compensation and damages including punitive damages, including and not limited to all legal costs and expenses to recover lost revenue.

…
4.2 Survival of clause
Clause 3.2 survives the expiration or termination of this Agreement.

4.3 Term of Agreement
4.3.1 The term of this agreement is 5 year[s] …
4.3.2Upon termination of this agreement whether at the end of the term or otherwise Elders cannot use or benefit in any way from the customers contacts and sources introduced by Kalimpa for a period of two years from the date of termination.
4.3.3Upon termination of this agreement Elders will be free to pursue other customers or relationships in Israel. However Elders are expressly precluded from entering contracts with customers contacts or sources introduced by Kalimpa as per clause 4.3.2, above.

On 26 October 2011, Ruschin and Bzezinski emailed to Schmidt a list of Kalimpa’s customers, including Tnuva and Dabach. They also provided to Elders information about the market for live exports in Israel.

In late 2011 and early 2012, Bzezinski and Schmidt travelled to Israel to meet with potential customers with whom Ruschin had established a rapport, including Tnuva and Dabach. Bzezinski and Ruschin (by telephone) usually conducted conversations with potential customers in Hebrew and translated for Schmidt as necessary.

Two voyages were completed pursuant to the Elders Agreement.

Negotiations for a joint venture; Voyages 1 and 2

In September 2012, Elders informed Kalimpa that it did not intend to continue with their relationship. Kalimpa accepted this. At around this time, negotiations commenced between Ruschin, Bzezinski and Schmidt regarding the possibility of Schmidt going into business with Kalimpa for the export of live cattle to Israel. Schmidt began to refer to Ruschin and Bzezinski as his partners.

On 24 October 2012, Schmidt sent an email to the law firm Harwood Andrews regarding the proposed business venture between him, Ruschin and Bzezinski. The email, which was copied to Ruschin and Bzezinski, relevantly stated as follows:

What we are looking for includes:
The establishment of a new entity/company (Newco) owned by three equal shareholder partners. The company will be trading livestock to Israel annual turnover will be in the [vicinity] of US$40-60M. All livestock and meat business carried out by this entity in the future and that is introduced by any of the partners will be traded through this entity.
What we request of you is to provide advice as to the appropriate structure and advice as to the protection of the business assets as they develop and accumulated [intellectual property]. We expect that the business will develop long term legally binding contracts between its self, customer end users, suppliers and shipping providers. These contracts will become valuable assets of the business.
The partners (besides myself) are Israelis that have been living in Australia for many years. I have known and worked with them for some 18 months. Basically they are providing the market and I will be providing the Cattle and Australian logistic knowledge and also funding. …
Initially it may be appropriate for my existing trading company [Otway] to do the exporting under contract to Newco. The reason being that my company has trading history and also an export licence. The issue here will be to ensure that the value that is created via the establishment of Newco is protected.
Other issues that need to be considered and drafted into the shareholders articles include … [n]on compete.
My partners currently own a company called Kalimpa. This company … has [a] contract to represent Elders in Israel. This contract expired at the end of October. Elders do not want to renew the contract. If the contract is not renewed Elders have a non-compete to Israel for two years. …
Elders have requested that Kalimpa release them from their non compete. If Kalimpa agrees to this Elders have indicated that they will release me from my non compete to work with my partners to export to Israel.

At this time, Ruschin and Bzezinski understood that Harwood Andrews were acting for all parties in seeking to set up an appropriate business structure and they were not told otherwise.

On 13 November 2012, Schmidt sent an email to Ruschin and Bzezinski attaching a nine page PowerPoint presentation which contained an organisational chart and information about the proposed venture. The covering email explained that the PowerPoint presentation would be used ‘as the basis for putting together our various contracts’.

The PowerPoint presentation referred to the parties as ‘joint venture partners’, with Kalimpa having a 66.6 per cent interest in the joint venture and Schmidt having a 33.3 per cent interest through a company, Ozfresh Pty Ltd (‘Ozfresh’). The proposed markets for the joint venture were Israel, China and Pakistan. It was contemplated that Kalimpa would provide ‘market access to Israel’ and manage market relationships in Israel and that Otway would manage market relationships in China and Pakistan and provide funding.

The PowerPoint presentation stated that a new company, AHRKalimpa, would act as the ‘operating entity (Agent) for the joint venture partners’ and that all sales contracts and shipping charters would be between customers and vessel owners, respectively, and AHRKalimpa acting as agent for the joint venture. The PowerPoint presentation noted that Otway was the holder of an Australian export licence and stated that Otway would deal with the general management of exports, including livestock purchase and delivery.

The PowerPoint presentation contemplated that a five year management contract, with an option to extend for a further five years, would be entered into between Otway and AHRKalimpa. It also stated that ‘[t]he parties and related entities of AHRKalimpa agree that they will not sell trade or facilitate delivery of any livestock via any other third party for a period of two years should the management contract cancel, expire or not renew’.

A slide titled ‘Management oversight and communications’ stated that there would be ‘a clearly defined contract’ between the ‘joint venture partners and AHRKalimpa’ and ‘AHRKalimpa and [Otway]’. With respect to decisions of AHRKalimpa’s board, the presentation stated that all matters would be decided by a simple majority and that the chairman would have a casting vote. The chairman was to be either a director of Ozfresh or Kalimpa, appointed on a rotating basis. The presentation also stated that, if a shareholder wished to sell its shares in AHRKalimpa, the remaining shareholders would have a ‘first and last right to purchase’ the shares.

In January 2013, Bzezinski and Schmidt travelled to Israel and met with various importers, including Tnuva and Dabach. They told importers that they were establishing a new company, with Schmidt as a partner, and that they would not be dealing with Elders any longer.

In March 2013, agreements for Voyage 1 were entered into with Tnuva and Dabach. Voyage 1 involved the export of a total of 7,200 head of cattle to arrive in Israel between 11 and 23 May 2013. Also in March 2013, agreements for Voyage 2 were entered into with Tnuva and Dabach for the same number of cattle to arrive in Israel between 1 and 5 July 2013. The contracts for Voyages 1 and 2 named Otway as the supplier but it was common ground that the voyages were conducted on behalf of the proposed joint venture vehicle, AHRKalimpa. Both voyages suffered significant losses.[7]
[7]Quantum Judgment [9(5)].

On 5 May 2013, Kalimpa signed a three year lease for commercial premises on St Kilda Road, St Kilda (‘Premises’). From that time, the business activities for the proposed joint venture were conducted from the Premises.

On 13 June 2013, a meeting was held between Ruschin, Bzezinski, Schmidt and commercial lawyer and friend of Schmidt, David Dunn. On 17 June 2013, Dunn sent an email attaching various documents for ‘sign off’ by Schmidt, Ruschin and Bzezinski, so that the parties could ‘move to documentation of the relevant structures and arrangements’. The attached documents included a corporate structure diagram, a schedule of documentation and a timetable for key deliverables. The corporate structure diagram included reference to Minerva Foods SA (‘Minerva’) providing a trade facility to the joint venture partnership. Minerva is a Brazilian-based livestock company and the co-owner of a vessel, Pearl of Para.

On 21 June 2013, Dunn sent an email to Harwood Andrews, which was copied to Schmidt, Rushin, Bzezinski and Katrina Day, an accountant who had worked with Schmidt since 2007. The email attached the proposed corporate structure and schedule of documentation referred to at [34] above. The covering email stated that Dunn was ‘working with Alan Schmidt and his partners with respect to the establishment, structuring and documentation of his livestock export business’. It also stated that ‘[t]here are a number of steps required to be taken to ensure the structure is appropriately in place and documented prior to 30 June’.

On 24 June 2013, Dunn sent an email to Schmidt, Ruschin and Bzezinski stating that AHRKalimpa could be incorporated that week. Dunn proposed that three shares be issued, one held by Otway and two by Kalimpa.

On 25 June 2013, Dunn sent an email to Schmidt, Ruschin and Bzezinski attaching a draft heads of agreement. He stated that, following execution of the heads of agreement, a significant number of ‘formation’ documents would need to be resolved and executed and that he would obtain a quote from Harwood Andrews for preparation of key documents on behalf of all the parties.

On 27 June 2013, AHRKalimpa was incorporated. Its founding directors were Schmidt and Dunn. Nine shares were issued, three in Dunn’s name and six in Schmidt’s name. That same day Dunn sent an email to Schmidt, Ruschin, Bzezinski and Day attaching a proposed management agreement.

On 2 July 2013, Dunn sent an email to Schmidt, Ruschin and Bzezinski, which was copied to Day, attaching a revised draft heads of agreement for ‘final sign off’. The draft agreement listed Schmidt, Ruschin and Bzezinski as the proposed parties. In the email, Dunn proposed that a workshop be held on 5 July 2013 at the Premises.

On 3 July 2013, Ruschin sent an email to Schmidt and Bzezinski stating that ‘[w]e [have a] deal for two shipments back to back’ and set out an email he had sent to Tnuva recording the details of the shipments. At this stage, Voyage 3 had been agreed upon but formal documentation had not yet been completed. That same day, Dunn sent an email to Schmidt, Ruschin and Bzezinski, which was copied to Day, attaching a draft joint venture agreement, between Kalimpa and Ozfresh, for discussion at the workshop scheduled for 5 July 2013. The agreement specified a five year term. It provided that the chair of the joint venture management company must be a director of Ozfresh and that the chair would have a casting vote. The agreement included a broad confidentiality clause and a two year post-termination non-compete clause.

On 5 July 2013, the workshop proposed by Dunn was held in the form of a board meeting of AHRKalimpa. Schmidt, Ruschin and Day attended on behalf of AHRKalimpa and Dunn attended on behalf of his firm, Otway Partners. At the meeting, Ruschin took exception to the manner in which the shares in AHRKalimpa had been issued. It was agreed and noted in the minutes of meeting that Dunn would transfer his three shares to Ruschin’s company, Kalimpac Pty Ltd, and Schmidt would transfer three of his shares to Bzezinski’s company, Bzezinski Pty Ltd. The minutes also noted that Dunn would be resigning as a director of AHRKalimpa. (Dunn was replaced as director by Bzezinski on 27 August 2013.)

Disagreements over terms of proposed joint venture; Voyages 3 and 4

On 5 July 2013, Dunn sent an email to Harwood Andrews, which was copied to Schmidt, Ruschin, Bzezinski and Day. The email instructed Harwood Andrews to prepare a shareholders’ agreement and other documents. Attached to the email were draft minutes of the board meeting held that day, a briefing memorandum, the draft heads of agreement referred to at [39] above and the draft joint venture agreement referred to at [40] above. The briefing memorandum relevantly included the following proposals:

(a)Dunn would be appointed the independent chairman of AHRKalimpa.
(b)AHRKalimpa would act as the employer of all staff and ‘provider of services for the live export operations of the AHRK Group’.
(c)AHRKalimpa would have ‘a standard constitution’ but the relationship between shareholders would be governed by a shareholders’ agreement.
(d)While AHRKalimpa was being funded by Otway, decision making by AHRKalimpa would be subject to the ‘overriding consent’ of Schmidt.
(e)Schmidt, Ruschin and Bzezinski would work full time for the AHRKalimpa Group.
(f)The joint venture would be for a fixed term of five years with an option for a further five years.
(g)Pre-emptive rights would be created between the joint venture participants in the event that one or more of them decided to leave the joint venture.
(h)Good faith and confidentiality provisions would be included in either the shareholders’ agreement or the joint venture participants’ employment contracts.
(i)The shareholders’ agreement would provide that none of the parties would participate in the live export business other than through AHRKalimpa for so long as each of them holds an equity interest in AHRKalimpa.

