Plaintiff v Defendants

1 This ruling determines a dispute about proposed amendments to a statement of claim. As outlined below, I will give leave to amend. However, the proposed claim has parts that are allowed and others that are not. A second statement of claim must be drafted.

2 By summons filed on 27 September 2022, the plaintiff applies to join Colin Barry Medway and Timothy Michael McKinnon as the third and fourth defendant respectively. The current defendants are Danny Thomas and LAWD Pty Ltd ('LAWD'). Thomas is a former employee of the plaintiff. It is alleged that Medway and McKinnon and Thomas are also former employees of the plaintiff, holding director level positions. It is alleged that they are now statutory directors and senior directors at LAWD.

3 The plaintiff says that Medway, McKinnon and Thomas breached contractual, equitable and statutory obligations. It pleads that LAWD induced their breaches of contract. The allegations against Medway and McKinnon raise factual and legal issues overlapping with the current claim. Sensibly, the defendants did not object to the joinder application. Medway and McKinnon should be joined to this proceeding pursuant to r 9.06(b)(ii) of the Supreme Court (General Civil Procedure) Rules 2015 (Vic) ('Rules'). That is, on the basis there may exist a question arising out of, or relating to, or connected with, any claim in the proceeding which is just and convenient to determine as between that person and that party, as well as between parties to the proceeding.

4 As to the proposed amended statement of claim, it is exhibited to the affidavits described now.

5 The plaintiff relies upon the affidavit of its solicitor, Sheridan Elizabeth Landwehr, affirmed on 15 September 2022.

6 The defendants rely upon the affidavit of their solicitor, Rhys Denovan, affirmed on 18 October 2022. The defendants filed written submissions on 19 October 2022.

7 I reiterate the principles I outlined in Tansley v Royal Australasian College of Surgeons.[1]

8 Rule 13.10(3) of the Rules regarding pleas of fraud is applicable here. I adopt Sifris J's reasoning in Finance & Guarantee Pany Pty Ltd v Auswild & Ors (No 2) ('Auswild').[2] Regarding the application of the Civil Procedure Act 2010 (Vic) to amendment applications, his Honour stated the following at [29] in Auswild:

The guiding principle and primary question remains: "what do the interests of justice require?"

9 There are three main areas of dispute regarding the proposed amended statement of claim. I shall analyse each in turn. As will also be outlined, there was a fourth issue, however it narrowed during the hearing.

1. Accessorial Liability - knowing assistance; knowing inducement

10 There is a dispute as to whether the plaintiff has properly pleaded a cause of action in equity for accessorial liability. The plaintiff says that Thomas, Medway and McKinnon are accessories. The defendants say the pleadings regarding accessorial liability are embarrassing.

11 Before turning to the particular dispute, I will make a brief observation regarding the state of Australian law today in relation to the liability of a third party who does not receive trust property, but who nonetheless participates in a breach of fiduciary duty or trust. The current law in Australia requires courts to maintain a distinction between 'knowing inducement' and 'knowing assistance' claims. As stated by the High Court in Farah Constructions Pty Ltd v Say-Dee Pty Ltd:[3]

Thirdly, whilst the different formulations of principle may lead to the same result in particular circumstances, there is a distinction between rendering liable a defendant participating with knowledge in a dishonest and fraudulent design, and rendering liable a defendant who dishonestly procures or assists in a breach of trust or fiduciary obligation where the trustee or fiduciary need not have engaged in a dishonest or fraudulent design. The decision in Royal Brunei has been referred to in this Court several times but not in terms foreclosing further consideration of the subject in this Court, in particular, further consideration of the apparent necessity to displace the acceptance in Consul Development Pty Ltd v DPC Estates Pty Ltd of the formulation of the second limb of Barnes v Addy were Royal Brunei to be adopted in this country. Until such an occasion arises in this Court, Australian courts should continue to observe the distinction mentioned above and, in particular, apply the formulation in the second limb of Barnes v Addy.

12 I adopt the principles given by McKerracher and Anderson JJ in Zibara v Ultra Management (Sports) Pty Ltd ('Zibara').[4]

13 The dispute centres on whether or not the plaintiff has adequately pleaded 'knowing assistance' and 'knowing inducement' claims against Thomas, Medway and McKinnon. In such claims, a defendant may liable to the object of a fiduciary obligation, even if they have not actually received property.

