Steadfast ICT Security Pty Ltd v Peak (No 2)
[2021] ACTSC 319
SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORY
Case Title: | Steadfast ICT Security Pty Ltd v Peak (No 2) |
Citation: | [2021] ACTSC 319 |
Hearing Date: | 15 October 2021 |
DecisionDate: | 17 December 2021 |
Before: | Mossop J |
Decision: | See [80] |
Catchwords: | CONTRACTS – CONTRACT OF EMPLOYMENT – Breach of contract – damages for breach of contract require causation – difficulty in assessing loss not a bar to recovery of damages CORPORATIONS – CIVIL PENALTY PROVISIONS – Where breaches of duties under ss 180, 181, 182 and 183 of the Corporations Act 2001 (Cth) were established against the first, second, third and fifth defendants – declarations of contravention under s 1317E of the Corporations Act – orders for compensation under s 1317H of the Corporations Act EQUITY – REMEDIES – Equitable compensation for breach of fiduciary duty – where account of profits ordered against knowing assistant – open to claim equitable compensation against defaulting fiduciary |
Legislation Cited: | Corporations Act 2001 (Cth), ss 180(1), 181, 182, 183, 1317E, 1317H Court Procedures Act 2004 (ACT), s 5A Court Procedures Rules 2006 (ACT), rr 501, 502 |
Cases Cited: | Adler v Australian Securities and Investments Commission [2003] NSWCA 131; 179 FLR 1 Agricultural Land Management Ltd v Jackson [No 2] [2014] WASC 102; 285 FLR 121 V-Flow Pty Limited v Holyoake Industries (Vic) Pty Limited [2013] FCAFC 16; 296 ALR 418 |
Texts Cited: | JD Heydon, Heydon on Contract (Lawbook, 2019) |
Parties: | Steadfast ICT Security Pty Ltd (Plaintiff) Gareth Peak (First Defendant) Lachlan Watt (Second Defendant) Nenad Stefanovic (Third Defendant) Dreamtime Supply Company Pty Ltd (Fourth Defendant) David Glavonjic (Fifth Defendant) |
Representation: | Counsel E Cox SC with A Munro (Plaintiff) B Buckland (Defendants) |
| Solicitors Mackenzie Workplace Law (Plaintiff) Bradley Allen Love (Defendants) | |
File Number: | SC 333 of 2019 |
MOSSOP J:
Introduction
In my principal judgment, I found the relevant facts and determined that relief should be granted against the fourth defendant: see Steadfast ICT Security Pty Ltd v Peak [2021] ACTSC 199 (Judgment). That relief involved making an order that the fourth defendant, Dreamtime Supply Company Pty Ltd (Dreamtime), account to the plaintiff, Steadfast ICT Security Pty Ltd (Steadfast), in the sum of $1,187,249.64. The parties were then further heard as to additional relief that should be granted.
The plaintiff proposed a series of orders and declarations sought in relation to each of the other defendants. They included declarations, damages for breach of contract, equitable compensation for breach of fiduciary duty and orders for compensation pursuant to s 1317H of the Corporations Act 2001 (Cth).
The defendants accepted that some of the declaratory orders were consistent with the reasons given by the court, submitted that others were too broad and made submissions opposing the granting of pecuniary relief against the defendants.
It is useful first to outline some of the principles applicable to the determination of the discrete issues of the relationship between remedies and causation which arise in relation to the various claims for relief against the remaining defendants.
Principles
Relationship between account of profits and equitable compensation
It is open to claim against one defendant equitable compensation or damages in circumstances where an account of profits has been awarded against another. In Michael Wilson & Partners Limited v Nicholls [2011] HCA 48; 244 CLR 427 (Michael Wilson & Partners), a majority of the High Court rejected the proposition that an order for the taking of accounts against one party precluded orders for equitable compensation against others. The court made clear (at [106]) that, although the liability of a knowing assistant has been described as “accessorial”, it is imposed directly upon the person who knowingly assists in the breach of fiduciary duty. The relief that is awarded against a defaulting fiduciary and a knowing assistant will not necessarily coincide in either nature or quantum. The example given in the judgment is that a claimant may seek compensation from the defaulting fiduciary who made no profit from the default and an account of profits from the knowing assistant who profited from his or her own misconduct. Similarly, if an account of profits were to be sought from both the defaulting fiduciary and the knowing assistant, the two accounts would very likely differ.
In light of the decision in Michael Wilson and Partners, there can be no doubt that the ordering of an account of profits against a knowing assistant is not a bar to the ordering of equitable compensation against a defaulting fiduciary.
Equitable compensation
The principles applicable to the award of equitable compensation for breach of fiduciary duty are stated in Parker, In the matter of Purcom No 34 Pty Limited (In Liq) (No 2) [2010] FCA 624 at [23]:
1.It is a “cardinal principle of equity” that the remedy is “fashioned to fit the nature of the case and the particular facts”: Warman International Limited v Dwyer (1995) 182 CLR 544 at 559; see also Hill v Rose [1990] VR 129 at 143.
2.Where a breach of fiduciary obligation occurs, compensation is available in equity to make good the loss (Nocton v Lord Ashburton [1914] AC 932) and the plaintiff must elect between the remedy of equitable compensation and account of profits: Nocton [1914] AC 932 at 956-957; Warman 182 CLR 544 at 558; R Meagher, D Heydon, M Leeming, Equity: Doctrines & Remedies (4th ed, 2002) at 837.
3.Equitable compensation is assessed at the time of trial, with the full benefit of hindsight and common sense, not at the date of breach: Youyang Pty Limited v Minter Ellison Morris Fletcher (2003) 212 CLR 484 at [35]; Re Dawson (deceased); Union Fidelity Trustee Co Ltd v Perpetual Trustee Co Ltd [1966] 2 NSWR 211 at 216; O’Halloran v RT Thomas & Family Pty Ltd (1998) 45 NSWLR 262 at 273 and 276.
