Supreme Court of SA|2003-09-10|Before: Lander JJ, Debelle J

SOUTHERN REAL ESTATE PTY LTD v VALERIE DELLOW & WAYNE ARNOLD No. SCCIV-02-1275 [2003] SASC 318 (10 September 2003)

SOUTHERN REAL ESTATE PTY LTD v VALERIE DELLOW & WAYNE ARNOLD

2 A rent roll is the list of clients whose rental properties are managed by a real estate business. In NP Generations Pty Ltd v Feneley [2001] SASC 185; (2002) 80 SASR 151, this Court held that a former employee of a real estate business was liable for damages for wrongfully using confidential information relating to the rent roll of the business. The issues in this appeal concern the reduction in the numbers of clients on a rent roll owned by a company operating a real estate business where that reduction is caused by a director preparing a list of clients on the company's rent roll and then resigning her directorship and immediately establishing a business in competition.

3 The appellant, Southern Real Estate Pty Ltd ("Southern Real Estate"), carries on business as a real estate agent. It was incorporated in 1993. The company was formed by five employees who had all left a real estate firm. They were Messrs Robertson, Whitlock, and Sanderson, the respondent, Mrs Dellow and a Mrs Smout. The initial directors of the company were Messrs Robertson, Whitlock and Sanderson. Ms Dellow, was one of the initial shareholders in the company. From 1993 she was employed by the company together with Mrs Smout. On 14 December 1999 Ms Dellow and Mrs Smout were appointed directors.

4 Ms Dellow's appointment as a director did not result in any change in remuneration. From time to time, after payment of salary or performance related salaries and commission to each Ms Dellow, Mrs Smout and the directors, any surplus would be paid as a bonus equally to the shareholders.

5 Ms Dellow's duties at Southern Real Estate required her to manage rental properties on behalf of clients of the firm. She managed the rent roll. At all relevant times, Mrs Dellow was employed on a full time basis. She took part in the management of Southern Real Estate. She attended board meetings. She was an executive director of Southern Real Estate.

6 Article 12 of the Articles of Association of Southern Real Estate provides that, if a member resigns, notice may be given inviting the others to buy the departing member's share. The other members are under no obligation to buy the departing member's share. If they do not, the share may be valued and sold. In practice, a sale to an outsider would be difficult without the support of the other members. In 1994, Mr Whitlock left the business. His share was bought by the remaining four shareholders including Ms Dellow. Those four continued as equal shareholders.

7 In 1996 Ms Dellow became dissatisfied with her position. She decided to leave. The other members were unwilling to purchase her share. Ms Dellow was angry that she was being treated differently from Mr Whitlock. She decided to remain with the company.

8 By December 2000 Ms Dellow was again dissatisfied. She decided to resign. She obtained legal advice as to how to manage her resignation. As legal professional privilege was claimed, the content of the advice was not proved. It was Ms Dellow's intention to operate a business managing rental properties out of the home she shared with the respondent, Mr Arnold. Mr Arnold has a real estate licence and has worked in real estate. He has worked in other fields in recent years. On 8 January 2001 Mr Arnold registered two business names for the business. He is the registered proprietor of those names. It is clear from the evidence that Ms Dellow was considering resigning from the company in December 2000 and by 8 January 2001 had definitely decided to resign.

9 The trial judge accepted the evidence of Ms Dellow and made the following findings of fact. These findings of fact are not challenged by Southern Real Estate.

10 Ms Dellow resigned on 30 January 2001. (Although the trial judge found the date to be 31 January, the objective evidence shows that is an error - albeit of no consequence.) She had not given any notice of her intention to do so. The next day she posted or delivered letters to 58 clients on the rent roll of Southern Real Estate. The total rent roll contained about 120 clients. The trial judge found that Ms Dellow had prepared the letters and the list of addressees before she had resigned. That was apparent from the fact that the letters were posted or delivered on the day following her resignation.

11 In her letter, Ms Dellow informed the clients of her departure from Southern Real Estate and invited them to call her. She provided a telephone number in the hope that the clients might call her. Fifty-seven clients of Southern Real Estate, that is to say, about half of those on the rent roll, have transferred their business to Ms Dellow.

12 The trial judge found that Ms Dellow had compiled the list of persons to whom she wrote from memory and from using other sources of information such as the Telstra Easy Find Service and the White Pages. He also found that she did not construct her list of clients by referring to or stealing lists from Southern Real Estate. There is no appeal against that finding. The judge found that Ms Dellow intended to take as many of the clients of Southern Real Estate as she lawfully could.