14 The defendant will be held liable if they knowingly procure or induce a breach of the fiduciary duty ('knowing inducement claim'). In respect of a knowing inducement claim, the defendant's knowledge that their conduct would occasion a breach of the fiduciary obligation must be established. It is unnecessary to demonstrate that the breach was a dishonest and fraudulent design.[5]

15 A defendant will be held liable if they knowingly assist in a breach if the four elements in the second limb of Barnes v Addy are established ('knowing assistance claim'). These four elements are oft-cited, for instance see KTC v David (No 1) ('KTC').[6] I adopt Kunc J's principles in KTC.[7] At [19] in KTC, his Honour stated the following:

(1) Where there has been no actual receipt of property, a defendant will be liable to the object of a fiduciary obligation:

i. assists in;

ii. a breach of fiduciary duty;

iii. with knowledge that;

iv. the breach was a dishonest and fraudulent design

(3) The 'assistance' must be 'facultative conduct or activity which is more than mere knowledge or notice of breach of duty'.

(5) Avoiding argument over what is fraud, the fiduciary's breach of duty must also be dishonest in the sense that it is a transgression of ordinary standard of honest behaviour.

(6) An allegation of knowledge of a dishonest and fraudulent design is a serious matter which must be fully pleaded and particularised and proven by reference to what is still referred to as the Briginshaw standard ...

16 In Zibara at [107], the Court stated the following:

It is plain (in Australia) that it is the quality of the fiduciary's breach which must answer the description of 'dishonest or fraudulent'.

17 In Zibara at [111], the Court stated the following:

To satisfy the requirements of the second limb of Barnes v Addy, the breach of fiduciary duty itself must be 'dishonest and fraudulent'. Such a formulation excludes from the second limb of Barnes v Addy conduct which does not have the requisite degree of 'seriousness' and is not 'significant'.

(Citations omitted)

18 In the case of either type of accessorial liability, the 'knowledge' must be one of the following types of knowledge identified in Baden v Societe Generale pour Favouriser le Developpement du Commerce et de l'Industrie en France SA.[8] That is: actual knowledge, or wilfully shutting one's eyes to the obvious, or wilfully and recklessly failing to make such inquiries as an honest and reasonable person would make, or knowledge of circumstances which would indicate the facts to an honest and reasonable person.

19 Turning now to paragraphs 13Q-13Y of the proposed amended statement of claim. They plead unlawful conduct of Thomas, Medway and McKinnon during their employment with the plaintiff. The dispute centres on paragraphs 13W-13Y, which plead accessorial liability.

20 Paragraph 13Q pleads that Thomas, Medway and McKinnon engaged in activities labelled 'during-employment activities' whilst still employed by the plaintiff. They were: working together to establish LAWD, obtaining a beneficial interest in it, assisting it to establish its business and commence trading, and, McKinnon assisting LAWD after it commenced trading. The particulars to 13Q refer to Thomas, Medway and McKinnon starting work together to establish LAWD in about March 2018 and continuing their during-employment activities until cessation of employment with the plaintiff. The particulars plead that the during-employment activities included: preparing business plans and other financial, strategy and planning documents for LAWD; participating in LAWD selecting and leasing office premises; participating in identifying prospective clients; assisting LAWD to obtain finance; providing capital to LAWD; participating in marketing for LAWD; and recruitment of LAWD employees. The particulars refer to examples of these alleged activities. They plead it is to be inferred that Thomas, Medway and McKinnon further discussed and participated in decision-making about the activities and obtained a beneficial interest in LAWD.

21 The defendants say that the activities pleaded in the particulars to paragraph 13Q do not appear to be material facts pleaded in respect of the during-employment activity allegations. They say the number of activities in the particulars exceeds the number of activities pleaded as during-employment activities. Further, they say the list is not exhaustive. The defendants say they are entitled to be on fair and proper notice as to what amounts to during-employment activities.

22 On the other hand, the plaintiffs say that the particulars to paragraph 13Q are detailed and extensive. They are not exhaustive and there may be further particulars provided after discovery. Paragraph 13Q forms the foundation for the alleged during-employment activity breaches. The during-employment activities are pleaded. The plaintiff says it has pleaded all the material facts upon which it relies. The particulars are not seeking to expand the material facts upon which the plaintiff relies.

