WA Fork Truck Distributors Pty Ltd v Jones
[2003] WASC 102
WA FORK TRUCK DISTRIBUTORS PTY LTD -v- JONES & ORS [2003] WASC 102
| SUPREME COURT OF WESTERN AUSTRALIA | Citation No: | [2003] WASC 102 | |
| Case No: | CIV:1044/2001 | 19-21, 24-28 MARCH 2003 | |
| Coram: | PULLIN J | 29/05/03 | |
| 37 | Judgment Part: | 1 of 1 | |
| Result: | Action against third, fourth and fifth defendants dismissed Claim allowed against the first, second and sixth defendants | ||
| A | |||
| PDF Version |
| Parties: | WA FORK TRUCK DISTRIBUTORS PTY LTD (ACN 009 099 861) JOHN MICHAEL JONES ACCESS EQUIPMENT RENTALS PTY LTD (ACN 009 273 974) LIONEL DESCHAMP WILLIAM EDMUND REILLY AARON POWELL ACCESS GROUP OF COMPANIES PTY LTD (ACN 096 170 071) |
Catchwords: | Contract Breach of employment contract by senior manager Equity Breach of fiduciary obligations by senior manager Damages and equitable compensation Income tax |
Legislation: | Nil |
Case References: | AF Ralston Associates Ltd v Ralston [1973] NI 229 Blyth Chemicals Ltd v Bushnell (1933) 49 CLR 66 Breen v Williams (1996) 186 CLR 71 Canadian Aero Services Ltd v O'Malley [1974] SCR 592 Carr v Finance Corp of Australia Ltd (No 1) (1981) 147 CLR 246 Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373 Digital Pulse Pty Ltd v Harris (2002) 166 FLR 421 Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1 Green & Clara Pty Ltd v Bestobell Industries Pty Ltd [1982] WAR 1 Hill v Rose [1990] VR 129 Hivac Ltd v Park Royal Scientific Instruments Ltd [1946] 1 Ch 169 Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 Johnson v Buttress (1936) 56 CLR 113 Lever Bros v Bell [1931] 1 KB 557 London & Thames Haven Oil Wharves Ltd v Attwooll [1967] Ch 772 McPherson's Ltd v Tate (1993) 35 AILR 225 Nocton v Lord Ashburton [1914] AC 932 O'Halloran v RT Thomas & Family Pty Ltd (1998) 45 NSWLR 262 Pilmer v The Duke Group Ltd (in liq) (2001) 207 CLR 165 PM Sulcs & Associates Pty Ltd v Daihatsu Australia Pty Ltd [2001] NSWSC 798 Re Dawson (deceased) [1966] 2 NSWR 211 Robb v Green [1895] 2 QB 315 Swain v West (Butchers) Ltd [1936] 3 All ER 261 Sybron Corporation v Rochem Ltd [1984] 1 Ch 112 Tuite v Exelby (1992) 25 ATR 31; (1992) 93 ATC 4293 United States Surgical Corporation v Hospital Products International [1983] 2 NSWLR 157 Warman International Ltd v Dwyer (1995) 182 CLR 544 Wessex Dairies Ltd v Smith [1935] 2 KB 80 Angus & Coote Pty Ltd v Render (1989) 16 IPR 387 Ansell Rubber Co Pty Ltd v Allied Rubber Industries Pty Ltd [1967] VR 37 Bendix Home Systems Ltd v Clayton [1977] 5 WWR 10 Boardman v Phipps [1967] 2 AC 46 British Syphon Co Ltd v Homewood [1956] 2 All ER 897 Corrs Pavey Whiting & Byrne v Collector of Customs (Vic) (1987) 74 ALR 428 Faccenda Chicken Ltd v Fowler [1984] ICR 589 Faccenda Chicken Ltd v Fowler [1987] 1 Ch 117 Fractionated Cane Technology Ltd v Ruiz-Avila [1988] 1 Qd R 51 Hartleys Ltd v Yukich [2002] WASC 184 Industrial Furnaces Ltd v Reaves [1970] RPC 605 Johns v Australian Securities Commission (1993) 116 ALR 567 Lock International plc v Beswick [1989] 3 All ER 373 Magna Alloys & Research Pty Ltd v Ten-Haaf [1978] Tas SR 136 Maryland Metals Inc v Metzner (1978) 382 A 2d 564 O'Brien v Komesaroff (1982) 150 CLR 310 Printers & Finishers Ltd v Holloway (No 2) [1964] 3 All ER 731 Sanders v Parry [1967] 2 All ER 803 Schindler Lifts Australia Pty Ltd v Debelak (1989) 89 ALR 275 SSC & B: Lintas New Zealand Ltd v Murphy [1986] 2 NZLR 436 Thomas Marshall (Exports) Ltd v Guinle [1979] 1 Ch 227 Timber Engineering Co Pty Ltd v Anderson [1980] 2 NSWLR 488 United States Surgical Corporation v Hospital Products International [1982] 2 NSWLR 766 Wan v McDonald (1992) 33 FCR 491 Wright v Gasweld Pty Ltd (1991) 22 NSWLR 317 |
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
- IN CIVIL
- Plaintiff
AND
JOHN MICHAEL JONES
First Defendant
ACCESS EQUIPMENT RENTALS PTY LTD (ACN 009 273 974)
Second Defendant
LIONEL DESCHAMP
Third Defendant
WILLIAM EDMUND REILLY
Fourth Defendant
AARON POWELL
Fifth Defendant
ACCESS GROUP OF COMPANIES PTY LTD (ACN 096 170 071)
Sixth Defendant
(Page 2)
Catchwords:
Contract - Breach of employment contract by senior manager
Equity - Breach of fiduciary obligations by senior manager
Damages and equitable compensation - Income tax
Legislation:
Nil
Result:
Action against third, fourth and fifth defendants dismissed
Claim allowed against the first, second and sixth defendants
Category: A
Representation:
Counsel:
Plaintiff : Mr P G McGowan
First Defendant : Mr J R B Ley
Second Defendant : Mr J R B Ley
Third Defendant : Mr J R B Ley
Fourth Defendant : Mr J R B Ley
Fifth Defendant : Mr J R B Ley
Sixth Defendant : Mr J R B Ley
Solicitors:
Plaintiff : Clayton Utz
First Defendant : Minter Ellison
Second Defendant : Minter Ellison
Third Defendant : Minter Ellison
Fourth Defendant : Minter Ellison
Fifth Defendant : Minter Ellison
Sixth Defendant : Minter Ellison
(Page 3)
Case(s) referred to in judgment(s):
AF Ralston Associates Ltd v Ralston [1973] NI 229
Blyth Chemicals Ltd v Bushnell (1933) 49 CLR 66
Breen v Williams (1996) 186 CLR 71
Canadian Aero Services Ltd v O'Malley [1974] SCR 592
Carr v Finance Corp of Australia Ltd (No 1) (1981) 147 CLR 246
Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373
Digital Pulse Pty Ltd v Harris (2002) 166 FLR 421
Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1
Green & Clara Pty Ltd v Bestobell Industries Pty Ltd [1982] WAR 1
Hill v Rose [1990] VR 129
Hivac Ltd v Park Royal Scientific Instruments Ltd [1946] 1 Ch 169
Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41
Johnson v Buttress (1936) 56 CLR 113
Lever Bros v Bell [1931] 1 KB 557
London & Thames Haven Oil Wharves Ltd v Attwooll [1967] Ch 772
McPherson's Ltd v Tate (1993) 35 AILR 225
Nocton v Lord Ashburton [1914] AC 932
O'Halloran v RT Thomas & Family Pty Ltd (1998) 45 NSWLR 262
Pilmer v The Duke Group Ltd (in liq) (2001) 207 CLR 165
PM Sulcs & Associates Pty Ltd v Daihatsu Australia Pty Ltd [2001] NSWSC 798
Re Dawson (deceased) [1966] 2 NSWR 211
Robb v Green [1895] 2 QB 315
Swain v West (Butchers) Ltd [1936] 3 All ER 261
Sybron Corporation v Rochem Ltd [1984] 1 Ch 112
Tuite v Exelby (1992) 25 ATR 31; (1992) 93 ATC 4293
United States Surgical Corporation v Hospital Products International [1983] 2 NSWLR 157
Warman International Ltd v Dwyer (1995) 182 CLR 544
Wessex Dairies Ltd v Smith [1935] 2 KB 80
Case(s) also cited:
Angus & Coote Pty Ltd v Render (1989) 16 IPR 387
Ansell Rubber Co Pty Ltd v Allied Rubber Industries Pty Ltd [1967] VR 37
Bendix Home Systems Ltd v Clayton [1977] 5 WWR 10
(Page 4)
Boardman v Phipps [1967] 2 AC 46
British Syphon Co Ltd v Homewood [1956] 2 All ER 897
Corrs Pavey Whiting & Byrne v Collector of Customs (Vic) (1987) 74 ALR 428
Faccenda Chicken Ltd v Fowler [1984] ICR 589
Faccenda Chicken Ltd v Fowler [1987] 1 Ch 117
Fractionated Cane Technology Ltd v Ruiz-Avila [1988] 1 Qd R 51
Hartleys Ltd v Yukich [2002] WASC 184
Industrial Furnaces Ltd v Reaves [1970] RPC 605
Johns v Australian Securities Commission (1993) 116 ALR 567
Lock International plc v Beswick [1989] 3 All ER 373
Magna Alloys & Research Pty Ltd v Ten-Haaf [1978] Tas SR 136
Maryland Metals Inc v Metzner (1978) 382 A 2d 564
O'Brien v Komesaroff (1982) 150 CLR 310
Printers & Finishers Ltd v Holloway (No 2) [1964] 3 All ER 731
Sanders v Parry [1967] 2 All ER 803
Schindler Lifts Australia Pty Ltd v Debelak (1989) 89 ALR 275
SSC & B: Lintas New Zealand Ltd v Murphy [1986] 2 NZLR 436
Thomas Marshall (Exports) Ltd v Guinle [1979] 1 Ch 227
Timber Engineering Co Pty Ltd v Anderson [1980] 2 NSWLR 488
United States Surgical Corporation v Hospital Products International [1982] 2 NSWLR 766
Wan v McDonald (1992) 33 FCR 491
Wright v Gasweld Pty Ltd (1991) 22 NSWLR 317
(Page 5)
1 PULLIN J: The plaintiff claims against a former employee, the first defendant ("Mr Jones"), damages for breach of an employment contract and equitable compensation for breach of fiduciary duties as employee. In short, the plaintiff alleges that Mr Jones breached his employment contract and fiduciary duties owed to the plaintiff by taking steps during his employment, and in particular during working hours, to make secret arrangements to set up a new business which would compete with the plaintiff as soon as Mr Jones resigned his employment with the plaintiff, which he planned to do.
