Morris v Interchem Agencies Ltd
[2003] NZCA 140
•3 July 2003
IN THE COURT OF APPEAL OF NEW ZEALAND
CA185/02
BETWEENGRANT COLIN MORRIS
Appellant
ANDINTERCHEM AGENCIES LIMITED
Respondent
Hearing:29 April 2003
Coram:Keith J
Blanchard J
Glazebrook JAppearances: P H Thorp for Appellant
H Fulton for Respondent
Judgment:3 July 2003
JUDGMENT OF THE COURT DELIVERED BY GLAZEBROOK J
Introduction
[1] Mr Morris was employed as sales manager by Interchem Agencies Ltd. He claims that he was unjustifiably dismissed. The Employment Court rejected his claim and awarded damages of $400,000 to Interchem on the basis of breaches by Mr Morris of his duty of good faith and fidelity.
[2] The alleged breaches related to an agency held by Interchem for Printpack, a large supplier of polypropylene film based in the United States, for the supply of polypropylene film used to wrap cheese slices to Pastoral Foods (NZ) Ltd, a division of Fonterra. The Employment Court found that Mr Morris had secured that agency for himself before his resignation from Interchem and that he had failed to pass on concerns expressed in August 1998 by Mr Haas of Printpack about comments made by Mr Evans, the Managing Director of Interchem. Mr Haas had understood Mr Evans to have said that Mr Morris should reduce the time he spent on Printpack and Pastoral. Mr Haas was concerned because, on the contrary, he wanted Mr Morris to increase his involvement.
[3] Mr Morris appeals both against the decision that he was not unjustifiably dismissed and the decision that he had breached his contract of employment. He also appeals against the quantum of damages awarded.
Background facts
[4] Mr Evans formed Interchem in 1987 to act as an agent for the importation and sale of chemical products. Mr Morris joined Interchem in 1991 and rose to the position of sales manager. Interchem had been supplying Pastoral with chemicals. Through contacts within Pastoral, Interchem was appointed Printpack’s agent in respect of the polypropylene film supplied to Pastoral. Mr Morris was appointed as the contact person in relation to the Printpack agency, including assisting in the resolution of problems Pastoral encountered with the film.
[5] On 25 August 1998, in a brief meeting at the airport with Mr Haas and Mr Morris, Mr Evans had raised the issue of whether the time spent by Mr Morris on the Printpack agency could be reduced. He asked Mr Haas and Mr Morris to determine the source of the problems with Pastoral and prepare a list of conclusions and proposals to resolve them. Immediately after the meeting Mr Haas and Mr Morris travelled to Taranaki to visit the Pastoral premises. We note at this point that a letter from Mr Morris’ former solicitor, Mr Carter, written on his behalf on 22 September said that, on the way to Taranaki, Mr Haas had suggested that Mr Morris might like to resign from Interchem and handle the Printpack account himself and also help Printpack expand into the Australian market. Mr Carter went on to say that Mr Morris said he would think about it but did nothing. Mr Morris in evidence said that Mr Carter had been mistaken about this and that the references were rather to Interchem spending more time on the Printpack agency and helping the expansion into Australia.
[6] Mr Morris sent to Pastoral, Mr Haas and Mr Evans a memorandum on the Pastoral visit. Mr Evans’ evidence was that the document he saw did not contain proposals for solving the problems with the agency. Mr Haas replied to Mr Morris by facsimile dated 10 September 1998 indicating his desire that Mr Morris should spend more time on the Printpack agency and alluding to the possibility of further opportunities in Australia. Mr Morris’ evidence was that Mr Evans must have seen this facsimile. Mr Evans said that he had not.
[7] Mr Morris says that he telephoned Mr Haas on 12 September requesting clarification of the 10 September facsimile. His evidence was that they discussed, among other general matters, the fact that Mr Haas was not happy with the efforts Interchem had made on developing the business in Australia. Mr Morris said that he only replied “That’s interesting”. There was no discussion, according to Mr Morris, about his taking over the agency.
[8] It is common ground that on 14 September Mr Evans and Mr Morris met in Tauranga where they jointly visited a customer. There was no discussion during the day they spent together about the Printpack agency and their relationship was normal and cordial.