23 I will allow paragraph 13Q. I am satisfied that sub-paragraphs (a)-(d) plead material facts. I am satisfied that the particulars correlate to the during-employment activities. It is unnecessary for the particulars to be divided into sub-categories by reference to (a)-(d). Most of the particulars relate to (a) working together to establish LAWD and (c) assisting LAWD to establish its business and commence trading.

24 Paragraph 13R pleads that Thomas, Medway and McKinnon engaged in the during-employment activities: (a) without informing the plaintiff; (b) without seeking the plaintiff's consent; (c) to assist LAWD to establish its business in competition with the plaintiff; and (d) thereby to gain an advantage for themselves and LAWD. The particulars state that the purpose is to be inferred from the nature of the during-employment activities and further particulars may be provided after discovery.

25 The defendants say that the particulars to paragraph 13R identify a 'purpose' or state of mind; however, there is no purpose or state of mind alleged in paragraph 13R. Accordingly, they say it is unclear what is precisely alleged in 13R.

26 The plaintiff says that the defendants' submission is misconceived because sub-paragraphs (c) and (d) allege a purpose, namely "to assist LAWD" and thereby "to gain". They are material allegations of fact that import an alleged purpose to be enjoined.

27 Paragraph 13R is disallowed. It is embarrassing. The reference to 'purpose' in the particulars is confusing. It is not properly answered by reference to sub-paragraphs (c) and (d). If those paragraphs seek to plea a state of mind, then that ought be plead. As currently pleaded, the defendants could not properly respond.

28 Paragraph 13V pleads that Thomas, Medway and McKinnon breached their fiduciary duties by engaging in the during-employment duties. The reference to duties is a typographical error that the plaintiff will correct, so the reference will be to the 'during-employment activities' as defined in paragraph 13Q.

29 The defendants say that 13V is not a sufficient pleading of an alleged breach of fiduciary duty.

30 The plaintiff says that the facts giving rise to the fiduciary duties are pleaded, as are the duties and so is the conduct said to be in breach of the duties, and the surrounding facts bearing upon the breach.

31 The plaintiff says it is prepared to amend paragraph 13V to make it explicit that it relies upon other paragraphs to support allegations of breach. That is, by pleading the breach is 'by reasons of the matters alleged in paragraphs 13R and 13S'. The plaintiff says that 13V and 13W must be read together. Paragraph 13W pleads the during-employment activities amounted to a dishonest and fraudulent design.

32 Paragraph 13U pleads the fiduciary duties owed by Thomas, Medway and McKinnon to the plaintiff. I disallow paragraph 13V. It does not plead the actual breach of fiduciary duties. The plea is not made good by reference to paragraphs 13R and 13S. I have disallowed paragraph 13R. Paragraph 13S alleges concealment of the during-employment activities. The plaintiff must plead how each fiduciary duty pleaded in paragraph 13U was allegedly breached. As it stands, paragraph 13V pleads a conclusion.

33 Paragraph 13W pleads that the during-employment activities amounted to a dishonest and fraudulent design by Thomas, Medway and McKinnon, "in that they constituted conduct that transgressed the ordinary standards of honest behaviour." Particulars follow.

34 The defendants say paragraph 13W appears to be a knowing assistance claim. They say that it is a plea of a conclusion and is therefore embarrassing. The defendants say that the dishonest and fraudulent design must be explicitly pleaded. Moreover, it appears that two different dishonest and fraudulent designs are being alleged: one in 13W and one in 13Y.

35 The plaintiff says that paragraphs 13V and 13W must be read together and one can then see that the allegation is properly put. Further, that it is clear that they are pleading both knowing assistance and knowing inducement. In paragraph 13W they plea a dishonest and fraudulent design. They characterise the breach as "conduct that transgressed the ordinary standards of honest behaviour".

36 I will disallow paragraph 13W. It pleads a conclusion and is embarrassing. As to reading it with paragraph 13V: I have disallowed paragraph 13V. The defendants must explicitly plead "exactly what is said to constitute the alleged dishonest and fraudulent design".[9]

37 Paragraphs 13X(a)-(d) refer to the knowledge of Thomas, Medway and McKinnon. Paragraph 13(e) pleads that they took no steps to prevent each other from engaging in the during-employment activities. Paragraph 13X(f) pleads that they encouraged, induced or permitted each other to engage in the during-employment activities. Particulars follow.