4.The objective of equitable compensation is compensatory – to restore the principal to the position it was in prior to the breaches and to make good any loss caused by the fiduciary’s wrongful conduct: see [75] of the Reasons; Nocton [1914] AC 932 at 952; Re Dawson (deceased) [1966] 2 NSWR 211; O’Halloran 45 NSWLR 262 at 272-273. No element of penalty is involved: R Meagher, D Heydon, M Leeming, Equity: Doctrines & Remedies (4th ed, 2002) at 837-839.
5.Unlike common law damages, equitable compensation is not limited or influenced by common law principles of remoteness of damage, foreseeability or causation: Hill v Rose [1990] VR 129 at 144; Canson Enterprises Ltd v Boughton & Co [1991] 3 SCR 534 at 556; O’Halloran 45 NSWLR 262 at 273.
6.However, there does have to be some causal connection between the breach of fiduciary obligation and the loss for which compensation is recoverable. It is necessary for the plaintiff to establish that the loss would not have occurred but for the breach: O’Halloran 45 NSWLR 262 at 275–6. The necessary enquiry is whether the loss would have happened had there been no breach, not whether the loss was caused by or flowed from the breach: O’Halloran 45 NSWLR 262 at 276–277.
Contractual damages
Damages for breach of contract require the establishment of causation. It may not be enough to establish that the loss would not have occurred but for the breach relied upon. While the breach may be a necessary link in the chain of causes, common sense must be applied and questions of policy may intrude: see Alexander v Cambridge Credit Corporation Ltd (1987) 9 NSWLR 310 (Cambridge Credit). So far as multiple causes are concerned, McHugh J said in Cambridge Credit (at 350-351):
Since the act or omission of a person will only be one of the set of conditions or relations necessary and sufficient to produce the result to which legal liability attaches, a choice has been forced upon the law. It must either abandon causation as a requirement of legal liability or be content to declare that, depending on the circumstances, responsibility for only one of the set of conditions or relations necessary and sufficient to produce a result is enough to attract liability. It has preferred the latter alternative. Hence in the law of contract, it is sufficient that the breach “causally contributed” to the loss: Norton Australia Pty Ltd v Streets Ice Cream Pty Ltd (1968) 120 CLR 635 at 643. However, whether or not a particular act or omission attract legal liability ultimately depends on policy and not logic. Thus the common law is concerned with whether on a particular occasion a particular act or omission contributed to the occurrence of a particular event (causation) and, if so, with whether responsibility should attach to that act or omission (remoteness). In principle, therefore, there is no reason why the legal theory of causation should be concerned with any question other than whether a particular act or condition was one of the conditions or relations necessary to complete the set of conditions which represent the total cause. This is the basis of the “but for” test of causation which is championed by many legal writers and applied in practice by courts and juries. It accords with ordinary habits of thought and speech. People attribute as a cause any condition or relation known to them “but for” which the result would not have occurred. Those who favour the “but for” test as an exclusive test of legal causation urge that a person should be liable for all the consequences of his conduct as long as they are within the scope of reasonable foresight, if the issue is in tort, and within the reasonable contemplation of the parties if the issue is in contract.
…
However, I am of the opinion that, leaving aside the question of the intervention of a new act – the novus actus interveniens, the issue of causation is to be resolved in general by simply applying the “but for” test in a practical commonsense way. I say in general because in the case of damage caused by the simultaneous operation of two separate and independent events each of which alone was sufficient to cause the damage, the “but for” test is plainly inadequate. And there may be other cases where the rationale of the “but for” rule may require a more elaborate formulation to be applied to the facts of those cases. Rules relating to causation and remoteness are to be liberally construed and not applied so rigidly as to cause injustice… The ultimate question is always whether the breach “causally contributed” to the damage.
It is also necessary to establish that the loss was not too remote, that is, it arose in the usual course of things from the breach or was in contemplation of both parties at the time they made the contract. It therefore requires more than is required for equitable compensation.
In relation to assessment of damages, provided there is evidence that the plaintiff has lost something of value, difficulty in assessing its worth is not a bar to the recovery of damages in contract. In Fink v Fink (1946) 74 CLR 127, Dixon and McTiernan JJ said (at 143): “Where there has been an actual loss of some sort, the common law does not permit difficulties of estimating the loss in money to defeat the only remedy it provided for breach of contract, an award of damages.” More recent authorities are collated in JD Heydon, Heydon on Contract (Lawbook, 2019) at [26.100].
Relief under s 1317H of the Corporations Act
Section 1317H of the Corporations Act provides, relevantly:
1317H Compensation orders—corporation/scheme civil penalty provisions
Compensation for damage suffered
(1)A Court may order a person to compensate a corporation, … if:
(a)the person has contravened a corporation/scheme civil penalty provision in relation to the corporation … ; and
(b)the damage resulted from the contravention.
The order must specify the amount of the compensation.
Note:An order may be made under this subsection whether or not a declaration of contravention has been made under section 1317E.
Damage includes profits
(2)In determining the damage suffered by the corporation, … for the purposes of making a compensation order, include profits made by any person resulting from the contravention or the offence.
Damage includes diminution of value of scheme property
(3)…
(4)…
(4A)…
Recovery of damage
(5)A compensation order may be enforced as if it were a judgment of the Court.
Section 1317E(1) of the Corporations Act identifies those provisions which constitute civil penalty provisions and the subset of those which constitute corporation/scheme civil penalty provisions. Corporation/scheme civil penalty provisions include sub‑ss 180(1), 181(1) and (2), 182(1) and (2) and 183(1) and (2). Section 1317E(1) of the Corporations Act then imposes an obligation on the court to make a declaration of contravention, where the court is satisfied that a person has contravened a civil penalty provision. Section 1317E(2) identifies what such a declaration must specify.