On 7 July 2013, Ruschin sent an email to Dunn informing him that he had sent the documentation in Dunn’s email of 5 July 2013 to his solicitor for review. The solicitor that Ruschin had engaged on behalf of himself and Bzezinski was Barry Moshel. On 15 July 2013, Moshel sent an email to Dunn and Schmidt, which was copied to Ruschin and Bzezinski, taking issue with a number of items in the documentation, including those set out at (a), (d) and (i) above. In relation to the proposed restraint of trade, Moshel suggested that the parties to the joint venture be subject to ‘non-competition and non-circumvention’ obligations for two years after termination of the joint venture, or the transfer of a party’s interest in the joint venture.

From this point onwards, negotiations regarding the formalisation of the joint venture continued to break down. It is unnecessary to detail all of the communications surrounding the break down. It is sufficient to refer to the following.

On 8 August 2013, a board meeting of AHRKalimpa was held at the Premises. Schmidt, Bzezinski, Ruschin, Dunn and Day attended the meeting. The draft heads of agreement was discussed. There were a number of disagreements, including in relation to the inclusion of Ruschin and Bzezinski’s companies as parties to the agreement, rather than Ruschin and Bzezinski themselves, and the requirement for Schmidt to give overriding consent in relation to management decisions.

On 16 August 2013, a further board meeting of AHRKalimpa was held at the Premises. It was attended by the individuals set out at [45] above and Moshel. The minutes of meeting relevantly stated:

Following extensive discussion, it was resolved that various forms of business model would be further reviewed and discussed prior to execution of the contract for Voyage 3.
It was further resolved that Voyage 2 would be completed, and if a suitable business model had not been agreed between the parties (or an alternative method of proceeding with Voyages 3 and 4), then the parties would exchange mutual non-compete undertakings in relation to their respective clients and markets, and the live export business between the parties would be wound up.

On 22 August 2013, Dunn sent an email to Schmidt, which he copied to Day, attaching a ‘Restructure Position Paper’ with respect to AHRKalimpa, which suggested that there was ‘now fundamental disagreement on key issues between the parties’.

On 17 September 2013, Ruschin forwarded a draft agreement ‘for the next two shipments’ to Schmidt and Bzezinski. The draft agreement listed Kalimpa, Schmidt and Otway as the parties. The draft agreement relevantly recorded the following:

(a)Two shipments had been undertaken and two further shipments were to occur.
(b)Minerva had provided 50 per cent of the funding for the shipments and was entitled to 50 percent of the net profit (or loss) per shipment.
(c)The parties intended for their relationship to continue beyond the four shipments and after the four shipments were completed they would operate through AHRKalimpa.
(d)All contracts and joint venture agreements after the first four shipments would be conducted exclusively through AHRKalimpa, with any existing contractual arrangements to be assigned.
(e)If the relationship between the joint venturers was terminated, for a period of two years from the date of termination, Schmidt and Otway would not be able to ‘use or benefit in any way from the existing customers contacts and sources in Israel.’

That same day, Ruschin sent an email to Schmidt and Bzezinski attaching the draft agreement. Schmidt discussed the draft with Dunn and they agreed that it was unacceptable.

On 21 September 2013, Schmidt sent draft sales contracts with Tnuva and Dabach to Ruschin and Bzezinski. Schmidt invited them to call if they had any issues. Both draft contracts listed Otway as the supplier.

On 23 September 2013, Dunn sent an email to Ruschin and Bzezinski attaching a note which addressed ‘substantive issues raised by the draft [heads of] agreement’ that had been prepared by Moshel. In the email, Dunn proposed that Schmidt transfer his shares and resign as a director of AHRKalimpa so that if an acceptable process for moving forward was resolved, the relationship between Kalimpa and Otway would be clearly defined.

On 29 September 2013, Ruschin sent an email to Schmidt referring to a phone conversation on 25 September 2013 concerning an email exchange between them on that day in which Schmidt alleged that Ruschin was ‘blackmailing’ and ‘threatening’. Ruschin’s email stated:

The fact that we still have the AHR & Kalimpa non-compete agreement matter outstanding, is detrimental to our efficacy as partners.
…
As per our meeting dated 24/09/13, you said that you were going to send me the NON COMPETE agreement commentary that we agreed on, in 24 hours (now 5 days ago) and that we can then sign it and keep working on our shareholders agreement for our new company AHRKalimpa. To date I still haven’t received your comment to the agreement we sent on the 17/09/13.
…
Alan, we need to finish this NON COMPETE agreement as soon as possible, we can’t just keep wasting time as you know that we’ve got two more contracts coming soon.
Let’s move forward with business.

Schmidt responded to Ruschin’s email on the same day. He stated that the ‘most important issue’ was the shareholders’ agreement rather than the non-compete. He stated that he would ‘get [Ruschin] something today’.

In September and October 2013, Schmidt executed sales contracts for Voyages 3 and 4 with Dabach and Tnuva for the export of cattle to Israel. The contracts with Dabach listed AHRKalimpa as the supplier. The contracts with Tnuva listed Otway as the supplier.

On 4 November 2013, Day distributed to Schmidt, Ruschin and Bzezinski a report on Voyages 1 and 2 and a cash flow forecast and operating budget for the 2013–2014 financial year. The report showed that Voyage 1 made a loss of $769,505.68, that Voyage 2 made a loss of $311,921.56, and that Minerva would bear 50 per cent of these losses. The forecast contained estimates of income to be received in respect of Voyage 3 in October 2013, Voyage 4 in December 2013, Voyage 5 in February 2014, Voyage 6 in March 2014, Voyage 7 in May 2014 and Voyage 8 in June 2014. The forecast also contained income estimates for a shipment to Uruguay and a shipment to China. The budgeted gross operating profit for the 2013–2014 financial year was $1,808,845.

Schmidt acts independently of proposed joint venture

On 8 November 2013, Schmidt sent an email to Tnuva, without copying it to any one, with the subject line ‘Confidential’. The email attached an ‘Invoice Breakdown’ for the cost of stock assigned to Tnuva as part of Voyage 3. The email stated:

As promised, here is the actual purchase details for all the cattle purchased for [Voyage] 3.
…
Again this is very confidential information and no one knows that you have this. I am sending you this just to confirm that I am deadly serious about trying to come to an arrangement with you regarding an open book arrangement.

On 12 November 2013, Dunn sent an email to Helen Zhang, a Chinese cattle importer who had also entered into arrangements with Schmidt to fund shipments to Israel. At some stage during 2013, Bzezinski and Schmidt had travelled to China and met with Zhang to discuss the prospect of exporting cattle to China. The email noted that Dunn had resigned as a director of another company and transferred his share in that company to Otway. The email suggested that should Schmidt and Zhang wish to proceed further with the venture, Zhang should feel free to contact Dunn. This email was not copied to Bzezinski or Ruschin.

Also on 12 November 2013, Dunn sent an email to Schmidt with the subject line ‘Cattle Operations’. The email referred to a number of matters, including ongoing and future voyages as well as previous advice that Dunn had given to Schmidt to resign as a director of AHRKalimpa. It relevantly stated:

I have previously advised you to resign from [AHRKalimpa] and execute an open transfer of your shares and to provide this documentation to your co-owners of [AHRKalimpa]. In my view, continuing to defer this action may leave you exposed to claims on proceeds of Israeli voyages (notwithstanding your view of how those arrangements are being undertaken).
…
There is no cohesive funding strategy for the debt funding of your ongoing voyages. In my view, given the risks and exposures you presently face, this needs to be established immediately.
…
I … remain prepared to assist you in bringing together and executing the tasks related to both the immediate voyages and longer term implementation of your business plan.

In early November 2013, Schmidt sought finance with respect to the business of exporting cattle to Israel. One finance application was made to HSBC Bank Australia Ltd (‘HSBC’) in Otway’s name for between $850,000 and $1.2 million on 15 November 2013 to ‘fund [Otway’s] ongoing trading operation’. The application documents included a report on Voyages 1–3 and a cash flow and operating budget for the 2013–2014 financial year. The report on Voyages 1–3 set out a loss of $754,905 for Voyage 1, a loss of $311,922 for Voyage 2 and a profit of $647,757 for Voyage 3. The forecast contained estimates of income to be received in respect of Voyage 3 in November 2013, Voyage 4 in December 2013 and January 2014, Voyage 5 in February and March 2014, Voyage 6 in March and April 2014, Voyage 7 in May and June 2014 and Voyage 8 in June and July 2014. The budgeted gross operating profit for the 2013–2014 financial year was $3,091,717.

The application documents also included a funding proposal which:

(a)was titled ‘Funding Proposal – Israel [Otway]’ and was on Otway’s letterhead, using the Premises as its address;
(b)stated that Otway had developed trading relationships with the two largest importers in Israel, Tnuva and Dabach;
(c)specified that four contracts had been completed with Tnuva and Dabach over the last two years, two under Elders ownership and two under Otway ownership, that the fourth contract was in progress, and that the rolling contracts for Voyages 5 and 6 were currently being negotiated;
(d)explained that Voyages 1 and 2 had resulted in losses due to ‘extraordinary events’ and that Voyage 3 had a projected profit of $400,000–$700,000; and
(e)noted that Otway had a partnership agreement with the vessel owner and the ‘Minerva SA group of Brazil’.

We make these observations about the application to HSBC. First, the application was in Otway’s name and did not mention AHRKalimpa. Secondly, the application portrayed the export business as an established and successful business rather than as an immature or speculative business. Thirdly, Ruschin and Bzezinski were not told about the application. The following extract from the funding proposal, under the heading ‘[Otway]–Background’, conveys the flavour of the application to HSBC:

[Otway became] the largest exporter of live cattle to Japan prior to selling this business to Elders in 2010–11.
…
The company has now re entered the export sector concentrating on Israel.
We found that Israeli customers had been dissatisfied with the existing supply chain from Australia and were seeking alternatives. In recognition of this, we have [been] developing the relationships over the past 8 months resulting in 4 Sale Contracts to date.

On 17 November 2013, Ruschin sent an email to Schmidt, Bzezinski and Day, complaining that Schmidt had stopped informing him and Bzezinski about ‘how the business [was] doing’ and had not copied them in ‘on any of the emails from our customers’ for the past two months. Ruschin questioned where this left things and suggested that they should meet to ‘see how we finish’ the shareholders’ agreement. That same day, Schmidt forwarded Ruschin’s email to Dunn.