2 The plaintiff also claims equitable compensation from three other former employees and against two companies controlled by Mr Jones. The claims against the three other former employees are that they knew of the activities of Mr Jones in breach of his contract and in breach of his fiduciary duties and that they failed to inform the plaintiff about his activities. The claims against the two companies are that they took the benefit of the breaches of duty with knowledge of those breaches.
The History of the Plaintiff, the Employment of Defendants and their Dismissal
3 Under this heading, I find the facts to be as follows.
4 In the mid 1980s, in Western Australia, Lawrence Puddy ("Mr Puddy Snr") acquired the plaintiff company and started a business involving the sale, service and hire of Crown Forklifts. Mr Puddy Snr's son Craig ("Mr Puddy Jnr") was also employed in the business. Later the business expanded to include the sale, service and hire of Nissan Forklifts. In 1987, the plaintiff expanded the business again. This expansion involved the business of selling and servicing access equipment. The business was conducted from separate premises by WA Access Pty Ltd, which was a subsidiary of the plaintiff. Access equipment consists of mobile elevating work platforms used to allow people to work above the ground.
5 In 1994, the plaintiff employed Mr Jones. He was first involved in the forklift side of the business but then, in about 1996, he was put in charge of the access business with the title of general manager. At that stage, the access business via WA Access Pty Ltd involved only the sale and service of access equipment, but not long after Mr Jones commenced as general manager, he expanded the business so that the access equipment was also hired out. That aspect of the business was successful, and it grew quickly. It was efficiently run and it had excellent staff and
(Page 6)
- astute management. The access hire business was conducted by WA Access Hire Pty Ltd, which was a subsidiary of WA Access Pty Ltd.
6 The third defendant ("Mr Deschamp") was employed by WA Access Pty Ltd in 1996, and started working in the new access hire business as hire manager. He left for a short time in 1998 and was then re-employed as a hire representative. A hire representative was a person who worked as a salesman who travelled around out of the office trying to secure contracts of hire with customers. The job of hire manager was an office-based job. In that role, Mr Deschamp would receive all incoming calls from people wanting to hire out equipment. He was authorised to set the rates to be charged for equipment, and made decisions about whether he could offer it at a cheaper rate than a competitor. After his employment as hire representative, and in the latter part of 2000, he again performed the role of hire manager as an employee of the plaintiff. His employment ceased on 11 January 2001.
7 The fourth defendant ("Mr Reilly") was employed in 1999 as a sales/hire representative by WA Access Pty Ltd. He worked in the access sales business and the assets hire business. After 30 June 2000, he was employed by the plaintiff until that employment ceased on 11 January 2001.
8 The fifth defendant ("Mr Powell") was employed by the plaintiff in September 2000 as a casual hire representative in the access hire business. He was employed on the recommendation of Mr Jones. In November 2000, Mr Puddy Jnr advised Mr Jones that he thought the plaintiff could not justify continuing to employ Mr Powell. Mr Jones said that he disagreed and said that he wanted Mr Powell to stay on to help gain new business. Mr Puddy Jnr accepted that, and Mr Powell continued in employment with the plaintiff until his employment ceased on 11 January 2001.
9 Mr Jones, Mr Deschamp, Mr Reilly and Mr Powell were each sent a letter recording the terms of the employment contract each entered into. Each of them signed the letter, indicating acceptance of the terms and conditions. The letters were in common form and included provisions stating that normal office hours were between 8.00 am to 5.00 pm, that when circumstances demanded they were required to work beyond normal office hours without overtime, and that one week's notice must be given prior to termination of the employment by either the employee or the employer.
(Page 7)
10 Each contract contained a term which read:
"Conduct & Confidential Information:
Employees of the Company are required to:–
1. Devote full attention and use best endeavours to further the development, reputation and business of the Company, and observe all lawful directions, orders, or instructions given.
2. Acknowledge that information relating to the business, or affairs of the Company, or its associated Companies, which is not readily available in the public domain, including, without limitation, pricing and trade policies and accounts or financial records, is 'CONFIDENTIAL INFORMATION' and is the sole property of the Company, and you shall not either during your employment, or thereafter, without the prior written consent of the Company, directly or indirectly, disclose to any person, or use any of the confidential information for your own or for another's benefit.
3. Undertake not to be directly or indirectly involved knowingly with any business activity, which conflicts or may tend to conflict, or be in competition with any of the Company's operations, unless otherwise agreed by the Managing Director."
11 Mr Deschamp, Mr Reilly and Mr Powell were required under the terms of the employment contract to report to Mr Jones.
12 None of the contracts of employment restrained these employees from setting up in competition with the plaintiff after they left the plaintiff's employment.
13 In February 1997, Mr Puddy Snr formed a committee consisting of himself and his senior managers. This was called the "board of management". It met monthly. Mr Jones was made a member of the board. The board of management meetings were attended usually by Mr Puddy Snr and Mr Puddy Jnr. Mr Jones would attend and report on the progress of the access business. Often his reports were given in two parts, one about the access sales and service side of the business and the other about the access hire business.
(Page 8)
14 As general manager, Mr Jones was responsible, as Mr Puddy Snr put it, for the profit or loss of the access business. Mr Puddy Snr, as owner of the plaintiff company, had minimal contact with customers of the access business. He left the running of the access business to Mr Jones, although he maintained an overall supervisory role.
15 In 1999, Mr Puddy Snr started up a new business in Sydney, and he shifted there to live. He appointed Mr Puddy Jnr to run the forklift side of the business. Mr Puddy Snr flew back monthly to attend the board of management meetings.
16 By 2000, these two arms of the plaintiff's business, that is the forklift business and the access business, were run from the same or adjoining blocks of land in Kurnall Road, Welshpool, but were housed in two separate buildings, with separate secretarial staff and separate stationery.
17 In 2000, the plaintiff decided that it would operate the access business itself rather than through its two subsidiaries. On 30 June 2000, WA Access Hire Pty Ltd ceased to conduct the access hire business and Access Pty Ltd WA ceased to conduct the access sales business. The assets and liabilities of the two companies were transferred to the plaintiff. Staff were informed that from 1 July 2000, the plaintiff would conduct all of the access sales, service and hire business. The invoices sent out after 30 June 2000 showed that access equipment hired out was hired by the plaintiff via its access hire division. The access business was still run from the separate building, and Mr Jones continued as its general manager.
18 In 2000, the access hire business was competing in a price-sensitive market. There were other competitors. The two largest were Coates Hire and Wreckair (Cockburn Hire). There were several other smaller competitors. The plaintiff's access business was involved in marketing mainly in the Perth area and its environs, and in Bunbury. Mr Puddy Snr said that there was speculation that the access hire market in the Perth area involved between 600 to 900 units of equipment. In 2000, the plaintiff had 167 items of access equipment to hire out. The plaintiff advertised its business and spent between $100,000-$150,000 per annum for the whole business. Elaborate brochures were published revealing details about the access equipment which the access hire business had available and details about the company. These brochures were sent to new customers or to potential customers.
(Page 9)
19 Mr Puddy Snr had high regard for Mr Jones and his work, and placed his full confidence in him to conduct the access business with minimal interference from Mr Puddy Snr. Mr Jones was left to his own devices on the day-to-day running of the access business. Mr Jones set the rates of hire, the terms of hire, decided whether or not discounts should be granted, maintained close contact with customers, made contacts with new customers, and decided when it was time to recommend the purchase of new equipment.
