Kawhia Offshore Services Ltd v Rutherford HC Hamilton Cp61-99
[2002] NZHC 1402
•24 April 2002
IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY
CP61-99
BETWEEN KAWHIA OFFSHORE SERVICES LIMITED Plaintiff
AND ALAN JAMES RUTHERFORD
First Defendant
AND MARINE MOORING CONSULTANTS LIMITED Second Defendant
Date of hearing: 23-25 October 2001
Counsel: P Morgan for Plaintiff
D Wilson QC for Defendants
Date: 24 April 2002
RESERVED JUDGMENT OF GLAZEBROOK J
Solicitors:
Haigh Lyon (S G Munro) DX CP19014, Auckland, for Plaintiff O'Sheas (J O'Shea) DX GX10052, Hamilton, for Defendants Copy to:
P Morgan, Barrister, DX CP20025, Auckland
D Wilson QC, Barrister, PO Box 15, Hamilton
Introduction
[1] Kawhia Offshore Services Ltd had a contract to provide marine services to BHP New Zealand Steel Mining Limited in connection with BHP's iron sand operations in Kawhia. In 1997 that contract was terminated by BHP and a contract for marine services was entered into between BHP and Marine Mooring Consultants Limited. At the relevant time Mr Rutherford was a director of Kawhia Offshore and of Marine Mooring.
[2] Kawhia Offshore claims that Mr Rutherford breached his fiduciary duty as director of Kawhia Offshore in negotiating the new BHP contract on behalf of Marine Mooring. In relation to Marine Mooring, the claim is that it knowingly assisted Mr Rutherford’s breach of fiduciary duty in this regard or knowingly received the benefit of that breach. Kawhia Offshore claims an account of profits as well as exemplary damages against both defendants.
[3] The issues, therefore, are:
[a] whether there was a breach of duty by Mr Rutherford; [b] if so, whether an account of profits should be ordered;
[c] whether Marine Mooring knowingly received the benefit or knowingly assisted the breach and again the appropriate remedy, and
[d] whether exemplary damages should be ordered against one or both of
Mr Rutherford and Marine Mooring.
[4] As the exact sequence of events assumed some importance in argument this is set out first.
Sequence of Events
[5] As indicated above, Kawhia Offshore had a contract to supply marine services to BHP. This was always a labour only contract, with the labour being provided by Kawhia Offshore’s shareholder/employees. The contract had been signed in 1994 when BHP took over the iron-sand mining operation but Kawhia Offshore had provided the same services since 1986 to the then operator. Before 1986 the marine services had been provided through a partnership, with some of the current shareholder/employees (or their relatives) as partners.
[6] In 1997 Kawhia Offshore had eight shareholder/employees – Mr Rutherford, Mr Warrender, Mr Stephen Watts, Mr Fenn, Mr Gordon Watts, Mr Maru, Mr Sherman and Mr Piggales. Most held their shares in their own names but two, including Mr Rutherford, held their shares through companies and, in the case of Mr Rutherford, through Marine Mooring. Each shareholder/employee was paid a salary for the work performed, with any remaining profits distributed as dividends (although there was some dispute as to whether there were ever any such profits).
[7] The directors of Kawhia Offshore were Mr Rutherford, Mr Fenn, Mr Piggales, and Mr Gordon Watts. Mr Rutherford was also the Managing Director and the person who dealt with BHP on behalf of Kawhia Offshore. He also contracted in his personal capacity with BHP for the provision of management services for its marine division.
[8] Mr Rutherford's evidence was that on 16 June 1997 Mr Precious of BHP telephoned him and informed him that BHP intended to terminate its contract with Kawhia Offshore. It is common ground that the contract provided for termination on
90 days notice and that BHP was able to terminate upon giving such notice.
[9] Mr Precious said, apparently in response to an inquiry from Mr Rutherford, that BHP was not interested in re-negotiating the contract with Kawhia Offshore. He then asked Mr Rutherford if he would be interested in applying for the contract using his own company. He stated that BHP was interested in an arrangement whereby they would deal with only one person as the contractor rather than continuing to deal with Kawhia Offshore with its multiple shareholder structure and that it was also interested in a substantial reduction of cost.
[10] Mr Rutherford's evidence is that he did not indicate whether or not he would consider BHP’s offer. The conversation adjourned on the basis that Mr Rutherford and Mr Precious would seek legal advice on whether BHP was required to re- negotiate with Kawhia Offshore.
[11] On 18 June 1997 Rutherford spoke to one of the Kawhia Offshore shareholders, Mr Michael Warrender. Mr Rutherford says that the purpose of the conversation was to take advice as to whether he should consider taking up the BHP offer personally, should it prove impossible to re-negotiate the Kawhia Offshore contract with BHP.
[12] He also contacted his solicitor, Mr O'Shea, and took the earliest appointment possible. On 19 June he spoke to Mr O'Shea who confirmed that BHP did not need a reason to terminate the contract. Mr Rutherford then told Mr O'Shea that he had been
offered the opportunity to negotiate personally with BHP and Mr O'Shea gave him some advice on how to proceed if he did decide to negotiate, including calling a meeting of the shareholders and directors of Kawhia Offshore. This meeting was called for 25 June.