13 Although the judge had found that, in preparing her list of clients, Ms Dellow had relied on memory and had not used confidential information belonging to Southern Real Estate, he noted that the list of the names and addresses of 58 clients had been prepared while Ms Dellow was an employee and director of Southern Real Estate. The judge, therefore, found that her work for Southern Real Estate had assisted her recall of names and details of clients. He added:

"47 I conclude that, despite her belief that she was entitled to do what she did, and despite her care to avoid doing what she believed she was not entitled to do, her memory was aided by her daily work for Southern Real Estate and her access to its records during the time that she worked on the lists of clients to whom she wrote. Her approach to at least some of the 58 to whom she wrote was wrongful."

Thus, the judge held that, although Ms Dellow would not have been liable for a breach of duty as an employee, she was liable for breach of her duties as a director of the company. However, he did not indicate the basis on which he held that she was liable.

14 All of the persons on the rent roll had executed agreements by which they had engaged Southern Real Estate to manage their properties. The agreements were for a term of one year and thereafter were terminable on 60 days' notice. It was not Ms Dellow's practice to try to renew the management agreement on the expiry of one year. Thus, when Ms Dellow resigned, some of the clients of Southern Real Estate were bound by a management agreement for one year which expired at different times. However, most were on agreements terminable on 60 days' notice.

15 At the trial, Southern Real Estate contended that Ms Dellow had deliberately allowed most clients to be on agreements terminable on 60 days' notice so that she could increase her chances of taking clients. The trial judge found that the high proportion of contracts terminable on 60 days' notice was the result of a long-established practice rather than a deliberate plan to be able to secure those clients quickly after Ms Dellow had resigned. He held that Ms Dellow had not acted in bad faith in allowing those clients to be on contracts terminable on 60 days' notice. There is no appeal against that finding.

16 The judge then turned to the assessment of damages. He found that 57 clients had left Southern Real Estate. He held that it would have taken Ms Dellow about one month to compile a list of clients after she had left Southern Real Estate. On that basis, he held, Ms Dellow got 57 clients one month earlier than she would have had she compiled the list after her resignation. The total commission those clients would have generated for Southern Real Estate in one year was $31,174. He, therefore, held that Southern Real Estate lost $2,598 in that month, a sum he rounded to $2,600. The judge concluded that there may have been ancillary referral business such as sales or new landlords and so increased the assessment of loss to $5,000. To that sum he added $600 by way of interest. As will be apparent from the later discussion the trial judge failed to assess correctly the loss caused by a breach of fiduciary duty. The judge also declined to allow Southern Real Estate its costs. He ordered that there should be no order as to costs.

17 From that decision Southern Real Estate appeals to this Court. It complains of the findings of the trial judge as to the grounds on which Ms Dellow is liable to it and of the method by which damages were assessed. Southern Real Estate complains that the judge assessed damages by using common law principles instead of equitable principles. It also appeals against the refusal to award costs in its favour.

18 There is a cross appeal by Ms Dellow that the trial judge erred in holding that Ms Dellow had acted in breach of any duty to Southern Real Estate.

19 At the trial, Southern Real Estate had claimed damages on two alternative grounds. The first was that Ms Dellow had acted in breach of her duties as an employee of Southern Real Estate in respect of the confidential information to which she had access and that she had acted in breach of her fiduciary and statutory duties as a director of Southern Real Estate. At the hearing of the appeal, Mr Manetta, who appeared for Southern Real Estate, relied on those same alternatives. He also sought to assert a third, namely, that Ms Dellow was in a quasi-partnership with other directors of Southern Real Estate and had acted in breach of her duties as a partner. This last ground was quite misconceived. It was also unnecessary for Mr Manetta to seek to rely on Ms Dellow's obligations as an employee or former employee of Southern Real Estate as those obligations were subsumed in the more onerous fiduciary duties to which Ms Dellow was subject as a director of Southern Real Estate.

20 Reference has already been made to the conclusion of the trial judge that Ms Dellow was liable to Southern Real Estate. However, the basis of that liability was not clearly articulated. The basis upon which damages will be assessed will turn on the nature and content of Ms Dellow's duties as a director. It is, therefore, necessary to set out the basis upon which Ms Dellow is liable.