[9] It is also common ground that Mr Morris on 16 September 1998 handed a letter of resignation to Mr Evans giving one months notice effective from that date. Mr Evans’ evidence was that Mr Morris then told him that he had the Printpack agency. Mr Morris’ version was that he had merely said that he was going to set up his own chemical importing business and that Mr Evans had thereupon shown him a copy of the 10 September facsimile and accused him of plotting to take the Printpack and other agencies. Another Interchem employee, Ms Moore, gave evidence that Mr Morris had gone into her office on 16 September and told her that he had just resigned, that he was taking the Printpack agency and that he would be looking after Pastoral in the Australian market.
[10] The following day, after consulting his solicitor, Mr Evans gave Mr Morris a letter informing him that he was suspended. Mr Morris says that at this meeting Mr Evans told him he was dismissed, searched his briefcase, company car and pockets and marched him off the property. He agrees that he was given a letter relating to suspension but says that this was in a sealed envelope and that he had not been given time to open it. Another Interchem employee, Ms Morse, gave evidence that Mr Morris had told her on that day that he had resigned and that he had mentioned later in the day that he may have the opportunity to work with Printpack on a commission basis.
[11] Mr Evans then instructed his staff to check email logs for any communication between Mr Morris and his home email address. They found evidence of an attempt by Mr Morris to transmit a schedule of various chemical suppliers on 24 August 1998. The information had not, however, been transmitted because of a problem with the server.
[12] Mr Evans telephoned Mr Haas on 18 September. He was told that Printpack had decided to appoint Mr Morris as its agent in New Zealand with immediate effect. Mr Evans confirmed receipt of this advice by facsimile to Mr Haas on 22 September. Mr Morris claimed that on this same day Mr Haas had telephoned him and he had told Mr Haas that he had left Interchem; and that Mr Haas then said that he wanted Mr Morris to take over the agency immediately and that he would inform Interchem and Pastoral.
[13] That same afternoon Mr Evans met with Mr Morris and handed him a letter requiring him to take his annual leave and a further letter requiring undertakings as to confidential information and asking that Mr Morris hand over any such information in his possession. Mr Morris also claimed that Mr Evans grabbed him by the arm and pulled him down the corridor, screaming “Get out of my office immediately”. Ms Moore, who had seen Mr Evans and Mr Morris leaving after the meeting, said that she had seen nothing of the alleged assault and that there had been no sign of distress on the part of Mr Morris. Indeed she had assumed from the expression on his face that Mr Morris was feeling happy with himself.
[14] The letter of 18 September required Mr Morris to have no contact with any of Interchem’s clients during the period he was working out his resignation notice. Mr Morris, contrary to this instruction, had further discussions with Mr Haas and took part in the conference telephone call with Pastoral on the same day. He also during the period of notice made a further site visit to Pastoral. At that visit he acquired orders which he put through for the benefit of his company, Filmchem Agencies Ltd.
[15] On 25 September Interchem staff found documents in Mr Morris’s computer recycle bin concerning Printpack’s expectations of their agent in New Zealand and Pastoral’s supply requirements. These documents addressed the future of the Pastoral agency. It appeared that Mr Morris had transferred these documents to his home computer. Mr Haas confirmed that Mr Morris had sent him these documents (although he did not say when) even though Mr Morris denied ever sending them to Mr Haas.
THE EMPLOYMENT COURT DECISION
[16] As can be seen the Employment Court was faced with sharply conflicting evidence from Mr Morris and Mr Evans, the resolution of which was recognised to be determinative of the outcome. The Judge was conscious that assessing credibility by means of demeanour of witnesses can be unreliable. Nevertheless he considered that his impression of the witnesses was helpful in this case, coupled with the contemporary documentation and the inherent logic (if any) of the statements made.
[17] The Judge’s impression of Interchem’s witnesses was that they were giving honest and accurate testimony, to the best of their recollection. His assessment of Mr Morris’ evidence was as follows:
Regretfully I did not form the same impression of Mr Morris. His evidence in chief was presented in a dramatic and forthright fashion, although markedly lacking in detail. As soon as the cross-examination started Mr Morris’s attitude and body language changed. He became defensive and was given to blustering when he had apparent difficulties in answering questions. There were also lengthy delays in his responses. He was evasive. He did not answer simple questions put to him where the answers could have caused difficulties for his case but instead would give irrelevant, non responsive replies, often repeating the same statement, as though it had been learnt by rote. Mr Morris’s demeanour in the witness box did not indicate that he was a witness of truth.
