The High Court has dismissed an appeal against a decision of the Full Federal Court of Australia regarding the principles governing the causal link required for the imposition and calculation of an account of profits where profits were made by a knowing participant in a dishonest and fraudulent breach of fiduciary duty, and has allowed a cross-appeal by a majority, holding that there was no reason to restrict the profits recoverable to five years. Consequently a knowing assistant of a dishonest and fraudulent breach of fiduciary duty was required to disgorge the total capital value of the business it acquired by reason of the breach.

The case arose in the context of a breach of fiduciary duty between two former employees of Lifeplan Australia Friendly Society Limited (“Lifeplan”), Woff and Corby. Through its subsidiary Funeral Plan Management Pty Ltd (“FPM”), Lifeplan provided products to meet the cost of pre-arranged funerals. Ancient Order of Foresters in Victoria Friendly Society Limited (“Foresters”) was also involved in the funeral products business although its market share was significantly smaller than Lifeplan’s, and not profitable. Woff and Corby were employed by Lifeplan in management positions at FPM, but in 2010, they approached Foresters with a five-year plan to divert Lifeplan’s existing funeral products business to Foresters, using Lifeplan’s confidential information and business records. They proposed to run this business via a company called Funeral Planning Australia Pty Ltd (“FPA”), which they incorporated while still employed by Lifeplan. This plan was very successful. Once it was implemented, Foresters’s profit increased enormously (from almost no profit to a huge profit), whereas Lifeplan suffered an almost identical loss of profit over the same period.

On appeal, Foresters sought to argue that the causal principles applied by the Full Federal Court were too broad, and that it should be required to disgorge only those profits which were a direct result of its assistance. Foresters also sought to argue that it should not be made to disgorge anticipated profits. Lifeplan counter-appealed that they should be entitled to the total capital value of Foresters’ funeral business (totalling $14,838,063).

The court unanimously dismissed Foresters’ appeal. A majority of the court (Kiefel CJ, Keane and Edelman JJ, and Gageler J in a separate judgment) also allowed Lifeplan’s cross-appeal and held that the total capital value of Foresters’ funeral business should be disgorged.

The general principles applying to breach of fiduciary duty and accessorial liability

Only Gageler J dealt with these principles in detail. His Honour noted that employees owe a fiduciary duty of loyalty to employers, which include duties not to conflict and not to profit (Gageler J at [67]-[69]). The intensity of the remedies imposed will vary according to the dishonesty and fraud involved. Those who assist in a dishonest and fraudulent breach may also be liable in the same way as the fiduciary (Gageler J at [70]-[71]). Knowing assistance includes assisting the fiduciary in a dishonest and fraudulent design, and knowledge will be made out when the assistant has knowledge of facts which would indicate the dishonesty to an honest and reasonable person (Gageler J at [71]). A knowing assistant is liable as a “constructive trustee” but this simply means the assistant may be imposed with the same remedies as if he were a fiduciary, principally an account of profits or equitable compensation (Gageler J at [74], [77]).

The causal principles which apply to accounts of profit

The High Court confirmed that the causal test applying to accounts of profit for breaches of fiduciary duty is a liberal one, and that this extends to assistance of dishonest and fraudulent breaches. It is not necessary that the breach be the sole cause of the profit. This is consistent with the deterrent rationale of the account of profits and fiduciary obligations (Kiefel CJ, Keane and Edelman JJ at [9], Gageler J at [79]-[80], Nettle J at [178]). Nettle J noted at [192] that England appeared to have different causal principles depending on whether the breach was a primary fiduciary breach or knowing assistance, and cited the English Court of Appeal in Novoship (UK) Ltd v Mikhaylyuk [2014] EWCA Civ 908. However, Gageler J confirmed at [79]-[80] that there was no reason why the causal principles which apply to accounts of profit for knowing assistance should be different to those which apply for fiduciary breaches.

According to Kiefel CJ, Keane and Edelman JJ at [5]-[7], “any benefit” received “as a result of” participation in a dishonest breach of fiduciary duty is recoverable, and business connections constitute such a benefit. “It is sufficient to show that the profit would not have been made but for dishonest wrongdoing.” A defendant cannot argue that profits made by a dishonest breach could have been made honestly and therefore are unavailable. The participation of Foresters in the breach was fundamental to the acquisition of Lifeplan’s business (Kiefel CJ, Keane and Edelman JJ at [4], [10]-[12]).