21 As a director of Southern Real Estate, Ms Dellow was subject to both statutory and fiduciary duties. Sections 180 to 184 of the Corporations Act list the duties of directors of companies. Section 185 provides that those duties are in addition to and do not derogate from any rule of law imposing duties on directors of corporations. In other words, the statutory duties and fiduciary duties of directors exist side by side, each in aid of the other.

22 Ms Dellow was subject to a duty to act in good faith in the best interests of Southern Real Estate. That duty is imposed by s 181 of the Corporations Act. The duty is so fundamental and has been established for so long as a fiduciary duty that it has been described as a trite proposition: Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722 at 729; see also Allen v Gold Reefs of West Africa, Limited [1900] UKLawRpCh 37; [1900] 1 Ch. 656 at 671; Southern Resources Ltd v Residues Treatment and Trading Co Ltd (1990) 56 SASR 455 at 472. The nature of the fiduciary duty was spelled out by Dixon J in Mills v Mills [1938] HCA 4; (1938) 60 CLR 150 at 185 in these terms:

" Directors of a company are fiduciary agents, and a power conferred upon them cannot be exercised in order to obtain some private advantage or for any purpose foreign to the power. It is only one application of the general doctrine expressed by Lord Northington in Aleyn v Belchier: 'No point is better established than that, a person having a power, must execute it bona fide for the end designed, otherwise it is corrupt and void.' "

23 If directors act in a way to promote their own interest or promote the private interest of others, they have not acted in the best interests of the company: Kinsela v Russell Kinsela Pty Ltd (in liq) (supra) at 729.

24 Ms Dellow was also subject to a duty not to use her position as a director improperly to gain an advantage for herself or for any other person or to cause detriment to Southern Real Estate: s 182 of the Corporations Act. This duty plainly flows from and might be regarded as one aspect of the duty to act in good faith in the best interests of the company. The duty spells out the obligations of a director not to allow personal interests to conflict with a duty to the company. That obligation stems from the fact that a director is a fiduciary: see Dixon J in Mills v Mills (supra). There must be a real or substantial possibility of a conflict: Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64; (1984) 156 CLR 41 per Mason J at 103; Chan v Zacharia [1984] HCA 36; (1984) 154 CLR 178 at 198 per Deane J. The question whether a director has acted for a proper purpose, namely, for the benefit of the company is to be objectively determined: Permanent Building Society (in liq) v Wheeler (1994) 11 WAR 187 at 218 per Ipp J. Thus, the duty may be expressed by saying that a director is under an obligation not to promote his personal interests by making or pursuing a gain in circumstances in which there is a conflict or a real or substantial possibility of a conflict between his personal interests and those of the persons whom he is bound to protect: Aberdeen Railway Co v Blaikie Brothers (1854) 1 MacQ 461 at 471 cited with approval by Mason J in Hospital Products (supra) at 103. Shortly after in his reasons in Hospital Products (at 104 - 105) Mason J referred to the reasons of Dixon and McTiernan JJ in Blyth Chemicals Ltd v Bushnell [1933] HCA 8; (1933) 49 CLR 66 at 82 where their Honours observed there would be misconduct amounting to a ground justifying dismissal for a manager to take steps during his employment to prepare a position to which he could retreat with a large part of his employer's business in the event that it should become necessary or desirable to vacate the managership. His conduct would constitute a breach of the fiduciary obligations of the employee to the company. In the case of a director, the position is even clearer.

25 The high obligation placed on a company director was clearly expressed by Laskin J, speaking for the Supreme Court of Canada in Canadian Aero Service Ltd v O'Malley (1973) 40 DLR (3d) 371 at 382 in these terms:

" An examination of the case law in this Court and in the Courts of other like jurisdictions on the fiduciary duties of directors and senior officers shows the pervasiveness of a strict ethic in this area of the law. In my opinion, this ethic disqualifies a director or senior officer from usurping for himself or diverting to another person or company with whom or with which he is associated a maturing business opportunity which his company is actively pursuing; he is also precluded from so acting even after his resignation where the resignation may fairly be said to have been prompted or influenced by a wish to acquire for himself the opportunity sought by the company, or where it was his position with the company rather than a fresh initiative that led him to the opportunity which he later acquired."

Section 183 prohibits a director of a company from improperly using information obtained as a director to gain advantage for themselves or someone else or to cause detriment to the company. That obligation is also a fiduciary duty. It is an instance of the fiduciary duty to act in good faith. Thus, a director must not divulge confidential information of the company to another or use that information to the detriment of the company: Riteway Express Pty Ltd v Clayton (1987) 10 NSWLR 238; On the Street Pty Ltd v Cott (1990) 101 FLR 234.