[18] It can be seen from this passage that the Judge was not merely judging on demeanour as it is usually thought of but was concentrating on the content of answers to questions and more importantly on Mr Morris not answering questions.
[19] As indicated, the Judge also tested his impressions by an examination of the documentary evidence and what he called the inherent likelihood of the accounts. The Judge referred, for example, to the conflict of evidence as to whether Mr Evans had seen the 10 September facsimile before the weekend. The Judge thought it highly unlikely that Mr Evans would have spent the day with Mr Morris on the Monday without mentioning that facsimile if that were so. He also considered it unlikely that Mr Morris would have resigned from his position at Interchem, where he earned a substantial salary, with no clear prospects in mind.
[20] In terms of contemporary documentation the Judge relied on the facsimile of 10 September and on the accounts given by Mr Morris and Mr Evans to their respective lawyers at the time of the dispute. The Judge considered, for example, that a number of the factual assertions contained in Mr Evans’ written record of the meeting of 16 September could only have come from Mr Morris – for example he held that the most critical point to be found in that record was the reference to Mr Morris saying that, as he did not have sufficient capital, Printpack would invoice the customer directly and reserve him a commission. That was in the event the arrangement between Mr Morris and Printpack. The Judge also referred to the accounts of Ms Morse and Ms Moore as backing up that of Mr Evans.
[21] The Judge was, as a result of his analysis, satisfied that Mr Morris had obtained the Printpack agency prior to his resignation on 16 September 1998 contrary to Interchem’s interests and for his own personal benefit. He also found that Mr Morris was suspended on 17 September and not dismissed. The attendance of Mr Morris at work the following day was consistent with continued employment rather than dismissal, as was the attempt to place Mr Morris on annual leave. There was no actual or constructive dismissal but, even if there had been, it would have been justified by the serious misconduct of Mr Morris in taking the Printpack agency for himself while still employed by Interchem.
[22] The Judge said it was not necessary in the light of this finding to rule definitively on whether there was a fiduciary relationship between Mr Morris and Interchem in relation to the Printpack agency but expressed the view that the evidence did not go that far. He also rejected Interchem’s contention that confidential information had been misused in relation to other Interchem clients, although noting that the evidence gave grounds for suspicion.
[23] Interchem was awarded $400,000 for the loss of the Printpack agency caused by Mr Morris’s breach of fidelity. The quantum of damages was assessed on the basis of the likely cash flow that Interchem would have earned had Mr Morris not taken the agency away with him. Judge Travis relied substantially on the expert assessment of Mr Hagen, a chartered accountant retained by Interchem, who assessed the loss at $485,000. This was on the basis of what the Judge at various points called conservative assumptions. The Judge then, having regard to fuller evidence than available to Mr Hagen, reduced the figure by a further $85,000, an amount he indicated had been set somewhat arbitrarily. This was to take into account the risk of the Printpack agency being lost at some future time if Pastoral were able to source the film in New Zealand and also a reduction in income that had arisen due to a change in the gauge of the film being provided. No expert witness was called on behalf of Mr Morris.
Appellant’s submissions
[24] Mr Thorp submits first that the Employment Court was wrong in law to hold that Mr Morris was not dismissed on 17 September 1998 because from that date all of the trappings of his employment had been removed from him.
[25] Secondly, Mr Thorp submits that the Employment Court was wrong in law to find that Mr Morris took the agency while employed by Interchem. The Employment Court should have accepted Mr Morris’ evidence that he had been approached for the first time on 18 September after his dismissal. In addition, even if he had been approached before this point, there was no breach of the duty of loyalty in the circumstances as it was Mr Haas who approached Mr Morris and not vice versa.
[26] Although Mr Thorp acknowledges that this appeal is limited to questions of law he submits that there was an error of law because many of the findings made by the Judge were findings for which there is no evidence or that are inconsistent with the evidence and contradictory of it. Mr Thorp submits that, once what he says are inconsistent and unreasonable findings of fact are put to one side, the evidence at most discloses an employee identifying an employment opportunity with the intention of taking up that opportunity following the termination of his existing employment.