20 In December 2000, at a Christmas function, Mr Puddy Snr offered Mr Jones the role of group general manager, which would have put him in charge of the plaintiff's access business and the forklift business. Mr Jones asked that that not be announced until the new year. Mr Puddy Snr thought that a strange request, but agreed to it.
21 In early January 2001, Mr Puddy Snr was given some information by a third party suggesting that Mr Jones had formed his own company. Mr Puddy Snr had a search carried out and discovered that Mr Jones was the owner of shares in the second defendant. The name Access Equipment Rentals Pty Ltd was self-explanatory. This company had been registered on 12 September 2000. Mr Puddy Snr at first did not believe what he was told, but when the search was carried out and it was confirmed, he was furious. He asked the plaintiff's financial controller, Mr Maxwell, to look for evidence. On the evening of 10 January 2001, Mr Maxwell went to the access division building and searched Mr Jones' office. He found a sheet of paper on Mr Jones' desk which revealed that Mr Jones was ordering business cards for himself, Mr Deschamp, Mr Reilly and Mr Powell. He also found a printout of a web page of Genie Australia. This was a supplier of access equipment. The plaintiff did not purchase Genie equipment. Part of the printout was dated 2 August 2000 and part was dated July 2000.
22 Mr Puddy Snr then travelled to Perth from Sydney. On 11 January 2001, at the Kewdale premises, Mr Jones was called into a meeting with Mr Puddy Snr and Mr Puddy Jnr and asked about Access Equipment Rentals Pty Ltd. Mr Jones admitted that it was his company and that he had planned to resign "in a couple of days". Mr Jones said that Mr Deschamp, Mr Reilly and Mr Powell were leaving the plaintiff and going to work with him. Mr Puddy Snr, in colourful language, told Mr Jones he was sacked.
23 Mr Deschamp and Mr Reilly were then called in on the same day. Each admitted that they planned to leave the plaintiff, and their
(Page 10)
- employment was terminated. Mr Powell also admitted he was leaving, and he resigned on 11 January 2001.
24 Those events reduced the plaintiff's sales staff numbers to three. They were salesmen named Plimmer, Mischefski and Sommer. The plaintiff immediately took steps to try and find people to replace the four men who had ceased employment. A Mr Allan Barker, who had some previous experience with the plaintiff, was employed to act as manager. He commenced on 15 January 2001. Mr Mischefski, who was acting as a hire representative, was transferred into the office to perform the work of hire manager which had previously been performed by Mr Deschamp. Mr Mischefski's role as a hire representative was filled by a Mr Codyre, who had been working in the forklift servicing side of the business. Mr Plimmer continued working as a hire representative, and a Mr Cole was promoted from the position of workshop mechanic to a hire representative.
25 On 12 January 2001, the plaintiff commenced these proceedings and sought an interlocutory injunction to restrain Mr Jones, Mr Deschamp, Mr Reilly and Mr Powell from engaging in any business in competition with the plaintiff until 15 February 2001. The second defendant opened its doors for business on 22 February 2001.
26 The plaintiff considered in June 2001 that Mr Barker should be replaced as the manager of the access business. In June or July 2001, he was replaced by Mr De Yong. Mr De Yong was more successful than Mr Barker.
Why Mr Jones decided to Set up his New Business and the Steps taken by Mr Jones to Set up the New Business
27 I make the following findings under this heading.
28 In early 2000, Mr Jones became unhappy with Mr Puddy Snr, although Mr Puddy Snr did not know it. Mr Jones formed the view that he should receive shares in the plaintiff. When this did not happen, he decided that he would go out on his own and set up a new access hire business. Doing this would put him in competition with the plaintiff.
29 In February 2000, he began this process by contacting a Bruce Williamson at Westminster Finance. He instructed Mr Williamson to approach two suppliers of access equipment, namely Genie Australia and JLG Australia, both of whom are Australian subsidiaries of American
(Page 11)
- manufacturers. Mr Williamson was to ask these companies for a quotation for certain access equipment. Mr Jones told Mr Williamson that his name was not to be revealed to the two companies. He wanted to make sure that the plaintiff did not hear what he was doing. By 1 March 2000, Mr Jones had identified 40 items of equipment that he wanted to purchase. Mr Williamson sought prices. On 3 March 2000, JLG Australia wrote to Westminster quoting prices for its equipment. On 20 March 2000, Genie Australia wrote to Mr Williamson setting out its prices, its terms of supply, and its proposals regarding finance. These documents were sent to Mr Jones and considered by him. There were further discussions with Mr Williamson, and these resulted in Mr Williamson being told to keep "chipping away" for information. Mr Jones told him that he was not going to do anything at that stage and that he was waiting to see whether he was allocated shares or whether the business of access hire was sold by the plaintiff. During the period March to June 2000, he did, however, speak to Mr Williamson on a number of occasions.
30 Then in August 2000, Mr Jones engaged Mr Everett, an accountant, and asked him to prepare a business plan or cash flow budget for his proposed new business. He also asked Mr Everett to arrange for the incorporation of the second defendant. This happened on 18 August 2000. The second defendant was registered as the owner of the business name "Access Rentals". During August 2000, Mr Jones met with Mr Goddard, the general manager of Genie Australia, at Westminster's premises. Mr Jones was still anxious to keep his activities a secret from the plaintiff and required Mr Goddard to sign a confidentiality deed. At this meeting, Mr Goddard said that he required further information from Mr Jones if finance was to be provided, or arranged, by Genie Australia.
31 At the August 2000 board of management meeting of the plaintiff, there was a discussion about whether or not Mr Jones could achieve his target sales in the access hire business. After the meeting, Mr Jones left in a "fury". He met up with Mr Deschamp outside the building. Mr Jones told Mr Deschamp that he was sick of the place and that he was "out of here". He explained that he was going out on his own. Mr Jones gave evidence that Mr Deschamp asked if he could join Mr Jones. Mr Deschamp, on the other hand, gave evidence that he said that if Mr Jones was not going to continue working there, he would not stay with the plaintiff. I prefer Mr Deschamp's evidence on this point.
32 Later, Mr Jones spoke to Mr Reilly on a trip to the south-west. He told Mr Reilly that he had had enough and that he was going to leave the plaintiff. The subject was not further discussed on that trip.
(Page 12)
33 By 8 September 2000, Mr Jones had instructed Mr Everett to gain more information from Genie Australia. On 8 September 2000, Genie Australia wrote to Mr Everett, quoting on the supply of 39 elevating work platforms and putting a proposal for finance and asking for a copy of a business plan and personal statements of financial position with the directors and guarantors. Mr Jones said that he would not provide the business plan or the information requested because he said that he felt he had a "legal and moral obligation" not to supply this information until he left the plaintiff's employment. On 12 September 2000, however, he did write to Genie Australia enclosing his personal profile and the personal profiles of two people who would be commencing with him on 15 January 2001, those people being Mr Deschamp and Mr Reilly. In this letter he stated that "we intend to commence on 15 January 2001 and take the market by surprise".
34 There was then a further meeting between Mr Jones, Mr Goddard and Genie Australia's financial controller, Mr Pfrunder, at Mr Everett's office.
35 On 17 November 2000, Mr Jones wrote to Genie Australia on letterhead of "Access Rentals", showing at the foot of the letter a name and address at 14 Sorbonne Crescent, Canning Vale. The letter emphasised again the need for confidentiality, and he said that this was "paramount in our endeavours". In this letter he said that he had arranged local finance – which was untrue. The letter then continued with the following.
"This position of local finance has put me in a very delicate situation regarding my legal position. I can not be seen to actively source local finance with the intent of purchasing equipment to supply existing customers in my current position until 15 January 2001.
In addition to this there is an ethical dilemma in the fact that the bankers in which I have established both personal and professional relationships through my current position, cannot be seen to be supporting our endeavours until I have severed all ties with my current employer as this would be a legal and unethical conflict of interest."
36 On 23 November 2000, Mr Williamson, of Westminster, wrote to Mr Jones saying that he was keen to make the venture a success for many reasons, and referring to the many hours spent on the project to the date of
(Page 13)
- that letter. Mr Williamson's letter referred to the proposed commencement date of 15 January 2001. On 19 December 2000, Genie Australia wrote to the second defendant putting forward a revised proposal, including the finance proposal which involved the second defendant financing half of the cost of the equipment and the other half being financed by Genie Australia. By December 2000, Mr Jones had arranged to open a bank account for the second defendant, and from that account expenses associated with the establishment of the business were paid. By December 2000, a post office box number had been arranged by Mr Jones, and he received mail at that box.
37 On 29 December 2000, Mr Jones went to lunch at Coco's Restaurant with Mr Reilly and Mr Powell. Mr Powell was informed by Mr Jones that he would be leaving the plaintiff's employment and starting up on his own. Mr Powell said he wanted to join Mr Jones in his new venture. Mr Jones told Mr Powell that he intended resigning on 12 January 2001.