26 Ms Dellow's conduct in preparing the list of customers whilst a director of Southern Real Estate with the intention of using it once she had resigned as a director was a breach of her duty to act bona fide and in the best interests of the company. She was placing herself and Mr Arnold in the most advantageous position to erode the goodwill of the company.

27 As she admitted in her cross-examination, by 8 January 2001 Ms Dellow had formed the firm intention to resign from Southern Real Estate and, with Mr Arnold, to establish a business in direct competition with it. From at least 8 January 2001, she was acting to her own advantage and that of Mr Arnold and to the detriment of Southern Real Estate. She was acting in a manner where there was a manifest conflict between her duty to the company and her personal interest. She knew that the rent roll was a most important asset of the company and, while she continued as a director of the company, she set out to duplicate at least part of it. In addition to preparing the list of customers and registering the business name, Ms Dellow and Mr Arnold organised the printing of stationery, the establishment of a bank account, the connection of an additional telephone line, the acquisition of a mobile telephone, and the purchase of a computer for the business. Thus, it is apparent that they were putting all necessary steps in train to enable the business to commence operations as soon as Ms Dellow had resigned. The software for the computer was not installed until 8 February but they had taken the steps necessary to arrange for that before Ms Dellow resigned.

28 When she announced her resignation, Ms Dellow informed her co-directors that she had no intention of walking away with nothing. She suggested that she was entitled to some of the customers on the rent roll in lieu of any other entitlement. A meeting was held the following day. Ms Dellow informed her co-directors that she had already contacted some of the landlords.

29 The duty of good faith required Ms Dellow to disclose her intentions. She plainly acted in breach of that duty. Ms Dellow described her announcement of her resignation to her co-directors by stating she "dropped the bombshell". It was just that. She intended to resign immediately and to commence her own business the next day. She had put everything in place to enable that to occur. The effectiveness of her action is demonstrated by the fact that, by as soon as 6 and 7 February 2001, Southern Real Estate began to receive notices from clients on the rent roll terminating their contracts.

30 It is quite apparent that Ms Dellow organised the preparation of the list and the affairs of the intended business so that she could commence operations on the day following her resignation. It is also apparent that she wished to deliver a pre-emptive strike by sending the letters soliciting custom immediately on her resignation and by opening her own business. In this way she ensured that Southern Real Estate had very little time in which to respond to her actions. She knew that by failing to give notice of her intentions, she would leave Southern Real Estate without a property manager. Its capacity to respond to her actions would, therefore, be even further diminished. As she admitted in her evidence, her sudden resignation left the company in the lurch. It was also apparent that, together with Mr Arnold, she had arranged her affairs to place herself and Mr Arnold in the most advantageous and competitive position. It is apparent from her evidence that she intended to arrange for about 58 clients from Southern Real Estate to transfer their business to her. As she said in her evidence, she wanted clients of Southern Real Estate to form the basis of her new business and she was going to do her best to ensure they did. In short, it was a carefully orchestrated plan to place Southern Real Estate in a position where it would face real difficulty in competing with her. Her resignation left it without a property manager. Her letters had already gone to customers. Any letter from the company would perforce be sent a day or two at least after her letter by which time the damage would have already been done.

31 Ms Dellow breached her duties to act in good faith and in the best interests of Southern Real Estate. While a director, she was actively preparing to enter into competition with Southern Real Estate and to be in a position to act pre-emptively to the detriment of Southern Real Estate. She was acting with a manifest conflict of interest by preparing the list of customers whilst still a director. As the trial judge found her memory of customers would have been refreshed by her daily duties. I do not think that there is any relevant distinction between the conduct of Ms Dellow who, whilst still a director, collated information for use as a competitor immediately upon her resignation and a director who resigns to take advantage of a business opportunity which his duties required him to offer to the company.

32 For those reasons Ms Dellow plainly acted in breach of her duties as a director, both fiduciary and statutory, to act in good faith and in the best interests of Southern Real Estate as well as not to use her position as a director improperly to gain an advantage for herself or to cause detriment to Southern Real Estate.

33 It is a breach of duty for a director to ask the company's customers to cease to deal with the company and deal with a competing business in which he or she is involved: Mordecai v Mordecai (1988) 12 NSWLR 58. However, the question whether a director may resign and compete with a company is not settled: see the discussion in Ford, para 9.140.