According to Gageler J at [88], it is not necessary to show a causal link between the gain and the conduct which constituted the knowing assistance. He continues at [88]:

A causal connection between a fiduciary’s breach of fiduciary obligation and a benefit or gain sufficient for the fiduciary or knowing participant to be liable to the equitable remedy of account will exist if the benefit or gain to the fiduciary or knowing participant would not have been obtained “but for” the breach, in the same way as a causal connection sufficient for the fiduciary to be liable to the equitable remedy of compensation will exist if a loss to the person to whom the fiduciary obligation is owed would not have been sustained but for the breach. Because the concern of equity is to vindicate the equitable obligation that has been breached, the “but for” connection will be sufficient even though other contributing causes might be in play. That the fiduciary’s breach of fiduciary obligation is dishonest and fraudulent is also good reason for treating a sufficient causal connection as existing if the dishonest and fraudulent breach can be concluded to have played a material part in contributing to the benefit or gain of the fiduciary or knowing participant even in circumstances where it cannot be concluded that the benefit or gain would not have been obtained but for the breach.

Thus, his test is formulated slightly differently to the majority test, although it made no difference on the facts of this case. He concluded that Foresters obtained an entire business by reason of its participation in the breach, and accordingly that it would be appropriate to require Foresters to disgorge the entire profit from the business.

The quantification of the account of profit

The majority held that once causation is established the onus is on the defendant to show that he should not disgorge the full profit (Kiefel CJ, Keane and Edelman JJ at [13], Gageler J at [91].) There are two ways of doing this, either to argue that an allowance for skill and effort should be applied (which was not relevant in this appeal) or to say that the profit was “beyond the scope” of the wrongdoing, in that it has no reasonable connection with the wrongdoing, such that it would be inequitable for the defendant to account for it (Kiefel CJ, Keane and Edelman JJ  at [15]-[16], Gageler J at [91]).

Gageler J at [94] held that it was relevant to consider whether the plaintiff’s loss reflected the defendant’s gain (as it did in this case) and to consider the dishonesty of the breach. He continued at [94]:

…although the purpose of the remedy is not to punish, consideration of what is just in the context of the equitable obligation to be vindicated by the remedy cannot exclude consideration of the severity of the breach of the fiduciary obligation and the extent of the defendant’s own involvement and culpability in it.

The majority held that Foresters could not show any reason why it would be inequitable for it to account for its full profits.

Kiefel CJ, Keane and Edelman JJ at [19]-[22] also observed that it was beside the point that Foresters could have made a profit in a non-wrongful fashion after Woff and Corby had ceased employment with Lifeplan. In the facts at hand, it was critical that Woff and Corby had already started the business before they left Lifeplan, and there was no evidence that the benefit received by Foresters would cease after time. Thus this case could be distinguished from Warman International Pty Ltd v Dwyer where the benefit of the breach by a former employee would diminish over time.

Nettle J dissented on the cross-appeal (at [180]-[189]). His Honour distinguished between cases where the breach results in the acquisition of a specific asset and cases where the breach results in the acquisition of a business opportunity. He would have upheld the Full Federal Court’s decision, and only awarded actual and anticipated profits for four and a half years. He held that the case was analogous to Warman International Pty Ltd v Dwyer, and that that it should be open for a defendant who received a business opportunity to show that not all the profits derived from the breach (at [192]-[198]).

Actual and future profit

The majority held that future losses (i.e. unrealised profits) may be encompassed by an account of profits, and in this case they should be awarded (Kiefel CJ, Keane and Edelman JJ at [23]-[24], Gageler J at [75]).

Conversely Nettle J held that it was true that accounts of profits generally encompassed actual profits “up to a point” (at [202]). He continued at [202]:

But that said, it does not mean that it is impermissible or inappropriate to assess the benefit derived by reason of a knowing involvement in a breach of fiduciary duty as being the net present value of profits likely to be derived by reason of the knowing involvement in the breach of fiduciary duty.

Consequently he found that it was permissible to account for profits by reference  to the net present value of profits of the business (at [203]).

Conclusion

Kiefel CJ, Keane and Edelman JJ said at [1] that there was no need for revision of principle in this case. However, the case has clarified the rules applicable in Australia to knowing assistance, causation and accounting for profit.