Plaintiff v Defendants

Supreme Court of Victoria|2007-03-21|Before: Hollingworth J

Equity - Fiduciary duties - Nature - Whether leave should be granted to plead fiduciary duty of disclosure

1 This proceeding involves a claim by the plaintiff property developer against its former business development manager, Anthony Porto, the first defendant. The plaintiff claims that Anthony Porto wrongfully appropriated and exploited an opportunity to buy and develop a large parcel of land at Taylors Hill, in breach of his statutory and fiduciary duties. The other defendants are alleged to have knowingly assisted or aided and abetted Anthony Porto in those breaches of duty.

(b) not to make improper use of information acquired by virtue of his position as company secretary or director (together and severally "his office") or employee, to gain, directly or indirectly, an advantage for himself or any other person or to cause detriment to the plaintiff (s232(5) of the Law);

(c) not to make improper use of his position as an officer or employee to gain, directly or indirectly, an advantage for himself or any other person or to cause detriment to the plaintiff (s232(6) of the Law).

12 Paragraph 11, the first of the disputed paragraphs, alleges fiduciary duties in the following terms:

Further and in the alternative, by reason of the matters set out in paragraphs 2 and 9, at all material times Anthony Porto owed [the plaintiff] fiduciary duties:

(a) to act honestly;

(b) to act in good faith;

(c) to keep confidential to [the plaintiff] any confidential information acquired by him in the course of or in connection with the performance of his office or his employment;

(d) to make full and accurate disclosure to [the plaintiff] of valuable commercial information acquired in the course of or in connection with the performance of his office or his employment;

(e) not to use information acquired in the course of or in connection with the performance of his office or his employment for his own benefit or for the benefit of others, without the informed consent of [the plaintiff];

(f) not to use a business opportunity available to [the plaintiff] for his own benefit, or for the benefit of persons other than [the plaintiff], without the informed consent of [the plaintiff],

(together and severally, "the fiduciary duties").

13 Paragraph 12 pleads that, prior to 21 April 1997, Anthony Porto acquired "the Information", being certain information about an opportunity to purchase land at Taylors Hill, its suitability for development and possible purchase price and terms. Paragraph 14 pleads that each item of Information: was acquired by Anthony Porto by virtue of his position as an officer or employee and in the course of or in connection with his office or employment; was valuable commercial information; was obtained in circumstances importing an obligation of confidence to the plaintiff; and concerned a business opportunity that was or, if disclosed, would have been available to the plaintiff ("the Taylors Hill opportunity").[3]

14 Paragraph 15 pleads a series of acts or omissions by Anthony Porto after his receipt of the Information. As sub-paragraphs (a) and (k) are the only in dispute, the particulars to sub-paragraphs (b) to (j) are not reproduced below. As it appears in the proposed third claim[4], paragraph 15 provides as follows:

(a) did not report the item of Information [concerning the possible purchase price and terms] to [the plaintiff];

(b) prior to 27 April 1997, discussed each item of the Information with [the second to fourth defendants];

(c) procured the incorporation of [the sixth defendant];

(d) procured [the sixth defendant] to purchase Taylors Hill;

(e) procured [the sixth defendant] to enter into a co-venture agreement with Australand for the development of Taylors Hill ("the Australand co-venture development");

(f) procured or assisted in procuring [the sixth defendant] to perform the Australand co-venture agreement;

(g) procured [the fifth defendant] to be incorporated;

(h) procured [the fifth defendant] to be appointed and act as project manager of the Australand co-venture development;

(i) procured the instruction of [the fourth defendant] as solicitors to act for [the sixth defendant] in relation to the acquisition of Taylors Hill;

(j) procured the instruction of [the fourth defendant] as solicitors to act for [the fifth defendant], alternatively the Australand co-venture partners, in relation to the acquisition of Taylors Hill and the subdivision, redevelopment and re-sale of lots at Taylors Hill;

(k) procured [the second to sixth defendants] to conceal the matters referred to in sub-paragraphs (a) to (j) above from [the plaintiff].

