Employees – Damages for Breach of Contractual and Fiduciary Obligations
Employees are generally subject to the express terms of their employment agreements and implied and fiduciary duties and statutory duties.
Breaching those duties may lead to significant damages claims against them, although the exact measure of damages may require an election by the Employer.
In this case, Qi and Tong (the employees) were employed by the Plaintiff (PIA), a real estate company and property developer whose business included leasing and management of residential investment properties. One of its major assets was a rent roll of over 4000 properties.
The undisputed facts at trial were that the employees, while employed by PIA:
- established the third defendant, Rental Master Pty Ltd (RM) to compete with PIA;
- leased office space for RM;
- obtained a corporate real estate agents licence for RM;
- in breach of their contractual, fiduciary and statutory obligations caused clients of PIA to become clients of RM and RM to manage 44 properties owned by those clients; caused Rental Master to manage 60 further properties;
- sent some 55 emails relating to PIA’s clients from their PIA email accounts to their personal accounts and that those emails contained “confidential information” within the meaning of their employment contracts.
PIA sought orders from the Court for:
- an injunction to restrain the employees;
- declarations as to the breaches by the Employees of their fiduciary contractual and statutory duties (under S 182 of the Corporations Act); and
The Employees were employed pursuant to written contracts entitled “Letter of Appointment Terms”. Each had the job title “Property Manager’s Assistant (Property Officer)” and later “Junior Portfolio Manager”. Each had management responsibilities for approximately 400 investment properties managed by PIA on behalf of its clients.
In their initial roles as property manager assistants, the Employees were to support “the Property Manager in the day to day management of their portfolio of investment properties” including:
(a) dealing with enquiries;
(b) biannual property inspections;
(c) showing properties to prospective tenants; and
(d) monitoring and managing the payment of rent by tenants.
There were express terms of the Employees employment by PIA that:
(a) during their employment, they would not enter into any contract which was contrary to the interests of PIA or in which they had interests which conflicted with their duties to PIA (cl 15.1);
(b) during working hours they would give their full attention to the performance of their duties for PIA (cl 15.2);
(c) while working for PIA they would not engage in any other employment without the consent of PIA or be involved in any capacity, directly or indirectly, in any other business in competition with PIA (cl 15.3);
(d) on termination of their employment they would promptly account to and return to PIA all records of PIA and property or things of PIA that were made available for their use in the course of their employment (cl 20.1);
(e) they were to maintain the confidentiality of all “confidential information” (defined to include all information contained in all databases owned or used by PIA) and to use such information solely for the benefit of PIA during and after the termination of their employment (cl 21.1);
(f) they would not, for 24 months after termination of their employment, for any reason, in any capacity directly or indirectly, canvass, solicit or otherwise seek the custom of persons who have been customers of PIA in the 12 months prior to the termination of such employment (cl 22.2); and
(g) they would, on termination of their employment with PIA return to PIA all files, records, documents, discs, equipment and similar items relating to PIA’s business (cll 20.1 and 21.5).
Fiduciary duties are proscriptive. A fiduciary must not promote his or her personal interest by making or pursuing a gain in circumstances where there is a conflict, or real or substantial possibility of conflict, between the personal interest of the fiduciary and those to whom the duty is owed: Pilmer v Duke Group Ltd (in liq)  HCA 31; (2001) 207 CLR 165 at 199; see also Coope v LCM Litigation Fund Pty Ltd  NSWCA 37 at .
The Employees admitted that the terms of their employment by PIA included fiduciary duties:
(a) to act with good faith and fidelity to PIA; and
(b) of loyalty to PIA such that neither of them would:
i. put themselves in a position of conflict with their obligation to act solely in PIA’s interests in relation to any of PIA’s businesses they were involved in; and
ii. take for themselves an opportunity within the sphere of PIA’s business operations without PIA’s fully informed consent.
Equitable Damages or account of profits?
The Court had to consider the measure of damages and considered the principles of equitable damages:
The relevant principles were summarised by the Full Court of the Federal Court of Australia in V-Flow Pty Ltd v Holyoake Industries (Vic) Pty Ltd  FCAFC 16.
So far as concerns equitable compensation or damages the Court (Emmett, Edmonds and Rares JJ) said at  to :
“The object of the equitable remedy of compensation or damages is restitution of what the victim has lost. The question is whether the loss would have occurred but for the breach. While the monetary sum awarded to the victim is normally computed by reference to the detriment actually suffered by the victim, it may occasionally be computed by reference to the profit that has been made by the errant fiduciary. Nevertheless, the primary purpose of equitable compensation or damages is compensatory (Nocton v Lord Ashburton  AC 932; Re Dawson (1966) 84 WN (Pt 1) (NSW) 399). No element of penalty is involved.” (Meagher, Gummow and Lehane, Equity: Doctrines & Remedies (4th ed) at [23–02]).
“The obligation imposed by equity to pay damages or compensation is not fettered by the usual notions that serve to diminish the quantum of an award of damages at common law. The obligation imposed by equity upon an errant fiduciary is of a more absolute nature than the common law obligation to pay damages for tort or breach of contract. Thus, the obligation is not limited or influenced by common law principles governing remoteness of damage, foreseeability or causation (Hill v Rose  VR 129 at 144). However, while foreseeability is not a concern in assessing equitable compensation or damages, the only losses that are made good are those that, on a common-sense view of causation, are caused by the breach of duty (Canson Enterprises Ltd v Boughton and Co  3 SCR 534 at 556).”
Account of Profits
In Australia, an account of profits is an equitable remedy available for cases involving a breach of fiduciary duty. This may be given in cases where a defendant has profited from committing an equitable wrong. This therefore requires the offending party to give up the profits made. This can be a long process and will likely require you to go Court.
Account of profits involves calculating the profit that the defendant made in breaching their duties. This is so that profits made can be returned to the plaintiff. Account of profits does not aim to punish the defendant, but rather serve justice by taking away the profits made by the defendant in committing a wrongful act. Account of profits is common in cases involving breach of duties by company directors and trustee breaches.
The Court cited with approval the V-Flow case summary of the purpose of an account of profits:
“On the other hand, the purpose of an account of profit is to prevent the unjust enrichment of the fiduciary by compelling the fiduciary to surrender any profits actually made by the fiduciary that were made improperly, and nothing beyond that. It is not to punish the errant fiduciary (Dart Industries Inc v Decor Corporation Pty Ltd (1993) 179 CLR 101 at 111) (Dart). The errant fiduciary is made to account for, and is then stripped of, profits made that it would be unconscientious for that person to retain, because they are profits made by the fiduciary dishonestly. For example, in the case of infringement of intellectual property rights, the account is limited to the profits of the wrongdoer during the period when the victim’s rights were being infringed” (Colbeam Palmer Ltd v Stock Affiliates Pty Ltd (1968) 122 CLR 25 at 34).
While the Court found that the Employees were liable to PIA, it ordered that the PIA elect where to seek equitable damages or an account of profits.
If you have any queries in regard to the matters raised in this article, please do not hesitate to contact us.
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