38 There was great activity on Mr Jones' part during the first few days of January 2001. On 3 January 2001, Mr Jones signed a letter indicating an acceptance of the last Genie Australia proposal. On 3 January 2001, Mr Jones prepared a list of 34 items of equipment to be ordered. He had telephone conversations with Genie Australia about the availability of items of equipment. On 4 January 2001, he purchased telephones and he arranged to purchase a computer for use in the business. He also arranged to purchase motor vehicles for the business and arranged finance for that purchase. On 8 January 2001, he met with the owner of the premises at 14 Sorbonne Crescent to make final arrangements to permit "Access Rentals" to occupy the premises. On 10 January 2001, Mr Jones and Mr Deschamp signed a tenancy agreement in relation to those premises.
39 Almost all, if not all, of the activities involved in setting up the new business, and which I have described above, occurred during Mr Jones' normal hours of work with the plaintiff.
Mr Jones' Breach of Employment Contract
40 Mr Jones, while being paid by his employer and during his normal hours of work with the plaintiff, established the whole infrastructure for the new business of Access Rentals. In summary, this involved arranging for the incorporation of the second defendant, the securing of rented premises, the acquisition of access equipment from Genie Australia, the arranging of finance, the opening of a bank account, arranging for
(Page 14)
- telephones, computers, business cards, motor vehicles, and the registration of a business name, registering his new business with the ATO and securing an ABN and a TFN, providing instructions to accountants for the preparation of cash flows or business plans, and attending meetings with Genie Australia representatives, Mr Williamson, and Mr Everett. During the period from August 2000 to 11 January 2001, Mr Jones made 55 telephone calls to Genie, 11 to Westminster, and eight to Mr Everett. These were all made on the plaintiff's mobile phone, which was supplied to Mr Jones by the plaintiff for the purposes of his employment. The accounts for this phone useage were paid by the plaintiff.
41 In doing all of these things, I find that Mr Jones was in material breach of the contractual obligation to devote his full attention, and to use his best endeavours, to further the development, reputation and business of the plaintiff.
The Pleaded Case Against, and the Facts Concerning, Mr Deschamp, Mr Reilly and Mr Powell
42 The plaintiff pleads that, as employees, these three men owed fiduciary duties to the plaintiff of fidelity and good faith. That is not in dispute.
43 The plaintiff then pleads that in breach of these duties, these three defendants:
(a) knew of the matters pleaded in par 17(a) to (e) prior to 11 January 2001, and
(b) failed to inform the plaintiff of those matters, in breach of their fiduciary duties.
44 The reference to the knowledge of the matters pleaded in par 17(a) to (e) of the statement of claim was a reference to Mr Jones' activities in incorporating the second defendant, negotiating with Genie Australia, entering into the tenancy agreement for the premises at 14 Sorbonne Crescent, Canning Vale, inducing Mr Deschamp, Mr Reilly and Mr Powell to terminate their employment with the plaintiff and start with the second defendant, and his entry into agreements for the purchase of motor vehicles, computer equipment and mobile telephones. As can be seen, this is a very limited claim.
45 These three defendants were on the sales staff and they were not involved in management of the company in any way. They were not
(Page 15)
- members of the board of management. It is necessary, in examining the relevant events which concern these defendants, to look again to their contractual position. Each of Mr Deschamp, Mr Reilly and Mr Powell could terminate his contract of employment by giving one week's notice. The plaintiff could do likewise. They were entitled to consider whether they would leave the plaintiff's employment or not, and to form an intention to give notice some time in the future. If they told other employees of such intention, there would be no breach of any duty in doing so. If other employees told them about an intention to give notice and to leave the plaintiff's employment, then a failure to report this information would not constitute a breach of any fiduciary obligation. See generally Sybron Corporation v Rochem Ltd [1984] 1 Ch 112 and Lever Bros v Bell [1931] 1 KB 557.
46 The facts in relation to each of these employees are as follows:
Mr Deschamp
47 There are six events which the plaintiff points to in the case of Mr Deschamp. I find that the events occurred as described below.
(a) In August 2000, Mr Jones, after emerging from the August 2000 board of management meeting, came across Mr Deschamp. Mr Jones expressed some disapproval about the plaintiff and said to Mr Deschamp that he would "probably pull the pin". Mr Deschamp said that if Mr Jones was not going to continue working there, then he would not stay.
(b) A month or so later, in September, Mr Deschamp met Mr Jones after work at a tavern in Northbridge. Mr Jones informed Mr Deschamp that he was going out on his own and was looking into a business of hiring out Genie Equipment. Mr Deschamp said that he would like to go with Mr Jones if that was the case. Mr Jones said that he was looking to hire Genie equipment, but did not disclose that he was, in fact, dealing with Genie. The men discussed what Mr Deschamp would be doing if he went to work with Mr Jones, and Mr Jones indicated that he would be doing the same job. There was no discussion about salary. There was discussion about the fact that the business might involve 25 to 30 pieces of equipment, and there was discussion about possible premises.
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- Mr Deschamp suggested that the business might establish at Canning Vale, and he told Mr Jones that he knew of a Mr Harris, of Harris Hire, who had some premises at 14 Sorbonne Crescent, Canning Vale, which might be available. There was no discussion about a precise starting date, although Mr Jones suggested that he wanted to start in early 2001.
- (c) About a week later, Mr Deschamp spoke to Mr Harris on the telephone, who told him that 14 Sorbonne Crescent was available. There was no evidence to say when this telephone conversation took place, and Mr Deschamp was not cross-examined to suggest that the conversation took place in working hours.
(d) In late December 2000, Mr Deschamp was invited to Mr Jones' house. This was outside of working hours. Mr Reilly was there. Mr Jones said that he had been speaking to Genie and had been offered a "Greenfield" deal. This was a reference to one of the finance packages that Mr Jones was negotiating with Genie. Mr Deschamp did not understand what the expression meant. Mr Jones said that he was planning to give notice of termination of his employment on 12 January 2001. Mr Deschamp said that he would do the same, and Mr Reilly said that he would do likewise. Mr Jones asked them not to tell anyone, and he said otherwise they should keep their nose to the grindstone in performing their work with the plaintiff.
(e) Early in January, Mr Deschamp went to Westminster's premises to sign a hire purchase agreement for a motor vehicle. I assumed that this was in working hours, but it is not alleged that a visit of this kind constituted any breach of duty. In any event, this was clearly a very short visit.
(f) Finally, in early January 2001, Mr Jones and Mr Deschamp went to meet with Mr Harris and a lease agreement was signed. Again, there is no allegation that taking the time to do that was a circumstance which constituted a breach of duty.
48 In my view, the conversations with took place out of working hours were conversations that were Mr Deschamp's own business and not a breach of any duty to the plaintiff. There was no obligation to report them
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- to the plaintiff. Further, there was no proof that Mr Deschamp had any knowledge of the large-scale effort being put in by Mr Jones to setting up the business during his working hours.
49 It was not established that Mr Deschamp knew anything about the incorporation of the second defendant. The other points pleaded in par 17 of the statement of claim said to have been known to Mr Deschamp were only made known to him in late December 2000 or early in January 2001, that is in the last two weeks of his employment.
Mr Reilly
50 As already mentioned, Mr Reilly's contract allowed him to give one week's notice to terminate the employment contract. I find that the relevant events so far as Mr Reilly is concerned are as follows:
(a) In August 2000, Mr Jones and Mr Reilly drove to the south-west on the plaintiff's business. Mr Jones informed Mr Reilly that he was going to leave the plaintiff's employment. Mr Jones did not say where he was going, did not say when he was going to leave, or indeed what he was going to do. After the trip, Mr Reilly discussed this with his wife and reached a conclusion that he did not want to work with the plaintiff if Mr Jones was not still working there.
(b) In late August or early September 2000, Mr Jones and Mr Reilly were in Mr Jones' office at the plaintiff's premises. They were going through sales forecasts for September, and Mr Jones was writing figures on a whiteboard. Mr Jones told Mr Reilly that he would have to learn about this side of the job because he, Mr Reilly, would probably have to take over this work when Mr Jones left. Mr Reilly considered that his close working relationship was with Mr Jones and that he did not know Mr Puddy Snr very well and did not think that Mr Puddy Snr would want to employ him in that role. Mr Jones said that he was starting his own access hire business. Mr Reilly asked if he could work in that business. Mr Jones said that nothing was planned and told Mr Reilly simply to keep working.
(c) A couple of times over the next couple of months, Mr Reilly asked Mr Jones what was happening. Mr Jones
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- said "not much". He said that he was trying to arrange a deal with JLG or with Genie. No details were given by Mr Jones about how he was doing this or when he was making these arrangements.
- (d) In late December 2000, between Christmas and New Year, Mr Reilly was invited to Mr Jones' house. This was in the evening after work. Mr Jones told Mr Reilly (and Mr Deschamp who was in attendance) that he had made a deal with Genie. He said that he was going to start a business called Access Rentals. Mr Reilly said that he would like to be part of it. Mr Jones told him to keep working hard at his job with the plaintiff. He agreed to do so. Mr Jones said then, or a little later, that Westminster would contact Mr Reilly to get particulars in relation to finance for the car.
(e) In early January, Mr Reilly signed the hire purchase agreement.