PARTICULARS

(a) [The fourth defendant] was instructed by Anthony Porto [and the second and third defendants] to:

(i) incorporate [the sixth defendant] to be the purchaser of the Taylors Hill Land;

(ii) cause Colin Kennedy, a person with no obvious connection with Anthony Porto, [or with the second or third defendants], to be the director of [the sixth defendant];

(iii) [cause a confidentiality clause to be inserted into the contract of sale of the land];

(iv) cause [the sixth defendant] to establish [a unit trust];

(v) cause the units in [the unit trust] to be allocated to [entities connected with Anthony Porto and the second defendant];

(vi) [instruct the sixth defendant's consultants not to disclose the identity of the purchaser of Taylors Hill];

(b) Anthony Porto, [and the second and third defendants]:

(i) did not inform the plaintiff; and

(ii) caused [the fifth and sixth defendants] not to inform the plaintiff;

of the matters referred to in sub-paragraphs 15(a) to 15(j) inclusive above.

15 Paragraph 16 pleads that by the acts or omissions in paragraph 15, Anthony Porto used the Taylors Hill opportunity for the benefit of himself and persons other than the plaintiff, and not for the benefit of, or to the detriment of, the plaintiff.

16 There is a dispute about the inclusion of any reference to paragraphs 15(a) and (k) in the introductory words to paragraph 17:

By reason of the matters referred to in paragraphs 14 to 16 Anthony Porto:

(a) did not act honestly, in contravention of section 232(2) of the Law;

(b) made improper use of information acquired by virtue of his position as an officer or employee of [the plaintiff], namely, the Information, to gain, directly or indirectly, an advantage for himself and to cause detriment to [the plaintiff], in contravention of section 232(5) of the Law;

(c) made improper use of his position as an officer or employee of [the plaintiff] to gain, directly or indirectly, an advantage for himself and to cause detriment to [the plaintiff] in contravention of section 232(6) of the Law.

17 A similar dispute exists in relation to the introductory words in paragraph 21. There is also a dispute about paragraph 21(d):

Further and in the alternative, by reason of the matters referred to in paragraphs 14 to 16 Anthony Porto:

(a) did not act honestly;

(b) did not act in good faith toward [the plaintiff];

(c) did not keep each item of the Information confidential to [the plaintiff];

(d) did not make full and accurate disclosure of each item of the Information to [the plaintiff];

(e) used each item of the Information for his own benefit and the benefit of persons other than [the plaintiff], without the informed consent of [the plaintiff];

(f) used the Taylors Hill opportunity for his own benefit and the benefit of persons other than [the plaintiff], without the informed consent of [the plaintiff],

18 Although not raised in his summons or notice of appeal, Anthony Porto also asserts that paragraphs 18 and 22 are deficient in so far as they allege that by reason of the statutory or fiduciary breaches the plaintiff has suffered and continues to suffer loss and damage.

19 The remainder of the second and proposed third claims contain claims against the remaining defendants, and the relief sought against the defendants.

My earlier decision

20 In my earlier decision, I noted that a person in a fiduciary position is not, unless otherwise expressly permitted, entitled to make a profit from his or her position of trust ("the no profit rule") or to put himself or herself into a position where his or her duty and personal interest conflict ("the no conflict rule"). The plaintiffs' pleading at that time alleged breaches by Anthony Porto of both the no profit and no conflict rules, which were not the subject of any pleading attack.

21 The primary issue before me on that occasion was whether the plaintiffs could also allege that Anthony Porto owed them a separate fiduciary duty to disclose his past wrongdoing. After considering relevant Australian[5] and English[6] authorities, I concluded that, in Australia, fiduciary duties are limited to proscriptive obligations and there is no positive obligation of disclosure of past wrongdoing.

22 In my earlier decision, I noted by way of obiter dicta that there are cases which do refer to a fiduciary as having an "obligation" to make disclosure. However, in each instance, upon proper analysis, advance disclosure functions only as the means of obtaining the consent of the beneficiary, thereby avoiding a breach of the two fundamental rules governing proscriptive fiduciary relationships. The function of disclosure in that context was quite different from the disclosure proposed by the plaintiffs on that occasion, namely a positive duty to disclose his past wrongdoing.

Is there a fiduciary duty of advance disclosure?

23 The present appeal does raise the issue of advance disclosure, which I touched upon only briefly in my earlier decision. That is because the plaintiff wishes to plead that Anthony Porto owed a fiduciary duty to make full and accurate disclosure of valuable commercial information acquired in the course of or in connection with the performance of his office or his employment. The plaintiff alleges that such a duty may be pleaded either as a separate fiduciary duty, or as part of a pleading of the no profit or no conflict duties.