There is no doubt that s 1317H(2) of the Corporations Act is a thoroughly odd provision. It was described in Grimaldi v Chameleon Mining (No 2) [2012] FCAFC 6; 200 FCR 296 (Grimaldi) at [626] as “a poorly executed drafting contrivance” and in V-Flow Pty Limited v Holyoake Industries (Vic) Pty Limited [2013] FCAFC 16; 296 ALR 418 at [54] as “singularly inelegant”. Remarkably, for something described as a “plain English rewrite”: see Grimaldi at [625], the subsection appears to be missing a word. It clearly should be understood to have the effect that it would if the word “damages” appeared before the word “include” so that it reads “for the purposes of making a compensation order, damages include profits made by any person resulting from the contravention or the offence”.
As is made plain by the text of s 1317H(1) of the Corporations Act, the making of an order is discretionary: Grimaldi at [627]. Where an order is made, the inclusion of profits as damages pursuant to the provision is also discretionary: Grimaldi at [628]-[631].
Section 1317H(1)(b) provides that the damage must have “resulted from” the contravention. The test of causation is that stated in Adler v Australian Securities and Investments Commission [2003] NSWCA 131; 179 FLR 1 at 156 [709], where Giles JA (Mason P and Beazley JA agreeing) concluded:
In my opinion, the words “resulted from” in s 1317H are words by which, in their natural meaning, only the damage which as a matter of fact was caused by the contravention can be the subject of an order for compensation. Like the word “by” in s 82 of the Trade Practices Act 1974 (C’th) (see Marks v GIO Australia Holdings Ltd (1998) 196 CLR 494 at [38]-[42]), they should be given their ordinary meaning of requiring a causal connection between the damage and the contravening conduct, free from the strictures of analogy with equitable claims against fiduciaries.
Compare Agricultural Land Management Ltd v Jackson [No 2] [2014] WASC 102; 285 FLR 121 at [449]-[452].
Mr Peak (first defendant)
Relief sought
The orders sought by the plaintiff against Mr Peak were as follows:
1.Declaration that the first defendant breached clause 3.1 of his contract of employment with the plaintiff in that he failed to faithfully and diligently serve the plaintiff to the best of his ability, failed to act honestly and with care and skill, and failed to act in the best interest of the plaintiff.
2.Declaration that the first defendant breached clause 13 of his contract of employment with the plaintiff in that he failed to keep the plaintiff's confidential information, confidential and used such information for purposes other than in the course of performing his duties as an employee.
3.Declaration that the first defendant breached clauses 18.1 and 18.2 of his contract of employment with the plaintiff in that he knowingly performed services of an IT security consultant or provided IT security services to former clients of the plaintiff and fourth defendant, and knowingly canvassed or endeavoured to entice away from the plaintiff, the clients of the plaintiff, during the period of 24 months following the end of his employment on 9 January 2019.
4.Declaration that the first defendant breached his fiduciary duties owed to the plaintiff in that he failed to faithfully and diligently serve the plaintiff to the best of his ability, failed to act honestly and with care and skill, and failed to act in the best interest of the plaintiff.
5.Declaration that the first defendant breached ss. 180, 181, 182 and 183 of the Corporations Act 2001 Cth.
6.Order that the first defendant is to pay to equitable compensation to the plaintiff in the sum of $1,187,249.64 for breach of fiduciary duties.
7.Further or in the alternative, order that the first defendant is to pay to compensation to the plaintiff in the sum of $1,187,249.64 for breach of the Corporations Act.
Although in the Amended Statement of Claim contractual damages were sought, the final orders formulated by the plaintiff did not seek any judgment for damages for breach of contract.
Findings
The findings of the court in relation to the various causes of action pleaded against Mr Peak are set out at in the Judgment at [267]-[293]. They involved findings of breach of clause 3.1 of his employment contract by reason of the course of conduct engaged in while employed by Steadfast to acquire for Dreamtime the benefit of Steadfast’s business: Judgment at [267]. That course of conduct involved a breach of his fiduciary obligations to Steadfast: Judgment at [286] and his obligations under ss 180, 181, 182 and 183 of the Corporations Act: Judgment at [292]. The course of conduct also involved a breach of clauses 13 and 14 of his employment contract by failing to keep the plaintiff’s confidential information confidential, using it for purposes other than in the course of performing his duties as an employee of the plaintiff and providing confidential information to Mr Glavonjic and Dreamtime: Judgment at [269], [271]. He also breached the restraints in clauses 18.1 and 18.2: Judgment at [281].
Declarations
The defendants accepted that the declarations 1-5 sought in relation to Mr Peak were consistent with the court’s findings.
The declaration in proposed order 5 needs to be more detailed in order to comply with the requirement of s 1317E(2). To comply with s 1317E(2) to a minimal degree, the declaration would need to provide:
Declare that the first defendant breached ss 180, 181, 182 and 183 of the Corporations Act 2001 (Cth) by engaging in a course of conduct between at least 19 October 2018 and 9 January 2019 which was designed to achieve the transfer of the benefit of the plaintiff’s business to the fourth defendant without payment and in doing so:
(a)failed to exercise his powers and discharge his duties with the degree of care and skill that a reasonable person would exercise if such a person occupied his position;
(b)failed to exercise his powers and discharge his duties in good faith in the best interests of the plaintiff and for a proper purpose;
(c)used his position as an employee of the company improperly in order to gain an advantage for himself and the fourth defendant and to cause detriment to the plaintiff;
(d)used information obtained by him as an employee to improperly gain an advantage for himself and the fourth defendant and to cause detriment to the plaintiff.
Equitable compensation
The plaintiff submitted that the losses to Steadfast could be assessed as being the same as the amounts identified in the Judgment at [449]. That was because there was a clear causal link between the diversion of existing Steadfast clients by Mr Peak and the loss of that business. It also submitted that in relation to former clients, they would not have been lost to Steadfast but for Mr Peak’s conduct.