(f) On 29 December 2000, Mr Reilly was invited to lunch by Mr Jones. There was no suggestion that such a lunch was not permitted by the plaintiff. Mr Powell was at the lunch. Mr Reilly had not had much to do with Mr Powell before. Mr Jones then informed Mr Powell that he was leaving, setting up his own business, and that Genie was to be the supplier. He informed Mr Powell that Mr Reilly and Mr Deschamp were going with him. Mr Powell expressed immediate interest in going to work for the new venture as well. Mr Jones asked them not to tell anyone.
As with Mr Deschamp, Mr Reilly was not privy to all of the steps that had been taken by Mr Jones during his ordinary working hours to set up the business. Mr Reilly was simply given information about what Mr Jones planned to do, but, as a salesman and a person not involved at management level with the company, it is my view that it was not a breach of fiduciary duty for Mr Reilly not to report this information to senior management of the plaintiff. The discussions about the new venture were discussions that Mr Reilly attended out of working hours. In my opinion, there was no breach of fiduciary duty in having those discussions.
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51 Mr Reilly knew nothing of the incorporation of the second defendant. He found out about Genie, and the negotiations with it, on 26 or 27 December 2000. He knew nothing about the tenancy arrangements in relation to Sorbonne Crescent, and he learned about the proposed termination of employment of the other defendants, and about the purchase of the motor vehicle, in late December 2000 or early January 2001. He knew nothing about the computer. Once again, all of these pieces of information he found out only within the last two weeks of his employment.
Mr Powell
52 Mr Powell only found out about Mr Jones' plan to leave the plaintiff at the lunch on 29 December 2000. I have found what happened at the lunch in the section of my judgment above discussing the events relating to Mr Reilly. This information and the very limited steps taken by Mr Powell between then and his departure on 11 January, which involved making arrangements for a motor vehicle, did not amount to a breach of any fiduciary duty on the part of Mr Powell.
53 Mr Powell knew nothing about the incorporation of the second defendant, nothing about the tenancy arrangements concerning Sorbonne Crescent, and only found out about the negotiations with Genie, and only knew about the proposed resignation of the others, at the lunch on 29 December 2000. He learnt about the securing of motor vehicles on that same day.
The Law – Fiduciary Duties
54 The relationship of employee and employer is one of the accepted fiduciary relationships: Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 96; Pilmer v The Duke Group Ltd (in liq) (2001) 207 CLR 165 at [70]. In circumstances where there was a real or substantial possibility of a conflict between Mr Jones' personal interests and the duty to his employer, Mr Jones was under a duty not to promote his personal interests without the plaintiff's consent: Pilmer v Duke (supra) at [78]. An employee must not improperly use his or her position to gain an advantage for themselves or someone else, or to cause detriment to the employer: Digital Pulse Pty Ltd v Harris (2002) 166 FLR 421 at [29]-[30].
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55 The precise content of fiduciary obligations depends upon a close analysis of the facts in each case. It was said in Canadian Aero Services Ltd v O'Malley [1974] SCR 592 at 620:
"The general standards of loyalty, good faith and avoidance of a conflict of duty and self-interest to which the conduct of a director or senior officer must conform, must be tested in each case by many factors which it would be reckless to attempt to enumerate exhaustively."
56 In Green & Clara Pty Ltd v Bestobell Industries Pty Ltd [1982] WAR 1 at 16, Kennedy J noted that Mr Green was a person in "top management" and not a "mere employee". As a result, Green had a "larger, more exacting duty which was similar to that owed to a corporate employer by its directors". Mr Jones was in a senior management position with the plaintiff. He owed a duty similar to a director's duty. Mr Deschamp, Mr Reilly and Mr Powell were not managers. They did not owe duties similar to a director.
57 The mere presence of a contract does not exclude the co-existence of concurrent fiduciary duties, and the contract may provide the occasion for their existence: Breen v Williams (1996) 186 CLR 71 at 132.
58 Fiduciary duties exist where there is a dependency or vulnerability on the part of one party that causes that party to rely on another: Johnson v Buttress (1936) 56 CLR 113 at 134-135.
59 The duty of loyalty of an employee in a position of senior management will be breached if the employee secretly makes arrangements during his employment to compete with his employer after termination of the employment. See Hospital Products Ltd v United States Surgical Corporation (supra) at 105 per Mason J; McPherson's Ltd v Tate (1993) 35 AILR 225; Blyth Chemicals Ltd v Bushnell (1933) 49 CLR 66 at 82.
60 Mr Jones was, of course, entitled to leave the plaintiff's service and set up business in competition: Robb v Green [1895] 2 QB 315. However, there is a prohibition on the commission of fraudulent, unfair or wrongful acts in the course of setting up a new business (McPherson's Ltd v Tate (supra)); particularly so in the case of a person in senior management. Examples are the use of confidential information to make arrangements with customers of the employer during the course of employment (Wessex Dairies Ltd v Smith [1935] 2 KB 80 at 88-89) or the recruiting of the employer's key staff for the new business (AF
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- Ralston Associates Ltd v Ralston [1973] NI 229). See also Hivac Ltd v Park Royal Scientific Instruments Ltd [1946] 1 Ch 169.
61 The manner of approaching employees and whether such approaches constitute a breach of contract or fiduciary duties, depends upon the manner in which the approach is made. See McPherson's Ltd v Tate (supra) at page 225.
62 In my opinion, neither Mr Deschamp, Mr Reilly nor Mr Powell had any duty to tell the plaintiff about the few steps they knew which Mr Jones was taking towards the establishment of his business during his working hours with the plaintiff: Sybron Corporation v Rochem Ltd (supra) and Lever Bros v Bell (supra).
63 In Swain v West (Butchers) Ltd [1936] 3 All ER 261, it was held that it was an employee's duty to report to his employer that another employee had done something which would be a breach of his duties in controlling the business of the company. It is clear, however, from the facts of the case that there was no suggestion that there is a general duty upon all employees to disclose conduct of fellow employees which might be a breach of contract. The duty to report was found to exist in Swain's case because the employee was the general manager of his corporate employer. His contract obliged him to do all in his power to promote, extend and develop the interests of the company. The managing director of the company gave the plaintiff certain unlawful orders, which the plaintiff carried out. The matters came to the notice of the chairman of the board of directors, who in an interview with the plaintiff told the plaintiff that if he gave conclusive proof of the managing director's dishonesty, he would not be dismissed. The plaintiff supplied the information and was then dismissed. The plaintiff brought an action for breach of contract and wrongful dismissal on the grounds that under the terms of the agreement between the plaintiff and the chairman, it was not open to the defendant to rely upon information given by the plaintiff relating to his own fraud and dishonesty. This claim was dismissed on the basis that it was at all times his duty to report the acts not in the interests of the company.
Did the Defendants Breach their Duties to the Plaintiff?
64 In the present case, I consider that a sharp distinction must be drawn between Mr Jones, who was the general manager of the plaintiff's access hire business and a member of the board of management of the plaintiff, and the position of Mr Deschamp, Mr Reilly and Mr Powell, who were
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- sales staff with no managerial responsibilities at all. In my opinion, the sales staff had no obligation to report to other senior management the few facts they knew that revealed to them that Mr Jones was planning to establish his own business. None of Mr Deshcamp, Mr Reilly or Mr Powell knew the extent of his secret activities.
65 I find that neither Mr Deschamp, Mr Reilly nor Mr Powell breached any fiduciary duties they owed to the plaintiff. Nothing they learned put them into circumstances where they had a duty to report to the plaintiff.
66 In the case of Mr Jones, however, what was wrong was that Mr Jones was using a substantial amount of time which was paid for by the plaintiff to establish the second defendant as a competitor, thereby giving himself an advantage, namely the opportunity to commence competitive activity as soon as he resigned. A minor attendance to other of his own affairs would not have been a breach. However, the scale of his attendance to the creation of a business to compete with the plaintiff was wrong. Not only was it wrong to do that, but as a senior manager it was a breach of duty not to report his own activities to the plaintiff.
67 In taking the steps during his employment to set up his business which I have described above, and in taking steps in late December 2000 which encouraged Mr Deschamp, Mr Reilly and Mr Powell to leave their employment with the plaintiff, I find that Mr Jones breached his fiduciary duties of good faith, that is, his duty not to improperly use his position to cause detriment to his employer. I have already found that he breached the contractual obligation requiring him to devote his full attention and to use his best endeavours, to further the development, reputation and business of the plaintiff.
The Plaintiff's Claim for Damages for Breach of Contract and Equitable Compensation
68 The plaintiff's claim for damages and compensation is for an amount of $610,459. The calculation of this amount appears from a report prepared by a chartered accountant, Mr Douglas-Brown. Mr Douglas-Brown has calculated amounts said by the plaintiff to represent the plaintiff's loss and damage flowing from Mr Jones' breach of contract. The claimed loss can be broken into two major components with subcomponents, as follows:
69 Losses in period 11 January 2001 to 30 June 2001. ("Loss of Sales and Margins"):
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- to the plaintiff. The plaintiff contends that this is the amount of damages which should be recoverable from Mr Jones (and the other defendants).