[13] On Friday 20 June Mr Precious telephoned Mr Rutherford again to say that he had taken legal advice and that Kawhia Offshore did not have any right to re- negotiate. He informed Mr Rutherford that he wanted to call a formal meeting of the shareholders of Kawhia Offshore on Friday 27 June so that he could give the company formal notice of termination. Mr Precious then asked if Mr Rutherford had further considered the offer to take up the contract himself. Mr Rutherford informed Mr Precious that he might be interested but that he wanted the weekend to consider his position.
[14] On Sunday 22 June 1997 Mr Rutherford told Mr Sherman and Mr Piggales that he might tender for a new contract himself and asked if they would be interested in working for him. He had a similar discussion with two of the other shareholders, Mr Gordon Watts and Mr Maru, on 24 June.
[15] Mr Rutherford says that, over the days following the 16 June phone call from Mr Precious, he also did his best to contact all the shareholders of Kawhia Offshore to inform them that BHP had signalled its intention to terminate the contract. He says that he had contacted all the shareholders by 20 June 1997. Mr Stephen Watts disputes this and says that Mr Rutherford contacted him for the first time on 24 June to say that there would be a contractual meeting the following day but that he did not give any other indication of what the meeting would be about. Mr Fenn similarly says that he was only told there would be a meeting on 25 June after he had telephoned on
24 June to say that he would not be in at work because he was ill.
[16] At the meeting of Kawhia Offshore's shareholders on 25 June, Mr Rutherford formally advised the company that BHP had told him that it was going to give notice of termination of its contract with Kawhia Offshore on 27 June. His evidence is that he told the meeting that BHP had offered him an opportunity to negotiate for the BHP marine services work. Mr Stephen Watts’ evidence is that the meeting was told by Mr Rutherford that he was under a legal obligation to declare that he had a vested interest in the outcome and could say nothing further but that he would not be the one left without a job.
[17] Mr Rutherford says that he typed out a minute to record that he had disclosed his position to Kawhia Offshore. He says that Mr Stephen Watts and Mr Fenn did not
sign the minute but all other shareholders did so. There is a dispute between the parties as to whether the minute placed in evidence was the minute signed at the meeting or one prepared later. Mr Fenn says that he signed the minute prepared at the meeting.
[18] On Friday 27 June 1997 Mr Precious attended a meeting of Kawhia Offshore and a formal notice of termination of the contract was given. Mr Precious indicated that there was no dissatisfaction with Kawhia Offshore's performance, and said, in response to a question from one of the shareholder/employees (probably from Mr Sherman), that Kawhia Offshore could put in a bid for the new contract but it would have to be quick.
[19] After the meeting on 27 June 1997 Mr Precious rang Mr Rutherford. Mr Rutherford said that he was interested in applying for the new contract with BHP. Mr Rutherford says that they then spent four hours the next day talking about what BHP was looking for in any new contract. On Sunday 29 June Mr Precious came over to Mr Rutherford’s house with a new contract for Mr Rutherford to sign. The parties to that contract were BHP and Marine Mooring.
[20] The shareholders of Marine Mooring are Mr Rutherford's wife Jane, the company accountant and Mr O'Shea. The accountant and Mr O'Shea are the trustees of the CJ Rutherford Trust and Mr Rutherford's wife and children (but not Mr Rutherford) are the beneficiaries of that Trust. Mr Rutherford and his wife are the directors of Marine Mooring.
[21] On 30 June 1997 Mr Rutherford called another meeting of the Kawhia Offshore shareholders and informed them that Marine Mooring had been awarded the new contract. He then formally offered positions with Marine Mooring to Mr Piggales, Mr Gordon Watts, Mr Warrender, Mr Sherman and Mr Maru. He saw Mr Stephen Watts and Mr Fenn privately and told them he was not able to offer them a position.
Was there a breach of Fiduciary Duty by Mr Rutherford?
[22] In Holden v Architectural Finishes Ltd (1996) 7 NZCLC 260, 976 McGechan J referred at 261,025 to the fiduciary duties owed by directors to companies (and possibly in some cases to shareholders). In this case, as in Holden, it is only duties to the company that are pleaded. The relevant duties were set out in Holden and are also applicable to this case. They are:
[a] A duty of good faith; ie to act as the director honestly sees as being in the best interests of the company;
[b]Both (i) not to profit from the company and (ii) not to place him or herself in a position where the company’s interests and his or her own personal interests conflict.
[23] McGechan J then went on to state that the two precepts carried certain consequences relevant to that case (and again these also seem relevant to this case). These were set out at 261,025 – 261,028 and can be summarised as follows:
[a] A director may not take, or make use of, company property.
[b]A director may not take over less tangible property such as an existing company contract. This rule also applies to senior employees – see Schilling v Kidd Garrett [1977] 1 NZLR 243.
