Rooney Earthmoving Limited v McTague

[2013] NZHC 3069

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

CIV-2009-476-471 [2013] NZHC 3069

BETWEEN  ROONEY EARTHMOVING LIMITED Plaintiff

ANDKELVIN DOUGLAS MCTAGUE First Defendant

CLARENCE HENRY WHITING Second Defendant

KERRY WAYNE BARTLETT Third Defendant

BMW CONTRACTING LIMITED (IN RECEIVERSHIP AND IN LIQUIDATION)

Fourth Defendant

Hearing:                   11 June 2013

Appearances:           D M Lester and R S Brown for Plaintiff

No appearances - defendants

Judgment:                20 November 2013

JUDGMENT OF PANCKHURST J

A formal proof hearing

[1]      A claim by the plaintiff, Rooney Earthmoving Limited (Rooney), against the fourth   defendant,   BMW   Contracting   Limited,   (BMW),   in   receivership   and liquidation, was heard by way of formal proof.  Judgment was obtained against the first,  second  and  third  defendants  in  the  Employment  Court  for  the  sum  of

$4,290,000, in essence because these defendants, former Rooney employees, left

their  employment  and  established  BMW in  direct  competition  to  Rooney using

ROONEY EARTHMOVING LIMITED v MCTAGUE AND ORS [2013] NZHC 3069 [20 November 2013]

commercially sensitive  information  to  ensure  that  BMW prospered  at  Rooney’s

expense.

[2]      Proof of the case against BMW in this Court was advanced by reference to both findings made in two Employment Court judgments as well as witness statements from a solicitor, and a director and a manager of Rooney.   For reasons which I shall explain shortly, I am satisfied that the findings of the Employment Court may be used to support the claim against BMW.  They were made in separate liability, and damages, judgments.   Limited reliance on the witness statements is necessary.

[3]      At the formal proof hearing judgment was reserved to enable me to fully consider the Employment Court judgments and other materials.   This prompted a request  for  further  information  subsequently  supplied  in  a  memorandum  from Mr Lester.  Through administrative error that memorandum was not provided to me. Much later I initiated an inquiry of counsel which led to the supply of the memorandum filed a considerable time earlier.  This explains the unfortunate delay in delivery of this judgment.

The background

[4]      Rooney is an earthmoving company based in Timaru.   It has a branch at Ashburton  of  which  Mr  Kelvin  McTague  was  formerly  the  regional  manager. Messrs Clarence Whiting and Kerry Bartlett were employed as supervisors at the branch.

[5]      At  various  dates  in  April  and  May  2004  these  three  men  (the  three individuals) resigned from their respective positions.   Officers of Rooney became aware that the three intended to establish an earthmoving business in competition to Rooney.

[6]      On 19 May 2004 BMW was incorporated.  It commenced trading on 1 June at Ashburton.

[7]      Messrs McTague, Whiting and Bartlett possessed confidential information concerning Rooney’s business, including knowledge of clients, work prospects, pricing arrangements and quotations given in relation to prospective work.  It was a term and condition of their employment with Rooney that such information be kept confidential and not be used to their personal advantage.

[8]      Commencing  in  about  March  2004  the  plan  to  incorporate  BMW  and commence a rival earthmoving business was implemented.   Steps taken included sourcing plant and equipment to enable BMW to begin trading at the beginning of June 2004, recruiting future employees of BMW including some other Rooney staff members and securing sufficient forward orders to provide about 12 months work for BMW.

[9]      BMW’s trading performance was strong from the outset.   In its first  10 months of trading to March 2005 the company enjoyed a turnover of over $1.6 million, rising to over $9.5 million in the year to March 2009 and totalling over

$33.8 million in the years to March 2011.

[10]     However, in September 2009 this proceeding was commenced.  A freezing order against the assets of BMW was initially obtained.  In the financial years ended March 2010 and 2011 BMW’s turnover was reduced to about $4.6 million as compared to the peak of $9.5 million in the year to March 2009.

[11]     On   23   November   2011   BMW   was   placed   into   receivership.      On

15 December 2011 the company was placed in  liquidation on the application of

Rooney.