At 8:40 am on 18 November 2013, Dunn emailed Schmidt stating that Ruschin’s email was ‘setting [Schmidt] up for an injunction on the proceeds of Voyage 3’ and to ‘[g]ive [Dunn] a call to discuss’. At 11:32 am, Dunn sent to Schmidt a proposed email to Ruschin and Bzezinski. At 11:50 am, Schmidt sent the proposed email to Ruschin and Bzezinski. It relevantly stated:

1 I have no argument with your relationship with your Israeli clients. …
…
4I have made it clear from the outset of our relationship that whilst my money is funding operations, I will have unrestricted authority to determine how business is executed.
5As is evidenced from your email, I have sought to resolve how business operations can be conducted through AHRKalimpa. However, in [the] absence of any meaningful response from you since 29 September of this year until yesterday, there has been no proposal, and indeed yesterday’s reply also contains no meaningful proposal.

As you know, the voyages undertaken to date have incurred substantial losses, a significant proportion of which have been funded by me. You have previously offered to source funds for the business (and have done so for months), but there has been no progress on this front either.
It is totally unsatisfactory for me to be continuing to carry the total load of funding and operation of the business in circumstances where you as Stakeholders assert rights, the basis of which are, at best, unclear.
As I have repeatedly stated, I have no issue with the relationship you have developed with your Israeli clients, and remain happy to recognise this value. To the extent you wish to have entitlements beyond this, and in particular entitlements to my business and my money, you need to formally outline the basis and proposal for this to occur.

On 19 November 2013, Dunn sent an email to Schmidt, which was copied to Day, attaching an agenda for an executive meeting of Otway later that day. The agenda items included ‘Minerva Funding/JV Arrangements’ and Schmidt’s ‘[r]eturn of shares and resignation as Director’ of AHRKalimpa. Schmidt, Day and Dunn attended the meeting. The minutes of the meeting noted that it was ‘anticipated that the next 2 contracts [for Voyages 5 and 6] be for February/late March [2014]: or March/April [2014]’. In relation to the joint venture, the minutes relevantly stated:

Role of AHR Kalimpa
Resolved that [Schmidt] confirmed with Minerva that Minerva requires no involvement by AHR Kalimpa in the [joint venture].
[Subsequent documentation by Minerva clearly confirms this.]
…
AHR Kalimpa
Resolved that [Schmidt] execute share transfers and director resignation and forward the same to [Bzezinski and Ruschin], together with a request for formal proposal for ongoing participation.
Noted that [Ruschin and Bzezinski] are seeking further discussions regarding ongoing arrangements. Agreed discussions should be limited to entertaining any proposal they may have which addresses [Otway’s] concerns regarding control and restraints. Agreed that in the absence of a formal proposal, a clear line should be drawn between past participation with [Ruschin and Bzezinski], and ongoing operations.
It was resolved in respect of the lease of [the Premises] that liability for this including expenses of set up should form part of any separation negotiation, and [Otway] should make no commitments to lease or sub-lease this space until either an ongoing acceptable proposal, or a separation arrangement has been finalised.

…
Overall Strategic Direction
Discussion regarding operations for 2014 and beyond. It was noted that Voyages through to June 2014 (best case), and December 2014, (stable case) will be required to restore capital lost to date.
Agreed that over December/January a strategy for operation more efficiencies and other scope enlargement be developed and pursued.

Later that same day, Dunn sent an email to Schmidt and Minerva attaching documents for Schmidt and Minerva’s execution to allow business to proceed between Minerva and Otway.

End of proposed joint venture

On 25 November 2013, Schmidt met with Ruschin and Bzezinski at the Premises. Schmidt had with him a notice of resignation as a director of AHRKalimpa with immediate effect and an executed transfer of Schmidt’s three shares in AHRKalimpa which specified a consideration of $3 but did not specify a transferee. He also had with him a letter addressed to Ruschin and Bzezinski which he read out to them. The letter relevantly stated:

We have been attempting to finalise an ongoing relationship now for some months entirely unsuccessfully, and accordingly I believe it is appropriate to remove myself from any ownership or management links with AHRKalimpa Pty Ltd.
Should you have a proposal acceptable to me which would enable us to move forward in an environment of joint ownership, I am prepared to re-engage with AHRKalimpa Pty Ltd. However, in the absence of any agreed proposal by the 20^th December 2013, you should assume [Otway] and I will continue to operate in the live cattle export business, on an independent basis. This does not preclude an ongoing relationship with Kalimpa Pty Ltd, or AHRKalimpa Pty Ltd, but makes it clear that any future relationship will be established by new arrangements between us.

At a time that Dunn could not recall, he advised Schmidt that he was entitled to take the course that he did.[8]
[8]Liability Judgment [253]. The judge noted at n 216 that the extent of Dunn’s instructions or his knowledge at the time that he gave advice to Schmidt was not the subject of evidence.

Since Schmidt’s resignation as a director of AHRKalimpa, Bzezinski has been the sole director.

On 26 November 2013, an executive committee meeting of Otway was held. The minutes of meeting recorded discussion of outstanding cost issues regarding Voyage 2 and financial arrangements with Minerva concerning that voyage. The minutes noted that ‘a first draft report for Voyage 3 would be tabled at the next Executive Committee Meeting’ and that ‘[a]greement on framework on shipping rates for balance of Voyages for Voyage 4 and beyond through 2014’ needed to be addressed. The minutes noted what had occurred the previous day and stated that, unless an acceptable proposal was received from Kalimpa by 21 December 2013, Otway would ‘continue to operate as an independent live cattle exporter’. The minutes also referred to financial obligations to Zhang regarding Voyage 3 and noted that Schmidt would confirm with Zhang whether she wished to ‘re-invest in Voyage 4’.

On 28 November 2013, Otway and Minerva executed an agreement for the purposes of an unincorporated joint venture to export live cattle from Australia. The agreement referred to the financial contributions Minerva had made for Voyages 1 and 2.

Voyage 3 commenced on 16 November 2013 and Voyage 4 commenced on 4 January 2014. Both were completed after Schmidt resigned as a director of AHRKalimpa on 25 November 2013. At trial, Schmidt acknowledged that Voyages 1–4 were conducted on behalf of AHRKalimpa.

As we have already stated, on Saturday 14 December 2013, Schmidt broke into the Premises and removed the computer and all hard copy files located there.[9]
[9]See [5] above.

On 24 December 2013, solicitors for Kalimpa, Ruschin and Bzezinski sent a letter of demand to Schmidt. The letter alleged that Schmidt had breached his duties as a director of AHRKalimpa and his ‘fiduciary duties to [his] fellow Joint Venture partners’. The letter demanded: that Schmidt pay the sum of $556,386 that was said to be owing to Kalimpa, Ruschin and Bzezinski; that Schmidt cease exporting livestock to Israel for two years; that Schmidt undertake not to export livestock under his name or Otway’s name to Israel, in particular to Tnuva or Dabach; and that Schmidt provide to Kalimpa, Ruschin and Bzezinski two thirds of any profits made on Voyages 3 and 4 and any further exports to Israel for the next three years.

On 27 December 2013, Schmidt responded to the letter of demand by email. He denied any liability to Kalimpa, Ruschin and Bzezinski and stated that a joint venture had never been concluded and a non-compete clause had never been agreed.

Since the end of the proposed joint venture on 25 November 2013, Otway has continued to export livestock to Israel. As at the end of January 2018, a total of 20 voyages had been completed.[10]
[10]Quantum Judgment [9(10)].

Voyage 5 was planned, using Minerva’s vessel the Pearl of Para, but the voyage did not take place. Schmidt was informed by the manager of the vessel that it was being sold and thus unavailable.[11]
[11]Liability Judgment [250].

The contract for Voyage 6 — which is relevant to ground 3 — was signed in September 2014 and the voyage took place in October 2014. HSBC provided a letter of credit for the shipment.

Ruschin and Bzezinski obtained an export licence in March 2016 in the name of Kalimpa Livestock Exports Pty Ltd.[12]
[12]The judge stated that there was nothing in the evidence to suggest that AHRKalimpa could not have obtained an export licence earlier if it had applied to do so. See Liability Judgment [160]. See also Quantum Judgment [11].

As we have already stated, on 16 December 2015, the respondents commenced a proceeding against the applicants and, on 22 November 2017, the judge published the Liability Judgment. Following publication of the Liability Judgment, the respondents sought the release of the security they had provided for the applicants’ costs of the trial. On 16 February 2018, the judge refused this application.[13]
[13]AHRKalimpa Pty Ltd v Schmidt [No 2] [2018] VSC 68 (‘Security for Costs Judgment’). The Security for Costs Judgment is relevant to the final ground of appeal. See [190] and [206] below.

The parties were invited to make submissions in relation to the appropriate relief. The applicants elected to claim equitable compensation rather than an account of profits, and the quantum hearing proceeded on that basis. As we have already stated, on 2 April 2019, the judge published the Quantum Judgment and, on 29 April 2019, he published the Interest Judgment.

APPEAL AGAINST LIABILITY JUDGMENT

As we have already stated, the applicants seek leave to appeal against both the Liability Judgment and the Quantum Judgment. We will consider the challenge to the Liability Judgment prior to discussing the challenge to the Quantum Judgment.

Liability hearing

The liability hearing was conducted over seven days in August 2017. Schmidt and Dunn gave evidence on behalf of the applicants and Bzezinksi and Ruschin gave evidence on behalf of the respondents.

During cross-examination, Schmidt was asked about the nature of the business that could have been conducted going forward if negotiations had not broken down between the parties. The following exchange occurred between Schmidt and counsel for the respondents:

If you could have made an accommodation as to business going forward with your co-venturers in November [2013], it would have been the same for the following voyages, wouldn’t it?---After 4?
Yes, if you could come to terms?---Yes.
Because effectively it was the same business all the way through from voyages 1 and following?---Correct.
Same customers?---Yes.
Same people you are talking to in the customer’s business?---Yes.
…
I’m putting to you your plan?---My plan was to continue on with the business in the absence of being able to come to a meaningful, completed shareholders agreement so that we could operate within [AHRKalimpa]. When it became obvious that we couldn’t do that, we carried on the business as - - -
[Otway] takes over the whole business?---Carries on.
…
You took all of the records of voyages 1–4 of AHRKalimpa Pty Ltd---I didn’t know that — okay, I took all the records, yes, we did.
You regarded those records as then belonging to [Otway]---They were the records of the business that we had been doing together.
…
You intended to carry on that business through [Otway] after 25 November 2013?---In the absence of being able to reach a proper agreement, yes.[14]

[14]Transcript of Proceedings (9 August 2017) 607.1–607.10, 671.17–671.23, 672.17–672.22, 677.27–677.29.

Ruschin and Bzezinski gave evidence in cross-examination as to their attempts to re-enter the market for the export of live cattle to Israel after the breakdown of the proposed joint venture.