[c] A director cannot take for him or herself a specific "business opportunity" which the company is pursuing, or would or might pursue. A director, or indeed a senior company officer, who comes to know of such an opportunity in the course of office, cannot resign with a view to taking up the opportunity him or herself. This particularly applies to a director who is involved in preparation or negotiations on behalf of the company – see Canadian Aero Service Ltd v O’Malley
(1974) 40 DLR (3rd) 371.
[24] McGechan J went on to comment on certain aspects of this last prohibition. He said that the concept of “maturing business opportunity” has received an expansive interpretation. It includes a situation where the company is actively pursuing an opportunity clearly open to it, albeit to others also. It extends more widely, however, to include areas of opportunity of a much more prospective character – see Pacifica Shipping Co Ltd v Andersen [1986] 2 NZLR 328.
[25] The barrier goes further than including realistic business opportunities. A breach of fiduciary duty can occur even in situations where the prospects of the company itself succeeding in obtaining the contract or benefit sought are remote, or indeed nil – see Industrial Consultants Ltd v Cooley [1972] 1 WLR 443, Green & Clara Pty Ltd v Bestobell Industry Pty Ltd [1982] WAR 1 (FC) and see also Humphris v Jenshol (1997) 160 ALR 107 at 118 –120 per Goldberg J. McGechan J
points out that the rule is policy driven. A director allowed to take up an opportunity personally would be tempted to reduce or down play the company’s ability.
[26] McGechan J also pointed out that there is no sensible difference between negotiating to take up a business opportunity that the company seeks and negotiating to take up a business opportunity that the company would wish to retain. In cases where a notice of cancellation has been given, the duty is to argue for withdrawal of the notice of cancellation and restoration of the contract to the company. Taking a contract for oneself in such circumstances or attempting to do so is clearly a breach of duty. These remarks are very pertinent to this case.
[27] The principles set out above were mentioned without apparent disapproval by the Court of Appeal on the appeal from McGechan J’s decision – see Architectural Finishes Ltd v Holden (CA 272/95, 7 April 1997) at 10, although at 11 McGechan J’s subsequent comments that causation was irrelevant in any account of profits claim was doubted. This is discussed later.
[28] R P Austin in “Fiduciary Accountability for Business Opportunities” in P D Finn (ed) Equity and Commercial Relationships (1987), 141-185 discusses a related duty not to misuse confidential information. He also refers to a number of issues with both the conflict rule and the profit rule set out at para 22(b) above. In terms of the conflict rule he concludes (at 148) that it will come into play where was a real sensible possibility of conflict between a fiduciary’s personal interest and some specific duty arising out of a particular undertaking or entailed by his or her general duty to act bona fide for the benefit of the principal.
[29] In order to be liable under the profit rule there must be linkage between the office and the profit. There are two main approaches to this question discussed by Austin at 150 -152. One requires a close causal and temporal connection between profit and office. The view is commonly regarded as having been first espoused by Lord Russell in Regal (Hastings) Ltd v Gulliver [1967] 2AC 134, 145 when he said that a director is accountable for profit arising by reason of and in the course of his fiduciary office. The other is a wider test and was set out by Roskill J in Cooley (supra). This requires only that the opportunity be of concern and relevance to the company. Austin suggests that this test is somewhat vague and would be better expressed by a formula that has regard to the principal’s present and likely future business. He suggests that the wider test may be the correct one for a full-time executive commercial fiduciary (as Mr Rutherford clearly was) but less relevant for a part-time non-commercial fiduciary. For part-time fiduciaries Austin suggests that Lord Russell’s formulation may be the appropriate one.
[30] Austin also points out (at 146) that, while in most situations the profit and conflict rules cover the same ground, there are cases where only one is applicable. For example, in the Bestobell Industry case (supra) the opportunity, being a tender advertised publicly, was not one that arose from the association with the company. This meant that the profit rule was inapplicable and the breach of duty came from breach of the conflict rule alone.
[31] I now move to examine whether Mr Rutherford breached any of the duties discussed above – that is the duty of good faith, the duty to avoid conflict, the duty not to profit from the company and the duty not to misuse the company’s confidential information.
[32] I examine first whether Mr Rutherford breached the duty of good faith. Mr Rutherford submitted that, far from breaching that duty, he was the only director who endeavoured to put Kawhia Offshore's case to BHP. This is unsurprising as he was the only director who was in the habit of having contact with BHP and was the person Mr Precious contacted on 16 June about the proposed termination. Mr Rutherford says that he tried on a number of occasions to persuade BHP to re-negotiate. I am not convinced this was done with any vigour. He certainly does not appear to have put a strategy together with his fellow directors or shareholders to deal with the issues. It does not appear, even on his evidence, that he called a directors’ meeting to discuss the response to BHP's indication it was going to terminate the contract. He did not even immediately discuss the position informally with all his fellow directors although most, if not all, were working close by on 16 June. He also indicated to BHP at a very early stage that he may be interested in a new contract, even if he did not definitively state his interest until 28 June.