The substance of the submissions made by the defendants was that the court’s judgment assessed the gain made by Dreamtime and not the loss caused by Mr Peak. They therefore submitted that equitable compensation was not available on the profit-based calculation sought by the plaintiff. There was therefore no basis in the evidence or submissions for the court to arrive at a figure for equitable compensation as was sought. The submissions drew a distinction between this case and what, for example, was disclosed in Ancient Order of Foresters in Victoria Friendly Society Ltd v Life Plan Australia Friendly Society Ltd [2018] HCA 43; 265 CLR 1 (Foresters). In that case there was good evidence that the gain made by the appellant corresponded to the loss made by the respondent: see Foresters at annexure A (265 CLR at 76).
I accept that there was not, in this case, clear evidence directed to the quantum of Steadfast’s loss as opposed to Dreamtime’s gain. There was not, in this case, evidence such as that which was available in Foresters that the gain to one party reflected the loss of the other. Nevertheless, given the comprehensive breach of Mr Peak’s fiduciary obligations, the comprehensive nature of his scheme to take the benefit of Steadfast’s business and his successful implementation of that scheme, it is clear that Steadfast suffered a loss as a result of his conduct. The issue is one of quantification. I do not consider that the loss to Steadfast corresponds to the gain to Dreamtime in the form of profits. When considering the loss to Steadfast it is necessary to consider whether, in the absence of Mr Peak’s conduct, Steadfast would have made the same profits that Dreamtime ultimately did. The counterfactual involves substantial uncertainty, having regard to the breakdown in the relationship between Mr Batley and Mr Joy on the one hand, and Mr Peak and Mr Glavonjic on the other. Further, there are uncertainties associated with staff changes more generally and the changeable nature of the market for IT services. However, these uncertainties do not avoid the necessity to make an assessment of damages even if it is necessarily attended with a degree of uncertainty. I assess those losses as being 50 per cent of the amounts identified in the Judgment at [449]. That figure appropriately reflects the centrality of Mr Peak’s breach of duty to the damage to Steadfast’s business and the various uncertainties involved in the counterfactual.
The plaintiff is entitled to equitable compensation from Mr Peak in the sum of $593,624.82.
Section 1317H of the Corporations Act
The plaintiff submitted that the same losses that arose from Mr Peak’s breach of fiduciary duty also arose under the Corporations Act. It submitted that the losses sustained by Steadfast “resulted from” the conduct of Mr Peak because Steadfast would not have suffered any such losses had there been no breach of duty by Mr Peak. It points to the fact that under s 1317H(2), the damage suffered by Steadfast may include profits made by Dreamtime. Therefore, it submitted that the order for compensation under s 1317H should be the figure of $1,187,249.64, being the same amount ordered to be paid by Dreamtime.
The defendants submitted that while it was open to include profits made by a third party in an order under s 1317H, such an order should not be made as it was Dreamtime not Mr Peak which realised the profits. It would therefore involve double compensation to the plaintiff when no order for joint and several discharge of this amount was sought.
The power to make compensation orders under s 1317H of the Corporations Act extends to orders which require a person to compensate a company for damage assessed by reference to a profit made by any person resulting from the contravention. In the circumstances of this case, that means that it is open to make a compensation order requiring Mr Peak to compensate Steadfast for damage assessed by reference to the profit made by Dreamtime if that profit resulted from the contraventions.
Given the comprehensive nature of Mr Peak’s scheme to transfer the benefit of Steadfast’s business to Dreamtime and necessarily, thereby, to damage Steadfast’s business, its successful implementation meant that Steadfast was damaged and Dreamtime profited.
In the absence of s 1317H(2), the assessment of damages caused to Steadfast would not be straightforward as the evidence was not specifically directed to assessing the value of that business prior to Mr Peak embarking on his breaches of statutory duty. However, the capacity to assess damages by reference to profits makes quantification easier. The breaches of statutory duty occurred during the period of Mr Peak’s employment, yet the profits were made by Dreamtime after that employment had concluded. The issue is, therefore, whether it can be said that the profits made by Dreamtime resulted from the contravention. In this case, the comprehensive nature of the scheme and the comprehensive nature of the breaches of Mr Peak’s statutory duty are such that I reach the conclusion that those breaches caused Dreamtime’s profits, notwithstanding that the profits were made after the conclusion of Mr Peak’s employment. That is because the scheme involved taking the whole of the benefit of the existing business and transferring it to the new entity. That the making of profits by Dreamtime involved additional work on Dreamtime’s part does not deny the fact that it was built upon the foundation of Steadfast’s documents, information, business systems and opportunities all taken by Mr Peak in breach of his statutory duty.
The next issue is the question of discretion. Having regard to the centrality of Mr Peak’s role and the gravity of the breaches of his statutory duties, it is appropriate that an order be made to compensate Steadfast and that pursuant to s 1317H(2) of the Corporations Act, the damage includes profits made by Dreamtime assessed in the same manner as summarised in the Judgment at [449]. Any potential for double compensation may be avoided by an order making clear that the plaintiff is not entitled to recover more than $1,187,249.64 from all defendants excluding any amount recoverable for costs.
Therefore, pursuant to s 1317H, the order would be that Mr Peak compensate Steadfast for damage suffered by Steadfast in the sum of $1,187,249.64.
Conclusion in relation to Mr Peak
The most favourable cause of action for the plaintiff is the claim for relief under s 1317H of the Corporations Act. In addition to declaratory relief, there will be an order for compensation under that section in the sum of $1,187,249.64.
Mr Watt (second defendant)
Relief sought
The orders sought by the plaintiff against Mr Watt were as follows
8.Declaration that the second defendant breached clause 3.2 of his contract of employment with the plaintiff in that he failed to act honestly and with care and skill, and failed to conduct himself in a professional and mature manner.
9.Declaration that the second defendant breached his fiduciary duties owed to the plaintiff in that he failed to act honestly and with care and skill, and failed to conduct himself in a professional and mature manner.