38 The defendants contrast paragraph 13X, which pleads the knowledge of Thomas, Medway and McKinnon with sub-paragraphs (e) and (f) which do not. Paragraph 13X(f) appears to plead inducement. The defendants say this rolls up knowing assistance and knowing inducement.

39 The plaintiff says it is clear that liability is pleaded on two distinct bases. That is, it makes both knowing assistance and knowing inducement claims. It says that there is unavoidably and naturally an overlap of both bases. It says sub-paragraphs (a)-(d) relate to both bases and sub-paragraphs (e) and (f) to the inducement claim.

40 I disallow paragraph 13X. It is a rolled up plea and is embarrassing.

41 Paragraph 13Y pleads that by reason of the matters alleged in paragraphs 13W and 13X, each of Thomas, Medway and McKinnon: (a) had actual knowledge or alternatively knowledge of circumstances that would indicate to an honest and reasonable person various matters including that the breach of fiduciary duties amounted to a dishonest and fraudulent design; (b) induced or procured each other's breaches; (c) knowingly assisted each other's dishonest and fraudulent design; and (d) is liable for breaches of fiduciary duties.

42 The defendants refer to paragraph 13Y and say it is confusing. It appears to plead by reason of the matters alleged in paragraph 13W that Thomas, Medway and McKinnon had actual knowledge. That is an illogical conclusion. Moreover, 13Y pleads both actual knowledge or alternatively knowledge of circumstances which would indicate, to an honest and reasonable person, a breach of fiduciary duties amounting to a dishonest and fraudulent design. It is embarrassing to plea both types of knowledge. Further, 13Y appears to refer to both knowing assistance and knowing inducement. The defendants say it is unclear if both claims are being made in the alternative, or if one claim is being made.

43 The plaintiff concedes that paragraph 13Y pleads a conclusion. It says that it is clear enough. The plaintiff says that the facts upon which the conclusion is based are pleaded. It is pleaded that each accessory had knowledge of the fiduciary duties and that the breaches amounted to a dishonest and fraudulent design. I refer to the plaintiff's submissions in respect of paragraph 13X regarding the overlap of the knowing assistance and knowing inducement claims. The plaintiff says that if there is any confusion, it could be easily avoided by separating paragraph 13Y into distinct paragraphs.

44 I disallow paragraph 13Y. It is a rolled up plea and pleads a conclusion. It is therefore embarrassing.

45 Turning now to a dispute about the pleading of LAWD's accessorial liability.

46 Paragraph 13UU pleads that the McKinnon Information Conduct amounted to a dishonest and fraudulent design by McKinnon in that it was conduct that transgressed the ordinary standards of honest behaviour. The McKinnon Information Conduct is defined in paragraph 13II as McKinnon's use and disclosure of the plaintiff's business information, which was not in the public domain, to assist LAWD.

47 Paragraph 13VV pleads that by reason of matters alleged in other pleaded paragraphs, LAWD had actual knowledge of, amongst other things, McKinnon's breaches of fiduciary duties amounting to a dishonest and fraudulent design.

48 The defendants say that paragraphs 13UU and 13VV misconceive the cause of action sought to be alleged and should not be permitted. The premise is that the McKinnon Information Conduct was a dishonest and fraudulent design. McKinnon cannot participate in his own fraudulent design as he is not a third party himself, and so that makes no sense. Further, it is unclear whether knowing assistance or knowing inducement is being pleaded. There is no reference to paragraph 13OO as the starting point of this part of the claim.

49 The plaintiff says that the allegations in paragraph 13UU encompass a breach of information that amounts to a dishonest and fraudulent design. Paragraph 13OO pleads McKinnon breached duties to the extent that the McKinnon Information Conduct occurred while he was still employed by the plaintiff. Paragraph 13VV(a)(ii) pleads McKinnon breached the fiduciary duties to the extent he engaged in the McKinnon Information Conduct while employed by the plaintiff. It pleads LAWD had knowledge of this.