The following exchange occurred between counsel for the applicants and Ruschin:

You haven’t undertaken any export of live cattle, you haven’t obtained an export licence, have you?---I did.
You did? When did you obtain that?---2015.
In what company name?---Under Kalimpa Livestock Export.
In 2015. So prior to that date, you didn’t have an export licence?---Yes.
I suggest to [you] that between November 2013 and the first voyage that Mr Schmidt undertook, [Otway], after voyages 1–4 in October 2014, you did not undertake any export of any cattle from Australia, did you?---No.
You didn’t organise for any cattle purchases, did you?---I did.
You did organise for cattle purchases? When did you do that?---Since 2015.
But not prior to 2015, had you?---No.
…
So just tell his Honour how you exploited that valuable customer list and the market information between November 2013 and October 2014 when Mr Schmidt commenced his first voyage after voyages 1–4?---I tried to do a few [shipments] to Israel with other exporter and between - - -
…
But not successfully?---Not just not successfully because [Schmidt] was already in the market dealing with my customer and he knew that there was [a] window of opportunity back then that I basically opened this door for him and yes, we couldn’t get into the market.
…
I’m asking about this period, Mr Ruschin, November 2013 after the walk-out, until October 2014?---No.
During that period you didn’t undertake any export of cattle, did you?---No, I didn’t.
After … 25 November 2013, I suggest to you that what Kalimpa had with its customer list and the relations that you had, was worth no value, what do you say to that?---That was the value that [Schmidt] took from us.
But you hadn’t been able to bring that value to fruition by entering into any contracts between November 2013 and October 2014, had you?---No.[15]

[15]Transcript of Proceedings (8 August 2017) 394.16–394.30, 395.4–395.9, 395.12–395.17, 395.23–396.3.

The following exchange took place between counsel for the applicants and Bzezinski:

It’s the case, is it not, that after the fourth voyage you did not export any cattle and still have not exported any cattle to Israel, is that correct?---Correct - well, there is no opportunity any more. It’s – there is two major - there is two suppliers which — what I’m trying to tell you here, the first — the opportunity was when there was only one serious exporter. Now there is two so the Israeli market — the window is not there any more, the window of opportunity is not there any more.
But I suggest that you couldn’t take up any opportunity post voyage 4 because you didn’t have an export licence, did you?---I’ve got an export licence now, but I can’t do it either, so - - -
But you didn’t have one then, did you?---No, but I’m answering your question. You asked me if I couldn’t do it because I didn’t have an export licence so I’m telling you now, I have an export licence and I can’t do it.
But at the time, I’m going back to post voyage 4, so that’s post January 2014, you didn’t have an export licence then, did you?---No.
You didn’t have the funds to be able purchase cattle, did you?---I did have.
You did have?---Yes.
Where were you going to get those funds?---Various investors.
Unidentified investors?---I’m here, it cost me money.[16]

[16]Transcript of Proceedings (8 August 2017) 456.31–457.27.

In re-examination by counsel for the respondents, Bzezinski gave the following evidence:

You said a few moments ago that there was only one serious exporter to Israel and now there’s two?---Yes.
Who was the only one originally?---Livestock Shipping company.
There’s two, who are the two now?---Otway Livestock.
Is that Mr Schmidt’s company?---Correct.
You said you had no export licence then but you have one now ‘but I can’t do it’; why can’t you export to Israel now?---Because I speak with the purchasers and one of them told me that unfortunately he can’t do any business with me right now because he’s got money with [Schmidt] tied in his pocket. So when he releases, he will do business with me. So for now, I’m concentrating on the Australian market.[17]
[17]Transcript of Proceedings (8 August 2017) 463.13–463.26.

Relevant legal principles

The applicants have not sought to challenge the judge’s finding that Schmidt owed director’s duties and fiduciary duties to AHRKalimpa in relation to the proposed joint venture up until he resigned as a director of that company on 25 November 2013. It is also not in contention that Schmidt and Otway are liable as accessories for any breaches of fiduciary duties each of them may have committed. However, a key contentious issue is whether Schmidt’s fiduciary duties continued after his resignation. Accordingly, we will focus on the legal principles relating to the nature and scope of fiduciary duties and whether they survive the termination of the relationship that gave rise to them.

Fiduciary relationships have been referred to as relationships of trust and confidence or confidential relations. As stated by the High Court in Hospital Products Ltd v United States Surgical Corporation, the critical feature of these relationships is that ‘the fiduciary undertakes or agrees to act for or on behalf of or in the interests of another person in the exercise of a power or discretion which will affect the interests of that other person in a legal or practical sense’.[18] There is no comprehensive statement of the criteria by reference to which the existence of a fiduciary relationship may be established.[19] The creation of a joint venture relationship is not, in itself, determinative of whether a fiduciary relationship exists.[20]
[18](1984) 156 CLR 41, 96–7; [1984] HCA 64 (‘Hospital Products’).
[19]Hospital Products (1984) 156 CLR 41, 68; [1984] HCA 64.
[20]John Alexander’s Clubs Pty Ltd v White City Tennis Club Ltd (2010) 241 CLR 1, 21 [44]; [2010] HCA 19.

Once a fiduciary relationship is found to exist, the duties of the fiduciary will vary according to the circumstances which generate the relationship.[21] The scope of the fiduciary duty is dependent upon the nature of the relationship and the facts of the case.[22] The scope of the fiduciary obligations may be determined by reference to the terms of the agreement giving rise to those obligations and also by reference to the course of dealings actually pursued by the parties.[23]
[21]Hospital Products (1984) 156 CLR 41, 102; [1984] HCA 64.
[22]Hospital Products (1984) 156 CLR 41, 102; [1984] HCA 64.
[23]Birtchnellv Equity Trustees, Executors and Agency Co Ltd (1929) 42 CLR 384, 408; [1929] HCA 24.

A person who occupies a fiduciary position may not use that position to gain a profit or advantage for himself or herself, nor may he or she obtain a benefit by entering into a transaction in conflict with his or her fiduciary duty, without the informed consent of the person to whom the duty is owed.[24] A fiduciary must account to the person to whom the duty is owed for any benefit or gain:

(a)which has been obtained or received in circumstances where a conflict or significant possibility of conflict exists between his or her fiduciary duty and his or her personal interest in the pursuit or possible receipt of such benefit or gain; or
(b)which was obtained or received by use or by reason of his or her fiduciary position or of opportunity or knowledge resulting from it.[25]

[24]Hospital Products (1984) 156 CLR 41, 67; [1984] HCA 64.

[25]Chan v Zacharia (1984) 154 CLR 178, 199; [1984] HCA 36.

A fiduciary may act in his or her own interests, and will not be required to account for any profits obtained, in matters falling outside the scope of the fiduciary relationship.[26]
[26]Noranda Australia Ltd v Lachlan Resources NL (1988) 14 NSWLR 1, 15, 17.

We now turn to whether fiduciary duties may survive the termination of the relationship that gave rise to them.

This issue was considered in Spincode Pty Ltd v Look Software Pty Ltd.[27] That case concerned an application by a former client to restrain a firm of solicitors from acting for an opposing party in litigation involving the former client. All members of the Court of Appeal (Brooking, Ormiston and Chernov JJA) agreed that the solicitors should be restrained because there was a real and sensible possibility that they would misuse confidential information of the former client. Brooking JA expressed the view that the solicitors could be restrained on two additional bases, namely, breach of the fiduciary duty of loyalty and the solicitors’ status as officers of the Court.[28] He stated that the fact that the fiduciary relationship between the solicitors and the former client had ended was not an impediment to the granting of relief because fiduciary duties could continue beyond the termination of the fiduciary relationship.[29] Ormiston and Chernov JJA did not express a final view on the two additional bases relied upon by Brooking JA.
[27](2001) 4 VR 501; [2001] VSCA 248 (‘Spincode’).
[28]Spincode (2001) 4 VR 501, 525 [60]; [2001] VSCA 248.
[29]Spincode (2001) 4 VR 501, 522–4 [55]–[57]; [2001] VSCA 248.

The decision of the Supreme Court of Canada in Canadian Aero Service Ltd v O’Malley[30] has often been cited, including in Spincode, in support of the proposition that fiduciary duties may survive termination of the fiduciary relationship.[31] That case concerned two former directors of a company using confidential information to acquire a business opportunity actively sought by the company. Laskin J, delivering the judgment of the Court, stated:

An examination of the case law in this Court and in the Courts of other like jurisdictions on the fiduciary duties of directors and senior officers shows the pervasiveness of a strict ethic in this area of the law. In my opinion, this ethic disqualifies a director or senior officer from usurping for himself or diverting to another person or company with whom or with which he is associated a maturing business opportunity which his company is actively pursuing; he is also precluded from so acting even after his resignation where the resignation may fairly be said to have been prompted or influenced by a wish to acquire for himself the opportunity sought by the company, or where it was his position with the company rather than a fresh initiative that led him to the opportunity which he later acquired.[32]

[30](1973) 40 DLR (3d) 371; [1974] SCR 592 (‘O’Malley’).

[31]See eg, Green & Clara Pty Ltd v Bestobell Industries Pty Ltd [1982] WAR 1, 19; Mordecai v Mordecai (1988) 12 NSWLR 58, 65; Lord Corporation Pty Ltd v Green (1991) 22 NSWLR 532, 543–4; Natural Extracts Pty Ltd v Stotter (1997) 24 ACSR 110, 141 (‘Stotter’); Addstead Pty Ltd (in liq) v Liddan Pty Ltd (1997) 70 SASR 21, 44; Nicholls v Michael Wilson & Partners Ltd [2012] NSWCA 383, [177]–[178] (‘Nicholls’).

[32]O’Malley (1973) 40 DLR (3d) 371, 382; [1974] SCR 592.

Edmonds v Donovan[33] involved an appeal against Warren J’s decision at first instance that the fiduciary duties owed by the respondents in the context of a joint venture agreement — which concerned the purchase, long term lease and subsequent sale of a golf course — survived termination of that agreement. Warren J stated that ‘[i]t is well established that fiduciary duties will continue beyond the end of the fiduciary relationship’.[34] Phillips JA, with whom Winneke P and Charles JA agreed, referred to the above statement of Warren J and said that ‘it may perhaps be more accurate … to say that fiduciary duties may survive the termination of the relationship that first called those duties into being’.[35]
[33](2005) 12 VR 513; [2005] VSCA 27 (‘Edmonds’).
[34]Disctronics Ltd v Edmonds [2002] VSC 454, [168] (citations omitted).
[35]Edmonds (2005) 12 VR 513, 536 [56]; [2005] VSCA 27.

Phillips JA went on to cite the passage in O’Malley set out at [95] above and then stated:

In this passage, the contrast is between ‘a fresh initiative’ leading to the opportunity which the prepositus acquires after his resignation and an opportunity to which he is led by his own position with the company; and the obligation of the director or employee to continue observing after resignation a fiduciary duty which arose before resignation will only be the clearer where that resignation may fairly be said to have been prompted or influenced by the desire to obtain the corporate opportunity … In the case under appeal, there can be no doubt at all but that [the appellants] were led by reason of their participation in the venture with the [respondents] to the opportunity upon which they latched, and latched so immediately after [the termination of the joint venture agreement].[36]

[36]Edmonds (2005) 12 VR 513, 537 [57]; [2005] VSCA 27 (citations omitted).

Phillips JA held that fiduciary duties were still owed by the appellants in that case notwithstanding the termination of the joint venture agreement. He also held that those duties had been breached by virtue of the appellants seizing the business opportunity which the parties had been pursuing together and which the respondents were intent on still pursuing.[37]
[37]Edmonds (2005) 12 VR 513, 537–8 [57], [59], [61]; [2005] VSCA 27.