10.Order that the second defendant is to pay to equitable compensation to the plaintiff in the sum of $234,521.09 for breach of fiduciary duties.
Findings
The finding in relation to Mr Watt was that he breached clause 3.2 of his employment contract:
(c)On 7 November 2018 Watt sent a test message to [email protected]
…
(f)On 10 January 2019, Watt stated to “Jake” that his intention was to disrupt the Plaintiff as much as he could and that he had lied to Melany Batley about a device by stating it was functional, when Watt knew that it was not.
In the Judgment at [303], (c) is recorded as relating to a “text” message when it should have been to a “test” message.
The conduct in (c) and (f) also constituted a breach of his employment contract, his fiduciary duty and s 182 of the Corporations Act: Judgment at [317], [319].
Declarations
While the defendants accepted that the declaration at [8] (set out above) was consistent with the court findings, they submitted that the declaration at [9] was broader than Mr Watt’s fiduciary duties.
I agree that the proposed declaration at [9] goes beyond the scope of his fiduciary duty. It should be limited to failing to act honestly in the best interests of his employer. Although this declaration would not match the terms of the contractual provision by reference to which the fiduciary duty was formulated, it does capture the reasons that he was in breach of his fiduciary duty to the plaintiff.
Equitable compensation
The only pecuniary order sought in relation to Mr Watt was an order for equitable compensation.
The plaintiff submitted that as a participant in the plan to divert Geo Group’s work to Dreamtime, Mr Watt’s conduct was a direct cause of the loss associated with Geo Group. The finding in the Judgment was that the loss of profits associated with the Geo Group work was $234,521.09. The plaintiff seeks orders that Mr Watt bear the same liability. The plaintiff sought that the second defendant pay equitable compensation to the plaintiff in the sum of $234,521.09 for breach of fiduciary duties.
The defendants submitted that a failure to disclose anything about Geo Group was not pleaded or particularised and there was no finding of breach in relation to that conduct. They also submitted that any order against Mr Watt must account for his position within Steadfast, being a junior employee in his first role and influenced to a significant extent by Mr Peak. They therefore submitted that Mr Watt’s involvement had no causal potency in relation to Geo Group.
While it is true to say that Mr Watt intentionally participated in the implementation of Mr Peak’s plan to redirect Steadfast’s business, the pleaded case against him and the findings made against him were very confined. That an alternative, broader, claim of participation in Mr Peak’s breach of fiduciary duty might, in light of the findings made in the Judgment, have been pleaded, does not provide a proper basis for more extensive relief than is justified by the proven, pleaded claims.
It cannot be said that the very narrow particularised claims that were established were linked to the loss of Geo Group or the profits subsequently made by Dreamtime. Having regard to the narrowness of the breaches of fiduciary duty, I am not satisfied that a sufficient causal connection exists for there to be an order for equitable compensation against Mr Watt.
Conclusion in relation to Mr Watt
Only declaratory relief will be granted in relation to Mr Watt.
Mr Stefanovic (third defendant)
Relief sought
The orders sought by the plaintiff against Mr Stefanovic were as follows:
11.Declaration that the third defendant breached clause 3.2 of his contract of employment with the plaintiff in that he failed to act honestly and with care and skill, and failed to do all in his power to promote or develop the reputation of the plaintiff.
12.Declaration that the third defendant breached his fiduciary duties owed to the plaintiff in that he failed to act honestly and with care and skill, and failed to do all in his power to promote or develop the reputation of the plaintiff.
13.Declaration that the third defendant breached ss. 182 and 183 of the Corporations Act 2001 (Cth).
14.Order that the third defendant is to pay to damages to the plaintiff in the sum of $202,378.75 for breach of contract.
15.Further or in the alternative, order that the third defendant is to pay to equitable compensation to the plaintiff in the sum of $202,378.75 for breach of fiduciary duties.
16.Further or in the alternative, order that the third defendant is to pay to compensation to the plaintiff in the sum of $202,378.75 for breach of the Corporations Act.
Findings
In the Judgment, Mr Stefanovic was found to have engaged in a series of acts between 16 October 2018 and 19 December 2018 which involved a breach of his contractual duty to act honestly and do all in his power to promote or develop and extend Steadfast’s reputation in business: Judgment at [329]. That included failing to make Ms Batley aware of Mr Peak’s and Mr Glavonjic’s plans. These matters also amounted to a breach of fiduciary duty: Judgment at [333]. Mr Stefanovic also breached clause 17 by failing to maintain the confidentiality of the plaintiff’s confidential information and participating or knowingly assisting in the unauthorised disclosure of the plaintiff’s confidential information to, or for the use of, Dreamtime and using the confidential information for the benefit of Dreamtime: Judgment at [330].
The matters giving rise to the breaches of clauses 3.2 and 17 of his contract were found to also involve breaches of his duties under ss 182 and 183 of the Corporations Act.
Declarations
The defendants accepted that the declarations sought at proposed orders 11 and 13 (set out above) were available but submitted that the terms sought at 12 were too broad. I agree that the declaration at 12 requires modification so as to appropriately capture Mr Stefanovic’s breach of fiduciary duty, rather than simply mirror the contractual term. Further, the declaration at 13 requires modification so as to achieve at least minimal compliance with s 1317E of the Corporations Act.
The orders that I will make will be:
(a)Declaration that the third defendant breached his fiduciary duties owed to the plaintiff in that he assisted and encouraged the first defendant in his breaches of fiduciary, contractual and statutory duty which were designed to achieve the transfer of the benefit of the plaintiff’s business to the fourth defendant without payment and failed to disclose to the director of the plaintiff the first defendant’s and his own breaches of duty.
