Warman International Limited & Anor v Dwyer

[1994] HCATrans 337

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IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Brisbane No B8 of 1994

B e t w e e n -

WARMAN INTERNATIONAL LIMITED

First Applicant

and

PEKO-WALLSEND OPERATIONS LTD

Second Applicant

and

BRIAN DWYER

First Respondent

and

BONFIGLIOLI TRANSMISSION (AUST)

PTY LTD

Second Respondent

Warman 1 13/5/94

and

ENGINEERING TRANSMISSION

AGENCIES PTY LTD

Third Respondent

Application for special leave

to appeal

BRENNAN J
DAWSON J .
GAUDRON J

TRANSCRIPT OF PROCEEDINGS

FROM BRISBANE BY VIDEO LINK TO CANBERRA

ON FRIDAY, 13 MAY 1994, AT 12.10 PM

Copyright in the High Court of Australia

MR D.R. GORE, QC:  May it please the Court, I appear with my

learned friend, MR G.H. BRANDIS, for the applicant.

(instructed by Phillips Fox)

MR R.I. HANGER, QC:  May it please the Court, I appear with

my learned friend, MR D.K. SMITH, for the

respondent. (instructed by Halletts)

BRENNAN J:	Mr Gore, we will call on Mr Hanger first.
MR GORE:	As the Court pleases.
BRENNAN J:	Mr Hanger.
MR HANGER:	We submit that the application should be refused

for two reasons; the first being that it may be an academic exercise in so far as the Court of Appeal

has sent the matter back to the trial judge for

assessment of damages and further consideration.

It may well be that at the end of the day the

plaintiff in the case is satisfied with the amount

of damages that it receives and this appeal

therefore would be a futile exercise.	The second
basis upon - - -

BRENNAN J: Before you proceed from that basis, the problem

that it raises is whether the basis of assessment

on which it has been sent back for reconsideration

is the appropriate basis.

MR HANGER:  I concede that, Your Honour.

BRENNAN J: That would be a special leave point, I should

think, would it not?

MR HANGER:  Your Honour, I will come to that on the second

basis.

BRENNAN J: Second point, yes.

Warman 2 13/5/94

MR HANGER:  The second point is this, that, with respect, in

each case involving a breach of fiduciary duty, the

court has got to determine what is the appropriate

method of determining relief it will grant. In

that respect, we would adopt the remarks that

appear at pages 134 and 135 of the record, starting

in the middle of page 134.

GAUDRON J: But the court did not adopt that approach. It

accepts that there is a liability to account and

proceeded on the basis that it should be determined

by reference to the applicant's loss.

MR HANGER: 

Your Honour, it determined that as being the

appropriate method in the particular circumstances
of the case, and with respect, what the court is
driving at is that the approach of equity must be
flexible on the circumstances of each case. At
times the remedy of account is not appropriate. It

arrived at that conclusion and said what you do

here is assess for loss of a chance. The

surrounding facts were that the Italian
distributor, Bonfiglioli had approached Warman, my
learned friend's client, in 1986, asking it to

assemble rather than merely sell its products, and had been rebuffed. That appears at pages 110, 133

and 134. Secondly, the Italian company was bent on

making new arrangements in Australia. That appears

at 134. Thirdly, a decision had been made by

Warman, affecting the agency adversely. That

appears at 110. Fourthly, the Italians were not

very pleased with a number of matters that Warman

were doing. That appears at page 73. So that, in

the Bonfiglioli Italian camp, there is great

discontentment and it would appear, a proposal to

go elsewhere.

On the other side of the ledger, in the Warman camp, there is a finding by the judge that there

was a serious contingency that Warman would abandon

the agency business. So, the Italians were
thinking of getting rid of the Warman and Warman

were thinking of getting rid of the Italian

distributor.  Now, in those circumstances, the

court said, the man should not have done what he

did, he acted in breach of fiduciary duty. We do

not quarrel with that. The question is how the damages are assessed, and they said, really the

best way of doing it is loss of a chance, what were

the chances of Warman retaining that

distributorship, and proceeded accordingly.