As appears from the above quoted passage from Edmonds, where the fiduciary is a director and the breach of fiduciary duty consists of the taking advantage of a business opportunity of his or her company, upon resignation as a director, it is not necessary for the beneficiary to establish that the resignation was for the sole purpose of pursuing the opportunity. It is sufficient if the resignation is prompted or influenced by that purpose.[38] In other words, it is sufficient if that purpose materially influenced the resignation.
[38]Stotter (1997) 24 ACSR 110, 141 cited in Edmonds (2005) 12 VR 513, 537 [57]; [2005] VSCA 27.

In the present case, the applicants relied on the decision of the Court of Appeal of England and Wales in Foster Bryant Surveying Ltd v Bryant.[39] That case considered whether the respondent, who gave notice of resignation as a director of the applicant, had breached fiduciary duties owed to the applicant by accepting a proposal from the applicant’s principal client to work for that client after his resignation came into effect. The respondent accepted the proposal before his resignation took effect. Rix LJ, with whom Moses and Buxton LLJ agreed, set out a number of principles relating to a director’s breach of fiduciary duty, including the following:
[39][2007] 1 BusLR 1565; [2007] EWCA Civ 200 (‘Foster Bryant’).

4A fiduciary relationship does not continue after the determination of the relationship which gives rise to it. After the relationship is determined the director is in general not under the continuing obligations which are a feature of the fiduciary relationship.
…
6Directors, no less than employees, acquire a general fund of skill, knowledge and expertise in the course of their work, which [it] is plainly in the public interest that they should be free to exploit … in a new position. After ceasing the relationship by resignation or otherwise a director is in general (and subject of course to any terms of the contract of employment) not prohibited from using his general fund of skill and knowledge, the ‘stock in trade’ of the knowledge he has acquired while a director, even including things such as business contacts and personal connections made as a result of his directorship.
7A director is however precluded from acting in breach of [his duty to avoid conflict between duty and self-interest], even after his resignation where the resignation may fairly be said to have been prompted or influenced by a wish to acquire for himself any maturing business opportunities sought by the company and where it was his position with the company rather than a fresh initiative that led him to the opportunity which he later acquired.
8In considering whether an act of a director breaches the preceding principle the factors to take into account will include the factor of position or office held, the nature of the corporate opportunity, its ripeness, its specificness and the director’s relation to it, the amount of knowledge possessed, the circumstances in which it was obtained and whether it was special or indeed even private, the factor of time in the continuation of the fiduciary duty where the alleged breach occurs after termination of the relationship with the company and the circumstances under which the breach was terminated, that is whether by retirement or resignation or discharge.
9The underlying basis of the liability of a director who exploits after his resignation a maturing business opportunity of the company is that the opportunity is to be treated as if it were the property of the company in relation to which the director had fiduciary duties. By seeking to exploit the opportunity after resignation he is appropriating for himself that property. He is just as accountable as a trustee who retires without properly accounting for trust property.
10It follows that a director will not be in breach of the principle set out at point 7 above where either the company’s hope of obtaining the contract was not a ‘maturing business opportunity’ and it was not pursuing further orders or where the director’s resignation was not prompted or influenced by a wish to acquire the business for himself.[40]

[40]Foster Bryant [2007] 1 BusLR 1565, 1571–2 [8]; [2007] EWCA Civ 200 quoting Hunter Kane Ltd v Watkins [2003] EWHC 186 (Ch), [25].

Rix LJ held that, by agreeing to be retained by the client after his resignation became effective, the respondent did not breach his fiduciary duties as a director. He stated that the resignation ‘was not planned with an ulterior motive’ and that there was ‘no finding of any property or maturing business opportunity taken or exploited by [the respondent]’.[41]
[41]Foster Bryant [2007] 1 BusLR 1565, 1595 [87], 1596 [89]; [2007] EWCA Civ 200.

The applicants also relied on Attorney-General v Blake[42] and submitted that it represents the correct position as a matter of law. In that case, the Court of Appeal of England and Wales stated, in the context of a claim against a former employee, that it did not recognise the concept of a fiduciary obligation which ‘continues notwithstanding the determination of the particular relationship which gives rise to it’.[43]
[42][1998] Ch 439 (‘Blake’).
[43]Blake [1998] Ch 439, 453.

Additionally, the applicants relied on Dealer Support Services Pty Ltd v Motor Trades Association of Australia Ltd.[44] In that case, Beach J of the Federal Court reviewed the relevant authorities and concluded that there was no fiduciary duty of loyalty that survives termination of the fiduciary relationship as expressed by Brooking JA in Spincode.[45] He said that there is little support in the Australian jurisdictions, other than Victoria, for Brooking JA’s opinion.[46]
[44](2014) 228 FCR 252; [2014] FCA 1065 (‘Dealer Support Services’).
[45]Dealer Support Services (2014) 228 FCR 252, 261, [36], 262 [42], 275 [89]; [2014] FCA 1065. Other authorities have disagreed with or declined to follow Brooking JA’s opinion that a solicitor owes a fiduciary duty of loyalty to a former client: see eg, Técnicas Reunidas SA v Andrew [2018] NSWCA 192, [36]; Kallinicos v Hunt (2005) 64 NSWLR 561, 577–83 [61],[76]; [2005] NSWSC 1181.
[46]Dealer Support Services (2014) 228 FCR 252, 269–71 [62]–[74]; [2014] FCA 1065.

Judge’s reasons

In the Liability Judgment, the judge made the following finding as to the credibility of Schmidt, Ruschin and Bzezinksi:

The 3 key individuals in this case are Bzezinski, Ruschin and Schmidt. On the whole, each of them gave frank and responsive evidence. Given the lapse of time, none of them had a perfect memory of all of the relevant events. Each of them readily acknowledged this. Although this affected the reliability of their evidence in some minor respects, each of them was a credible witness.[47]

[47]Liability Judgment [16].

Subsequently, in the Quantum Judgment, the judge did not make any separate finding as to the credibility of any of the witnesses. However, the judge made the following statement as to the honesty and propriety of Schmidt’s conduct:

Finally, before dealing with quantum, the issue of dishonesty must be addressed. In the Liability Judgment, Schmidt was found to be a credible witness. Further, the advice he received from … Dunn, that Schmidt was entitled to pursue the course he did, was acknowledged. But whatever views Schmidt may have held about his ‘entitlements’ given his predicament in October and November 2013 (including the protracted negotiations and the venture having suffered significant losses to that time), that did not warrant Schmidt taking matters into his own hands and flagrantly breaching his director’s duties. A similar observation is made with respect to [Otway’s] fiduciary duties. In this context, no submission was made that the court ought to grant relief pursuant to s 1318 of the Corporations Act 2001 (Cth) on the basis that Schmidt ought fairly be excused for his breaches of director’s duties because he had acted honestly and the circumstances of the case warranted it. No such submission could properly have been put.[48]

[48]Quantum Judgment [54] (citations omitted).

It is relevant that, although AHRKalimpa was not incorporated until 27 June 2013, the judge held that this did not mean that after 27 June 2013, the contracts entered into pre-incorporation were not to be treated as being on behalf of AHRKalimpa or that it could not obtain the benefit of those contracts in due course.[49] Accordingly, the judge focussed on the position of AHRKalimpa as the corporate vehicle for the proposed joint venture rather than the position of Kalimpa.
[49]Liability Judgment [150].

Breach of confidence

The judge found that AHRKalimpa held and maintained confidential information and expertise in relation to the livestock import market in Israel, which he defined as the ‘Israel Market Information’. He said that Ruschin, with Bzezinski’s support, spent considerable time acquiring and compiling the Israel Market Information and that this information was, as a compilation, confidential.[50] The judge determined that much of the Israel Market Information was ‘clearly confidential’ — even if some of it could have been discovered in the public domain — and that it had been disclosed to Schmidt in confidence.[51] He held that Schmidt had deployed this information in an unauthorised way by using it to carry on the business of exporting cattle to AHRKalimpa’s existing customers in Israel and had therefore committed a breach of confidence.[52]
[50]Liability Judgment [169], [172].
[51]Liability Judgment [166], [172]–[173], [175], [177], [184], [186], [192], [194], [199]–[200], [202]–[203], [208], [212]–[214], [216], [218].
[52]Liability Judgment [222].

When considering whether Schmidt and Otway had engaged in a breach of confidence, the judge made the following factual findings about the nature of AHRKalimpa’s business and its continuation by Otway after 25 November 2013:

There is no issue that Otway … has continued to export livestock to Israel after December 2013, with a total of 17 voyages now completed. This was a continuation of AHRKalimpa’s business. Clearly, the [applicants] have used the contacts provided and relationships made in continuing to conduct the business of the joint venture. In doing so, they have unfairly taken advantage of the confidential information conveyed to Schmidt, first pursuant to the Elders Agreement, and later (to Schmidt and Otway …) as part of the joint venture arrangements. Further, the Israel Marking Information was conveyed to Schmidt (and Otway …) pursuant to those arrangements, and not for any other purpose.
… The [respondents] have plainly suffered detriment by reason of the [applicants’] use of the Israel Market Information. This flows from the fact that the [applicants] have diverted the business of AHRKalimpa to Otway … Further, given the nature of the Israeli market, the entry of Otway … into the market has fundamentally altered, if not substantially negated, the Business Opportunity AHRKalimpa once had to provide an attractive alternative to the incumbent supplier.
…
Further, not only did AHRKalimpa and Kalimpa not authorise the use of their confidential information for extraneous purposes, AHRKalimpa’s directors, including Schmidt, had unanimously resolved that the business would be wound up if agreement could not be reached, with ‘mutual non-compete undertakings’. In substance, Schmidt undertook not to do what he subsequently directly facilitated Otway … to do, namely to carry on the existing business of exporting cattle to Israel; and, in particular, to AHRKalimpa’s existing customers. Absent such an agreement by directors’ resolution (which substantially reflected what had been previously agreed as recorded in the [PowerPoint presentation]), Schmidt may well have been required to withdraw from exporting cattle to Israel for a period of time in any event.[53]

Schmidt’s breach of fiduciary duties and duties as a director of AHRKalimpa

[53]Liability Judgment [219]–[220], [222] (citations omitted, emphasis added). The judge’s definition of the term ‘Business Opportunity’ is set out at [123] below.

The judge stated that from 27 June 2013 until 25 November 2013, as a director of AHRKalimpa, Schmidt owed the following duties:

(a)A duty to act in good faith in the best interests of AHRKalimpa and for a proper purpose pursuant to s 181(1) of the Corporations Act 2001 (Cth).
(b)A duty not to improperly use his position as a director of AHRKalimpa to gain an advantage for himself or someone else, or to cause detriment to AHRKalimpa pursuant to s 182(1) of the Corporations Act, including by using information obtained, or knowledge or opportunity derived, from that position.
(c)A fiduciary duty not to make or pursue a gain in circumstances where there was a conflict, or a real possibility of conflict, between his interests — or those of related parties — and those of AHRKalimpa.[54]

[54]Liability Judgment [225].