(b)Declaration that the third defendant breached ss 182 and 183 of the Corporations Act 2001 (Cth) by engaging in a course of conduct between at least 19 October 2018 and 19 December 2018 which assisted and encouraged the first defendant to achieve the transfer of the benefit of the plaintiff’s business to the fourth defendant without payment and in doing so:
(a)improperly used his position as an employee of the plaintiff to gain an advantage for the fourth defendant and cause detriment to the plaintiff; and
(b)improperly used information that he obtained because he was an employee of the plaintiff to gain an advantage for the fourth defendant and cause detriment to the plaintiff.
Breach of contract
The plaintiff submitted that Mr Stefanovic’s role in the “wholesale destruction” of Steadfast’s business was more confined than that of Mr Peak and Mr Glavonjic. His role was to actively assist Mr Peak and Mr Glavonjic in preparing to transfer Steadfast’s business to Dreamtime. The plaintiff pointed to the findings in relation to Mr Stefanovic’s role in relation to the Australian Financial Security Authority (AFSA), Strategic Data and the University of Canberra as reflected in the following findings in the Judgment.
(a)Judgment at [355]: In relation to AFSA, from November 2018 Mr Stefanovic was aware that Mr Peak and Mr Glavonjic were deliberately intending to interfere with Steadfast’s relationship with AFSA to transfer the work that had been performed by Steadfast to Dreamtime.
(b)Judgment at [392]: From 23 October 2018 Mr Peak, Mr Stefanovic and Mr Glavonjic conspired to shift the Strategic Data work from Steadfast to Dreamtime.
(c)Judgment at [398]: Mr Peak and Mr Stefanovic, with the knowledge of Mr Glavonjic, sought to procure University of Canberra work for Dreamtime instead of Steadfast.
The plaintiff submitted, on the basis of the specific findings of the court, that Mr Stefanovic’s breaches of his contractual duties were causative of the plaintiff’s losses in respect of AFSA, Strategic Data and the University of Canberra. Those losses, assessed by reference to the figures at [449] of the Judgment, were $202,378.75.
The defendant submitted that it was not open to claim damages for breach of contract assessed by reference to the loss of profit made by Dreamtime and that the plaintiff did not prove a case in damages for breach of contract against Mr Stefanovic.
The submissions of the parties were of very limited assistance in analysing the question of causation in relation to Mr Stefanovic.
The position of Mr Stefanovic’s breaches is as follows:
(a)he committed a range of breaches of duty which involved assisting and supporting Mr Peak’s breaches of duty;
(b)the actions of Mr Stefanovic would not have caused losses in the absence of Mr Peak’s conduct;
(c)Mr Stefanovic’s assistance and support facilitated and encouraged Mr Peak’s breaches of contract; and
(d)had Mr Stefanovic disclosed to Ms Batley Mr Peak’s conduct and plans, then there is a chance that Steadfast would not have suffered the losses that it did.
The counterfactual is difficult. It is likely that in the absence of disclosure to Ms Batley, Mr Peak would have been able to largely carry through his plans without Mr Stefanovic’s assistance. However, had Ms Batley been notified then there was at least a chance that Mr Peak’s plans would have been interrupted and the damage to Steadfast’s business would have been less. It can be said that Mr Stefanovic’s conduct causally contributed to Steadfast’s loss because his failure to disclose his conduct and Mr Peak’s plans allowed those plans to be carried through to fruition.
The plaintiff targeted its submissions at three clients, AFSA, Strategic Data and the University of Canberra. It did so by reference to the profits made by Dreamtime identified at [449] of the Judgment, an amount totalling $202,378.75 as a result of the direction of that work to Dreamtime As pointed out in relation to Mr Peak, it is necessary to discount these figures for the purposes of assessment of contractual damages. Had Mr Stefanovic not breached his duties and had disclosed his knowledge of Mr Peak’s plans to Ms Batley, I assess that there was a 25 per cent chance that Steadfast would have been able to make these profits from those clients and that the damages suffered as a result of his conduct is the value of that loss of chance namely $50,594.69 (25 per cent of $202,378.75). The plaintiff is entitled to judgment against him for $50,594.69.
Equitable compensation
The defendants noted that although relief in the form of equitable compensation was sought, no submissions were made in support of that claim.
Although the causal requirements for an order of equitable compensation for a breach of fiduciary duty are less onerous than for a breach of contract, in the circumstances of this case the limiting factor is the assessment of the losses that would have been incurred if Mr Stefanovic had made proper disclosure to Ms Batley. That can only be assessed by reference to a loss of chance. That can be calculated in the same manner as for the breach of contract. The plaintiff is entitled to an award of equitable compensation of $50,594.69.
Section 1317H of the Corporations Act
Alternatively, compensation was sought pursuant to s 1317H(2) of the Corporations Act for the losses relating to AFSA, Strategic Data and the University of Canberra.
Although the defendants accepted that an award of compensation was available under s 1317H, they submitted that it should not be made because it was Dreamtime which realised the gain from Mr Stefanovic’s actions, not Mr Stefanovic himself. They also submitted in relation to AFSA that Mr Stefanovic’s conduct had a little causal potency given the findings in relation to Mr Peak’s conduct with AFSA.
Damages under s 1317H of the Corporations Act may be assessed by reference to profits made by Dreamtime. The threshold issue is whether they resulted from Mr Stefanovic’s breach of statutory duty. The position is the same as in relation to other causes of action. Mr Stefanovic assisted and supported Mr Peak’s conduct but Mr Stefanovic’s own conduct was not by itself a cause of loss. His participation and his failure to disclose his breaches and what he knew of Mr Peak’s plans allowed them to proceed to a point where the monetary benefit of them was obtained by Dreamtime. That, in my view, is sufficient to establish that Mr Stefanovic’s conduct resulted in the making of profits by Dreamtime. The plaintiff’s claim focused on the three contracts referred to earlier. Having regard to the profits made by Dreamtime in relation to those clients, it is appropriate to make an order requiring Mr Stefanovic to compensate Steadfast for an amount assessed by reference to the profits made by Dreamtime in relation to those clients, namely $202,378.75.