Our submission is this, that there is a degree

of flexibility in the remedy, or the way that the court will go about assessing the damages that it

awards or whether it gives an account or not, and

while I do not suggest that Hospital Products is on

Warman 13/5/94

all fours with a case like this, the approach is

confirmed in the judgment of Mr Justice Mason, as

he then was, in that case along these lines; in

each case the form of inquiry to be directed is

that which will reflect as accurately as possible

the true measure of profit or benefit obtained by the fiduciary in breach of his duty. What is the measure of profit obtained in breach of his duty?

It is, we would suggest, in a case like this a head

start, because he could have done all this lawfully

three months later, and Bonfiglioli could have

terminated the franchise in 3 months, but he got in

early and certainly he is liable and the question

is for how much. Our submission is that the

approach of the Court of Appeal is an approach that

is open to any court, that it has a discretion as

to how it approaches the problem of assessing

damages or whether it awards an account, and that

it reached the right result in this case.

BRENNAN J: The problem, Mr Hanger, seems to be this, that

there are only two considerations that seem to have

attracted attention. One is, what did Warman lose

and, in the result, that is the order that has been

made for reassessment. The other was, did Dwyer

take Warman's goodwill and turn it into part of the

new business, and in that event, Warman should be

entitled to an ongoing percentage of the new

business. Both of those seem to overlook an

intermediate situation which is that what Dwyer

picked up and took with him was the ephemeral

goodwill of Warman and if he misappropriated
anything, he misappropriated only that. But what
profits did he make out of it? That puts you into
the area of account again. That does not mean that
Warmans are entitled to an ongoing percentage of

the business, it means that they are entitled to an

account of the profits made by the defendant in

utilizing whatever goodwill Warmans had left. That

is not quite the same as what the Court of Appeal

has ordered, is it?

MR HANGER:  No, Your Honour, it is not quite the same. I

can only put it on the basis that there is a

discretion in the particular case as to how it

thinks best to compensate somebody or to make him

account. In this case the court thought that the

best approach was the one that it accepted in the

end which was, there was compensation for loss of a

chance in the particular facts of the case.

As I say, in Hospital Products the method

adopted was a head start approach - in the

dissenting judgments of course, but dissenting on a

different point - a head start approach being the

appropriate one in that case. May I remind the

Court of the statement in Chan v Zacharia that

Warman 4 13/5/94

equity must not be used as an instrument of

oppression. What the trial judge did, and what the

Court of Appeal said, was that it was being used as

an instrument of oppression, whereas the approach

adopted by this Court said, well, the best way of

handling this is to say, loss of a chance, because

you were going to lose that agency anyway.

BRENNAN J: But the prima facie entitlement of a beneficiary

against a fiduciary is to an account, is it not?

MR HANGER:  Yes, Your Honour.

BRENNAN J: What is it, if anything, in this case, which

leads to the conclusion that damages rather than an

account is appropriate?

MR HANGER:  The particular facts to which I referred, that

is to say, that to exaggerate the - Warman was

about to lose the distributorship, and the employee

who gets in - let me exaggerate and say, gets in

the day before Warman is about to lose the

distributorship, should not be liable for their

accounts indefinitely, and that would be to make

equity oppressive.	He should be liable for
something.

DAWSON J:  No one is suggesting it is indefinite, but I

suppose you would say it is so difficult to fix a

date at which you bring it to a halt, that damages

are a better method in the circumstances.

MR HANGER:  Yes, and what His Honour the trial judge did,

was actually assess damages and did not end up

saying that is the ultimate result, but said, "I am

going to say that Warman would have kept that

distributorship for another year" and said that is

worth $325,000, and that is the approach that we

would adopt. It was just that he then went on to

deal with the accounting remedy and said

accounting-wise it is a lot more than that, it is

in the order of a million dollars.

BRENNAN J:  Mr Hanger, if it was worth $325,000 to Warman,

is there anything about the evidence in the case

which would indicate that it was worth more or less

in the hands of Dwyer and the companies when they

took it over?

MR HANGER:  No, Your Honour, because what the Italians

wanted was a person who would manufacture or

assemble their gearboxes, and so he immediately

started assembling. So, I think I would be right

in saying, you cannot really say what it was worth

to him afterwards without going into a dissection

of his business and say, the assembly was worth

Warman 13/5/94

this, the franchise of just selling gearboxes that

had been assembled elsewhere was worth so much.

BRENNAN J:	Is that not perhaps what should be done?
MR HANGER:	It may be what should be done and we complained

that His Honour actually took the account himself,

and that was one of our grounds of appeal before

the Court of Appeal. We said, if anything, it

should go back and the account be properly taken,

but that really disappeared in the course of the

appeal because of the way the court went.