[27] Thirdly, Mr Thorp submits that the Employment Court erred in law in assessing damages on the basis of profits that would have been earned by Interchem had it not lost the agency. Damages should have been assessed instead on the basis of the value of any loss by Interchem of any chance it may have had of retaining the Printpack agency following the termination of Mr Morris’s employment. There was in fact no loss because Interchem chose not to insist on any period of notice of termination for the agency from Printpack and because the loss of the agency was inevitable after Mr Morris had left Interchem, given Mr Morris’s expertise in its operation.
[28] Lastly, Mr Thorp submits that Mr Hagen overestimated the damages by failing to allow for the deductions of items of expense included in the gross commission figures upon which he based his calculations as well as by failing to take account of overhead costs of running the agency.
Respondent’s submissions
[29] Mr Fulton, for Interchem, submits that Mr Morris’s appeal is essentially a challenge to the Employment Court’s findings of fact. This is not legitimate where there is an appeal on questions of law only. There was supporting evidence upon which the Court was entitled to rely in reaching its determination. That is the end of the matter.
[30] Mr Fulton submits that nominal damages are inappropriate and that, even if damages are to be for loss of chance, the formulation by Mr Hagen produces an appropriate level of damages. In addition, Mr Fulton submits that Mr Morris accepted the basis for Mr Hagen’s assessment at trial. Finally he submits that the evidence is clear that Mr Morris caused the loss of the Printpack agency and that, but for Mr Morris’s breach, there was no reason for Interchem to lose it.
DISCUSSION
[31] The first point we make is that appeals to this Court from the Employment Court are on questions of law only. It would have to be shown, therefore, either that there was no evidence for the conclusion reached by the Employment Court, or that no reasonable court could have come to the conclusion it did on the evidence before it.It is not enough to suggest that the Judge may have been mistaken in relation to certain facts or that there is another more likely interpretation of the evidence.
[32] If Mr Evans’ version of events was accepted there was clearly evidence for the findings of the Employment Court, both in relation to the suspension question and the timing of the taking of the Printpack agency. Indeed, if the Court was correct on the suspension question then, on Mr Morris’ own evidence, the agency was taken before employment ceased.
[33] The Employment Court resolved the conflict of evidence on the basis of a credibility assessment. Even in a general appeal an appellate Court is reluctant to interfere with findings of fact made on the basis of credibility. Where the appeal is on a question of law there would be no basis for interfering unless no reasonable court could have come to the conclusion it did.
[34] In this case the Judge relied not only on his credibility assessment, for which he gave cogent reasons, but also assessed the likelihood of the two versions of events. Mr Thorp suggests that, in making his assessment, the Judge ignored other more likely explanations. Even if this is correct, not accepting a possible alternative explanation cannot amount to an error of law.
[35] Mr Thorp also pointed to documents that he suggested had been misinterpreted by the Employment Court. In particular he suggests that the facsimile of 10 September cannot be construed as a confirmation of an offer to Mr Morris to take the Printpack agency. We do not accept this submission. Even if Mr Thorp is correct that that was not the most likely interpretation, we consider it was (at least) a possible interpretation, especially if (as Mr Morris’ former solicitor’s letter suggested) there had been a discussion some two weeks before with Mr Haas about Mr Morris taking on the agency.
[36] In any event it does not suffice to show that a Judge has misinterpreted a particular document. For there to be an error of law it must be shown that, on the basis of all the documentary evidence properly interpreted, no reasonable Court could have come to the conclusion the Employment Court did on credibility.
[37] We conclude that there has been no error of law shown in the Employment Court decision, either as to the suspension or the timing of the taking of the agency.
[38] Mr Thorp’s alternative argument is that, even if the arrangement to take the agency had been made before the termination of the employment, there was no breach of the duty of fidelity. This argument is rejected. It is of no moment who makes the first approach. The duty of an employee in such circumstances is to reject categorically any such approach, to report it to his or her employer along with any criticisms made of the employer and to work with the employer to rectify any perceived shortcomings. A similar argument was rejected by Havers J in the case of Sanders v Parry [1967] 1 WLR 753 (QB), referred to with approval by Cooke J (as he then was) in his judgment in Schilling v Kidd Garrett Ltd [1977] 1 NZLR 243, 270.
[39] We move now to the assessment of damages. We accept Mr Thorp’s submission that damages in such cases should be calculated on the basis of the loss of a chance to retain the agency: Schilling v Kidd Garrett Ltd.
