Australia: Till death do us part – Accounting for disloyalty

The recent decision of the High Court of Australia in Ancient Order of Foresters in Victoria Friendly Society Limited v Lifeplan Australia Friendly Society Limited [2018] HCA 43 clarified the consequences for those who may be deemed to have knowingly assisted a fiduciary in breach of their duties. While the Court stated that there was no revision of principle required, in its decision, the High Court has clarified the applicable rules to knowing assistance, causation and accounting for profit.

Facts

Lifepan Australia Friendly Society (Lifeplan), through its wholly owned subsidiary, Funeral Plan Management Pty Ltd (FPM) and Ancient Order of Foresters in Victoria Friendly Society Ltd (Foresters) both operate in the pre-paid funeral products industry.1 The fiduciaries –Mr Woff and Mr Corby – were senior managers of Lifeplan. While still employed, it was found Woff and Corby secretly offered to Foresters, a five-year business plan designed essentially to systematically divert their employer's funeral director clients for the benefit of Foresters. At the time of Woff and Corby's presentation Lifeplan generated significantly greater revenue ($68M) than Foresters ($1.6M).

The detailed 5-year business concept plan (BCP) as described by the Full Federal Court was a "wholesale plundering of the confidential information and business records of Lifeplan". That BCP was considered by the Foresters board and ultimately approved with the primary judge and Full Federal Court finding that Foresters would not have proceeded without having reviewed the BCP and confidential information of Lifeplan it was based upon. Woff and Corby while still employed by Lifeplan took steps to implement the plan including preparation of Foresters marketing material and documentation as well as attending meetings with client referrers who were to be targeted in the first year as per the BCP.

After resigning from Lifeplan, as employees of Foresters Woff and Corby implemented the BCP which proved to be highly successful with Foresters revenue increasing from $1.6M to $24M and Lifeplan's revenue decreasing from $68M to $45M over a two year period.

In December 2012 Lifeplan commenced proceedings against Woff and Corby for breach of fiduciary and director's duties with Foresters being subsequently joined to the litigation due to its knowing assistance in Woff and Corby's breach of fiduciary duties.

Decision at First Instance

Justice Besanko found that Woff and Corby had breached their fiduciary duties as employees and Woff as an officer of Lifeplan and ordered an account of profits against each employee. Although his Honour found Foresters had knowingly assisted the employees in their breaches he held that the confidential information in the BCP was not used to generate the profits earned in the business.

Appeal to Federal Court

On appeal the Full Federal Court (FFC) found that the primary judge's test for causation was unduly narrow. After emphasising the strictness of a fiduciary's duties the FFC stated that without the breaches of duty in which Foresters was involved, without Woff and Corby taking advantage of their positions and the confidential information taken from Lifeplan, Foresters would not have made the profit it did.2

The FCC ordered Foresters to account for its profits in the sum of $6,558,495 calculated as the net present value of the Foresters' business on the assumption that it ceased marketing funeral products at the end of June 2015.

High Court Appeal

The issues on appeal and cross-appeal before the High Court can be summarised as follows:

  1. Did Foresters' knowing assistance in Woff and Corby's breaches cause the profits it was ordered to account to Lifeplan?; and
  2. Could Foresters be made to account for unearned future profits?

The High Court found that it it would not have generated its profits. In so doing, the Court re-affirmed the deterring purpose of the strict equitable rules forbidding fiduciaries to profit from their position, which is equally applicable to those knowingly assisting fiduciaries in violating such duties. Gageler J (with whom Kiefel CJ and Keane and Edelman JJ agreed) held that in relation to the causal connection between Foresters' knowing assistance and the account of profits ordered it was sufficient to show that Foresters' profit would not have been made but for the dishonest wrongdoing. The Court also held it is necessary to consider the totality of the effect of any knowing assistance rather than direct consequences of each act. In making such findings, the majority perceived Foresters' role as integral in Woff and Corby's breach of duty and therefore deduced the benefits derived were Lifeplan's business connections as opposed to any individual customer revenue streams. The majority construed that Foresters would continue to enjoy such connections for as long as they were retained in the business, which would extend beyond the five-year period envisioned by the BCP.

On that basis the majority (Kiefel CJ, Keane and Edelman JJ concurring and Gageler J) allowed Lifeplan's cross appeal holding that there was no reason in principle which required Foresters to disgorge anything less than the entire capital value of the business acquired through participation in Woff and Corby's dishonesty being $14, 838, 063. Nettle J dissented on the basis that the 5 year time limit imposed by the FFC was reasonable in the circumstances relying on the principles in Warman International Ltd v Dwyer.3

Take Aways

This case is of particular importance for employers considering business opportunities tendered by former employees of competitors, given the majority ordered Foresters to disgorge the total capital value of the business it acquired by reason of the breach.

It is also a significant reminder of the strict fiduciary duties owed by employees which may apply regardless of whether they have been expressly incorporated in an employment contract. In the absence of restraint clauses, ex-employees may be legally able to compete with former employers. However, this is only so long as they are not in breach of their duties such as act in their employer's interest, protect employer's business connections and not divert opportunities as well as maintaining their confidentiality obligations.

From the viewpoint of Foresters, they took the business risks but the profits want to Lifeplan/FPM, so this would have hurt.

Footnotes

1See Ancient Order of Foresters in Victoria Friendly Society Limited v Lifeplan Australia Friendly Society Limited [2018] HCA 43, [26] (Gageler J) and [121] (Nettle J) for explanation of the products sold.

2 Ancient Order of Foresters in Victoria Friendly Society Limited v Lifeplan Australia Friendly Society Limited (2017) 250 FCR 1 at 21-22 [66].

3(1995) 182 CLR 544.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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