BRENNAN J: Yes .

MR HANGER: There is nothing I can add, Your Honour.

BRENNAN J: Yes, Mr Gore.

MR GORE:  Thank you, Your Honours.

BRENNAN J: You can see the problems that are concerning the

Court. Is this a case where it is necessary or

desirable to grant special leave simply in order to

consider the question of account as against

damages, on the facts of this case?

MR GORE:  Your Honour, it is, because at the moment the

order of the majority of the Court of Appeal limits

Warman's recovery to an assessment by the trial

judge on a further hearing of the amount of

Warman's loss. That amount, on the trial judge's

own figures, is less than the amount that would be

produced if an account were taken. Therefore, the

question, whether or not the prima - - -

BRENNAN J: Where does that appear from His Honour's

findings?

MR GORE:  The figure of $325,000 that has been referred to

appears in the record at page 85, line 22, where

His Honour expressed the view, in the path along to

his final judgment, that:  If equitable damages had been the basis

of assessment, it would have been appropriate

to award $325,000 as the loss of warman's

chance of retaining the agencies

business: Saunders v Parry ( supra) That

figure would have been reached by assessing

the value of the business at that time at one

year's potential profits before tax.

That statement and the authority of

Saunders v Parry to which reference is there made

suggest that the approach which His Honour is there dealing with is one where Warman's loss is assessed

Warman 6 13/5/94

in some capital sum. The amount that somebody in

the market-place might pay for the business at that

time. However, in the context of equitable relief

against a fiduciary who obtains a benefit arising
out of a circumstance of conflict, to put it rather

generally, the prima facie right is not simply to

some capital amount which the principal may have

lost but also to the profits of the asset which is

wrongfully taken by the fiduciary.

BRENNAN J: That is the point. Were you able to demonstrate

at any stage of these proceedings that the profits

that the defendant to the proceedings made was

greater than the amount of the loss as assessed to

Warmans?

MR GORE:  Yes, Your Honour.

BRENNAN J: Does that appear anywhere?

MR GORE: 

There is a summary of the profit figures.

BRENNAN J: 

It would not be simply a matter of the profits

overall of the business, would it? It would be the
profits that were made as the result of the
misappropriation of the Warman goodwill.

MR GORE: 

That is what the trial judge sought to assess for

the period from the date the business was lost to

the date of judgment. He sought to assess the

amount of the profits, together with the amount of

the goodwill, and he then adopted a discounting

approach, to use a loose expression, based upon the

approach of Lord Upjohn in Re Jarvis Deceased as

discussed also by the Chief Justice in

Hospital Products, and he discounted each by half,

but the resultant figure is much greater than the

$325,000. The resultant figure, as calculated by

the trial judge, appears at page 91 of the record

in a table between lines 35 and 45. The total, it

was accepted before the Court of Appeal, of

$957,821 is incorrect.	I will come back to that.
I hope I am answering the presiding Judge's

question by directing your attention to the account

of profits of $801,090. That is half only of the

profits for the period that I have mentioned; a

small component for interest, which was explained

earlier in the judgment; the next entry is for half

of the goodwill.

BRENNAN J: As I understand it, what the trial judge was

saying is, there were two inputs to the profits

that were made. One was goodwill, the other was

blood and sweat and toil and tears. Dividing them

down the middle, I appropriate so much to goodwill.

But that assumes that the goodwill that went to the

earning of these profits by the new venture was a

Warman 7 13/5/94

goodwill that corresponded with the goodwill that

was misappropriated. But was it? If the old

goodwill was going to expire, was the new goodwill

not something new and additional?

MR GORE:  His Honour recognised the kind of problem that

Your Honour has raised and took it into account in

the 50 per cent discounting approach that he took.

He sought to make an assessment of the very issue

to which Your Honour has referred, the decline in

goodwill, if you like, together with the added

benefit of the new features of the business that

the joint venture between the Italian company and

the Dwyer company produced.	He sought to take all
of those matters into account.

BRENNAN J: Can you show me that in the trial judge's

findings?

