Australia: All for one or one for all – Fiduciary duty to subsidiaries

H&H Consulting Engineers Pty Limited & Anor v Meyers & Anor [2011] NSW SC 4

Facts

H&H Consulting Engineers Pty Limited (H&H) is an engineering company who employed Mr Meyers (the first defendant) from September 2006 to April 2008 as a business development engineer. The first defendant was previously involved with the Rochem Group of Companies headed by a German-based company which had subsidiaries worldwide. The first defendant advised H&H of his involvement with Rochem prior to the commencement of his employment. He sought to continue this business relationship, and was permitted to do so.

In early 2006, prior to commencing with H&H, the first defendant set up a business related to Rochem in Australia that provided renewed water solutions, known as Renewed Water Solutions Pty Limited (RWS). The first plaintiff and his wife were the sole shareholders and directors. H&H was not notified of this.

Later in December 2006, H&H decided to reject a proposal from the first defendant to establish a consortium involving H&H, RWS, and two other parties. This consortium proposal was rejected on the grounds that an existing subsidiary within H&H, Innaco Pty Ltd (Innaco), provided a similar service.

The first defendant then introduced H&H to Econova Operations Pty Limited (Econova), a company which delivered construction project management services. Again, H&H advised the first defendant that Innaco was well placed to deliver the services offered by Econova, and declined to enter into a business relationship on those grounds.

However, the first defendant ignored H&H's direction to establish Innaco as a water engineering department, and later facilitated an agreement between H&H and Econova which resulted in Econova being the lead contractor of a project, without the informed consent of H&H. The first defendant then left H&H to take up employment with Econova.

Decision

The NSW Supreme Court (the court) was satisfied that the first defendant received explicit instructions to develop Innaco as a business. The first defendant maintained he had no duty to promote Innaco for a variety of reasons, including that he had a role specific to H&H that did not involve him working with Innaco. The first defendant also submitted that Innaco was effectively run as an entirely separate company (despite having common directors).

However, the court found that by building up Econova (and, in turn RWS) at the expense of H&H, the first defendant breached his fiduciary duty by not to promoting personal interests of persons other than H&H by making or pursuing a gain in conflict with the interests of those other persons and the interests of H&H and Innaco.

The court awarded an account of profits of $127,500 against the first defendant's company, RWS, or equitable compensation of $262,312 awarded jointly against the first defendant and RWS.

Conclusion

This case clearly demonstrates that carefully worded employment contracts are vital in addressing employee fiduciary duties within groups of companies.

H&H succeeded in this case because the employment contract expressly stated that the first defendant's dealings with Rochem were to be carried out in a manner that would not disadvantage H&H.

For the purposes of assessing the first defendant's conduct, the court viewed H&H and Innaco as one company. This is a lesson for companies to be proactive in constructing their employment contracts by ensuring that fiduciary obligations extend to all subsidiaries.

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