Employment Court proceedings

[12]     This Court does not have jurisdiction to determine proceedings alleging a breach of employment agreements.   Exclusive jurisdiction is vested in the Employment Court.  BMW, however, had no employment relationship with Rooney, and Rooney’s claim against it can only be heard in this Court.

[13]     There  were  two  hearings  in  the  Employment  Court.   A liability hearing occurred over 14 hearing days in late 2008, early 2009.   Judge Travis delivered a liability judgment on 24 August 2009 in which he found that Messrs McTague, Whiting and Bartlett were variously in breach of the employment duties they owed to Rooney.  Such breaches included soliciting Rooney’s clients and its employees to work for BMW, filching Rooney’s client list, using knowledge of work quotations provided by Rooney in order to undercut prices provided to prospective clients, and otherwise  using  Rooney’s  confidential  information  in  the  conduct  of  BMW’s business.

[14]     Over three days in June 2011 Judge Travis heard Rooney’s damages claim. In a judgment dated 23 April 2012 Rooney was awarded $4,290,000.  Judgment was entered against the three individuals for this sum.

[15]     Subsequently each of the three were adjudicated bankrupt.   The Official Assignee has filed notices of discontinuance in relation to the defences filed by the three in this proceeding.  A stay of proceedings earlier imposed in this Court was lifted in May 2012.  This enabled Rooney to continue with its claim against BMW in liquidation.  On 8 March 2013 the liquidators consented to the continuation of the High Court proceeding against BMW, since absent a judgment they declined to recognise Rooney as a creditor of BMW.

Basis of the claim

[16]     The 2009 statement of claim in this Court raised multiple causes of action against the three individuals and BMW.  Mr Lester, however, ultimately relied upon breach  of  confidence  as  the  cause  of  action  against  the  Company.    It  is  well recognised that there are three elements to an action for breach of confidence.  These are:

(a)       the  existence  of  information  which  has  the  necessary  quality  of confidence about it,

(b)the  imparting  of  such  information  to  persons  in  circumstances involving an obligation of confidence, and

(c)       unauthorised use of that information by such persons.

These elements were recognised in Coco v A N Clark (Engineers) Ltd,1  an English case decided in 1969.  The case has been accepted and followed in a number of New Zealand cases over the past 40 years.

[17]     In the Employment Court Judge Travis found that the three individuals were each in possession of confidential information in circumstances giving rise to an obligation of confidence.  Following the damages hearing he also accepted that such confidential information was used to enable BMW to generate net profits (after deduction of operating expenses) of $4,290,000 over a period of almost three years to March 2007.

[18]     Mr  Lester  submitted  that  BMW  was  a  third  party  possessed  of  actual knowledge that its business operation was significantly based on the use of Rooney’s confidential information.   In short, he submitted that the knowledge of the three individuals could be imputed to BMW, so that in the end result it was also liable to Rooney.

[19]     In my view, there are two main issues for determination. These are:

(a)       whether BMW is fixed with liability on account of its unconscionable

use of Rooney’s confidential information, and

(b)whether the factual findings of Judge Travis in the Employment Court may be applied in relation to this proceeding as well.

In the event, I can deal with these two questions quite briefly.

Is BMW liable as a third party?

[20]     In my view, the principles relevant to fixing liability to a third party are clearly established.   Third party liability applies where that party, here BMW, has acted unconscionably in relation to the acquisition of the information, or in the way it is subsequently employed.  In this instance both limbs are relevant, since Rooney contends that BMW acquired the information unconscionably, and then used it in a

unconscionable manner.   The case is put as one where the company had actual

1      Coco v A N Clark (Engineers) Ltd [1969] RPC 41 (Ch) at 47.

knowledge that the information was confidential, given that the three individuals controlled and operated BMW.   These principles  are described by the Court of Appeal in Hunt v A.2

[21]     The inference that BMW was incorporated as a corporate vehicle to enable the three individuals to establish an earthmoving business in opposition to Rooney is irresistible.  The name of the company, BMW Contracting Limited, is based on the first   letters   from   the   surnames   of   Messrs   Bartlett,   McTague   and  Whiting, respectively.  BMW was incorporated while the three individuals were in the process of leaving their employment with Rooney.  Messrs Bartlett, McTague and Whiting became directors of BMW at inception.  The shareholding in the company, 100,000 shares, was initially held by Mr McTague and his wife, but was then transferred to a trustee company.  Subsequently, a different trustee company took ownership of the shares.  This strongly suggests that each of the three individuals were shareholders of BMW, albeit the individual holdings are not in evidence.