MR GORE:  It probably really begins at the bottom of page 86

of the record at line 58 to about line 20 on

page 87 before the reference to Re: Jarvis Deceased, and then further on that page 87:

The case for such allowances is quite

strong in the present case because some of the

profits were derived -

et cetera. If I could invite the Court to read

page 87.

BRENNAN J: Yes.

GAUDRON J: Does that passage really take account that the

goodwill may by then have evaporated, or perhaps

had evaporated?

MR GORE:  Perhaps not expressly, but the difficulty with

that is that factually there is no opportunity for

a court to consider that. The goodwill was

wrongfully taken before it could evaporate and it

would have been wrong for the trial judge to have	hypothesized too much about when it might have
evaporated, to use that term, had it not been for the wrongful conduct. Having said all of that, I must emphasize that the trial judge nevertheless
recognized in more than one passage in his judgment
that there was the prospect of some limitation on
the period that Warman would retain the
distributorship agreement, and those passages were
summarized in the judgment of the majority for
convenience at page 117 of the record from about
line 7 to about line 32.

BRENNAN J:  Mr Gore, one of the problems, if I can take you

back to page 90, seems to me to be in the trial

judge's approach that he was regarding the goodwill

Warman 13/5/94

of Warman as having earned for it the continuing stake in the business of the defendants, is that

right, which was being paid out by an assessment of

the plaintiff's half share, as he calls it on page

90.

MR GORE: It is right for two reasons; it is right to say

that that is the approach that the trial judge took

and we would respectfully add that that is the

right approach to take in the sense that once it is

demonstrated, as it was here, that a particular

asset - and we will call it goodwill in this case -

has been wrongfully taken by a fiduciary arising

out of the circumstance of conflict of interest,

then equity, as it were, will seize on that asset

at that point of time and hold it for the benefit

of the principal, virtually indeterminately. It

may lead - - -

DAWSON J: That cannot be right. As I understand it, the

two remedies are there. But if someone has been

doing something by using, really, something which

belongs to someone else and making profits out of

it, and has to stop doing it, then they will be

made to account for the profits which they have

made by this wrongful use of this asset. On the

other hand, if they acquire the asset so that they

can go on using it from here after, then the value

of what they acquired is the thing to look at, but

you cannot look at both.

MR GORE: If I am understanding Your Honour's two

alternatives correctly, we would, with respect,

disagree with the second alternative. If what is

acquired is an asset which is profit earning, then

equity will give relief that entitles the principal

to both the asset and the profit which is earned

from it.

DAWSON J: That is not the normal way of going about it.

When equity grants an injunction to stop someone

account of profits which has been made in the	from doing something, they will also order an
meantime. But if they are entitled to go on doing
it, that is, they have acquired a goodwill, it is
the value of the goodwill, in the circumstances, which is the important thing.

MR GORE:  Your Honour, the effect of -

DAWSON J: But you cannot have both.

MR GORE:  No, and both were not granted here. The effect of

the trial judge's approach was to terminate the

relationship between the parties as at the date of

the judgment. He opted not to follow the normal

equitable remedy of a constructive trust.

Warman 13/5/94

DAWSON J: Leaving the new enterprise with the goodwill.

MR GORE: Correct. And, therefore, it was his view,

correctly, we respectfully submit, of the equitable

rules, that there having been no injunction in the

meantime up to then and there having been no

payment or whatever by the defendants to the

innocent plaintiff up to then, the plaintiff was

entitled to the benefit of so much of the profits

up to that date as could be said to have - - -

DAWSON J: That is doubling up.

MR GORE:  If it is doubling up, Your Honour, if we are

entitled to the profits component, that is still a

much more substantial amount than - - -

DAWSON J:  But the trouble with that is you cannot put a

stop to that. In the cases where an injunction is

granted, of course, it is profits up to the time

that the defendant is stopped doing what he has

been wrongfully doing. But you have not a locus

paenitentiae, as it were, in this case.

MR GORE:	Your Honour, if there is any fault in the
judgment, it is only the doubling up - we do not
concede that for a moment - but it would involve - let me assume, with respect, that Your Honour's approach is correct.

DAWSON J: It may not be.