34 It is not improper for a director of one company to be at the same time a director of a competitor or personally to carry on a competing business providing he discloses that fact and does not disclose confidential information: Bell v Lever Brothers Ltd [1931] UKHL 2; [1932] AC 161 at 195; On The Street Pty Ltd v Cott (supra) at 242; Rosetex Company Pty Ltd v Licata (1994) 12 ACSR 779 at 782 -783; SEA Food International Pty Ltd v Lam (1998) 16 ACLC 552. It has been suggested that the position may differ as between executive and non-executive directors: Riteway Express Pty Ltd v Clayton (supra) at 241. It may be that a consequence of the fiduciary duties of a director is that, even in the absence of an express term in an employment contract requiring the director to serve the company exclusively, some such term would be implied: Hivac Limited v Park Royal Scientific Instruments Limited [1946] Ch 169; On the Street Pty Ltd v Cott (supra). See also Industrial Development Consultants Ltd v Cooley [1972] 1 WLR 443. It is unnecessary to determine the interesting question of an implied term as the case for Southern Real Estate was not advanced on that basis.

35 It is unnecessary also to examine the interesting question when a former director of a company may begin to compete with that company. The issues are identified by Professor Austin, as he then was, in his paper: "Fiduciary Accountability for Business Opportunities" in Finn_, Equity and Commercial Relationships_ (1987, Law Book Company Ltd ) at 180:

" In principle it would seem that the temporal qualification to the misappropriation of assets rule should be a flexible one. It would be absurd to hold that a director may misappropriate his company's assets as long as he resigns first. Eventually a former director will become a layman as far as fiduciary law goes, and the only constraints on his misappropriating corporate assets will be the constraints of the criminal law and the law of torts. But he must surely be subject to the more onerous fiduciary standard for a substantial time after resignation.

The conflict rule may have a built-in temporal limitation which is sharp and open to abuse. The rule is attracted by actual or potential conflict between personal interests and a duty of fiduciary office, and it is hard to avoid the inference that the duties evaporate as soon as the fiduciary resigns. One would have to say that a duty continues for a time after resignation in spite of the understandings implied by the principal's acceptance of the resignation." [Emphasis added]

36 There is an obvious tension between a reasonable period during which the former director remains subject to his or her fiduciary duties and freedom of competition. Although she could not make a list of customers or solicit customers whilst a director, after the expiry of that reasonable period Ms Dellow was at liberty to make a list of the clients from memory and actively to solicit their custom: Robb v Green [1895] UKLawRpKQB 58; [1895] 2 QB 1 and 315; Wessex Dairies Ltd v Smith [1935] 2 KB 80; Mordecai v Mordecai (supra). In other words, at an appropriate time after her resignation Ms Dellow was entitled to establish a business in competition with Southern Real Estate.

37 These breaches of Ms Dellow's duties as a director occurred while she was a director and immediately upon her resignation. However, she could not escape her fiduciary and statutory duties as a director by resigning: Canadian Aero Services Ltd v O'Malley (supra) at 384 and 388; Ferrari Investment (Townsville) Pty (in liq) v Ferrari [1999] QCA 230; [2000] 2 Qd R 359 per Thomas JA at 367 - 368.

38 In this case, the question of what constitutes a reasonable period during which the former director remains subject to her fiduciary and statutory duties does not require close consideration because Ms Dellow had, whilst still a director, put everything in place so that she and Mr Arnold would be in a position to compete with Southern Real Estate immediately upon her resignation and they did in fact enter into competition on the day following her resignation using a list of customers of Southern Real Estate compiled while she was a director.

39 For all of these reasons Ms Dellow is liable for the breaches of her statutory and fiduciary duties.

40 Southern Real Estate claimed equitable damages or equitable compensation for the loss sustained by it in consequence of Ms Dellow's breaches of her duties. I infer that it elected not to seek an account of profits as no claim of that kind was made.

41 It is necessary to consider whether Ms Dellow's breach of her duties caused the loss suffered by Southern Real Estate. In the following discussion, I have been assisted by the examination of principle by Ipp J in Permanent Building Society (in liq) v Wheeler (supra) and by Spigelman CJ (with whom Priestley and Meagher JJ agreed) in O'Halloran v R T Thomas and Family Pty Ltd [1998] NSWSC 596; (1998) 45 NSWLR 262 at 271.