71 Mr Douglas-Brown considered that the plaintiff had the capacity to make the sales (which were made by the second defendant in this period). He concluded that the plaintiff had equipment of a similar kind to let out and that the plaintiff had the capacity to service all of the hire sales undertaken by the second defendant in the relevant period. However, he concedes that it has been worked out by overall percentage rather than by determining the circumstances on each day and deciding whether or not, on a particular day, if the second defendant hired a piece of equipment, whether the plaintiff, in fact, had such a piece of equipment available for hire. He considered doing that exercise, but decided the cost of that exercise would have been excessive. I agree that his method was reasonable to adopt.
72 The next subcomponent of the Lost Sales and Margins component is $41,095. This figure is calculated by Mr Douglas-Brown by looking at the average daily rate of hire which was charged by the plaintiff in the period from July 2000 up until 11 January 2001, when Mr Jones and the others left the plaintiff's employment. Mr Douglas-Brown's examination of the records reveals that the average daily hire rate during that period was $107.61. He has therefore assumed that had it not been for the competition from the second defendant in the period from 11 January 2001 through until 30 June 2001, that the plaintiff would have been able to hire out the equipment which had been hired out by the second defendant at an average rate of $107.61 rather than the lower average rate which was charged by the second defendant. This calculation assumes that there is no downturn in the market which forced down hire rates. Mr Douglas-Brown has assumed that the lower rates charged by the second defendant are not explained by general market pressures. That is an unsustainable assumption, given the findings I make later about market conditions.
73 Finally, the third subcomponent of the Lost Sales and Margins component is a claim of $124,668, being the loss of margin that the plaintiff says it suffered in relation to its own sales during this period. Once again, Mr Douglas-Brown has assumed that had it not been for the breach of contract by Mr Jones and the other defendants, the plaintiff would have been able to continue charging a daily hire rate of $107.61 on its own hiring for the period 11 January 2001 to 30 June 2001, whereas, in fact, the plaintiff's average daily hire rate was a figure which was less than that for much of the period. That lost margin over the relevant period
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- produces the figure of $124,668. Once again, this assumes that the reduction in rate has been driven entirely by the existence of the second defendant as a new competitor and not by general market conditions. This would be so if the plaintiff had determined to compete vigorously with the second defendant and to match its prices to offset the effect of Mr Jones' new business. However, the evidence of Mr Barker was (and I accept it) that the second defendant was not specifically targeted. The general market conditions had turned down, and I find that this explains the reduction in the plaintiff's average hire rates in the period.
74 The second major component of loss is for two years after 30 June 2001. This is called "Future Loss". Mr Douglas-Brown estimates that after the initial period through to 30 June 2000, there was an ongoing loss suffered by the plaintiff. He calculated the sales of the second defendant for May 2001 and June 2001, which indicated that the sales of the second defendant had by then settled down. He than annualised those figures. He considered that 40 per cent of the revenue earned in the period from 1 July 2001 through to 30 June 2002 could be said to be a loss suffered by the plaintiff. Mr Douglas-Brown calculated this by discounting the second defendant's projected earnings by 60 per cent. This gave a loss said to be suffered by the plaintiff in the first year to 30 June 2002 of $206,400.
75 He did a similar exercise for the year 1 July 2002 to 30 June 2003 and discounted that by 80 per cent, meaning on that calculation that 20 per cent of the revenue earned by the second defendant was, in fact, revenue lost to the plaintiff. This produced a claimed loss of $103,200. Adding together those two figures produced a total loss of $309,600 for the second component.
76 Since Mr Douglas-Brown prepared his report, which was in September 2001, the plaintiff sold its access hire business. I find that sale occurred on 31 October 2002. As a result, Mr Douglas-Brown concedes that the claimed loss of $103,200 referred to above is excessive. Mr Douglas-Brown agreed this sum would have to be reduced. It could either be adjusted by dividing that figure by twelve and multiplying by four (which produces a figure of $34,400) or by making an estimate which he said should reflect the fact that the greater loss would be earlier in the period and a smaller loss later in the period. He used the latter method of adjustment, and therefore concluded that the loss which he said occurred in the year to 30 June 2003 should be reduced by half to $51,600.
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77 I find that the Future Losses – the losses for the period after 30 June 2001 – cannot be recovered as damages or compensation from the defendants. The claim made against the first defendant is that, in breach of contract and his fiduciary duties, he set up his business when he was supposed to be working for his employer. If he had resigned and then taken steps to set up his business, it would have taken a certain period of time before he could start trading (I deal with that below). Thus, after that time he could have legitimately begun to trade. Any loss after that time and attributable to the new business is a consequence of Mr Jones going into legitimate competition. That loss – the future loss – does not flow from the breach of contract or breach of duty.
78 The plaintiff has analysed its sales list and the sales list of the second defendant to provide support for its claim. Mr Maxwell, the plaintiff's financial controller, took the second defendant's customer list in relation to invoices rendered between the commencement of its trading on 22 February 2001 through until the end of June 2001. The total number of customers who had been billed for hire by the second defendant in that period was 130. The names on this list were then compared with names on the plaintiff's customer list. Ninety-six, or 73.85 per cent, of the second defendant's customers' names appeared on the plaintiff's customer list. Expressed in another way, 34 customers, or 26.15 per cent of the second defendant's customers, were customers who had not been customers of the plaintiff.
79 Mr Jeffrey Herbert ("Mr Herbert"), a chartered accountant, was called by the defendant, and he made an attack on a number of aspects of Mr Douglas-Brown's report. The most important aspects of the attack are as follows:
80 First, he attacked the assumption that all sales made by the second and sixth defendants in the period between 11 January 2001 and 30 June 2001 were lost sales to the plaintiff. His opinion was that it was necessary to examine the plaintiff's share of the whole access hire market in Perth, which he assumed was 19 per cent. He then assumed that the sales by the second and sixth defendants were achieved by winning sales from each other competitor in the market, and that therefore only 19 per cent of the second or sixth defendants' sales were sales lost to the plaintiff. In my opinion, that is not a valid approach.
81 The position is that on 10 January 2001, Mr Jones made sales on behalf of the plaintiff. If he had proceeded as planned (in breach of contract and his duties), he would have started making sales within a few
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- days on behalf of the second defendant. In my opinion, any sales made by Mr Jones in the "headstart" period (see below) were sales that should not have been made by him and which were made only in consequence of his breach of contract and breach of duty owed to the plaintiff.
82 It is clear that if Mr Jones was able to make a sale, it was a sale he could make no matter what corporate name appeared below his name on the quotation. I find that all the sales in the "headstart" period were sales gained by the second and sixth defendants as a result of Mr Jones' breach of contract and breach of fiduciary duty. It does not matter whether the sale was to an existing customer of the plaintiff or a new customer. They were all sales lost to the plaintiff.
83 In any event, there is a problem associated with this assessment made by Mr Herbert. It is that there is no clear evidence of the size of the access hire market. The only evidence on the topic was the evidence of Mr Puddy Snr, who said that he did not know what the size of the market was, but that there was conjecture about whether there were 600 or 900 machines in the Perth market.
84 Secondly, Mr Herbert also said that if sales of the second and sixth defendants were added to the plaintiff's sales, that the downward trend in the plaintiff's sales over the preceding 30 months would come to an end. It would show the plaintiff's sales beginning to trend up again from January 2001. Mr Herbert expressed the opinion that the overall downtrend in revenue over the period from July 1999 through to January 2001 was likely to have continued. I cannot accept that opinion. If carried through to its logical conclusion, sales would trend down until they reached zero. This was improbable because the plaintiff was run by Mr Puddy Snr, who was a successful and efficient businessman.
85 In any event, the three months of September, October and November 2000 revealed an uptrend in the plaintiff's revenue. That is the first time there had been an uptrend for a period of three months since July 1999. All of the other uptrends in that period showed an uptrend of only one month. December 2000, of course, produced a low result, but then December in every year was a flat month for sales.
86 It may also be observed that when the sales of the second and sixth defendants for the "headstart" period are added to the plaintiff's own sales figures, they do not produce figures which are very far out of kilter with earlier months. Indeed, the addition of those figures only brings the
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- plaintiff's monthly sales figures back to the amount that it was earning in about October 2000.
87 Thirdly, Mr Herbert also challenged Mr Douglas-Brown's assumption that the plaintiff could have achieved the sales lost to the second and sixth defendants, at higher margins. The evidence of a number of witnesses was that price competition during the first half of 2001 was still fierce. Thus, although utilisation may have increased and by that means revenue increased, there is evidence which I accept which leads me to find that margins were still being kept down by price cutting in the first half of 2001. I have referred to that evidence elsewhere. I agree with Mr Herbert that the claimed extra margin (which Mr Douglas-Brown says should be added to the loss represented by sales of the second and sixth defendants) cannot be sustained. Nor do I consider that the limited competition which Mr Jones' company produced in the market resulted in a reduction in the plaintiff's margins on the sales the plaintiff achieved in the period after 11 January 2001.
88 Fourthly, Mr Herbert also challenged Mr Douglas-Brown's calculation of future losses for the two years after 30 June 2001. Mr Herbert noted that Mr Douglas-Brown assumed that Mr Jones' companies were entitled to compete with the plaintiff by 1 July 2001, and that they would have been fully operational by that date. Mr Herbert said he found it difficult to understand how the plaintiff's profit in 2002 and 2003 could be lower in fact than it would have been but for the alleged breaches by Mr Jones. In Mr Herbert's opinion, this component of the plaintiff's claim is unsubstantiated, arbitrary and speculative. I agree that this part of the plaintiff's claim cannot be substantiated or supported in principle, for the reasons I have given above.