[40] The Judge, in assessing damages, relied on the expert evidence of Mr Hagen whose methodology was appropriate for assessing the loss of a chance. Mr Hagen assessed the present value as at 1 October 1998 of the net cash flows Interchem would have expected to receive if the agency had not been taken by Mr Morris, less the present value as at 1 October 1998 of any actual net cash flows received or savings made. In assessing the income Interchem could have expected to earn subsequent to Mr Morris’s breach Mr Hagen examined the actual revenue earned by Mr Morris and his company from the agency. He then applied a 50% probability factor to reflect the risk that Pastoral may in the future use an alternative film and/or that the Printpack agency may have been lost to Interchem. He said in cross-examination that he was aware that there was no formal contract between Interchem and Printpack and that this factor was included in the 50% allowance.
[41] The Judge accepted Mr Hagen’s figures and then applied a further discount to take into account the reduction in revenue as a result of a lighter gauge of film being used and the risk of the Printpack agency being lost at some point in the future if Pastoral were able to source the film in New Zealand. Up to this point there is no error.
[42] The Employment Court considered that Mr Morris did not owe fiduciary duties to Interchem in relation to the Printpack agency, despite his seniority and the fact that he was effectively in sole charge of that agency. There is no challenge to that finding. This means that damages should have been assessed on the basis that Mr Morris would have been free to approach Printpack once his employment relationship with Interchem was over, provided no confidential information was used either in the approach or in the later running of the agency if the approach were successful.
[43] Mr Hagen accepted in cross-examination that he had not taken into account the fact that Mr Morris had no form of restraint on his activities had he chosen to leave Interchem. Mr Hagen said that it would not have been appropriate to take that into account where, as here, there was a suggestion of breach of fiduciary duty and misuse of position and knowledge. It was thus not included in his 50% allowance. Even though the Judge reduced the damages calculated by Mr Hagen by $85,000 he also did not take into account the fact that Mr Morris would have been free to resign and approach Printpack once his employment relationship with Interchem was over. This was despite the finding, contrary to Mr Hagen’s assumption, that there was no breach of fiduciary duty. This was an error of law.
[44] This does not mean, however, that we accept Mr Thorp’s submission that only nominal damages should have been awarded as there was no chance of Interchem retaining the agency even if Mr Morris had behaved properly. First the court would have to assess the likelihood of Mr Morris having left Interchem at all (or at least having left at the time he did) without the certainty of having acquired the Printpack agency. Secondly, in assessing the chance of Interchem retaining the agency, it has to be assumed that, even if Mr Morris did decide to give notice, he would not breach his duty of fidelity to Interchem before or during the period of notice. This means that any chance of Interchem retaining the agency must be assessed on the assumption that Mr Morris did not indicate a positive response to the approach from Mr Haas, and reported it to Mr Evans along with the wish Mr Haas had expressed that more rather than less time be spent on the agency, and also on the assumption that Mr Morris was prepared to work with Mr Evans during the period of notice to try to find a solution to the difficulties perceived by Mr Haas. In this connection it must be remembered that Interchem had a pre-existing relationship with Pastoral, which could have been utilised to help retain the agency.
[45] Given Mr Morris’ seniority and his position as sole contact point for the agency during any period of notice Mr Morris would have been responsible for ensuring as far as possible a smooth transition with which the client was comfortable. The more senior the employee, the more onerous is the duty of fidelity. Arguably a longer period of notice may be required for a senior employee, but in this case Interchem has not asserted that Mr Morris was obliged to give longer notice than one month.
[46] A Court would be justified in being conservative in making any assessment of the possibility that an employee might behave properly but still take the business after he left upon working out his notice. Such an attitude is justified by a desire to ensure that a departing employee does not profit from a breach of the duty of fidelity.
[47] We do not have sufficient material upon which to make an assessment of damages taking the above factors into account. The question of damages will therefore have to be remitted to the Employment Court. Mr Thorp’s final issue as to expenses can be raised with that Court.
RESULT AND COSTS
[48] The appeal is allowed on the basis set out above. The matter is remitted to the Employment Court for a reassessment of damages in the light of this judgment.
[49] As the appeal has been successful only in part, costs on the appeal will lie where they fall.
Solicitors:
Garry Pollak & Co, Auckland for Appellant
Bell-Booth & Co, Auckland for Respondent
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