[22]     The factual findings made by Judge Travis in the liability judgment were comprehensive.  These included findings that the three individuals were in breach of duties of fidelity and trust owed to Rooney in an employment context.   Centrally important were conclusions that the three acted in concert to establish BMW and breached their obligation of fidelity and trust particularly in relation to the misuse of

the commercially sensitive information identified earlier.3   Given that BMW was the

vehicle established to conduct the rival business, it is obvious that the controlling minds of the Company had actual knowledge of the confidential information subsequently used as the springboard to establish the new business.

[23]     In  the damages  judgment,  Judge Travis  found  that  the three individuals, through misuse of the confidential information, generated profits to BMW totalling

$4,290,000.  This figure was based upon expert evidence from forensic accountants who had analysed BMW’s turnover, including its sources.   The accountants also assessed the downturn in the turnover of Rooney’s Ashburton branch, a downturn

that commenced in the months prior to the departures of the three individuals in

2      Hunt v A [2008] 1 NZLR 368 (CA) at [69] – [94]. See also Andrew Butler (ed), Equity and

Trusts in New Zealand (2nd ed, Thomson Reuters, Wellington, 2009) at 20.2.2 (7).

3 See [7] and [13].

May 2004.  This enabled Judge Travis to conclude that for the three year period to March 2007 Rooney’s loss was matched by BMW’s gain.  The figure of $4,290,000 represented damages for breach of contract, whereas Rooney’s claim against BMW is an action for breach of confidence based in equity.

[24]     Regardless, I am satisfied that the finding of Judge Travis that BMW derived profits of $4,290,000 consequent upon its misuse of Rooney’s confidential information is equally applicable in the breach of competence context.  One remedy for breach of confidence is disgorgement of the ill-gotten gain, although a plaintiff may also recover its proven loss of profits.4    I turn, therefore, to whether the Employment Court findings are applicable.

Is issue estoppel available?

[25]     Generally a finding of fact in a civil proceeding is not admissible to prove the existence of that fact in another civil proceeding.5   However, this rule does not affect the operation of the law relating to issue estoppel,6 and its related doctrines.

[26]     In response to the minute issued after the formal proof hearing, Mr Lester submitted that findings made against the three individuals in the Employment Court were binding against BMW in this proceeding,  provided privity of interest was shown.  That is, if the interests of the three individuals in the Employment Court can be equated to the interests of BMW in this Court, the earlier findings are applicable against BMW as well.7

[27]     I am in no doubt that privity of interest exists in this instance.  The reasons for this conclusion have already been identified.   The three individuals possessed, and misused, confidential information for their own economic advantage.  They did so through the vehicle of BMW, a limited liability company.  At all relevant times they controlled, and I infer, owned BMW.  The interests of the three individuals, and

of BMW, were closely aligned.   Accordingly, issue estoppel applies and the key

4      Blanchard, Civil Remedies in New Zealand, 2ND ed p 401-2.

5      Section 50(1) of the Evidence Act 2006.

6      Section 50(2)(b).

7      Dominion Rent A Car v Budget Rent A Car [1987] 2 NZLR 395 at [428] – [433].

findings  reached  in  the  Employment  Court  judgments  are  applicable  in  this proceeding as well.

Conclusion

[28]     Rooney is entitled to judgment against BMW in the sum of $4,290,000. [29] Costs are reserved.  If sought, a memorandum may be filed.

Solicitors:

D M Lester, Christchurch

R S Brown, Christchurch