Market Conditions in 2000 to 2001
89 In November 2000, Mr Puddy Jnr thought that Mr Powell should be dismissed, because the access hire business turnover had fallen from levels earlier in the year. I find that to some degree there had been a reduction in turnover in the latter half of 2000. There is an issue between the parties about whether this reduction in turnover was because part of the energy of Mr Jones, Mr Deschamp, Mr Reilly and Mr Powell was being dedicated to the setting up of Mr Jones' business, or whether it was caused solely by market conditions. It has not been established that Mr Deschamp, Mr Reilly and Mr Powell dedicated more than an hour or two in discussing the new business in working hours. I find that they continued to work hard at all times up until 11 January 2001 to secure
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- business for the plaintiff. However, Mr Jones did not dedicate all his time to his job. On the contrary, he spent a lot of time attending to the establishment of his new business. This had the effect of allowing him to start in business earlier than he would have been able to do if he had not breached his contractual and fiduciary duties; but that is another issue. The issue here is whether any of the plaintiff's downturn in the second half of 2000 was caused by Mr Jones' breaches of contract and fiduciary duties.
90 The plaintiff has not attempted to claim some portion of this reduced turnover in 2000 from Mr Jones. Instead, the plaintiff claims that the remuneration paid to Mr Jones from February 2000 until 11 January 2001 should not have been paid. The plaintiff claims it as part of its compensation and damages. I deal with that claim later.
91 I find that market conditions had become more difficult and that this did cause a reduction in the plaintiff's turnover during the second half of 2000 and during the first half of 2001. One reason was that a number of major projects had come to an end during the year 2000, and this resulted in less demand for access hire equipment throughout the whole industry. As a result, a price-cutting war had commenced between the plaintiff and its competitors. The downturn was bad enough to cause another one of the major competitors, Coates Hire, to send some of its hire units back to the eastern states. The downslide in the prices had been in place during 2000, and it was particularly evident during at least the first quarter of 2001. Mr Alan Barker confirmed this. When he commenced work in January 2001, he very soon discovered that there was a price war between the various competitors within the field. He had authority to discount prices, and he and his team followed the market. He said that when he arrived to start work, there were a number of work platforms sitting idle. His discounting was an effort to increase the utilisation rate of the hire equipment in the yard. The impression he gained when he started work for the plaintiff on 15 January 2001 was that rates were very low and getting lower. This could not have been as a result of the activities of Mr Jones and his company, because his company did not start trading until 22 February 2001. This does not mean that revenue could not increase. It could do so if utilisation of plant increased.
Headstart
92 The plaintiff alleges that the work of Mr Jones carried out in the plaintiff's time resulted in the establishment of Mr Jones' business in much shorter time than would have been the case had he not breached his
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- contract and his fiduciary duties. This gave Mr Jones and his companies a "headstart", a "springboard"; that is, an early start into his new business.
93 The expressions "headstart" or "springboard" have been used as a tag in other cases to refer to the advantage gained by persons who have misused confidential information. Those cases do not apply here. In United States Surgical Corporation v Hospital Products International [1983] 2 NSWLR 157, many "headstart" or "springboard" cases were considered. Following the reference to those cases, the Court then said at page 233:
"This review shows that the headstart approach to damages or other relief is not based on some artificial or arbitrary doctrine, to be applied regardless of the facts of the case. It is a principle applied in conformity with the more general principle that a person misusing confidentially information must answer for his default according to his gain."
94 In my view, the "headstart" cases are no more than a collection of cases dealing with circumstances where a person has gained an advantage which is measured by reference to the advantage which has followed the misuse of the information. By analogy, that approach can be applied here. The plaintiff, instead of waiting until he terminated his employment, by giving proper notice, and then taking the considerable time which was necessary to set up his competing business – which he was entitled to do – took the time of his employer and established the business so that he was in a position to start in competition almost immediately after he left his employment. If he had not breached his duties and contract, he would not have been able to start in business straight away. He therefore gained a "headstart" as a result of his breach of contract and breach of fiduciary duty.
How Long Would it have Taken to Set up a New Business after 11 January 2001?
95 If Mr Jones had fulfilled his contract, he would, on 11 January 2001, have given one week's notice of his intended departure and ceased employment on 18 January 2001. To set up his new business, he would have taken all the steps which he actually took during the term of his employment. It is true that this could have been done in a shorter time than it took him in 2000. He started his activities in February 2000, and those activities were spread over the next 11 months. There were, however, periods of inactivity, which leads me to the conclusion that it
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- would not have taken Mr Jones anywhere near 11 months to set up his business if he had started the process on 18 January 2001. The plaintiff concedes this and submits that the process would have taken about five-and-a-half months before the second defendant would have been operating in competition.
96 The defendants sought to show that it would have taken much less time than five-and-a-half months to set up the business. Counsel for Mr Jones submitted that Mr Jones could have set up and been operating by mid-March, ie in less than two months. To this end, the defendants called Mr Pfrunder. Mr Pfrunder was the financial controller of Genie Australia. He was asked questions, the answers to which showed that if every step was taken expeditiously, the first step commencing on 18 January 2001, Genie could have started delivery of machines by mid-March. However, that does not take into account the time that Mr Jones wanted to take to gain competitive prices from JLG Australia. In addition, if he had not been trying to keep his activities a secret, it was likely that he would have contacted the manufacturer which supplied equipment to the plaintiff. (Mr Jones did not do that during 2000 because news would have reached the plaintiff about his enquiry.) Once he had received information from the manufacturers, Mr Jones would have to have taken time to compare the prices gained from the manufacturers. On the assumption that he would have still have chosen Genie, it is clear that Genie required cash flow and financial information and this would then have resulted in Mr Jones going off to see Mr Everett. During this process, Mr Jones would have had to take time to arrange for the incorporation of his company, to secure a post office box, to arrange for stationery, to arrange for his premises, to purchase telephones, a computer and motor vehicles, and to make arrangements to employ staff. There are other things not even mentioned which would have to have been organised. To mention just one, it would have been necessary to arrange for desks and chairs for the premises. He would have to have taken time to talk to his bank manager about opening an account once his company was incorporated.
97 In my opinion, the true position lies somewhere between the time the plaintiff says it would have taken and the time that Mr Jones says it would have taken, to set up the business. The plaintiff's assessment of five-and-a-half months is based on the fact that Mr Jones took about that time once he had firmly resolved to leave the plaintiff's employment in August 2000. However, it is clear that during the period from August 2000 to January 2001, Mr Jones did continue to take time to carry out his duties for the plaintiff, and that must therefore have slowed his progress
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- towards the setting up of his own business. I have explained why I consider that the two-month period suggested by counsel for Mr Jones is not long enough.
98 I will now decide how long the process would have taken. In my view, once Mr Jones left his employment with the plaintiff, it would have taken him a month to arrange the incorporation of the second defendant, to employ staff, to arrange accommodation, to arrange a bank account, to arrange registration with the Australian Taxation Office, and to acquire telephones, motor vehicles and the like. During that month he could also have made his initial contact with, and obtained prices from, potential suppliers. In my view, he would have then required just over two months to settle on his business plan in a form which would satisfy the supplier of equipment, to negotiate and arrange finance, to arrange for delivery of equipment, to check it and make it ready for business. Allowing also for the week of notice which Mr Jones would have to have given to the plaintiff before commencing these activities, leads me to the conclusion, and I find, that it would have been the end of April 2001 before he had set up the business. In other words, he would have been able to commence earning income on 1 May 2001.
The Role of the Second Defendant and the Sixth Defendant
99 Originally Mr Jones planned to conduct all his business in the name of the second defendant. That is why the company was incorporated in 2000 and a business name "Access Rentals" registered in the name of that company. Letterhead was arranged in the name of that company. As soon as the plaintiff discovered what Mr Jones was doing, he was dismissed and these proceedings were commenced. An application for an injunction restraining Mr Jones from conducting business was filed on 12 January 2001. Negotiations took place between the parties, and on 2 February 2001 Mr Jones gave an undertaking that the second defendant would not commence trading until 15 February 2001. According to Mr Jones, his bank then required him to establish a new company to carry on his business, and on 9 March 2001 the sixth defendant was incorporated. Thereafter it traded as "Access Rentals".
100 Between 22 February and 9 March 2001, items of equipment were hired out. These could only have been hired out by the second defendant. Invoices were, in fact, sent out in the name of the sixth defendant, but this did not truly reflect what had happened. I find that what happened was that the second defendant began running the business in 2000 when it opened its bank account and began paying expenses associated with the
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- business, and that when trading commenced on 22 February 2001 it was the second defendant which did so. The second defendant then ceased to trade on 9 March 2001, and the sixth defendant then started trading on that day and has since that day conducted the business of Access Rentals. Mr Jones controls both companies and owns the shares in both companies.
