Foresters, a hitherto unsuccessful funeral products business, who had acquired the benefit of a profitable funeral products business by knowingly assisting two employees of a competitor to dishonestly breach their fiduciary duties, was required to disgorge the total capital value of the business acquired, the High Court of Australia has held: Ancient Order of Foresters in Victoria Friendly Society Limited v Lifeplan Australia Friendly Society Limited [2018] HCA 43 (10 October 2018).
The two employees, while employed with the competitor, approached Foresters with a proposal to divert the competitor’s business to Foresters using the competitor’s confidential information and business records. The plan was very successful and resulted in a significant increase in Foresters’ profits and a corresponding decline in the competitors’ profits. The competitor brought proceedings against the former employees and Foresters. The trial judge found that the former employees had breached their fiduciary and statutory duties and that Foresters had knowingly assisted in some of these breaches.
The issue before the High Court was the extent of Foresters’ liability to account for profits. The court’s reasoning clarifies principles of causation and quantum in accessory liability cases. The result illustrates the strong protection the law affords to beneficiaries of a fiduciary duty by requiring defaulting fiduciaries and those who assist them to disgorge advantages obtained, and by identifying those advantages in a liberal manner.
Causation
Foresters contended it should only be required to disgorge those profits that directly resulted from its particular acts that constituted knowing assistance of the former employees’ breaches of their fiduciary duties: Kiefel CJ, Keane and Edelman JJ at [4]. It relied on the trial judge’s findings that those particular acts resulted in no advantage to Foresters.
The court rejected this contention. Foresters was liable for any benefit received as a result of its knowing participation in the breach of fiduciary duty. It was unnecessary to show a causal link between the profit and the acts of assistance. It was sufficient to show that the profit would not have been made but for the breaches of fiduciary duty: Kiefel CJ, Keane and Edelman JJ at [12], Gageler at [88]; Nettle J at [179].
Foresters’ submission ignored or sought to divert attention from the fact that its acts of assistance were “inseparable from”, “integral to” and “crucial to the implementation of” the former employees’ “general scheme of breach of duty”: Kiefel CJ, Keane and Edelman JJ at [5]-[12]
Gageler J’s and Nettle J’s views on causation may be broader than the plurality’s in going beyond but for test of causation. Gageler J stated that where the fiduciary’s breach is dishonest or fraudulent, there would be sufficient causal connection if the breach played a “material part in contributing” to the profit earned: at [88]. Nettle J also referred to “material contribution” as the relevant test: at [191].
Further, Gageler J and Nettle J each noted a divergence between English and Australian approaches to assessing the amount of disgorgement. Gageler J stated: “Contrary to approaches which have emerged in some English cases since Warman, identification of a benefit or gain for which a defendant fiduciary or knowing participant is to be ordered to account is the outcome neither of judicial discretion nor of the determination of a mere factual issue of causation”: at [83]; see also Nettle J at [191]-[193].
Quantification of Profit
Once it has been established Foresters had received an advantage as a result of its knowing participation in the breach of fiduciary duty, Foresters would be liable to disgorge the full value of that advantage unless it could show that this would be inequitable. The burden to show this lay on Foresters: Kiefel CJ, Keane and Edelman JJ at [13], Gageler at [91].
There are two broad bases on which Foresters could show this. First, Foresters could show that an allowance should be made for costs incurred and labour and skill employed. This basis was not relevant in this case as the discount cash flow method used to calculate profits already accounted for these factors.
Second, Foresters could show that the profit was “beyond the scope of the wrongdoing”, in that it had “no reasonable connection with the wrongdoing” or “some other reason why accounting for the whole of the gain would amount to a windfall to the plaintiff of such a nature or to such a degree” that it would be inequitable: Kiefel CJ, Keane and Edelman JJ at [14]-[15], Gageler at [92].
An example of a defendant successfully relying on the second basis is Warman International Ltd v Dwyer (1995) 182 CLR 544. There the profits awarded were limited to the first two years following the defendants’ appropriation of a business opportunity in breach of fiduciary duty. In that case, however, there was evidence that the advantage obtained by the breach was apt to endure for a short period only and to diminishing effect over that period.
The majority of the court rejected Foresters’ contention that it should not be required to disgorge the full value of the advantage obtained. By contrast with Warman International Ltd v Dwyer, Foresters had put forward no evidence to show that there was any reason for its increased profitability apart from the former employees’ scheme, or that the advantage they obtained did not endure: Kiefel CJ, Keane and Edelman JJ at [18]-[22]; Gageler at [119].
As a result, a majority of the court held that Foresters was liable to the competitor for the total capital value of the business acquired.
Nettle J dissented, holding that the defendant should only be required to disgorge actual and anticipated profits for a fixed period following the breach of fiduciary duty. His Honour’s dissent was not based on any point of legal principle, but rather a different view of the facts and in particular, his Honour’s view that the breaches of fiduciary duty had ceased to make a material contribution to any advantage obtained by Foresters by the end of the fixed period.