No separate fiduciary duty of disclosure

24 The plaintiff alleges that Anthony Porto owed a fiduciary duty of disclosure which was completely separate from any other fiduciary duty. That is to say, even if he never used the Information himself or passed it on to others, he could be liable for failing to disclose it to the plaintiff.

25 The plaintiff contends that such a fiduciary duty arises because Anthony Porto's responsibilities as business development manager included identifying and assessing property development opportunities and advising the plaintiff about them. The plaintiff argues that the existence of such a duty is supported by the following remarks of Mason J and Nettle J, as they then were.

26 In Hospital Products Ltd v United States Surgical Corp[7] Mason J said:

The fiduciary relationship, if it is to exist at all, must accommodate itself to the terms of the contract so that it is consistent with "and conforms to" them. The fiduciary relationship cannot be superimposed upon the contract in such a way as to alter the operation which the contract was intended to have according to its true construction.

27 That passage was quoted with approval by Nettle J, as he then was, in Victoria University v Wilson[8], after his Honour had observed that "the scope of an employee's fiduciary duties to the employer depends as much as anything upon the nature and terms of the employment."[9]

28 It is clear, on a proper reading of their reasons for decision, that neither Mason nor Nettle JJ was suggesting that new fiduciary duties, additional to the no profit and no conflict duties, can arise to reflect the terms of a contract. Rather, their Honours were saying that the existence and extent of any fiduciary relationship will be affected by any contract which governs the relationship between the parties. In particular, they were saying that the scope of any fiduciary duty may be restricted by contract.

29 The existence of the separate fiduciary duty alleged by the plaintiff would be directly inconsistent with the binding High Court decisions in Breen v Williams and Pilmer v Duke Group Ltd, which were discussed at length in my earlier decision. There is no such positive fiduciary obligation of disclosure.

30 Of course, a person who is in a fiduciary relationship with another person may owe that other person a duty of disclosure. For example, an employee may owe a contractual duty of disclosure to his or her employer, or a director may owe duties of disclosure which are imposed by statute[10] or the company's articles of association. But in each of those examples, the source of the disclosure obligation is not equitable. No such contractual or statutory obligation is pleaded in this case.[11]

Disclosure as a means of negating liability

31 Further and in the alternative, the plaintiff argues that it should be permitted to include paragraph 11(d) as part of a pleading of the no profit or no conflict duties.

32 In my earlier decision, I noted that advance disclosure by a fiduciary functions as the means of obtaining the consent of the beneficiary, thereby avoiding a breach of the two fundamental rules governing proscriptive fiduciary relationships. I quoted with approval the following observation of Lindgren J in National Mutual Property Services (Australia) Pty Ltd v Citibank Savings Ltd[12]:

... there are countless statements in the authorities that fiduciaries as such (I exclude contractual undertakings) have an obligation to make voluntary disclosure, but always, so far as my researches reveal, as the means of avoiding a breach of the related duties not to have a secret interest conflicting with their duty as a fiduciary and not to make a secret profit from their fiduciary position ...

33 In the present case, the plaintiff pleads in paragraphs 11(e) and (f) that Anthony Porto owed fiduciary duties not to use certain information or business opportunities "without the informed consent" of the plaintiff. No attack is made on the way in which the advance disclosure issue has been raised in those paragraphs.[13]

34 The only disputed part of paragraph 11, sub-paragraph (d), alleges that Anthony Porto owed a duty to make full and accurate disclosure to the plaintiff of valuable commercial information acquired in the course of or in connection with the performance of his office or his employment. As presently drafted, sub-paragraph (d) bears no obvious relationship to the rest of paragraph 11. In so far as it appears to be a stand-alone allegation, sub-paragraph (d) must be struck out for the reasons discussed earlier. In so far as it is said to form part of a pleading of the no profit or no conflict duties, the alleged connection with those allegations is not apparent and it is embarrassing.

35 For these reasons, I agree with Anthony Porto that the plaintiff should not be given leave to plead paragraphs 11(d) (which pleads the fiduciary duty of disclosure) and 21(d) (which pleads the corresponding breach of that duty).

Paragraphs 15 (a) and (k) and references to them

36 Paragraph 15(a) pleads that Anthony Porto did not report the Information to the plaintiff. Paragraph 15(k) pleads that he procured the other defendants to conceal the various steps which they took at his instigation.