50 I disallow paragraphs 13UU and 13VV. I reiterate the analysis for paragraphs 13W and 13Y.

51 Paragraph 13FF pleads that "LAWD committed the tort of inducing a breach of contract" concerning each of Thomas, Medway and McKinnon. It is alleged they breached their duties of loyalty in paragraph 13T. Paragraph 13EE pleads LAWD knew they had contractual duties of loyalty. It pleads too that LAWD knew they were breaching their contractual obligations by engaging in the during-employment activities.

52 The defendants say that the allegations in paragraphs 13EE and 13FF fail to identify how it is alleged that LAWD induced a breach of the alleged duties of loyalty.

53 The plaintiff relies on the inconsistent dealings principle referred to in DC Thomson & Co Ltd v Deakin & Ors ('DC Thomson'),[10] which states the following:

[T]he contract breaker may himself be a willing party to the breach, without any persuasion by the third party, and there seems to be no doubt that if a third party, with knowledge of a contract between the contract breaker and another, has dealings with the contract breaker which the third party knows to be inconsistent with the contract, he has committed an actionable interference ... The inconsistent dealing between the third party and the contract breaker may, indeed, be commenced without knowledge by the third party of the contract thus broken; but, if it is continued after the third party has notice of the contract, an actionable interference has been committed by [the third party].[11]

54 The plaintiff says that the High Court adopted this principle in DC Thomson in Zhu v Treasurer (NSW).[12]

55 The plaintiff says that it may rely upon the inconsistent dealings principle. It need not plead positive acts by LAWD. It says it is enough that LAWD engaged in conduct inconsistent with the contractual obligations of Thomas, Medway and McKinnon.

56 The defendants accept the inconsistent dealings principle. However, they say that the pleadings go further than that. They refer to the pleading in paragraph 31 that LAWD has knowingly induced or procured a breach. On the other hand, the plaintiff says that paragraph 31 is an existing pleading and the defendants have pleaded to it.

57 Paragraphs 13EE is allowed. It pleads LAWD's knowledge. Paragraph 13FF is disallowed. I accept the defendants' submission that paragraph 13FF should be disallowed on the basis that it fails to identify how LAWD induced the breach of contract. The paragraph is embarrassing. Whilst the plaintiff submits that no positive act of inducement needs to be pleaded, in fact, it appears that has been attempted. Paragraph 13FF says the inducement is by reason of the matters alleged in paragraphs 13BB to 13EE. Paragraphs 13BB and 13CC plead LAWD's knowledge. Paragraph 13DD pleads, amongst other things, that LAWD encouraged, induced or permitted Thomas, Medway or McKinnon to engage in the during-employment activities. The particulars refer back to paragraph 13Q (the paragraph alleging the during-employment activities) and paragraph 13S (the allegation of concealment by Thomas, Medway or McKinnon). This creates confusion. There is a basic question to be answered - what constitutes the inducement? If the plaintiff relies on the inconsistent dealing principle, it must clearly plead that. The defendants will then be able to answer the plea.

58 As to paragraph 31, as the plaintiff says, it is an existing pleading. There are some amendments to it but they do not change the central allegation that LAWD knowingly induced or procured a breach of the restraints in the employment contract between the plaintiff and Thomas. This has been expanded to include breaches of the same type by Medway and McKinnon.[13] Given that the allegations against Thomas in paragraph 31 have not been the subject of a strike out application, and indeed the defendants have pleaded to it, and the proposed amendments are of the same character, it should not be considered further in this application.

59 I referred above to paragraph 13II describing the McKinnon Information Conduct. The particulars refer to the information allegedly used and disclosed by McKinnon to LAWD. Paragraph 13KK pleads that information was confidential information within the meaning of McKinnon's contract with the plaintiff, and paragraph 13JJ pleads it was information that McKinnon was obliged to keep confidential, that is, an equitable obligation.

60 The defendants say that many of the items identified in the particulars of 13II are not capable of constituting confidential information. They refer to particulars (ii) to (vi) which refer to matters disclosed in an email from McKinnon, including predictions about the fees that three of the plaintiff's employees could generate for LAWD, information about an employee's skills and about the proposed remuneration that LAWD should offer two of the employees. The defendants say this is speculative. They say that someone commenting on another person's skills is not confidential information. They say that it should be confined to matters that are confidential.

