A party affected by a breach of fiduciary duty may elect to claim equitable compensation, or to pursue an account of the profit or benefit derived by the party committing the breach and any party who knowingly assisted the breach.

Pursuing an account of profits is often more attractive because it spares the innocent party from having to prove the loss it has suffered from the breach. Such loss may be difficult to prove – for example, clients who have been snatched away by an employee in breach of his/her fiduciary obligations are unlikely to agree to give evidence about the affair.

Moreover, the value of the provable loss may be modest and compare unfavourably with the legal costs involved in obtaining the relief. The results of an account of profits can be much more substantial.

This is illustrated by a recent decision of the High Court of Australia (Ancient Order of Foresters in Victoria Friendly Society Ltd v Lifeplan Australia Friendly Society Ltd [2018] HCA 43) in which it was held that an account of profits can include the total net capital value of a business that was established by reason of the breach, including future net profits.

Facts

Lifeplan provided products to meet the cost of pre-arranged funerals. Two management employees of Lifeplan, Woff and Corby, approached the board of a competing business (Foresters) with a plan to divert Lifeplan’s existing funeral products business to Foresters using Lifeplan’s confidential information and records.

While still employed by Lifeplan, Woff and Corby incorporated a company to be used as a vehicle for this plan, which became very successful. Foresters’ revenue grew from $1.6 million in 2010 to $24 million in 2012.  Lifeplan’s revenue fell from $68 million to $45 million over the same period.

Lifeplan commenced proceedings claiming an account of profits in respect of breaches of fiduciary duties and contraventions of the Corporations Act 2001 (Cth). Foresters was joined on the basis that it had knowingly assisted in the breaches.

Issues before the High Court

The High Court had to deal with two issues:

  • What causal connection is required between the conduct of a knowing assistant (such as Foresters) to a breach of fiduciary duty of a third party and the benefit derived from that conduct?
  • What are the principles governing the quantification of profits and benefits to be disgorged by a knowing assistant?

Causation

The majority of the High Court found that any benefit received as a result of participation in a dishonest breach of fiduciary duty is recoverable.  It is sufficient to show that the profit would not have been made but for the dishonest wrongdoing.  It is not necessary that the breach be the sole cause of the profit or benefit derived.

Quantification

Once causation is established, the onus is on the defendant to show that it should not disgorge the full profit. It must either be shown that an allowance for skill and effort should be applied, or that the profit was “beyond the scope” of the wrongdoing, that it has no reasonable connection with the wrongdoing such that it would be “inequitable” for the defendant to account for it.

Foresters did not demonstrate that any of its increased profitability could be attributed to matters other than the business connections appropriated from Lifeplan.

Given the dishonest nature of the conduct in this case and Foresters’ failure to adduce any evidence to suggest its extraordinary increase in profits could be explained by anything other than the success of Woff and Corby, the High Court found it was not inequitable for Foresters to disgorge the net capital value of the business and future profits – being the sum of $14,838,063.

Significance

The decision serves to reinforce the attraction to a plaintiff of pursuing an account of profits, rather than equitable compensation, in cases of breach of fiduciary obligations.

For companies that look to grow by taking on staff from an existing business, the decision underscores the need to ensure that no encouragement is given to those staff to violate their existing duties, lest the fruits of the future business be lost.

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