37 I do not agree with Anthony Porto that paragraph 15(k) is simply dealing with the issue of past disclosure. It is primarily concerned with concealment steps allegedly taken by him at the time of, and in order to carry out, his breaches of duty.

38 There is no suggestion that the sub-paragraphs are embarrassing, only that they are not relevant to any permissible cause of action. I do not agree that these allegations should be disallowed on the same basis as paragraphs 11(d) and 21(d). The sub-paragraphs do not themselves allege, and are not dependant on, the existence of any impermissible positive duty of disclosure.

39 Paragraph 15 contains a series of factual allegations about the various acts and omissions of Anthony Porto after he acquired the Information. Sub-paragraph (a) alleges his failure to report, sub-paragraph (k) alleges more active concealment of, what he was doing. Both matters are at least arguably relevant to the allegations in paragraph 21 that Anthony Porto did certain things for the benefit of himself and others "without the informed consent" of the plaintiff, allegations to which no objection is taken.

40 The next question is whether the reference to paragraphs 15(a) and (k) in the introductory words to paragraph 17 should be struck out. Paragraph 17 pleads the breaches of the statutory duties pleaded in paragraph 10. It is common ground that the relevant statutory duties impose no duty on a director greater than those imposed on fiduciaries by equity. For similar reasons, it is at least arguable that the matters pleaded in paragraphs 15(a) and (k) are relevant to the matters pleaded in paragraph 17.

41 It follows that leave should be given to plead the following allegations: paragraphs 15(a) and (k), and the reference to those paragraphs in the introductory words of paragraphs 17 and 21.

Causation pleadings

42 No objection is taken to paragraphs 18 and 22 in so far as they allege that, by reason of Anthony Porto's breaches of statutory and fiduciary duties respectively, he has made a profit. Objection is taken to the allegations that, by reason of the relevant breaches, the plaintiff has suffered loss and damage. Anthony Porto alleges that the plaintiff is also required to plead the causative link between the breach of duty and the loss. For example, it is suggested that the plaintiff should plead that, if informed of the Information, the plaintiff would have taken up the Taylors Hill opportunity.

43 Given that neither the strike-out summons nor the notice of appeal seeks to attack paragraphs 18 and 22, I am not required as part of this appeal to determine whether the relevant allegations should be permitted. Nevertheless, my initial inclination was to resolve all outstanding pleading points, if I was in a position to do so. However, upon further reflection and some research of my own, it has become apparent to me just how brief and incomplete the parties' submissions and reference to authorities on these matters has been. For those reasons, I have reached the conclusion that it would be undesirable for me to resolve the issues as a matter of law without the benefit of further argument.

44 I will hear from the parties as to the precise form of order and as to costs.

[1] P & V Industries v Porto [2006] VSC 131; (2006) 14 VR 1.

[2] The proposed third claim provides particulars of the employment contract, but the substantive allegations in paragraph 2 of the second and proposed third claims are identical.

[3] The proposed third claim provides particulars of the employment contract, but the substantive allegations in paragraph 14 of the second and proposed third claims are identical.

[4] Whilst paragraph 15 is different in the second and proposed third claims, the relevant allegations are similar enough for the purpose of understanding the Master's decision.

[5] Especially Breen v Williams (1996) 186 CLR 71 and Pilmer v Duke Group Ltd [2001] HCA 31; (2001) 207 CLR 165.

[6] Especially Item Software (UK) Ltd v Fassihi [2004] EWHC 948; [2004] IRLR 928; [2005] 2 BCLC 91.

[7] [1984] HCA 64; (1984) 156 CLR 41 at 97.

[8] 60 IPR 392; [2004] VSC 33.

[9] At [145].

[10] For example, s191 of the Corporations Law 2001 imposes an obligation on a director to notify other directors of material personal interests.

[11] Paragraph 9 of the proposed third claim pleads Anthony Porto's employment "responsibilities". It does not allege that they formed a term of any contract of employment. Far less is there any subsequent allegation that he had or breached any contractual duty to disclose the Information.

[12] [1998] FCA 564 at 23.

[13] It is therefore not necessary for me to determine whether a plaintiff needs to plead "lack of informed consent" as an element of the cause of action, or whether the issue should only be raised by a defendant pleading "adequate disclosure" by way of defence.

At a glance

Court

Decision date

Before

Source

Judgment (35 paragraphs)

Cases Cited (4)