Conclusion in relation to Mr Stefanovic
So far as monetary relief is concerned, the cause of action most favourable to the plaintiff is that under s 1317H of the Corporations Act. An order for compensation pursuant to that provision of $202,378.75 will be made.
Mr Glavonjic (fifth defendant)
Relief sought
The orders sought by the plaintiff against Mr Glavonjic were as follows:
17.Declaration that the fifth defendant breached his fiduciary duties owed as a director to the plaintiff in that by seeking, on behalf of the fourth defendant (Dreamtime), to enter an area of business undertaken by the plaintiff he acted in conflict of his duties and failed to disclose that conflict to the other director of the plaintiff.
18.Order that the fifth defendant is to pay to equitable compensation to the plaintiff in the sum of $316,982.00 for breach of fiduciary duties.
Although in the Amended Statement of Claim relief was sought under ss 1317E and 1317H of the Corporations Act, in the submissions and final relief the plaintiff did not press for any declarations or orders under these provisions.
Findings
The findings in the judgment were limited. That was because of the limited nature of the allegations against Mr Glavonjic. The allegation in the plaintiff’s claim related to a closed period between “about August 2018” and 31 October 2018. Even though the particulars of breach purported to extend well beyond 31 October 2018, because the substantive pleading ended on that date and no attempt was made during the hearing to address the inconsistency, I ignored the post-31 October 2018 particulars: Judgment [337]. Therefore, the breaches alleged were between August 2018 and 31 October 2018, the date when Mr Glavonjic resigned his position as director. The only breach that was established involved Mr Glavonjic’s participation in the meeting with Mr Benkendorfer of AlienVault. In relation to that meeting the finding (at [339]) was:
I am satisfied that the enquiries about establishing Dreamtime as a reseller of AlienVault products were undertaken by Mr Glavonjic with a view to taking this business from Steadfast, even if the plan with Mr Peak had not been fully formulated.
The defendants submitted that there had been contact with AlienVault on behalf of Dreamtime as early as July 2018. They contended that Mr Glavonjic was taking legitimate steps to set Dreamtime up as an AlienVault reseller well before there was any suggestion of a split between Dreamtime and Steadfast. They therefore submitted that he was not breaching his fiduciary duty in the period 18 – 31 October 2018. They further pointed out that Dreamtime only became a competitor of Steadfast in December 2018, well after Mr Glavonjic ceased to be a director. I do not accept these submissions as they are inconsistent with the finding that I made at [339] in the Judgment which I have just set out.
Declaration
Having rejected the submissions of the defendant because they were inconsistent with the findings made in the Judgment, it is appropriate to make the declaration sought in [17].
Equitable compensation
The defendants submitted that there was no basis for making an order for equitable compensation against Mr Glavonjic because no such relief was pleaded and it was not appropriate to conflate the profit made by Dreamtime with compensation owed to Steadfast.
The submission that equitable compensation had not been sought led to an application for leave to amend pleadings. During the course of submissions in reply, senior counsel for the plaintiff sought leave to amend the statement of claim so as to add, in relation to the claim against Mr Glavonjic, a claim for equitable compensation as an alternative to an order under s 1317H of the Corporations Act. The amendment was said to not factually expand the issues or the claim but rather simply provide an alternative legal basis for the granting of relief against Mr Glavonjic. The plaintiff sought to explain the amendment as arising because of the defendants’ written submissions of 1 October 2021 and their oral submissions made at the hearing on 15 October 2021 which pointed out that equitable compensation had not been sought against Mr Glavonjic.
This amendment was opposed by Mr Glavonjic. Mr Glavonjic submitted that the existing pleadings confined the relevant conduct of Mr Glavonjic to the period up to 31 October 2018. He pointed to the fact that the findings against Mr Glavonjic were limited, given the narrow way in which the claim was pleaded and particularised against him. He submitted that the court should not assume that the case would have been run the same way if the claim had been pleaded. He submitted that both Mr Glavonjic and the other defendants were also materially affected by such an amendment because the pleaded claim formed the basis for the offers of settlement that they made. In the event that the amendment was made, the defendants sought an order that the plaintiff pay costs thrown away by reason of such an amendment.
The starting point must be that the case was to be determined on the basis of the pleadings. The defendants were entitled to defend the claim on the basis of the pleadings. The case was not conducted in a manner which indicated that the parties were departing from the pleadings. Insofar as the submissions of the plaintiff sought to characterise the issue as only having arisen by reason of the defendants’ written submissions, that is not correct. The issue arose because the claim against Mr Glavonjic, as opposed to the other defendants, was drafted in a way that did not include a claim for equitable compensation.
Rule 502 of the Court Procedures Rules2006 (ACT) gives the court a broad discretion. That discretion must be exercised having regard to r 501 of the Court Procedures Rules and s 5A of the Court Procedures Act 2004 (ACT). It must also be exercised having regard to the statements of the plurality in Aon Risk Services Australia Ltd v ANU [2009] HCA 27; 239 CLR 175.
The pleading of the case by the plaintiff was not without its difficulties. Notably, although I concluded that the pleadings were sufficient to allege breaches of fiduciary duty, that arose by implication from the terms of the relief sought rather than by being clearly pleaded in the body of the claim: see Judgment at [11]. Similarly, as noted in the Judgment, the claims against Mr Watt and Mr Glavonjic were very narrowly particularised, notwithstanding that the circumstances might have given rise to broader claims. Having regard to the involvement of senior and junior counsel, these are matters that would have been clearly known to the plaintiff, at the very latest shortly prior to the commencement of the trial. It is quite understandable that a forensic decision would have been made not to seek to amend the pleadings so as to put them in an ideal form because of the potential for that to be refused or to further delay the final hearing in the matter. In other words, it was better to go to trial with suboptimal pleadings than to be distracted from a final hearing by a substantial skirmish over those pleadings. The effect of that forensic decision was to “bake in” any defects in the pleadings.
