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Equitable compensation

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Nicholls & Ors v Michael Wilson & Partners Ltd [2012] NSWCA 383. Sackville AJA.

Principles

170. There is no disagreement between the parties as to the principles to be applied in the assessment of equitable compensation. Indeed neither takes issue with the primary Judge's exposition of the principles, although they differ as to the application of the principles to the particular circumstances of the case. Nonetheless, the relevant principles should be restated.

171. Equitable compensation has three principal features: Meagher, Gummow and Lehane's Equity: Doctrines and Remedies (4th ed 2002), at [23-020]. First, the primary purpose of the remedy is compensation for what has been lost. Thus, compensation is ordinarily computed by reference to the detriment suffered by the plaintiff: see McKenzie v McDonald [1927] VicLawRp 19[1927] VLR 134, at 146-147, per Dixon AJ. This reflects the observations of the High Court in the present case (at [101]), see at [37] above).

Secondly, the assessment of equitable compensation is not fettered by common law principles, such as remoteness of damage or foreseeability, which can diminish the quantum of damages at common law. The justification for the difference in approach is that the obligation to make restitution which courts of equity have imposed on defaulting trustees and fiduciaries is of a more absolute nature than the common law obligation to pay damages for tort or breach of contract: Re Dawson (dec'd) [1966] 2 NSWR 211, at 216, per Street J; I E Davidson"The Equitable Remedy of Compensation" [1982] MelbULawRw 4(1982) 13 Melbourne University Law Review 349, at 350-353.

Thirdly, although the equitable duties imposed on a fiduciary have an element of deterrence (W M Gummow, above, at 79), as a general proposition there is no element of penalty in the assessment of compensation: cf Harris v Digital Pulse Pty Ltd [2003] NSWCA 1056 NSWLR 298, at [44], per Spigelman CJ; at [404]-[407], [470], per Heydon JA.

172 It is common ground that a claim for equitable compensation requires a causal link between the breach and the loss:Youyang Pty Ltd v Minter Ellison Morris Fletcher [2003] HCA 15212 CLR 484, at [44] (adopting the observations of Mummery LJ in Swindle v Harrison [1997] EWCA Civ 1339[1997] 4 All ER 705, at 733-734, that there "is no equitable by-pass of the need to establish causation" and that "in questions of causation it is important to focus on the relevant equitable duty"); O'Halloran v R T Thomas & Family Pty Ltd [1998] NSWSC 596(1998) 45 NSWLR 262, at 269, 274, per Spigelman CJ (with whom Priestley and Meagher JJA agreed); Beach Petroleum NL v Kennedy [1999] NSWCA 40848 NSWLR 1, at [449], per curiam.

Thus to claim equitable compensation for the appellants' breaches of fiduciary duty, MWP must establish that it has sustained losses and that there is a causal link between the losses claimed and the breaches.

173. The parties agree that the principles relating to causation for the purposes of equitable compensation are as stated by Spigelman CJ in O'Halloran v Thomas. That was a case involving breaches of fiduciary duty by a former director of a company. However, Mr Blake did not dispute that the same principles applied to MWP's claim for equitable compensation.

174. The principles stated by Spigelman CJ may be summarised as follows (with additional references in square brackets): 

175. The particular issue in O'Halloran v Thomas was whether the registration of a share transfer by a former director of a company in breach of his fiduciary duty to the company caused the company to lose the opportunity to sell the shares to a third party. The issue arose because the loss of opportunity might also have been caused by a number of other acts or omissions for which the defendant was not necessarily responsible (the separate and concurrent causes). As Meagher JA observed (at 281), since the defendant had committed serious breaches of fiduciary duty, equity would not enter into a debate as to whether the loss was also caused by the other acts or omissions.

176. The causation issue in the present case is somewhat different. Neither party suggests that this is a case involving separate and concurrent causes of loss. The appellants accept that their breaches of fiduciary duty caused some relatively minor losses sustained by MWP, for example the loss of opportunity to undertake work for the Maersk Oil Joint Venture and Kangamiut Seafoods, for which they are liable to compensate MWP.

Their principal contention is that the primary Judge erred in awarding compensation for other claimed losses because neither Mr Schoonbrood nor Mr Sinclair would have dealt with MWP had Mr Emmott not been with the firm. It follows, so the appellants argue, that any loss of opportunity for MWP to act on behalf of Messrs Schoonbrood or Sinclair was not caused by the appellant's breaches of duty, at least insofar as the claimed losses are attributable to work on projects undertaken by TIL after Mr Emmott left MWP. 