[33] Mr Rutherford also points to the fact that he sought advice on the termination from Mr O'Shea. The first point here is that Mr O'Shea was Mr Rutherford's personal lawyer. The company lawyers, according to Mr Stephen Watts, were Govett Quilliam and they were certainly listed as such on the company accounts. Mr Rutherford, therefore, saw his personal lawyer and he did so in the absence of any of the other directors of Kawhia Offshore. This suggests that his primary motivation in making the appointment was to talk about the opportunity he had been offered personally by BHP. He does not appear to have asked Mr O'Shea to do any further work on the termination issue outside of the meeting. One may have thought that he would have done so, given that the meeting lasted only some ten minutes according to the evidence of Mr O'Shea.
[34] Mr Rutherford’s next point was that he called a meeting of shareholders once he had received the advice from Mr O'Shea. It appears that the reason he did this was because of Mr O’Shea’s advice that he should disclose to the company the possibility of his being offered the contract personally by BHP. His motivation in calling the meeting thus appears to have been to advance his interests rather than to advance the interests of Kawhia Offshore. As noted above, there is a dispute as to exactly what disclosure he made at that meeting. As both parties are agreed that full disclosure would not excuse a breach of fiduciary duty unless there was consent from Kawhia Offshore it is not necessary to resolve this point.
[35] Mr Rutherford suggested that, even if he had discussed the termination with the other directors and shareholders, Kawhia Offshore would not have been able to undertake measures to address the BHP concerns. Of course the first task would have been for Mr Rutherford to alert the directors and the other shareholders to the problems that had been heralded by BHP rather than being evasive as he appears to have been at the 25 June meeting. Both he and Mr Precious were evasive at the 27
June meeting.
[36] Mr Rutherford’s evidence was that, at the meeting of 25 June, termination was discussed but there was no resolution of the difficult issues as to how to reduce price or numbers of workers in order to be able to put proposals for re-negotiation before BHP. I am not convinced the issues were discussed in any detail, given Mr Sherman says it was not a lengthy meeting. The further argument appears to be that these issues would not have been able to be resolved in a company with equal shareholding. Mr Fenn was of the opinion that some reduction in price could have been achieved through efficiencies. It is likely, however, that a reduction in price or manpower could not have been achieved without some financial sacrifice on the part of the shareholder/employees (for example, by buying shareholders out or by the shareholder/employees taking a reduction in income from the company). This does not mean that restructuring would have been impossible to achieve, especially against the background of a threat of termination.
[37] Mr Rutherford does not appear to have tried in any meaningful manner to put Kawhia Offshore in a position to be able to put proposals to BHP to restructure the contract. For a start he waited until 25 June before having a shareholders’ meeting (and, as stated above, his primary purpose in calling that meeting appears to have been disclosure of the overtures from BHP). In addition, he did not call a director's meeting or even inform his fellow directors immediately as to the contents of the telephone call of 16 June.
[38] Mr Rutherford says that he informed all of the shareholders before 20 June about the proposed termination but could not remember the exact days and time of such discussions. The first point is that telling shareholders individually is not the same as informing the company. In addition Mr Stephen Watts and Mr Fenn say that they were not told of the proposed termination in any meaningful manner before the meeting of 25 June. I accept their evidence. Mr Rutherford can remember talking to each of the other shareholders about the possibility of his taking over the contract and can remember the exact dates of such conversations. He thus remembers talking to all of the shareholders who were eventually offered positions with Marine Mooring. He cannot remember the days he allegedly talked to Mr Fenn and Mr Stephen Watts. It is difficult to draw any other conclusion than that his main concern over the days following 16 June was to see whether the chosen shareholder/employees would work for him and thus to see if taking over the contract was a realistic possibility.
[39] Mr Rutherford does not appear to have gone to the meeting of 25 June with any possible strategies to put to the company to stop BHP issuing its termination notice or to ensure that there was some chance of re-negotiation of the contract or inclusion in any tender process. It appears to me that Mr Rutherford should have taken the lead in putting any such proposals as he was the managing director and effectively the only person who dealt with BHP. He was also the only person who had been party to the conversations with Mr Precious over the proposed termination. He does not even appear to have specifically passed on the concerns Mr Precious had indicated to him about cost reduction. Mr Rutherford argued that these concerns would have been obvious to the other shareholders for some time. This appears doubtful to me against the background of evidence of praise from BHP as to Kawhia Offshore's efficiency and against the background of it being rewarded the normal contractual increase in contract price in January 1997. In any event, whether it was obvious or not, Mr Rutherford had a clear duty to pass on BHP’s expressed concerns.
[40] For completeness I also note that on Saturday 28 June Mr Rutherford had discussions with Mr Precious about the contractual terms that BHP was envisaging for the contract with Marine Mooring. At this stage (and he says for the first time) Mr Precious gave him information about the exact dollar amounts of the savings BHP wished to achieve. Mr Rutherford made no effort to pass on this information to Kawhia Offshore or its directors. Instead he signed the contract with BHP on behalf of Marine Mooring the very next day. He says that the speed of signing was not for the purpose of ensuring that Kawhia Offshore could not put in a counter bid. Whether this was his motivation or not it certainly had that effect.
[41] In my view the only conclusion from the above is that there was a clear breach of the duty of good faith. Mr Rutherford was not acting in the best interests of the company. He was acting in his own interests (and of course this leads on to a discussion of the conflict rule).
