Furs Ltd v Tomkies [1936] HCA 3;

Furs Ltd v Tomkies [1936] HCA 3; - HCA 1936 case summary — Zoe

[30]

On the side of the appellant company, the chief part in them was taken by the respondent. At an early stage, apparently, it became clear that the proposing purchasers required that the respondent should come over with the business. When he reported this to his fellow directors, they told him that their company could not employ him after the sale of the fur dressing and dyeing branch and advised him to look after himself and to make the best terms he could for his services with the purchasing company. That advice he acted upon without delay. On the afternoon of the same day, he met representatives of the purchasing company and, after some discussion of what he would be called upon to do, consented to go over with the business at the same salary as he was receiving and to give a covenant not to compete for five years after the end of his service. But this consent was subject to the proviso that the purchasing company would pay him in cash and shares a lump sum of £5,000 which he demanded. The demand was conceded and they agreed to give him £1,000 in shares and to secure £4,000 by promissory notes payable over four years. This settled, the negotiations on behalf of the company were resumed. In the course of the next few days, proposals were made for a consideration in shares, but the chairman and directors of the appellant company would entertain nothing but an offer of cash. When this was put to the purchasers, according to the respondent's version, they refused to offer more than £8,500 and this refusal he reported to his board, who had looked for a price of £13,000. After some consideration they accepted the offer. In doing so they appear chiefly to have been influenced by a desire to relieve themselves of the current expenditure which arose out of the fur dressing and dyeing branch and to obtain ready money. They knew nothing of the arrangement that the respondent should receive £5,000. He told them, in effect, that the purchasers had found that more money was called for by the business than they had expected, but he did not divulge to his fellow directors that he was the cause of a burden of £5,000. As a result, no doubt, of this suppression he now finds himself faced in these proceedings with a demand that he should account as for a secret profit.

[32]

The fact that he was to receive a payment was not kept a close secret. He, his chairman of directors, and the representative of the New Zealand purchasers went together to the solicitor who acted for the appellant company and instructed him on behalf of both parties to prepare the necessary instruments to carry out the sale of the fur dressing and dyeing section of the business. Afterwards, on the same day, the solicitor received instructions from the purchasers concerning various matters, including, probably, the preparation of the service agreement between them and the respondent. At any rate, the solicitor learned of the payment that had been arranged. He thought it necessary in the circumstances to refuse to act for both parties and, upon his informing the chairman of the appellant company of this decision, the latter guessed that the cause consisted in knowledge obtained of some illicit payment. He appears to have had no further information than the solicitor's assent to his surmise, but, after consulting two of his co-directors, the chairman resolved to pursue the matter no further for fear the sale should go off. He found, however, that the simple expedient of refusing to recognize the respondent sufficed to make him aware of his suspicions and his feelings. A fortnight or so afterwards he asked the respondent if he might see his service agreement, but the respondent evaded the question and wrote asking the solicitors to give no information until he returned to Sydney from a holiday he contemplated. Among the provisions of the agreement of sale was one by which the appellant company agreed that the formulas and secret processes acquired for it by the respondent and all other formulas and processes used by it, all being described as within the knowledge of the respondent, should become the property of a company to be formed by the purchasers, that they should be handed over by the respondent in a sealed envelope and that it should be lawful for him after the completion of the sale to disclose any further or additional information that might have come to his knowledge in relation to such formulas and processes while in the service of the appellant company. On the day after the execution of this agreement, the respondent and the representative of the purchasers on behalf of the company to be formed executed a service agreement by which he agreed to serve the company for three years, to give them the benefit of his knowledge and experience in the treatment, dressing and dyeing of furs and in the use of formulas and chemicals and to disclose all the information in his knowledge or power. He agreed that, during the term of his employment and for three years thereafter, he would not divulge to others any of the formulas, secret processes, or methods of treatment employed in the business, and that, for five years after the termination of his employment by the intended company, he would not in the southern hemisphere take part or be concerned in any similar business. "For the consideration aforesaid," it was agreed that he should receive promissory notes for £4,000 and shares for £1,000.

[46]

Furs Ltd., the appellant here, carried on the business of manufacturing furs, fur coats, and stoles, and dyeing and dressing skins, for itself and other manufacturers. It was possessed of secret or business processes for tanning, dyeing and dressing skins. Tomkies, the respondent here, was originally employed by the appellant as its business manager. He was sent by the appellant on a business visit to Europe and America, and acquired in the course of his travels considerable information as to tanning, dyeing and dressing skins, and particulars of various processes for use in those operations. Ultimately the respondent became the managing director of the appellant company at a remuneration of £20 per week. He acquired in the course of his duties considerable personal skill and knowledge in regard to the manipulation of the processes and the tanning, dyeing and dressing of skins. About 1929 negotiations were opened with the representatives of a company carrying on a somewhat similar business in New Zealand for the sale of the tanning, dressing and dyeing portion of the appellant's business and the equipment connected therewith. The respondent took an active part in these negotiations. The price suggested on the part of the appellant was £8,500 for plant and establishment charges, and £5,500 for the processes and the business as a going concern. But the representatives of the New Zealand company were not prepared to pursue the negotiations unless assured that the respondent would be available to any company or organization that it formed to take over the business. The appellant, through its chairman of directors, intimated that it could not retain the respondent in its service if the portion of its business relating to the tanning, dyeing and dressing of skins were sold, and advised the respondent to make the best deal he could with the new company. The result was that the respondent arranged to join the new company or organization at a salary of £20 per week and a further sum of £5,000, payable partly in shares and partly by promissory notes over an extended period. It was also arranged that his service agreement, as it has been called, should endure for a period of three years, and that the respondent should covenant not to go into competition against the new company or organization for at least five years. Some few days subsequently to this arrangement, negotiations for the purchase of that part of the appellant's business already mentioned were resumed. The respondent took an active part in these negotiations. The representatives of the New Zealand company intimated that the secret or business processes were of no practical use or value without the respondent, whom it had to employ, and suggested a sum of £8,500 for the part of the appellant's business already mentioned, including the secret or business processes. This proposition was discussed by the directors of the appellant, who resolved that the plant, furniture, fittings and formulae be offered to the New Zealand company for £8,500, stock and certain rights to be taken over at cost price. The representatives of the New Zealand company closed with the offer. The respondent was present at the meeting of directors of the appellant company, but he did not then or at any other time disclose the particulars of his service agreement to them or to the shareholders of the company.

