Dear Colleagues,

Notwithstanding that Kiefel CJ, Keane and Edelman JJ say at [1] that the case requires no revision of principle, it is useful for principles that it confirms.

1. The proper test for 2^nd limb Barnes v Addy liability is knowing assistance in a dishonest and fraudulent design: [2], [26], [70] – [72].  This is in accord with Farah v Say-Dee, and not consistent with Lord Nicholls’ rewriting of the test in Royal Brunei Airlines v Tan (which is not mentioned anywhere in the Foresters judgment).
2. Second limb Barnes v Addy liability can arise for knowing assistance in a dishonest and fraudulent breach of a fiduciary duty: [2], [26],
3. The onus is on a defendant who is liable to account for a 2^nd limb Barnes v Addy breach to show why it should not be liable to disgorge all of the profit that was caused by the breach, in the sense of profit that would not have been made but for the breach, even if there are other contributing causes: [13] – [17], [90] – [95].  In particular, the concepts of remoteness and novus actus interveniens are not ones that enter into equity’s evaluation of causation – rather, the sort of facts which might be used by the common law as a basis for a decision about remoteness or novus actus can enter into equity’s essentially evaluative decision about whether it would be inequitable for the defendant to disgorge the whole of the profit that has arisen by reason of the breach: [89] – [97]
4. If profit was actually made as a consequence of a breach of fiduciary duty, it is not to the point to argue that some or all of that profit might have been made without any breach of the duty: [19] – [20]
5. The “profits” that the defendant can be required to disgorge include not only profits that have accrued due at the time of the hearing, but also the net present value of the future benefits likely to arise from the breach: [23] – [24], [75], [110]

There is one significant difference between the judgments of Kiefel CJ, Keane and Edelman JJ, and that of Gageler J.   The plurality judgement accepted that the causal connection that must exist is that between the acts of knowing assistance and the benefit that the assister has received: [4] – [9], [13].  Gageler J says that the causal connection that must exist for a knowing participant to be liable to account for a benefit or gain is one between the fiduciaries’ breach and the resulting profit – it is not a connection between the assisting conduct of the defendant and the profit: [85] - [89].  As it happened, the profits that the plurality held arose from the assistance that the defendant gave, and the profits that Gageler J held arose from the breach of duty of the fiduciaries, were identical, so all four judges could agree on the orders that were appropriate to be made. As the decision was one of a five-member bench (in which Nettle J dissented concerning the assessment of the quantum of the profit), it will be the test adopted in the plurality judgment that lower courts must apply.  

The judgement of Nettle J is consistent with that of the plurality, concerning this point. While at [179] in the judgment of Nettle J his Honour says: “The aim, however, is to determine as accurately as possible the true measure of the profit or benefit obtained as a result of the breach of fiduciary duty”, that is in a paragraph where his Honour is considering collectively quantification of the profit derived as a result of breach of fiduciary duty or knowing involvement in a breach. Later, at [183] 1805], [186] and [191] his Honour accepts that what the assister must account for is the profits it received by reason of its knowing assistance.

The plurality judgment also contains a dictum to the effect that the concept of vicarious liability can play a role in equity, so that the wrongful act of one person is attributed to another person: [5].  Gageler J explained at [64] why he said nothing about the substance of that topic. Likewise, Nettle J said nothing about the topic.

Regards,

Joe

Dear Colleagues;

An interesting decision today from the High Court of Australia in Ancient Order of Foresters in Victoria Friendly Society Limited v Lifeplan Australia Friendly Society Limited [2018] HCA 43 (10 October 2018) http://www6.austlii.edu.au/cgi-bin/viewdoc/au/cases/cth/HCA/2018/43.html . The case involves questions of liability for knowing assistance of breach of fiduciary duty, causation in such claims, and how to calculate an account of profits as a remedy.

In brief, two employees of Lifeplan (a funeral company) formed a detailed business plan to use the confidential information they had obtained while working at that company (including contacts with funeral directors) to “steal”  a large part of the business of Lifeplan and transfer it to the Foresters company. They were extremely effective in doing so, as vividly demonstrated by a graph attached to the main plurality decision here shows (I think in fact this is a case where the graph would almost have won the liability case on its own- it demonstrates a sharp fall in Lifeplan’s business after implementation of the scheme in 2010, almost exactly matched by a sharp upturn in Forester’s business). [If anyone has problems seeing the graph online, as I did, I found it downloaded in the rtf file.]

The 5-member HC bench all agreed that Foresters could be held liable as knowingly concerned in the breach of fiduciary duties by the former employees. There was a 4-1 split, however, on a cross-appeal point. The Full Federal Court had ruled that the account of profits should stop after 5 years (the terms of the original “business plan” presented to Foresters), leading to an award of some $6.5 million. But the majority here (Kiefel CJ, Keane and Edelman JJ in a joint judgment, Gagelar J in an individual decision which was the main one) hold that in fact the correct amount to be awarded should be the value of the whole funeral business of Foresters, which had really been fairly tiny before the scheme. They preferred a “but for” causation analysis rather than isolating individual aspects of profit made by specific breaches of duty. They award some $14.8 million. (Nettle J was in dissent on this point, preferring the Full Court decision.)

Other colleagues here will be able to give a better analysis than I can of specific features of the decision relating to equity and remedies. I was struck, however, by an interesting passage in Gagelar J’s judgement where his Honour compares the approaches of equity and common law to causation issues: see [88]-[90] and ff. I think our colleague Katy Barnett is planning to comment on the “Opinions on High” blog soon.

Regards

Neil

NEIL FOSTER

Associate Professor, Newcastle Law School

Faculty of Business and Law

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