[42] Mr Rutherford and Marine Mooring submit that there was no conflict of interest as there was no maturing business opportunity for Kawhia Offshore. Mr Rutherford’s evidence was that there was no warning as to BHP’s proposed termination before the telephone call of 16 June 1997. Even in that call, there was no indication of when the termination would take effect. However, it was submitted that from that time, there was never any chance at all that BHP would not issue its termination notice or that it would re-negotiate the contract. It was only on 24 June that Mr Rutherford decided to apply for the contract himself and this was after he had been convinced that there was no prospect that Kawhia Offshore would be considered by BHP. Even then, Mr Rutherford’s interest was not conveyed to BHP before formal termination notice had been given to Kawhia Offshore.
[43] On the basis of the principles set out above Mr Rutherford’s arguments must fail. The contract with BHP was the only business of Kawhia Offshore. There must in such circumstances be a real sensible possibility of conflict between Mr Rutherford’s personal interest and his duties to Kawhia Offshore in his even considering taking on the contract for himself. In such a case it is irrelevant whether or not Kawhia Offshore had any prospect of retaining the contract with BHP or negotiating a new contract. McGechan J in Holden made it clear that the concept of not usurping a company's business opportunity includes a situation where the prospect of the company retaining or acquiring that business opportunity is remote or indeed nil. It follows that it is also irrelevant whether Mr Rutherford was convinced that there was no such prospect or not.
[44] It is also clear from the authorities set out above that it would not have been open to Mr Rutherford to resign his directorship and take up the new contract with BHP. It is thus certainly irrelevant that his interest was only conveyed to BHP after the formal termination notice (if indeed that was the case), especially as he did not even resign as director of Kawhia Offshore before Marine Mooring signed the new contract. Finally, even if he had taken steps on behalf of Kawhia Offshore, this cannot excuse the breach of duty in putting himself in a position where his personal interest and the interests of the company conflicted.
[45] Even though I have rejected Mr Rutherford’s arguments on the conflict point, I still make some findings of fact with regard to his submissions on the question of
whether there was a maturing business opportunity for Kawhia Offshore. Mr Rutherford submitted that there was no maturing business opportunity for Kawhia Offshore as BHP had clearly made up its mind about the termination before 16 June. He submits that, although Mr Precious at the 27 June termination meeting (in answer to a question from one of the shareholders), stated that Kawhia Offshore could put in a bid if it was done quickly, this was not intended seriously and was not taken seriously by anyone present. That may be the case but it is clear that, if Mr Rutherford had not agreed to take the contract for Marine Mooring, then one option would have been for BHP to withdraw the termination notice. In my view this may indeed have been the more likely option. This is particularly the case as there seems to have been no dissatisfaction with the manner in which Kawhia Offshore performed its contract and the letter accompanying the termination notice stated as much.
[46] Indeed, Mr Rutherford’s evidence was that as late as 24 June, he thought that Kawhia Offshore still had a chance of retaining the contract. His evidence was that, if he had opted not to take the contract for Marine Mooring, then perhaps BHP would have revisited its position relative to Kawhia Offshore. Once the termination notice was given he appears to have lost this hope. When asked what had changed between
21 and 28 June he answered that his personal circumstances had changed – meaning, it appears, that he had decided to take the contract. He thus appears to be saying that this removed the last chance for Kawhia Offshore. His own evidence, therefore, was that it was his agreeing to take the contract for Marine Mooring (that is his breach of duty) that caused Kawhia Offshore to lose the contract or at least the chance to re- negotiate that contract.
[47] It was suggested in evidence that, if Mr Rutherford had not taken the contract, then others from inside BHP would have been brought in. This was of course a possibility but I am not convinced that it could be put any higher. In my view the more likely result would have been a continuation of the Kawhia Offshore contract. For a start, if Mr Precious' evidence is accepted, the primary motivation in terminating the contract was to retain the services of Mr Rutherford for BHP. Offering him a contract for his own company was seen as the best means of achieving this. If Mr Rutherford had rejected this offer then presumably he would have remained with Kawhia Offshore, at least for a time. There was no indication in evidence that Mr Rutherford was in imminent danger of leaving Kawhia Offshore because he had another post. Indeed Mr Precious had been unsuccessful in securing him a position elsewhere with BHP because of the Asian crisis. If Mr Rutherford remained the Kawhia Offshore contract would have been unlikely to be terminated as this would have meant losing Mr Rutherford also.
[48] Secondly, a change from Kawhia Offshore to employees from inside BHP would have meant the loss of the experience of Kawhia Offshore’s shareholder/employees (even apart from Mr Rutherford). In addition, one of the original reasons for the Kawhia Offshore structure being instituted had been to ensure that the marine services were not subject to union control. Even if union issues were no longer of such major importance, Mr Precious’ evidence was that there was a very militant workforce on the main site (see Notes of Evidence p 90, line 10). Bringing in further employees from within BHP for the Marine Division may thus not have been the best option. Another option would have been merely to bring in another manager from inside BHP to replace Mr Rutherford if he had left. This appears to have been the option being considered when Mr Precious was attempting to secure for Mr Rutherford another position elsewhere in BHP (see para 14 of Mr Precious’ brief of evidence).