Having regard to the lateness of the application, the fact that the plaintiff must be taken to have made a deliberate forensic choice to not remedy the difficulties with the pleading of the claim and the very limited scope of the claim ultimately made out against Mr Glavonjic, itself a result of inadequate pleading, it is not, in my view, appropriate to grant leave to make the amendment.
Even if leave had been granted to amend the pleadings, no award of equitable compensation would have been made. That is because, having regard to the narrowness of breach, the plaintiff cannot establish that a loss would not have occurred but for the breach. Even if the proven breach had not occurred, the losses incurred by the plaintiff would still have happened.
Conclusion in relation to Mr Glavonjic
Only declaratory relief will be granted in relation to Mr Glavonjic.
Costs
The plaintiff sought an order in relation to costs in the following terms:
19.Order that the defendants are to pay the plaintiff’s costs of the proceedings on the ordinary basis until 12 April 2021, and on the indemnity basis thereafter.
While the parties had filed written submissions in advance of the hearing relating to the form of final relief against Mr Peak, Mr Watt, Mr Glavonjic and Mr Stefanovic, it is appropriate that they be further heard in relation to the question of costs in light of these reasons.
Orders
Given that the amounts ordered to be paid by individual defendants have been quantified by reference to the amount of the profits made by Dreamtime, it is appropriate to make an order which makes express that which is implied, namely, that the plaintiff may only recover a total of $1,187, 249.64 from all defendants exclusive of any amount recovered in relation to the costs of the proceedings.
It is also appropriate to make an order requiring any further submissions in relation to costs to be made in writing.
The orders of the Court are:
The Court declares that:
1.Gareth Peak breached clause 3.1 of his contract of employment with Steadfast ICT Security Pty Ltd (Steadfast) in that he failed to faithfully and diligently serve Steadfast to the best of his ability, failed to act honestly and with care and skill, and failed to act in the best interests of Steadfast.
2.Gareth Peak breached clause 13 of his contract of employment with Steadfast in that he failed to keep Steadfast's confidential information confidential and used such information for purposes other than in the course of performing his duties as an employee.
3.Gareth Peak breached clauses 18.1 and 18.2 of his contract of employment with Steadfast in that he knowingly performed services of an IT security consultant or provided IT security services to former clients of Steadfast and Dreamtime Supply Company Pty Ltd (Dreamtime), and knowingly canvassed or endeavoured to entice away from Steadfast, the clients of Steadfast, during the period of 24 months following the end of his employment on 9 January 2019.
4.Gareth Peak breached his fiduciary duties owed to Steadfast in that he failed to faithfully and diligently serve Steadfast to the best of his ability, failed to act honestly and with care and skill, and failed to act in the best interests of Steadfast.
5.Gareth Peak breached ss 180, 181, 182 and 183 of the Corporations Act 2001 (Cth) by engaging in a course of conduct between at least 19 October 2018 and 9 January 2019 which was designed to achieve the transfer of the benefit of Steadfast’s business to Dreamtime without payment and in doing so:
(a)failed to exercise his powers and discharge his duties with the degree of care and skill that a reasonable person would exercise if such a person occupied his position;
(b)failed to exercise his powers and discharge his duties in good faith in the best interests of Steadfast and for a proper purpose;
(c)used his position as an employee of the company improperly in order to gain an advantage for himself and Dreamtime and to cause detriment to Steadfast;
(d)used information obtained by him as an employee to improperly gain an advantage for himself and Dreamtime and to cause detriment to Steadfast.
6.Lachlan Watt breached clause 3.2 of his contract of employment with Steadfast in that he failed to act honestly and with care and skill, and failed to conduct himself in a professional and mature manner.
7.Lachlan Watt breached his fiduciary duties owed to Steadfast in that he failed to act honestly and in the best interests of his employer, Steadfast.
8.Nenad Stefanovic breached clause 3.2 of his contract of employment with Steadfast in that he failed to act honestly and with care and skill, and failed to do all in his power to promote or develop the reputation of Steadfast.
9.Nenad Stefanovic breached his fiduciary duties owed to Steadfast in that he assisted and encouraged Gareth Peak in his breaches of fiduciary, contractual and statutory duty which were designed to achieve the transfer of the benefit of Steadfast’s business to Dreamtime without payment and failed to disclose to the director of Steadfast Gareth Peak’s and his own breaches of duty.
10.Nenad Stefanovic breached ss 182 and 183 of the Corporations Act 2001 (Cth) by engaging in a course of conduct between at least 19 October 2018 and 19 December 2018 which assisted and encouraged Gareth Peak to achieve the transfer of the benefit of Steadfast’s business to Dreamtime without payment and in doing so:
(a)improperly used his position as an employee of Steadfast to gain an advantage for Dreamtime and cause detriment to Steadfast; and
(b)improperly used information that he obtained because he was an employee of Steadfast to gain an advantage for Dreamtime and cause detriment to Steadfast.
11.David Glavonjic breached his fiduciary duties owed as a director to Steadfast in that by seeking, on behalf of Dreamtime, to enter an area of business undertaken by Steadfast, he acted in conflict of his duties and failed to disclose that conflict to the other director of Steadfast.
The Court orders that:
12.Gareth Peak pay compensation to Steadfast in the sum of $1,187,249.64 for breach of the Corporations Act 2001 (Cth).
13.Nenad Stefanovic pay compensation to Steadfast in the sum of $202,378.75 for breach of the Corporations Act 2001 (Cth).
14.The plaintiff may only recover a total of $1,187,249.64 from all defendants exclusive of any amount recovered in relation to the costs of the proceedings.
15.Each party is to file and serve any further written submissions on costs limited to three pages by 31 January 2022 and any written submission in reply limited to not more than two pages by 7 February 2022.
| I certify that the preceding eighty [80] numbered paragraphs are a true copy of the Reasons for Judgment of his Honour Justice Mossop. Associate: Date: 17 December 2021 |
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