The judge held that, ‘whilst he remained a director [of AHRKalimpa], Schmidt did not seek to, nor did he, confer an advantage on himself or Otway … other than to the extent that an advantage was derived from the fact that he was a director and shareholder … of AHRKalimpa.’[55] He also found that Schmidt did not misuse any Israel Market Information on or before the time he resigned as a director of AHRKalimpa.[56] The judge said that, with respect to Voyages 1–4, at the time the contracts for those voyages were entered into, Schmidt was not planning or intending to divert any profits that would have flowed to AHRKalimpa.[57] He found that any benefit derived from Voyages 3 and 4 from the two contracts between AHRKalimpa and Dabach was a benefit to which AHRKalimpa was entitled as part of the business it was conducting.[58]
[55]Liability Judgment [231].
[56]Liability Judgment [240].
[57]Liability Judgment [230]–[233]. As stated at [54] above, the sales contracts for Voyages 3 and 4 were executed in September and October 2013.
[58]Liability Judgment [229].

However, the judge went on to state that from on or about 18 November 2013, Schmidt had formed the view that he would not agree to the conditions sought to be imposed by Ruschin and Bzezinski concerning restraint of trade and that he intended to plan for the export of live cattle to Israel regardless of whether or not a joint venture agreement was concluded. The judge found that for a period of at least one week while Schmidt was still a director of AHRKalimpa, he was deliberately planning to divert revenue, and ultimately profits, from AHRKalimpa to himself or his associated entities from the export of live cattle to Israel, contrary to the interests of AHRKalimpa.[59]
[59]Liability Judgment [235].

The judge stated that, in early November 2013, Schmidt took steps ‘behind his fellow directors’ backs’ which made it possible for him to divert revenue and profits from AHRKalimpa to himself or his associated entities.[60] He found that it was inconceivable that, when Schmidt took those steps, he did not have an eye to a future in which Otway conducted the cattle exporting business to the exclusion of AHRKalimpa and was not conscious that those steps would facilitate this.[61] Those steps included sending the funding proposal to HSBC[62] and actual purchase details to Tnuva.[63] The judge said that Schmidt’s conduct in relation to the funding proposal materially misrepresented the background of the export business and provided for Otway alone to engage in future trading.[64] He said that Schmidt’s disclosure of confidential information to Tnuva was a ‘critical change in approach which fundamentally altered AHRKalimpa’s premise for negotiations with a major customer’.[65]
[60]Liability Judgment [236].
[61]Liability Judgment [237].
[62]See [60] above.
[63]See [56] above.
[64]Liability Judgment [237].
[65]Liability Judgment [237].

The judge found that from at least 19 November 2013, Schmidt put steps in place by which he, through Otway, could take the business that was then being conducted by AHRKalimpa.[66] The judge also found that Schmidt could not have done so without the information that Ruschin and Bzezinski had provided to him through Kalimpa. The judge stated that Schmidt’s conduct was inconsistent with him acting in good faith in the best interests of AHRKalimpa. The conduct was found to be for an improper purpose and constituted an improper use of Schmidt’s position as a director of AHRKalimpa because it sought to benefit Schmidt and those associated with Otway or to cause detriment to AHRKalimpa. The judge said that the conduct was also a clear breach of Schmidt’s fiduciary duties owed to AHRKalimpa.[67]
[66]Liability Judgment [242].
[67]Liability Judgment [243], [245].

The judge held that Schmidt, as a director, was acting secretly in planning to operate the business upon his resignation as a director and shareholder which would have the likely, if not inevitable, consequence of AHRKalimpa being unable to conduct a cattle export business in the foreseeable future and that this could only be viewed as a clear breach of his director’s duties.[68]
[68]Liability Judgment [244].

Accordingly, the judge found that Schmidt’s conduct had breached all of the duties referred to at [109] above.[69] He said that this finding was not dependent on whether the parties entered into an ongoing joint venture agreement beyond Voyage 4 or whether the Israel Market Information was confidential or had been misused. That was because, by reason of his position as a director, Schmidt was not permitted to use information and know-how obtained as a director, or obtained in anticipation of becoming a director, for his own benefit to the exclusion of AHRKalimpa.[70]
[69]Liability Judgment [233]–[239].
[70]Liability Judgment [246].

In relation to events that occurred following Schmidt’s resignation as a director of AHRKalimpa on 25 November 2013, the judge rejected the applicants’ argument that all voyages after Voyage 4 were conducted by Otway in its own right, without any obligation to account to AHRKalimpa.[71]
[71]Liability Judgment [248]–[252].

The judge also rejected their argument that the delay between 25 November 2013 and October 2014 — when the first new voyage after Schmidt’s resignation occurred — evidenced a lack of connection with AHRKalimpa. The judge held that the delay resulted from factors other than Schmidt desisting with his involvement in the business, including the unavailability of Minerva’s vessel (Pearl of Para) and the seasonal nature of the Israeli import market.[72] The judge concluded:

The flexibility of the remedies for a breach of fiduciary duty committed in relation to the establishment of an ongoing business is exemplified by the following statement by Gageler J in Ancient Order which was made in the context of a claim for an account of profits:

Where the benefit or gain which has in fact been obtained by the errant fiduciary … is the establishment of an ongoing business, the outcome might accordingly be that the fiduciary … is liable to account ‘for the entire business and its profits, due allowance being made for the time, energy, skill and financial contribution that [the fiduciary …] has expended or made’. Depending on the circumstances, the outcome in the alternative might be that some lesser measure, more favourable to the fiduciary … is judged better to reflect the equities of the case.[174]

[174]Ancient Order (2018) 265 CLR 1, 40 [96] (citations omitted).

Judge’s reasons

As we have already stated, prior to publishing the Quantum Judgment, the judge published the Security for Costs Judgment in which he refused to release the security that the respondents had provided for the applicants’ costs of the trial. The judge said that it was premature to release the security because there was a real possibility that the losses suffered in respect of Voyages 1 and 2 might outweigh any compensation to which the respondents might be entitled in respect of subsequent voyages. Paragraphs 22 and 23 of the Security for Costs Judgment are set out below because they are relevant to ground 7:

In the circumstances, while I express no view as to whether it is likely, and put it no higher than a real possibility, it may be that the significant losses suffered with respect to Voyages 1 and 2 outweigh any entitlement of the [respondents] to compensation with respect to the applicable subsequent voyages.
As such, it is not yet apparent whether or not the [respondents] will ultimately receive substantive or nominal damages. Further, the Liability Judgment does not foreshadow what order the court might ultimately make with respect to costs. In these circumstances, there is still a real question as to what the appropriate costs order will be.[175]

[175]Security for Costs Judgment [22]–[23].

Before the judge, the applicants submitted that the respondents should only be compensated for any loss of opportunity they may have suffered by reason of the wrongful conduct of the applicants. According to them, that opportunity was not to be measured by reference to the value of AHRKalimpa’s business or the applicants’ gain in conducting the business after Schmidt resigned as a director on 25 November 2013. The respondents submitted that they had lost a business of value and not a mere opportunity and that the applicants’ breaches were continuing in circumstances where there had been no attempt to compensate the respondents for the value of the business and the misappropriated assets.

The judge found that the conduct of Schmidt and Otway in misappropriating AHRKalimpa’s business, including depriving AHRKalimpa of its books and records, caused AHRKalimpa to suffer a loss and that the most appropriate characterisation of the loss was as the loss of the business itself.[176] He stated that not only did Schmidt and Otway continue the ‘Business’, but they ‘treated it as their own without paying any valuable consideration’.[177] The judge defined the term ‘Business’ as AHRKalimpa’s business as an exporter of cattle which it conducted as a joint venture vehicle up until the time when Schmidt resigned as a director.[178]
[176]Quantum Judgment [45].
[177]Quantum Judgment [40].
[178]Quantum Judgment [6].

The judge rejected the applicants’ contention that the respondents’ loss ought to be assessed on the basis of a loss of opportunity to engage in a livestock export business after 25 November 2013. This was because, due to the applicants’ conduct, the respondents’ ability to take advantage of that opportunity ‘never really crystallised in late 2013’.[179] He went on to say:

Further, to adopt [the lost opportunity] approach would be contrary to the facts as found. The opportunity that would have existed if the breaches of duty had not occurred would have been to seek other possible co-venturers in circumstances where neither Schmidt nor Otway … would be competing in the short term. In particular, to adopt the lost opportunity approach would be effectively to ignore the fact that the Business continued uninterrupted because of Schmidt’s and [Otway’s] conduct.[180]

[179]Quantum Judgment [47].

[180]Quantum Judgment [47].

The judge said that, although he had found that there was no binding joint venture agreement between the parties which required Schmidt to remain involved in the joint venture beyond Voyage 4, Schmidt was not free to treat the business as his own or use confidential information that he had obtained as an employee of Elders (and continued to use as a joint venturer).[181]
[181]Quantum Judgment [41].

The judge stated that Schmidt had ‘flagrantly’ breached his directors’ duties by taking matters into his own hands and a similar observation was made with respect to Otway.[182] The judge said that upon his resignation as a director of AHRKalimpa, Schmidt should have refrained from conducting the business of exporting live cattle to Israel:

[U]pon his resignation as a director of AHRKalimpa (whether or not Schmidt had engaged in breaches of duties before that time), if Schmidt had acted in good conscience and consistent with what had been resolved by the board, he would have refrained from conducting the Business, including treating existing prospective shipments as his, or [Otway’s], own. As the [applicants’] submissions properly acknowledged, it ‘was contemplated by the parties there would be a two-year pause if relations came to an end’. Moreover, the board resolution on 16 August 2013 made it plain to Schmidt that, unlike the [respondents’] interests, he would not be free to export livestock into Israel, or to pursue such a business, immediately upon the joint venturers failing to agree upon the business model.
Further, and in any event, no possible ability of Schmidt in the future to set up in competition with AHRKalimpa, by reason of the non-existence of an ongoing joint venture agreement, included the ability to break into the Premises and misappropriate the books and records of AHRKalimpa. … This demonstrably wrongful conduct not only allowed Schmidt, and [Otway], to continue the Business, but also deprived AHRKalimpa of any real prospect, at least in the short term, of engaging in the Business.[183]

[182]Quantum Judgment [54].

[183]Quantum Judgment [42]–[43] (citations omitted).

The judge also stated that he could not be satisfied that, if Schmidt had been advised by Dunn in late 2013 that he could not lawfully continue the business with Otway and to the exclusion of AHRKalimpa, he would not have stayed as a director of AHRKalimpa in order to recoup the losses incurred up until that time.[184]
[184]Quantum Judgment [163].

As to when the loss of business was to be assessed, the judge rejected the applicants’ contention that the business should be valued as at either 25 November 2013 (when the joint venture ended) or 25 November 2015 (when the two year restraint that was contemplated would have ended).[185] He stated that as a general principle, equitable compensation is directed at restoring the claimant to the position in which he or she would have been had the breach of duty not occurred and that in order to achieve this, the assessment of loss was to be made at the time of judgment, as opposed to the date of the breach, using hindsight to ensure that the claimant is put in the presently correct position.[186]
[185]Quantum Judgment [48].
[186]Quantum Judgment [28].