101 The case against the second defendant is that it participated, or assisted, in Mr Jones' breaches of duty. The case against the sixth defendant is that it took the benefit of the breach of duty by Mr Jones with knowledge. A person who knowingly participates in a breach of fiduciary duty will be liable to account to the person to whom the duty was owed for any benefit he received as a result of such participation: Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373 at 397 per Gibbs J. There is no doubt that from the date of its incorporation, the second defendant was involved in the preparation of this business. The second defendant therefore participated in the acts of Mr Jones which were breaches of his fiduciary duty insofar as they occurred during his employment with the plaintiff.
102 The sixth defendant was not a participant in the breach of fiduciary duties, because it did not exist until March 2001. However, the sixth defendant was a recipient of the benefits which have flowed from the breach of fiduciary duty, knowing of the breaches of duty. It had this knowledge as a result of Mr Jones' knowledge. In my view, the sixth defendant is therefore liable and equitable remedies are available against it.
The Law - Equitable Compensation for Breach of Fiduciary Duties and Damages for Breach of Contract
103 In Nocton v Lord Ashburton [1914] AC 932 at 956-957, the Lord Chancellor stated that courts of equity have jurisdiction to direct accounts to be taken, and in proper cases to order a solicitor to replace property improperly acquired from the client, or to make compensation if he had lost it by acting in breach of a duty which arose out of his confidential relationship to the man who had trusted him. In Warman International Ltd v Dwyer (1995) 182 CLR 544 at 556, the High Court said these words are of general application in relation to remedies for breach of fiduciary obligations. A plaintiff may therefore elect to have a compensatory remedy against the fiduciary instead of claiming an account of profits. See Warman International Ltd v Dwyer (supra) at 559.
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104 In this case, the plaintiff has elected to claim only equitable compensation for the breach of fiduciary duties. The assessment of equitable compensation is not fettered by many of the common law notions which have to be considered in an assessment of the quantum of an award of damages at common law: Re Dawson (deceased) [1966] 2 NSWR 211; Hill v Rose [1990] VR 129 at 144. Issues of foreseeability, remoteness and contributory causes do not have to be considered. The subject is well covered in Meagher, Gummow and Lehane "Equity Doctrines and Remedies" 4th ed, 23-015 to 23-020.
105 In Re Dawson (supra), Street J said that issues of causation do not readily enter into consideration when considering the remedy of restitution. This does not, however, mean that the loss leading to the claimed compensation does not have to have any link at all to the breach of fiduciary duties. In O'Halloran v RT Thomas & Family Pty Ltd (1998) 45 NSWLR 262, Spigelman CJ and Meagher JA concluded that in assessing equitable compensation, while foreseeability is not a relevant consideration, it is essential that losses made good are only those which, from a commonsense point of view, were caused by the breach of duty (see page 273 and page 281). I respectfully agree.
106 Viewed from a commonsense point of view, I conclude that breaches of fiduciary duty by Mr Jones caused the plaintiff a loss of sales in the "headstart" period and the other loss I refer to below.
107 Damages for breach of contract are assessed by putting the plaintiff in the position it would have been in had the contract been performed: Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1 at 11-12. In the circumstances of this case, there is no practical difference in the assessment of compensation in equity and damages at law.
Quantification of Equitable Compensation and Damages
108 The subparagraphs below correspond with the losses claimed by the plaintiff and referred to in the subparagraphs in par 69 above.
(a) The undertakings in lieu of injunction meant that Mr Jones did not start the second defendant into business until 20 February 2001. Hire sales which were made by Access Rentals after that date and by the end of April, amounted to $58,113. The majority of those sales were to persons who were customers of the plaintiff on 11 February 2001. The others were not. For reasons given above, that does not matter. The establishment of Mr Jones' business
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- resulted in Mr Jones being able to bring into the market a company with a large section of the plaintiff's sales staff earlier than would have been the case if he had complied with his contract. That revenue, less five per cent maintenance costs which reduces the figure of $58,113 to $55,207.35, is therefore fairly representative of part of the loss the plaintiff suffered.
- This head of compensation and damages I therefore assess at $55,207.35.
- (b) Loss of margin on "Access Rentals" sales.
(c) Loss of margin on plaintiff's own sales.
As explained earlier, in my opinion, none of the loss claimed under (b) or (c) is a sustainable claim for compensation or damages. It was general competition in the whole access hire market which kept down hire rates in the first half of 2001, even though utilisation rates began increasing, with the result that revenue was increasing for that reason.
(d) Future losses – 1 July 2001 to 30 June 2002.
(e) Future losses – 1 July 2002 to 31 October 2002.
109 For reasons given above, I hold that none of the loss claimed under (d) and (e) supports a claim for compensation or damages
Wages
110 The plaintiff claims to recover all of the wages paid to Mr Jones for the period February 2000 to January 2001. It is alleged that he did not earn these wages and allowances because he spent all his time setting up his business. I do not agree.
111 The plaintiff did work and did earn income for the plaintiff by his efforts. In my view, he dedicated the equivalent of three months' working time to the task of setting up his new business. Exhibit 11 reveals that wages, allowances and bonuses paid in the 12-month period February 2000 to January 2001 amounted to $115,705. The amounts paid each month varied. I will take one-quarter of that amount as representative of the plaintiff's loss, ie $28,926.25. That will be added to the figure of $55,207.35 referred to above, making a total of $84,133.60.
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Allowance for Skill and Income Tax
112 After I had reserved my decision, I sought further written submissions on the question about whether or not some allowance should be made in respect of Mr Jones' skill, expertise or other expense. See Warman International Ltd v Dwyer (supra) at 562. The plaintiff did not wish to make any further submissions, and the defendants did not submit that any amount should be allowed to the defendants. As a result, it is not necessary to further consider whether or not any allowance should be made.
113 I also invited further written submissions from the parties following a submission by the defendants that any award of compensation should be reduced by the amount of corporate tax which would have been payable by the plaintiff. The defendant referred to Digital Pulse v Harris (supra) at [107], where Palmer J held that a provision for tax at the corporate tax rate should be deducted from the gross profits of the projects which had been diverted from the plaintiff in that case. As a result, I invited further submissions from the parties. Neither of the parties chose to make any submissions. In Tuite v Exelby (1992) 25 ATR 31; (1992) 93 ATC 4293 at 93, the Court awarded damages without deducting income tax likely to be payable. Shepherdson J quoted the following statement of Diplock LJ in London & Thames Haven Oil Wharves Ltd v Attwooll [1967] Ch 772 at 815 where he said:
"Where, pursuant to a legal right, a trader receives from another person compensation for the trader's failure to receive a sum of money which, if it had been received, would have been credited to the amount of profits (if any) arising in any year from the trade carried on by him at the time when the compensation is so received, the compensation is to be treated for income tax purposes in the same way as that sum of money would have been treated if it had been received, instead of the compensation. The rule is applicable whatever the source of the legal right of the trader to recover the compensation. It may arise from a primary obligation under a contract, such as a contract of insurance, from a secondary obligation arising out of non-performance of a contract, such as a right to damages, either liquidated, as under the demurrage clause in a charterparty, or unliquidated, from an obligation to pay damages for tort, as in the present case, from a statutory obligation, or in any other way in which legal obligations arise."
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114 In PM Sulcs & Associates Pty Ltd v Daihatsu Australia Pty Ltd [2001] NSWSC 798, Kirby J noted that in Tuite v Exlby (supra), Shepherdson J had formed a view that it was likely that the Commissioner would assess the plaintiff for income tax on the amount awarded, and therefore included that sum in the award. Kirby J noted that Shepherdson J had sought and obtained from the plaintiffs an undertaking to be given in open court that in the event that tax was not assessed, they would refund to the defendants the amount of tax which had been allowed in the judgment. In my opinion, the component of compensation and damages I have awarded, which amounts to $55,207.35, is, in effect, income which the plaintiff should have earned, and as a result it is likely, in my opinion, that income tax will be payable on it at the rate of 30 per cent. The recovery of wages already claimed as a tax deduction will probably be treated in the same way. I will require an undertaking from the plaintiff to be given in open court that in the event that such tax is not assessed at all, or that such tax is assessed at less than 30 per cent, they will refund to the first, second and sixth defendants, the amount by which 30 per cent of $84,133.60 exceeds the tax assessed, as the case may be.
115 I should add that the defendant took the opportunity, as a result of my invitation to make further submissions on the point, to make other submissions about alleged savings in the plaintiff's wages bill as constituting further marginal savings to the plaintiff over and above maintenance costs for equipment, which was the only item identified by the parties during the course of the trial which should be deducted from any compensation or damages based on loss of earnings. These additional submissions have no relevance to the point on which I invited further submissions, and were made without leave. They should not have been made. See Carr v Finance Corp of Australia Ltd (No 1) (1981) 147 CLR 246 at 258. The plaintiff wrote objecting to the further submissions and pointing out that it was a matter not canvassed by either of the parties' witnesses. I uphold that objection.
Award of Equitable Compensation and Damages
116 Subject to the undertaking in the terms referred to above, the result is that I assess the equitable compensation and damages payable to the plaintiff at $84,133.60. The first, second and sixth defendants are liable to pay that sum.
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