[49] It is likely also that bringing in BHP employees would have taken time. In the meantime the Kawhia Offshore contract may have been extended. This time could have been utilised to address any issues arising, including finding a replacement for Mr Rutherford if he had decided to leave. This could then have led to Kawhia Offshore retaining its contract.
[50] Finally on this point one of BHP’s expressed concerns about Kawhia Offshore was the shareholding structure. BHP’s concern appears to have been at least partially engendered by conversations Mr Rutherford had with Mr Precious. Even if the shareholding structure would have prevented a new contract being awarded to Kawhia Offshore then Mr Rutherford could be seen as being responsible for this to a degree.
[51] Moving now to a discussion of the profit rule there is no doubt that this rule was breached whether the narrow or wider formulation discussed above is taken. Mr Rutherford was in a special position (being managing director of Kawhia Offshore with extra remuneration for that role) and the only person effectively with links to BHP. Any profit derived must be linked to the breach of duty in such circumstances as it was his very position with the company that had placed him in the position to be offered the opportunity of taking the contract personally.
[52] Finally, I examine whether there was any use of confidential information. Mr Rutherford submitted that there was no misuse of any Kawhia Offshore material by him. He says that the contract signed between Marine Mooring and BHP was prepared covertly by Mr Precious and that Mr Precious relied on no information from Mr Rutherford to prepare it.
[53] The first point is that Mr Rutherford must have used information gleaned from his time with Kawhia Offshore in deciding whether he could take on the contractual opportunity for the price offered. Mr Rutherford, as a director and the managing director of Kawhia Offshore, would have had information on salary levels and working schedules within the company, information presumably not widely disseminated outside the company and BHP. Mr Rutherford must have used his knowledge of the work required and the method of operation of Kawhia Offshore in making his decision as to whether Marine Mooring could deliver the services for the adjusted price BHP were offering.
[54] In addition, the new Marine Mooring contract was virtually the same as the old contract with Kawhia Offshore, apart from the termination period and the inclusion of management services. Mr Rutherford's evidence was that this enabled him to sign it without legal advice. His knowledge of the similarity must be seen as arising from his position with Kawhia Offshore and again the exact terms of the contract must have been confidential to BHP and Kawhia Offshore.
[55] Mr Rutherford's knowledge of the above matters does not come into the category of general (if specialised) knowledge and skills acquired in the course of office or of information globally available and for which protection may not be available – see the remarks of McGechan J in Holden at 261,030. It is clearly confidential information. Equally clearly it must have been used by Mr Rutherford in the ways set out above.
[56] Mr Rutherford submits that it is not open to me to draw the inference that he used confidential information. He submits that this was not pleaded and not argued by Kawhia Offshore. Kawhia Offshore's claim was that Mr Rutherford had used confidential information in the negotiation of the contract between Marine Mooring and BHP. There was no pleading as to Mr Rutherford using confidential information to assess whether to accept BHP's offer on Marine Mooring's behalf.
[57] I have difficulty in understanding the distinction sought to be drawn. Acceptance is the end stage of negotiation and must be encompassed within the term. In addition, even on Mr Rutherford’s evidence, there was negotiation between Mr Precious and Mr Rutherford on Saturday 28th. Mr Rutherford must have used the type of confidential information discussed above in the course of these negotiations.
[58] It is true that the question of the use of confidential information was not specifically mentioned in Kawhia Offshore's closing arguments. It was, however, pleaded and dealt with in the closing address on behalf of Mr Rutherford and Marine
Mooring. All parties then had the opportunity of filing further submissions on the subject. There is thus no unfairness to Mr Rutherford or Marine Mooring in my dealing with the topic now.
[59] In conclusion, Mr Rutherford was clearly pursuing the new opportunity for Marine Mooring right from 16 June and did very little to advance the interests of Kawhia Offshore This business opportunity arose out of his special position with Kawhia Offshore and he used confidential information of Kawhia Offshore in his negotiations with BHP. In addition, there was clearly a maturing business opportunity for Kawhia Offshore. Indeed, had Mr Rutherford not taken the contract for Marine Mooring, it is likely that Kawhia Offshore would have retained its contract (even if some restructuring may have been necessary). The finding is that there was a clear breach of fiduciary duty on the part of Mr Rutherford in relation to all of the various duties discussed above.
Should an Account of Profits be ordered?
[60] Mr Rutherford submits that, even if there had been a breach of fiduciary duty, no such breach “caused loss” to Kawhia Offshore "in a causative [sic] sense". If equitable damages had been sought then Kawhia Offshore would have had to prove causation. The test, in cases of breach of fiduciary duties, is described by Fisher J in Bank of New Zealand v NZ Guardian Trust Co [1999] 1 NZLR 213, 244 as requiring only a distant nexus showing some causal link between the breach and loss. This is a “but for” test, with the onus of establishing contrafactuals (that is, whether the same outcome would have occurred in any event) reversed. This approach was endorsed on appeal – see Bank of New Zealand v Guardian Trust Co Ltd [1999] 1 NZLR 664 (CA).