177. MWP relies on the judgment of the Supreme Court of Canada in Canadian Aero Service Ltd v O'Malley [1974] SCR 59240 DLR (3d) 371. In that case, a former director of a company used confidential information to acquire an opportunity actively sought by the company. Laskin J, delivering the judgment of the Court, said (at [24]-[25]):

"24. [The directors] stood in a fiduciary relationship to [the company], which in its generality betokens loyalty, good faith and avoidance of a conflict of duty and self-interest. Descending from the generality, the fiduciary relationship goes at least this far: a director or a senior officer ... is precluded from obtaining for himself, either secretly or without the approval of the company (which would have to be properly manifested upon full disclosure of the facts), any property or business advantage either belonging to the company or for which it has been negotiating; and especially is this so where the director or officer is a participant in the negotiations on behalf of the company. 

25. An examination of the case law in this Court and in the Courts of other like jurisdictions on the fiduciary duties of directors and senior officers shows the pervasiveness of a strict ethic in this area of the law. In my opinion, this ethic disqualifies a director or senior officer from usurping for himself or diverting to another person or company with whom or with which he is associated a maturing business opportunity which his company is actively pursuing; he is also precluded from so acting even after his resignation where the resignation may fairly be said to have been prompted or influenced by a wish to acquire for himself the opportunity sought by the company, or where it was his position with the company rather than a fresh initiative that led him to the opportunity which he later acquired." 

178. Canadian Aero has frequently been cited with approval in Australia. The passage to which I have referred was quoted with approval (through the intermediary of another Canadian decision) by this Court in Mordecai v Mordecai (1988) 12 NSWLR 58, at 65, per Hope JA (with whom Samuels and Priestley JJA agreed). (See also Edmonds v Donovan[2005] VSCA 27(2005) 12 VR 513, at [58], per Phillips JA (with whom Winneke P and Charles JA agreed) and cases cited there.)

However, it is important to appreciate that, as Phillips JA pointed out in Edmonds v Donovan (at [57]), the contrast drawn by Laskin J is between a fresh initiative leading to the opportunity acquired by the director after his resignation and an opportunity "to which he is led by his own position with the company".

Phillips JA also pointed out that the effect of Canadian Aero is that the obligation of a director or employee to continue observing a fiduciary duty after resignation, where the duty arises before resignation, will be clearer if the resignation can fairly be said to have been prompted by the desire to obtain the "corporate opportunity". 

179. The approach to be taken to the assessment of equitable compensation is illustrated by Warman International Ltd v Dwyer [1995] HCA 18182 CLR 544. 

In that case, the defendant was employed as a manager by the plaintiff, an importer of gearboxes under an agency agreement with an Italian supplier. In breach of his fiduciary obligations to the plaintiff, the defendant secretly negotiated with the supplier to set up a joint venture. In consequence of these negotiations, the supplier terminated the plaintiff's agency agreement and entered into the joint venture with the defendant. 

180. The trial Judge assessed equitable compensation for the plaintiff's loss of the chance of retaining the agency. The assessment of $325,000 reflected a finding that the supplier, which was dissatisfied with the plaintiff's performance, probably would have terminated the agency in any event, but would have waited a little longer to do so had the defendant not breached his fiduciary duty. The trial Judge valued the lost opportunity to retain the agency at one year's profits, after tax. The order ultimately made in favour of the plaintiff, however, was not for equitable compensation, but was based on an account of the profits derived by the joint venture. The trial Judge awarded the plaintiff, in effect, a sum equivalent to four years profit from the new venture.

181. The appeal in Warman v Dwyer turned on the period for which the defendant had to account for the profits he had derived from the joint venture embarked upon in breach of his fiduciary duties.

What is relevant for present purposes is that the High Court expressly approved the trial Judge's approach to the assessment of equitable compensation.

On that basis, the Court pointed out (at 565) that the agency agreement between the plaintiff and the supplier was terminable on three months notice. Given that the supplier was dissatisfied with the plaintiff's performance, it was reasonable to conclude that the arrangement would not have continued for much longer even if the defendant had not breached his fiduciary duties.

In assessing equitable compensation, the trial Judge had correctly considered what would have happened but for the defendant's breach. His Honour had taken account of various contingencies, including the remote possibility that the agency might have continued indefinitely, and concluded that the agreement, in all likelihood, would have remained on foot for a further year but no longer.

Thus, in considering the hypothetical situation where the defendant was not in breach of his fiduciary duties, the High Court took into account objective facts (in this case the supplier's dissatisfaction with the plaintiff's performance under the agency agreement) to assess the extent to which the plaintiff's losses could be attributed to the defendant's breach of fiduciary duty."

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