42 Having acted in breach of her duties as a fiduciary, Ms Dellow was liable to make good the losses incurred by Southern Real Estate as a result of that breach. As was pointed out by Lord Hoffman in Environment Agency (formerly National Rivers Authority) v Empress Car Co (Abertillery) Ltd [1998] UKHL 5; [1999] 2 AC 22 and reaffirmed by Spigelman CJ in O'Halloran v R T Thomas and Family Pty Ltd (supra) at 271, analysis of causation depends on what rule is to be applied. Lord Hoffman said (at 29) "the first point to emphasise is that common sense answers to questions of causation will differ according to the purpose for which the question is asked ..." His Lordship continued (at 358; 488 - 489):

"One cannot give a common sense answer to a question of causation for the purpose of attributing responsibility under some rule without knowing the purpose and scope of the rule. Does the rule impose a duty which requires one to guard against, or makes one responsible for, the deliberate acts of third persons? ...

Before answering questions about causation, it is therefore first necessary to identify the scope of the relevant rule. This is not a question of common sense fact; it is a question of law."

43 The case against Ms Dellow is based on a breach of her fiduciary duties as a director. It is well established that questions of causation of loss arising from a breach of fiduciary obligations are to be determined in a different way from a breach of common law obligations.

44 The object of equitable compensation is to restore persons who have suffered loss to the position in which they would have been if there had been no breach of the equitable obligation: Nocton v Lord Ashburton [1914] UKLawRpAC 31; [1914] AC 932; O'Halloran v R T Thomas and Family Pty Ltd (supra) at 272. Dixon AJ, as he then was, noted in McKenzie v McDonald [1926] VicLawRp 74; [1927] VLR 134 at 146 that Nocton v Lord Ashburton shows that the jurisdiction to remedy breaches of fiduciary duty extends to decrees of compensation in favour of the person whose confidence has been abused. As the editors of Meagher, Gummow and Lehane's Equity - Doctrines and Remedies (4th ed) note in para 23-010, what Nocton v Lord Ashburton illustrates is that the remedies available in Chancery against delinquent trustees obliging them to restore trust funds and to make good any loss caused by breach of trust apply also to fiduciaries generally: see also I.E. Davidson, "The Equitable Remedy of Compensation" [1982] MelbULawRw 4; (1982) 13 MULR 349 cited with approval in United States Surgical Corporation v Hospital Products International Pty Ltd [1982] 2 NSWLR 766 at 816.

45 In Target Holdings Ltd v Redferns [1995] UKHL 10; [1996] 1 AC 421 Lord Browne Wilkinson said at 439:

"Equitable compensation for breach of trust is designed to achieve exactly what the word compensation suggests: to make good a loss in fact suffered by the beneficiaries and which, using hindsight and commonsense, can be seen to have been caused by the breach."

46 In O'Halloran v R T Thomas and Family Pty Ltd (supra) at 273 Spigelman CJ quoted with approval the following remarks of McLachlin J in Canson Enterprises Ltd v Boughton & Co (1991) 85 DLR (4th) 129 at 163, stating that they represent the law in Australia.

" In summary, compensation is an equitable monetary remedy which is available when the equitable remedies of restitution and account are not appropriate. By analogy with restitution, it attempts to restore to the plaintiff what has been lost as a result of the breach, ie the plaintiff's lost opportunity. The plaintiff's actual loss as a consequence of the breach is to be assessed with the full benefit of hindsight. Foreseeability is not a concern in assessing compensation, but it is essential that the losses made good are only those which, on a common sense view of causation, were caused by the breach."

47 Ms Dellow acted in breach of her fiduciary duties as a director. Causation in equity is not susceptible to the formulation of a single test: O'Halloran v R T Thomas and Family Pty Ltd (supra) per Spigelman CJ at 274 - 275. In this context also, it is necessary to identify the purpose of the particular rule to determine the appropriate approaches to issues of causation.