[47]

The appellant's case is that the £5,000 payable to the respondent under his service agreement with the new company or organization was for disclosing its secret or business processes, and therefore an illicit gain, acquired in the conduct of the company's business, whilst the respondent denies that the payment was for disclosing any secret or business process and claims that it was for teaching the workmen of the new company or organization how to apply and work the processes acquired or to be acquired by it. The learned Judge who tried the case and heard and saw the witnesses accepted the respondent's version of the facts. The distinction is fine, but it is clear enough: as I understand the learned Judge, the respondent acquired no personal benefit from anything connected with the appellant's processes or business, but merely undertook to impart the personal skill and knowledge acquired by him in the practical working of the secret and business processes. The rule of law above stated is a most salutary one, but it does not preclude anyone from making the most of his own skill and talent and so earning his living. The respondent was entitled to enter the service of the new company or organization, and no one suggested that he was accountable for the salary of £20 per week payable to him under his service agreement. The learned Judge was of opinion that the sum of £5,000 was also remuneration for his personal services and was not an illicit gain acquired in the course of the appellant's business. I should agree with the learned Judge if the facts were as he found them. But unfortunately that finding is contrary to various documents put in evidence. It is possibly consistent with the service agreement, which stipulates that the respondent should serve as consulting technical expert and give the full benefit of his knowledge and experience in the treatment and dressing and dyeing of furs and skins, and in the use of the formulae and chemicals and processes formerly used by him in the conduct of the business of Furs Ltd. or known to him from any source whatsoever; but the agreement also requires him to make a full disclosure of all information which is then or may thereafter during the currency of the agreement be within his knowledge or power. It is inconsistent with an undertaking given by a representative of the New Zealand company to the respondent in August 1929 (Ex. 2) to deliver promissory notes for £4,000 as consideration for procuring (inter alia) all the appellant's "formulae now used ready for use or in the course of compilation." It is inconsistent with a receipt given by the respondent in January 1930 for promissory notes for £4,000 "as purchase price for dressing and dyeing formulae." It is inconsistent with an agreement of March 1930 (from which the signatures were subsequently torn) describing the respondent as in possession of the formulae and purporting to sell the same. It is inconsistent with a letter of May 1930 (Ex. 5) from a representative of the New Zealand company to the respondent acknowledging the receipt

[62]

I agree with the judgment of my brothers Rich, Dixon and Evatt, and would add only a reference to some observations of the Vice-Chancellor (Sir J. L. Knight Bruce) in Benson v. Heathorn[8]: - "It is mainly this danger, the danger of the commission of fraud in a manner and under circumstances which, in the great majority of instances, must preclude detection, that in the case of trustees and all parties whose character and responsibilities are similar (for there is no magic in the word), induces the Court (not only for the sake of justice in the individual case, but for the protection of the public generally, and with a view to assert and vindicate the obligation of plain and direct dealing between man and man in all cases, but especially in those where one man is trusted by another) to adhere strictly to the rule, that no profit of any description shall be made by a person so circumstanced - saying, to the person complaining that he has thus employed his time and skill without remuneration, that he has elected so to treat the matter; that he has had his reward, for he has had the possibility, nay the probability, of retaining to himself that which he never ought to have retained; that he has been willing to run the risk, and cannot complain if he happens to lose the stake. It is on this principle that Lord Eldon proceeded in the cases so familiar to us all of purchases by trustees. It is only an instance of the application of the rule, not the rule itself. In those cases Lord Eldon said (I allude particularly to Ex parte Lacey1(1802) [1802] EngR 75; 6 Ves. 625, at p. 627; [1802] EngR 75; 31 E.R. 1228, at p. 1229., which occurred soon after Lord Eldon first received the Great Seal): The rule is founded on this, that, though you may see in a particular case that he has not made advantage, it is utterly impossible to examine upon satisfactory evidence in the power of the Court, by which I mean, in the power of the parties in ninety-nine cases out of a hundred, whether he has made advantage or not. ... If, in the present case, Mr. Heathorn had openly and directly brought forward the matter before the body of shareholders generally, I consider it possible, if not probable, that he would have been allowed to receive, and would now have been entitled to retain all the sums in question paid for commission. He has not elected to take that open and straight-forward course; he has chosen that the matter should be undisclosed, and he must abide the inevitable result."

At a glance

Court

Decision date

Before

Source

Judgment (70 paragraphs)

Furs Ltd v Tomkies [1936] HCA 3; (1936) 54 CLR 583 (13 February 1936)

Parties

Cases Cited (1)