MR GORE:  Just let me assume it to grapple with the question

Your Honour is testing me with. Your Honour's

approach nevertheless proceeds on the footing that

one way or another the innocent plaintiff will

receive an account. As I understand Your Honour's
concern, it is just that that account should not

double up in some way. The difficulty with this

case and the reason why special leave should be

granted is that neither of those options is

because the majority have determined not simply available any longer to this innocent plaintiff	that an account of profits is inappropriate but
that the relief should be limited to compensation
or damages assessed by reference to Warman's loss, ignoring altogether any profits that the guilty
fiduciary may have earned post the date of the
loss.
The thrust of our submissions is that none of the authority referred to by the majority supports
that approach, supports the displacement of the prima facie rule that a fiduciary, in circumstances
like this, is entitled to an account.

Warman 10 13/5/94

So that at the very worst for Warman, if the

question asked by Your Honour Justice Dawson does

turn out to be sound, it will still mean that

Warman is entitled to relief different from, and on

the figures greater than, the relief which is

currently anticipated as a result of the majority's

order. A major criticism that one can make of the

majority reasoning and of the order which it has

primary judge had arrived at was unjust but that

led to is that it leaves out of account altogether

traditional equitable notions of unjust enrichment.

was viewing at it through Dwyer's eyes. Unjust
enrichment, which is an approach traditionally

taken in equity, looks at disgorging the fiduciary

of what he has wrongfully gained irrespective of

whether it is at the expense of the innocent

principal.

The majority has also ignored those bases for

these equitable rules which seek to promote
particular moral standards amongst fiduciaries. If

all the fiduciary has to worry about is the loss to

his principal, then those standards must fall.

To the extent, therefore, that the Court is

concerned about whether this is an appropriate

vehicle to consider the questions which we have

identified in paragraphs 2 and 3 of our outline, we

submit that it plainly is. There is sufficient on

the facts for this Court to consider whether there

is any basis for displacing the prima facie rule to

an account when all that can be said by a court is

that the result seems unfair. There is simply no

authority beyond this one which would support that

approach.

The closest that one could come is a judgment

of Justice Deane in Chan v Zacharia. I will not

take Your Honours to the passage. You are,

doubtless, familiar with it. It is also a passage

which does not appear to have the necessary support

of the other members of the Court which, I think,

included Your Honours Justices Brennan and Dawson,

but what Justice Deane there spoke of was the
absolute terms in which the principle was often

expressed. It is often expressed in inflexible

terms. He expressed the view that the principle is

not unqualified and, of the examples that he gave,

the only one that could potentially be relevant to

this case is the one where he referred to Regal

(Hastings) Ltd v Gulliver and Phipps v Boardman,

and said that it may still be possible to argue in

this Court that notwithstanding those decisions and

cases like it, the liability may be displaced where

it would be unconscientious for the principal to

assert it.

Warman 11 13/5/94

Now, by implication, His Honour is saying that

it is not open to a court lower than this Court to

so conclude and, moreover, the Court of Appeal by a

majority in this case did not conclude that it

would be unconscientious for Warman to assert its

liability to account. They did not even use the

word, with respect. They spoke of "notions" which,

we would submit, on authority and principle, have

no place in the particular circumstances of relief
of this kind.

As far as the reference by our learned friends to Hospital Products is concerned, it is not simply

a case of their acknowledging that the passages to which they refer are in dissenting judgments, more importantly, those dissenting judgments themselves.

upheld the liability to account for profits. The

only question that was agitated was whether that

liability should be fixed by reference to the value
of assets at a particular date or profits for a

particular period, and the minority opted for the

latter. But neither minority judgment is authority

to support the proposition that, in circumstances

like the present, a liability to account for

profits is displaced. They are our submissions.

BRENNAN J: Thank you, Mr Gore. Mr Hanger.

MR HANGER: Just one thing: might I try and answer the

question posed by Your Honour Justice Dawson? The

goodwill in so far as this distribution business is
concerned, while of course it belonged to the
employer, was a personal goodwill of our client.

There are passages at pages 65, 68, 74 and 75 which

indicated that the Sydney branch had been closed

down; he was handling it for all of Australia in

the end and there was a personal contact element of

it. So that if he left the company, obviously the

company certainly lost the goodwill. But if he

left the company and went out and sold petrol, the

company would lose a substantial amount of its

goodwill because he was the service provider.

There is nothing further, thank you.

BRENNAN J: Thank you, Mr Hanger.

There will be a grant of special leave in this

case.

AT 12.42 PM THE MATTER WAS ADJOURNED SINE DIE

Warman 12 13/5/94