[61] That case was, however, not concerned with the remedy of account of profits and indeed was rather concerned with negligence by a fiduciary. The case is therefore not authority for the proposition that similar causation principles apply to the remedy of account of profits as to damages. Dal Pont and Chalmers Equity and Trusts in New Zealand and Australia (2001) state at 120 that, as an account is a restitutionary remedy, the relevant inquiry is the profit derived from the breach of fiduciary duty, not whether the principal has suffered injury or loss therefrom. See also the discussion in Austin (supra) at 175-180.
[62] Mr Rutherford, however, does point to the decision of the Court of Appeal in Architectural Finishes Ltd v Holden (supra). At 11 the Court of Appeal stated that causation is not irrelevant in an accounting for profits claim. A Court will give the
benefit of any reasonable doubt on this question to the beneficiary but there can only be a requirement to account for profits where the profits have been derived wholly or partially by means of an action taken in breach of fiduciary duty. While an account of profits was ordered in Industrial Development Consultants Ltd v Cooley, the linkage came through the use of information obtained as an employee. This meant that the employee was liable to account even though the employer in that case would not itself ever have been able to derive the profit.
[63] It must be noted that in Architectural Finishes v Holden an account of profits was not sought so the comments were obiter. The comments were also made in a case where there was no chance of the company deriving the profit and where the actions of Mr Holden could be seen, in the circumstances, as relatively minor breaches of fiduciary duty which were not causative of any loss. Nevertheless it would not be logical to order an accounting for profits if there was no link with a breach of duty. The law therefore appears to be that for damages there must be a causal link with loss whereas for an account of profits there must be a causal link with a breach of duty. Presumably the onus of proving contrafactuals in the case of an account of profits claim (that is that the profits would have been made anyway and were related to the breach) would, as with a damages claim, also be on the fiduciary. It would only be in exceptional cases that such an onus could be discharged.
[64] This case is very different from Architectural Finishes v Holden. First it is likely that Kawhia Offshore would have retained the contract had Mr Rutherford not taken a contract on behalf of Marine Mooring. The breach was thus the direct cause of the loss of the chance (even on Mr Rutherford's own evidence). In such circumstances any profit derived by Mr Rutherford must be seen as having such a clear a linkage with the breach of duty that the remedy of account of profits is an appropriate remedy.
[65] Secondly in policy terms the remedy is there to deter fiduciaries putting themselves in a position of conflict or otherwise breaching their duties. In this case in my view, Mr Rutherford did almost the opposite of what he would have done had he not been offered the contract for himself. This alone would be enough to make an account of profits appropriate even if Kawhia Offshore had had no chance of retaining the contract. In addition, the opportunity to profit clearly arose from Mr Rutherford’s position with the company and there was use of confidential information.
[66] It is true that the remedy of account of profits remains discretionary but, on whatever view of causation is taken and taking into account all the circumstances of the breaches, an account of profits is an appropriate remedy (even if perhaps not the
most satisfactory for the two individual aggrieved shareholders of Kawhia Offshore or indeed for Mr Rutherford). An account of profits by Mr Rutherford is therefore ordered.
Was there knowing receipt or knowing assistance by Marine Mooring?
[67] Kawhia Offshore submits that an account of profits by Mr Rutherford only is a meaningless remedy. This is because Marine Mooring rather than Mr Rutherford personally has retained the benefit of Mr Rutherford’s breach of fiduciary duty (apart perhaps from the extent to which Mr Rutherford’s salary paid by the company could be seen as being a distribution of profits rather than salary). The submission is that Marine Mooring clearly knowingly received that benefit and indeed knowingly assisted the breach. It therefore holds the contract on an institutional constructive trust.
[68] Kawhia Offshore submits that this conclusion is inevitable if the following factors are taken into account. First Kawhia Offshore points to the fact that the sums paid for Mr Rutherford’s contract in 1997 for being the manager of BHP’s marine division were paid to Marine Mooring. In addition, both Mr Precious and Mr Rutherford spoke of Marine Mooring as being Mr Rutherford's company on a number of occasions in evidence.
[69] Secondly Kawhia Offshore points to the fact that Mr Rutherford directed that Marine Mooring be the contracting party and negotiated and signed the new contract on its behalf. He is not a shareholder of Marine Mooring and not a beneficiary of the trust that owns the company but his wife and children are beneficiaries. He is, however, a director of Marine Mooring and takes a salary from that company. In these circumstances Mr Rutherford’s knowledge of his actions (or omissions) in relation to Kawhia Offshore has to be imputed to Marine Mooring.
[70] These submissions are accepted. Through Mr Rutherford, Marine Mooring knew of the breach of duty to Kawhia Offshore, and by taking the contract, knowingly assisted that breach. The remedy of account of profits, therefore, applies equally to Marine Mooring and is ordered.
Exemplary Damages
[71] Kawhia Offshore submits that an award of exemplary damages is appropriate on the basis that the evidence shows a high handed and indeed deceitful undertaking
by Mr Rutherford to deprive Kawhia Offshore of the benefit of its contract and acquire it for himself.