Applying the above principle, the judge held that, in order to compensate the respondents for the applicants’ ongoing breach, the valuation must occur as close as practicable to the date of the trial.[187] He relied on his findings that the business of AHRKalimpa continued to be conducted successfully by the respondents by reason of their breaches of duty and that Schmidt ‘ensured the success of the transition arrangements by putting things in place before he resigned’.[188] He said that, in these circumstances, it would be inappropriate to limit the value of the business by reference to some earlier point in time.[189] He selected 31 January 2018 as the proxy date of the trial for the purpose of assessing the respondents’ loss.[190]
[187]Quantum Judgment [45].
[188]Quantum Judgment [46], [48].
[189]Quantum Judgment [48].
[190]Quantum Judgment [16] n 32.

The judge went on to analyse the evidence before the Court and make an assessment of the value of AHRKalimpa’s live cattle export business. For present purposes, it is not necessary to discuss in detail the methodology the judge adopted in valuing the business. It suffices to say that the judge adopted the ‘capitalisation of future maintainable earnings’ methodology and that this methodology included the following elements or steps:

(a)Future maintainable earnings calculated by reference to expected earnings before interest, tax, superannuation and amortisation (‘EBITDA’).
(b)Selection of a base year to calculate future maintainable earnings, being an average of the EBITDA of the business over a select number of voyages.
(c)A capitalisation multiple which took into account various growth and risk factors to give a present value of the business.[191]
(d)The base year figure that the judge adopted was the average EBITDA for Voyages 17 to 20 because he said that they represented the most recent voyages up to 31 January 2018 and provided the best available financial information for the purposes of obtaining the base year figure.[192] The parties’ experts had also both accepted Voyages 17 to 20 as the basis for calculating a base year.[193]
(e)The capitalisation multiple that the judge adopted took into account various risk factors, including the risks associated generally with the live export industry and AHRKalimpa’s business specifically.

[191]Quantum Judgment [59]–[60]

[192]Quantum Judgment [69]–[71].

[193]Quantum Judgment [69].

The judge assessed the base year figure (for a year involving four voyages) at $1,801,820 and calculated the capitalisation multiple at 2.31.[194] Accordingly, he assessed the capital value of the business at $4,162,204 and the equitable compensation to be awarded as a two thirds share of this, namely, $2,774,803.[195] This compensation was payable ‘on the basis that AHRKalimpa relinquish any ownership in the Business’.[196]
[194]Quantum Judgment [150]–[151].
[195]Quantum Judgment [151].
[196]Quantum Judgment [7].

After ascertaining the amount of equitable compensation that represented two thirds of the value of the business, the judge went on to consider the amount of compensation that should be awarded to the respondents for being excluded from the business. He decided that this should be in the form of an award of interest from the date that the proceeding was commenced rather than an apportionment of the net profits up until 31 January 2018.[197]
[197]Quantum Judgment [152], [159].

The judge said that this was for a number of reasons, including that as the applicants had not disclosed the results of Voyage 16,[198] it was not possible for him to conclusively determine the true net profit position of the business for all the relevant years in question.[199]
[198]Voyage 16 did not proceed and the cattle were sold domestically. See Quantum Judgment n 116.
[199]Quantum Judgment [155].

In addition, the judge relevantly gave the following reasons for not taking into account the losses suffered for Voyages 1 and 2 in his assessment of equitable compensation:

For completeness, the [applicants] submitted that the [respondents] were required to account for the losses for Voyages 1 and 2 as part of an accounting exercise for Voyages 1 to 4 while the joint venture remained on foot. In closing submissions, they submitted this had been found in the Liability Judgment. When asked to identify such findings, the [applicants] were not able to do so. In any event, nothing said in the Liability Judgment or in [the Security for Costs Judgment] amounted to any finding or concluded view by the court as to the appropriate approach to compensation (see esp, Liability Judgment, [275]), noting that the [respondents] did not make their election to seek equitable compensation until shortly before 16 February 2018. Plainly, no such findings could be made until a consideration of all the relevant facts and circumstances, including those the subject of the quantum hearing. Further, when the [applicants] were asked for any authority that supported the proposition that the [respondents] would have to account for any losses suffered during Voyages 1 to 4 when there was a joint venture on foot, none was proffered.[200]

[200]Quantum Judgment n 178.

The judge ordered that the applicants pay to AHRKalimpa equitable compensation in the sum of $2,774,803 together with interest of $899,606.34.[201] He dismissed Kalimpa’s claim against the applicants on the basis that it was not necessary for him to address what part of the judgment represented any entitlement of Kalimpa. He gave the following reasons for this approach:

To the extent Kalimpa has a right to the proceeds of the judgment, that is a matter to be resolved between the [respondents]. The fact that Kalimpa may be entitled to proceeds of the judgment is not relevant to the issues as between AHRKalimpa and the [applicants].[202]

[201]The basis upon which the judge awarded interest is set out in the Interest Judgment.

[202]Quantum Judgment [166]. In n 196, the judge recorded that the Court had been informed by the respondents’ counsel that compensation was sought directly by AHRKalimpa rather than Kalimpa.

Notwithstanding his finding that the respondents suffered a loss of the business and should be compensated for that loss, the judge also made findings in relation to the applicants’ submission that there had been a loss of opportunity. He concluded that if a loss of opportunity approach had been adopted, the compensation would still have been substantial.[203]
[203]Quantum Judgment [162].

Grounds of appeal

The applicants sought to rely on the following proposed grounds of appeal in relation to the Quantum Judgment:

Ground 5The trial judge erred in finding that the appropriate characterisation of the respondents’ loss was the loss of AHRKalimpa’s business: [Quantum Judgment] [45].
The trial judge should have found that what the respondents lost was the opportunity to export cattle to Israel using the information and relationships stated at [Liability Judgment] [159] and [221] free of any competition from the applicants for a period of two years from 25 November 2013.

Ground 6Alternatively to ground 5, the trial judge erred in finding that the amount of the respondents’ loss was two-thirds of the value of the business as at 31 January 2018.
The trial judge should have valued the business on the date of the loss, which was November 2013.

Ground 7The trial judge erred in not deducting from any amount of compensation payable to the respondents the amount of losses incurred in respect of voyages 1 to 4: [Quantum Judgment] [156] footnote 178.
The losses incurred in the conduct of voyages 1 to 4 carried out on behalf of the intended joint venture should have been deducted from the amount of compensation as stated in [the Security for Costs Judgment] at [22]–[23].

Ground 5: Characterisation of respondents’ loss as loss of business
Parties’ submissions on ground 5

The applicants submitted that the judge should have found that what the respondents lost was the opportunity to export cattle to Israel, using the information and relationships that Ruschin, Bzezinski and Kalimpa had accumulated over a number of years,[204] free from competition for a period of two years from 25 November 2013. They argued that the respondents had never established an ongoing business which was diverted by the applicants. Rather, according to the applicants, the respondents had an opportunity to establish an ongoing business, which was contingent upon the matters set out at [152] above being satisfied. According to the applicants, the appropriate remedy for the diversion of a business opportunity is equitable compensation for the loss of the value of that opportunity.
[204]See [125] above.

According to the applicants, the judge’s failure to precisely define AHRKalimpa’s business concealed the limits and contingencies inherent in the scope of the parties’ proposed joint venture and left their effect and value unexamined in the context of the value of the respondents’ loss. In particular, so it was said, the respondents were required to demonstrate that, taking into account those limits and contingencies, a valuable opportunity had been lost.

The applicants contended that the opportunity was contemplated to be of a limited duration, namely for a five year period with a two year restraint, and that it was accordingly wrong for the judge to award a remedy that was calculated by reference to the entire business valued in perpetuity. The applicants argued that the relief awarded by the judge placed the respondents in a better position than if they had succeeded on their claim that a concluded joint venture agreement for a five year term with a two year restraint had been reached.

AHRKalimpa submitted that the applicants’ contention that what the respondents lost was a mere opportunity is incorrect in fact and law. It argued that the respondents lost more than a mere opportunity as the applicants misappropriated their entire ongoing business, including their customers, records and assets, which excluded them from the Israeli market. According to AHRKalimpa, the respondents’ loss and the applicants’ gain would not have occurred but for the applicants’ misconduct. It relied on the judge’s finding in that regard.[205]
[205]See [193] above.

AHRKalimpa contended that the applicants had the onus of establishing that the relief sought would be inequitable and that they called no evidence to demonstrate that the value of the business and its profits were generated by any client or business other than those the applicants misappropriated in 2013.[206]
[206]AHRKalimpa relied on Ancient Order (2018) 265 CLR 1, 16–18 [17]–[22]; [2018] HCA 43.

As to the applicants’ contention that the respondents’ loss was of a limited duration, AHRKalimpa submitted that a court should not speculate against the innocent party as to what course it would have taken if there had been no breach, or assume that something might have occurred when in fact it did not. AHRKalimpa noted the judge’s statement that the joint venture business had a proven ability to successfully export cattle to major Israeli importers and was forecasting future voyages and cash flows accordingly. AHRKalimpa contended that had the parties all observed their duties, the relationship may have lasted longer than the five years contemplated. They relied on the judge’s statement that he could not be satisfied that had Schmidt been advised in late 2013 that he could not lawfully — and to the exclusion of AHRKalimpa — continue the business, he would not have continued as a director of AHRKalimpa.[207]
[207]See [196] above.

AHRKalimpa contended that, in any event, the judge found that even if the loss of opportunity approach were adopted, the compensation would have still been substantial.[208]
[208]See [205] above.

Decision on ground 5

There is some force in the applicants’ contentions in relation to ground 5. The respondents were negotiating with the applicants for a five year joint venture agreement for the export of live cattle to Israel, with the protection of a two year restraint of trade clause upon termination of the agreement. On this basis, it might be said that the loss the respondents suffered as a result of the established breaches of fiduciary duty was the loss of the opportunity to export live cattle to Israel free of competition from the applicants for a two year period commencing on 25 November 2013.

Additionally, there may be some reason to question the judge’s analysis as to whether the observations that were made in Ancient Order[209] about the onus of proof in the context of an account of profits are equally applicable to equitable compensation.[210]
[209]See [188] above.
[210]See Quantum Judgment [33]. AHRKalimpa’s submission summarised at [211] above is premised on the observations in Ancient Order being equally applicable to equitable compensation.

However, a close examination of the evidence before the judge inexorably leads to the conclusion that the approach for which the applicants contended would involve a mischaracterisation of the loss suffered by the respondents and fail to adequately compensate them. That is because, as found by the judge, although the parties did not enter into a written joint venture agreement as at 25 November 2013, they had established a business as at that date which the applicants misappropriated. It was not a prospective business which the respondents were prevented from establishing by the applicants’ breaches of fiduciary duty, but an existing business with key customers in a new market that had been introduced by Ruschin and Bzezinski.

As discussed under ground 1, Schmidt’s breaches of fiduciary duty involved taking over AHRKalimpa’s business, without paying any consideration, following his resignation on 25 November 2013. He did so by: misappropriating AHRKalimpa’s books and records; assuming control over AHRKalimpa’s stock in trade (the live cattle on route to Israel under Voyage 3) and choses in action (the contracts for Voyages 3 and 4); and using AHRKalimpa’s confidential information in entering into contracts for future voyages with one of AHRKalimpa’s key customers. It follows that the applicants’ breaches of fiduciary duty deprived AHRKalimpa of more than an opportunity to conduct a business having particular attributes — they deprived it of an existing business.