61 The plaintiff says that if the defendants wish to dispute the information is confidential, it can be reflected in the defence.

62 In Adrianakis v Uber Technologies (Ruling No 1),[14] Macaulay J (as his Honour then was) stated the following at [43]:

[A]t the stage of considering the pleading's sufficiency, where the existence of important facts depend upon inference, the Court should permit the claim in the pleaded form to go forward unless the inference cannot be said to have any real prospect of success.

63 Paragraph 13II, including the particulars, are allowed. Whether or not the information is confidential information is a matter for trial. It is arguable that the information in the particulars is confidential. The plea infers that the prediction and proposed remuneration were based on information about their skills, activities and remuneration of the employees whilst in the employ of the plaintiff. The plea is not that the prediction is confidential but rather that it was based on confidential information. I understand the query about how an employee's skills may be confidential, but truly, that is a matter for the plaintiff to prove at trial.

64 The following dispute between the parties narrowed and primarily resolved during the hearing. The proposed amended statement of claim seeks forms of relief including both an account of profits and damages. These are not pleaded as alternatives. However, they need not be. If the plaintiff succeeds on establishing liability, they will need to make an election. The plaintiff need not do that now. Such an election is ordinarily made at trial.[15] The plaintiff will however need to particularise the loss and damage claimed prior to trial. It should be done prior to mediation. This may require expert evidence.

65 I have allowed parts of the proposed amended statement of claim and disallowed other parts. I will make orders for joinder. I will give the plaintiff leave to file an amended writ reflecting the joinder.

66 The interests of justice require the plaintiff be given leave to file an amended statement of claim. This is not a circumstance where the claims pleaded by the plaintiff have no real prospect of success. Rather, there are claims that need to be clearly articulated, particularly because they make allegations of dishonesty.

67 As to the form of the amended pleading: it should be in the form of a second statement of claim. The numbering in the proposed statement of claim is confusing and will create issues at trial. By starting the numbering again in a second statement of claim, the pleading will be easier to navigate. I will make an order dispensing with r 36.05(4) of the Rules so that the plaintiff need not mark up the changes in the new pleading. However, the plaintiff should provide to the defendants a Word doc. version of the proposed second statement of claim, and a Word doc. version of the current statement of claim, so that the document compare function can be used if necessary to view the changes. The Court does not need that information. As a courtesy, and before the second statement of claim is filed, and consistently with the duty of co-operation, the plaintiff should provide the draft to the defendants' legal practitioners. If they have any concerns, they should promptly inform the plaintiff's legal practitioners who should then consider whether further changes are necessary to respond to those concerns and, as a courtesy, respond to the defendants' legal practitioners. It is then a matter for the plaintiff to file the second statement of claim and, if the defendants have any concerns that have not been met, they will need to bring a strike out application.

[1] [2020] VSC 587, [7]-[13].

[2] [2016] VSC 59, [29]-[40].

[3] (2007) 230 CLR 89, [163].

[4] [2021] FCAFC 4; (2021) 283 FCR 18, [91]-[107].

[5] Grimaldi v Chameleon Mining NL [No 2] [2012] FCAFC 6; (2012) 200 FCR 296, [245].

[6] [2019] NSWSC 281, [19] (Kunc J).

[7] KTC v David (No 1) [2019] NSWSC 281, [19].

[8] [1992] 4 All ER 161, 242_._

[9] KTC v David (Pleadings) [2019] FCA 1556, [19]-[20]; KTC v David (Summary Dismissal) [2020] FCA 1012, [136], [150]-[151].

[10] [1952] Ch 646, 694 ('DC Thomson').

[12] [2004] HCA 56; 218 CLR 530, 586 [157]. In OBG Ltd v Allan [2007] UKHL 21; [2008] 1 AC 1 ('OBG v Allan'), the House of Lords did not apply DC Thomson. It is not yet known whether the High Court will apply OBG v Allan. OBG v Allan has been applied in Australian Courts. For a recent example, see: Derikuca v Secretary, Department of Education [2022] NSWSC 1239, [138] (Rothman J).

[13] It is presumed that retention of the words "by Thomas of" is a typographical error.

[14] [2019] VSC 850.

[15] GM & AM Pearce & Co Ltd v Australian Tallow Producers [2005] VSCA 113, [56].