[72] Under this head Kawhia Offshore points to what it says was the deliberate withholding of the advice of termination and of BHP's advice that it wanted a reduction in the contract price. It also points out that, right from the outset, Mr Rutherford sought to acquire the contract for himself and points to the approach to Warrinder on 18 June, while actively concealing from two of the shareholders (one of whom was a director) what was going on.
[73] Kawhia Offshore also submits that Mr Rutherford knew full well that, if he did not seek the contract, then Kawhia Offshore had the opportunity, not only of tendering for but actually of obtaining a new contract or retaining its old one. Despite this, he took virtually no steps at all to advance the interests of Kawhia Offshore and, when there was a hint of Kawhia Offshore putting in a tender, secured the contract for Marine Mooring with unseemly haste. Finally Kawhia Offshore points to the failure by Mr Rutherford even to offer to resign his position as either managing director or director of Kawhia Offshore.
[74] There is some controversy as to whether exemplary damages are appropriate in the context of breach of fiduciary duty. Dal Pont and Chalmers (supra) state at 897 that the award of exemplary damages in such cases is difficult to rationalise on doctrinal grounds as it is inconsistent with the accepted understanding that awards of equitable relief are compensatory in nature. Other commentators disagree – see e.g. J Glover Commercial Equity; Fiduciary Relationships (1995) at 6.130. In New Zealand the authorities would suggest that exemplary damages are available. They have been awarded in the case of a breach of fiduciary duty – see the decision of Fisher J in Cook v Evatt [1992] 1 NZLR 676 and, while they were not awarded in Acquaculture Corporation v NZ Green Mussel Co [1990] 3 NZLR 299, the majority of the Court of Appeal at 301-302 said there was no reason in principle why an award of exemplary damages could not be made in actions for breach of confidence. Somers J at 302, however, expressed some doubt as to that position. In Australia the concept that exemplary damages are not appropriate for breaches of fiduciary duty has received considerable approval. I note, however, the recent decision of Palmer J in Digital Pulse Ltd v Christopher Harres [2002] NSWSC 33 where exemplary damages were awarded. At paras 160-173 there is an extensive discussion of the authorities and the policy arguments involved in this question. For present purposes I assume exemplary damages are able to be awarded.
[75] The most recent authority on exemplary damages is Bottrill v A [2001] 3
NZLR 622. In that case the Court of Appeal held by majority that exemplary damages are only available when the defendant is subjectively aware of the risk to which his or her conduct exposes the plaintiff and acts deliberately or recklessly taking that risk. The case was discussing exemplary damages in the context of negligence.
[76] In this case Mr Rutherford was clearly conscious that his actions could cost Kawhia Offshore the contract. I note his evidence referred to above that Kawhia Offshore would have had a chance of retaining the contract had he not decided to take it. Because of the advice of Mr O’Shea he probably erroneously thought that his actions did not constitute a breach of duty as long as he disclosed his conflict of interest to the company. Ignorance of the law, however, is not an excuse. I would see Mr Rutherford as in quite a different position from Dr Bottrill who was unaware of the fact of his negligence, as against unaware of the legal consequences of his actions.
[77] In Cook v Evatt (supra), Fisher J at 705 set out three requirements for the award of exemplary damages. The first is that the defendant’s conduct must have been so outrageous that punishment is called for as an end in itself. There must be conscious wrongdoing in contumelious disregard of another’s rights. I do not consider, by a narrow margin, that Mr Rutherford’s conduct has met this test. His conduct did not reach the level of that in Cook v Evatt where the finding was that the fiduciary in that case formed a deliberate plan to conceal his personal interest and the Court thought it necessary to deter others from taking a similar course of action. Similar considerations led to the award in Digital Pulse (supra). Although there may have been late disclosure of Mr Rutherford’s conflict in this case there was nevertheless disclosure.
[78] The second requirement set out by Fisher J is that such other remedies as the defendant will have to bear must fall short of an adequate punishment. Punishment may not strictly be the correct term, given an account of profits is not supposed to be punitive. Nevertheless in these circumstance I consider an account of profits to be an adequate remedy by itself. The third statement is probably a restatement of the first two – that is that exemplary damages should only be awarded in serious and exceptional cases. This case does not come into that category of cases.
Result
[79] There was a breach of fiduciary duty by Mr Rutherford. Marine Mooring knowingly received the benefit and knowingly assisted the breach. An account of profits in favour of Kawhia Offshore is ordered by both Mr Rutherford and Marine Mooring. There is no award of exemplary damages.
Costs and Account of Profits
[80] Kawhia Offshore has until 5pm, 6 May 2002 to submit a memorandum as to costs. Mr Rutherford and Marine Mooring have until 5pm, 14 May 2002 to submit a memorandum in reply.
[81] The parties should also by 17 May 2002 file a memorandum (preferably joint) in relation to the account of profits. A conference should be set down (preferably before me) as soon as possible after that date.
…………………………………………
Glazebrook J
Delivered at …………………..am/pm on 24 April 2002
0