The fact that the applicants’ breaches of fiduciary duty involved the misappropriation of AHRKalimpa’s books and records, stock in trade and choses in action and the taking over of its customers and business immediately after 25 November 2013, is of fundamental importance to the proper characterisation and assessment of AHRKalimpa’s loss. If equitable compensation were assessed on the basis of loss of opportunity, AHRKalimpa would not be placed in the position in which it would have been if the breaches of fiduciary duty had not taken place. That is because, as found by the judge, the applicants’ breaches deprived AHRKalimpa of any real prospect of engaging in the business of exporting live cattle to Israel.[211]
[211]Quantum Judgment [43]. See [194] above.

Thus, as the applicants’ breaches nullified AHRKalimpa’s opportunity to conduct the business and deprived it of any real value, it would be inappropriate to assess equitable compensation by reference to the value of the lost opportunity.

Furthermore, as discussed under ground 6, the judge was correct to value the misappropriated business as at 31 January 2018, with the full benefit of hindsight. Accordingly, rather than speculating on what may have happened to the business, the judge was entitled to take into account the durability of the business and its actual performance. In those circumstances, the proposed five year term of the joint venture and the two year non-compete period that the parties contemplated — but did not agree — did not constrain the judge in assessing the respondents’ loss.

Our summary of the legal principles at [181]–[189] above indicates that those principles are sufficiently flexible to enable the court to fashion its relief in order to achieve practical justice in the circumstances of each case. Those principles also enable the Court to have regard to the seriousness of the fiduciary’s breaches of duty and the substance of the loss suffered by the beneficiary of the duty in determining the relief to be granted. In the present case, the judge was entitled to take into account his finding that Schmidt’s breaches were flagrant. The judge was also entitled to take into account the fact that it was those flagrant breaches that enabled the applicants to seamlessly conduct AHRKalimpa’s business as if it were exclusively their own after 25 November 2013.

It follows that the judge correctly characterised AHRKalimpa’s loss as the loss of the business and that he did not err in awarding it equitable compensation on the basis of two thirds of the capital value of that business.

Accordingly, ground 5 must be rejected.

Ground 6: Appropriate date for valuation of business

It will be recalled that ground 6 was raised as an alternative to ground 5 and was in the following terms:

Alternatively to ground 5, the trial judge erred in finding that the amount of the respondents’ loss was two-thirds of the value of the business as at 31 January 2018.
The trial judge should have valued the business on the date of the loss, which was November 2013.

Parties’ submissions

The applicants submitted that the judge erred in valuing the respondents’ loss as at 31 January 2018 — as opposed to 25 November 2013 — and basing this upon his finding that the business continued to be conducted successfully by reason of the breaches of duty.[212] The applicants argued that if the judge was correct in finding that the value of the respondents’ loss was the value of the business, valuing it as at 31 January 2018 failed to take into account the risks and contingencies that the business faced in November 2013. They contended that the judge’s assessment inappropriately took as certain the prospects of the business being discussed by the parties at that time. According to the applicants, the appropriate valuation of the business as at 25 November 2013 was $868,689.
[212]See [197] above.

AHRKalimpa submitted that there was no error in the judge using 31 January 2018 as the date at which to value the respondents’ loss.[213] According to it, the use of that date was consistent with principle,[214] and the applicants did not demonstrate sufficient grounds for departing from the ordinary rule.
[213]See [197] above.
[214]See [184] above.

AHRKalimpa contended that the judge appropriately took into account both the successful operation of the business arising from the applicants’ breaches of their fiduciary duties and the nature of that conduct. It argued that limiting the value of the respondents’ loss by reference to a point in time earlier than 31 January 2018 would have resulted in the applicants receiving a windfall gain as they ‘treated [AHRKalimpa’s business] as their own without paying any valuable consideration’.[215] As to the nature of the breaches, it submitted that the judge’s statements that Schmidt ‘flagrantly’[216] breached his directors’ duties and that entering the Premises and removing the business records of AHRKalimpa was ‘demonstrably wrongful conduct’[217] were relevant to fashioning the relief.
[215]See [192] above.
[216]See [194] above.
[217]See [194] above.

In relation to the applicants’ contention that the judge failed to take into account the risks and contingencies that the business faced in 2013, AHRKalimpa argued that this impermissibly speculated about what course would have been taken by the respondents had there been no breach of duty. It also submitted that risk was a factor taken into account in applying the methodology that the judge used to value the business.

Decision on ground 6

In our opinion, ground 6 is not made out.

As stated at [184] above, the normal rule is that equitable compensation is assessed at the time of trial. There is nothing in the circumstances of the present case that warrants departure from the normal rule. On the contrary, the following factors render it appropriate to apply the normal rule:

(a)The applicants misappropriated AHRKalimpa’s business just as it was starting to be profitable. To value the business as at 25 November 2013 — or even 25 November 2015 — would enable the applicants to retain the bulk of the value of the business and thus unfairly benefit from their breaches.
(b)As discussed under ground 1, Schmidt’s fiduciary duties — and his breaches of those duties — continued beyond 25 November 2013. Accordingly, there is no basis for adopting that date as the valuation date. The best way to hold Schmidt fully accountable for his breaches of fiduciary duties was to assess equitable compensation by reference to the practical consequences of the breaches as at the time of trial.
(c)As Schmidt’s breaches of his fiduciary duties were flagrant — including the ‘demonstrably wrongful conduct’[218] of misappropriating AHRKalimpa’s books and records — the date of trial was a more appropriate valuation date than the earlier dates of 25 November 2013 and 25 November 2015.
(d)The judge’s methodology for calculating the value of the business took into account the risks associated with the business.[219]

[218]See [194] above.

[219]See [199] above.

There is nothing in the cases on which the applicants relied, Mordecai v Mordecai[220] and Ferrari Investment (Townsville) Pty Ltd (in liq) v Ferrari,[221] that required the judge to value the business as at a date earlier than 31 January 2018. The judge correctly distinguished those cases.[222]
[220](1988) 12 NSWLR 58.
[221][2000] 2 Qd R 359; [1999] QCA 230.
[222]See Quantum Judgment [50]–[52].

Ground 7: Deduction of losses incurred in respect of Voyages 1–4

It will be recalled that ground 7 is in the following terms:

The trial judge erred in not deducting from any amount of compensation payable to the respondents the amount of losses incurred in respect of voyages 1 to 4: [Quantum Judgment] [156] footnote 178.
The losses incurred in the conduct of voyages 1 to 4 carried out on behalf of the intended joint venture should have been deducted from the amount of compensation as stated in the [Security for Costs Judgment] at [22]–[23].

Parties’ submissions on ground 7

The applicants submitted that the loss incurred in the conduct of Voyages 1–4, which the judge found were carried out on behalf of the intended joint venture (AHRKalimpa) and were not undertaken in breach of duty,[223] should have been deducted from the amount of compensation awarded to the respondents. According to the applicants, as the judge sought to compensate the respondents for the value of the business which he held had been misappropriated, the valuation of the business should have taken into account its initial losses. The applicants submitted that, as the judge did not take into account the initial losses, they were left to bear the entire burden of those losses, even though the voyages in question had been undertaken for the benefit of all parties who had an interest in the business.
[223]See [71], [110] above.

The applicants submitted that, as the parties had conducted the business with a view to shared profit, the principle that those who seek equity must do equity[224] meant that the respondents should be required to bear their share of the common losses.
[224]The applicants referred to Bofinger v Kingsway Group Ltd (2009) 239 CLR 269, 294–5 [67]; [2009] HCA 44.

In oral submissions, the applicants argued that the evidence did not establish that Otway’s agreement with Minerva in relation to Voyages 1–4 required Minerva to share any part of the losses for those voyages.

The applicants also argued that it was inconsistent with the Security for Costs Judgment[225] for the judge to have failed to take into account the losses incurred in undertaking Voyages 1–4.
[225]See [190] above.

AHRKalimpa submitted that the methodology that the judge used to value AHRKalimpa’s business was not challenged by the applicants and that any question of losses from Voyages 1–4 are irrelevant to that analysis.[226] It further argued that to artificially deduct those losses from the compensation owing to the respondents would ignore: the subsequent years during which profits have been made; adjustments made by the judge in the applicants’ favour (such as annual directors’ salaries); and other benefits that the applicants obtained from the business (such as interest free loans and motor vehicles). According to AHRKalimpa, as Voyages 1–4 were conducted on the basis that Minerva would share 50 per cent of the profits and losses, the applicants have failed to demonstrate what losses they would have actually borne in respect of those voyages.
[226]The respondents cited [155] n 178 of the Quantum Judgment. See [202]–[203] above.

Decision on ground 7

In our opinion, ground 7 must be rejected.

Although ground 7 refers to losses incurred in respect of Voyages 1–4, the evidence established that Voyages 3 and 4, considered in isolation, were profitable. Voyages 1 and 2 made losses which were substantially offset against the profits made on Voyages 3 and 4.

The applicants’ reliance on the judge’s observations in the Security for Costs Judgment[227] is misconceived. That is because those observations do not constitute a finding by the judge that the losses incurred in Voyages 1–4 must be deducted from any assessment of loss. The judge merely observed that, as the quantum hearing had not yet taken place and no determination had been made on what, if anything, was payable to the respondents, it would be premature for him to order that the security which the respondents had provided for the applicants’ costs be released to the respondents.
[227]See [190], [236] above.

Having decided to assess the equitable compensation to which the respondents were entitled on the basis of the value of the business, the judge determined that value by reference to the expert evidence that the parties had adduced. As appears from [199] above, the methodology the judge adopted to value the business involved adjustments to account for various growth and risk factors, including risks that were specific to AHRKalimpa’s business. The losses incurred for Voyages 1 and 2 formed part of the factual matrix for assessing the growth and risk factors. This conclusion is supported by the judge’s statement that there was ‘no suggestion that those risks were not in existence in 2013 when AHRKalimpa first secured sales in Israel’.[228]
[228]Quantum Judgment [120].

In our opinion, the principles relating to assessment of equitable compensation are sufficiently flexible to support the approach adopted by the judge in the present case. If the judge had deducted the losses incurred in Voyages 1 and 2 as a discrete calculation, he would have been required to bring to account all the benefits — such as the use of motor vehicles and interest free loans — that Schmidt and his family enjoyed in the course of conducting the business.[229] As insufficient evidence to enable the judge to quantify those benefits was adduced by the applicants, the judge was not able to bring those benefits to account with an acceptable degree of accuracy. Nor was he able to determine whether Minerva bore any part of the losses for Voyages 1 and 2. In these circumstances, the judge was entitled to adopt the approach that he did.
[229]Quantum Judgment n 195.

Conclusion

As some of the proposed grounds of appeal were arguable, leave to appeal will be granted. However, as none of them have been made out, the appeal will be dismissed.

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[2020] VSCA 193

31 July 2020