48 In this case equitable compensation must be assessed for a breach of a duty by a fiduciary who is not a trustee. Gummow J in a paper delivered in Canada "Compensation for Breach of Fiduciary Duty" published in T.G. Youdan, Equity, Fiduciaries and Trusts (Carswell, 1989) at 57 examined the principles of causation applying in cases of breach of duty by non-trustee fiduciaries where the controversy does not concern replacement of a trust fund. The issues were discussed in O'Halloran v R T Thomas and Family Pty Ltd (supra). In Maguire v Makaronis [1997] HCA 23; (1987) 188 CLR 449 at 473 the majority of the High Court noted that the Court must identify the criteria which supply an adequate or sufficient connection between the equitable compensation claim and the breach of fiduciary duty. When considering whether an adequate or sufficient connection exists, the Court does not allow an examination into the relative importance of contributory causes: Barton v Armstrong [1976] AC 104 at 118. I adopt with respect the following remarks of Spigelman CJ at 277:

" The issue is whether, in the circumstances of this case, an 'adequate or sufficient connection' is established by applying the test appropriate in the case of breach by the trustee of a traditional trust or by some other, less stringent, test.

As McLachlin J said in Canson Enterprises v Boughton (at 155):

'... the better approach, in my view, is to look to the policy behind compensation for breach of fiduciary duty and to determine what remedies will best further that policy.'

The strict standard applicable to a trustee of a traditional trust with respect to improper application of trust property is based on the vulnerability of beneficiaries with respect to the disposition of property by a trustee who has control over such disposition. This policy applies equally to the case of a director of a company, such as a managing director, (or a group of directors) who has (or have) the power to dispose of company property and who does (or do) dispose of such property for an improper purpose. The analogy of ensuring 'restitution' to the estate (in the sense of 'restoration') is, in my opinion, an appropriate one. Such a director (or directors) is (are) subject to the same stringent test with respect to the exercise of the fiduciary power to dispose of property, as is the trustee of a traditional trust. It is not necessary to consider the appropriate test for breach by a director of other fiduciary duties.

Policy favours a stringent test in the circumstances of this case. It is the vulnerability of a company which places its property in the power of directors, that makes it appropriate to adopt the approach to causation applicable to the trustee of a traditional trust in deciding issues of causation for the contravention by a company director of his or her duty not to exercise the power to dispose of property for an improper purpose. As McLachlin J put it in Canson Enterprises v Boughton (at 154): '... equity is concerned, not only to compensate the plaintiff, but to enforce the trust which is at its heart.' "

49 See also His Honour's remarks at 277 - 278. Thus, the approach to causation in the particular circumstances of this case of a breach of fiduciary duty by a defaulting director is the same test as is applicable to the defaulting trustee of a traditional trust.

50 The loss in this case is a substantial reduction in the number of clients remaining on the rent roll of Southern Real Estate. Ms Dellow's conduct caused that loss. She is, therefore, liable to restore Southern Real Estate to the position in which it would have been had she not acted in breach of her duties. Southern Real Estate does not require an account of profits. The most appropriate method, therefore, of assessing that loss is to assist the diminution in value of the rent roll.

51 There is a market in rent rolls of this kind. Mr Hawkins, an experienced valuer of businesses, gave evidence as to the method of assessing the market value of a rent roll. The value of rent rolls will vary depending on the ease and quality of administration of the properties being managed. As the trial judge found, where properties are in good order, close to the manager's office, with stable tenants and few problems and where management has been efficient, a rent roll will be more valuable than one without those attributes. In 2000 and 2001 the common measure of the market value was to multiply the gross annual revenue from commissions to the owner of the rent roll by a multiple of 1.5 for a poor rent roll to 2.3 for a very good one. (I note in passing that this method of assessment of market value is the same as that which was adopted in Ferrari Investment (Townsville) Pty Ltd (In Liq) v Ferrari (supra).) According to Mr Hawkins, a multiplier of 2.3 is appropriate for the rent roll of a business with highly efficient property management within the Central Business District of Adelaide and highly populated suburbs. Mr Hawkins believed that in 2001 a fair multiplier for the rent roll in this case was 1.8. The trial judge held that the appropriate multiplier was 1.8.

52 Mr Hawkins gave evidence that values of rent rolls have increased since 2001 and on that footing if the rent roll were being valued at the date of trial the multiplier would be 2. When assessing equitable compensation, the court applies the full benefit of hindsight and ordinarily determines that compensation of the date of the trial: Re Dawson (deceased); Union Fidelity Trustee Co Ltd v Perpetual Trustee Co Ltd [1966] 2 NSWR 211; Canson Enterprises Ltd v Boughton & Co (supra) at 162 per McLachlin J; Biala Pty Ltd v Mallina Holdings Ltd (1993) 11 ACSR 785 at 851 - 852 per Ipp J and Permanent Building Society (in liq) v Wheeler (supra) at 235 per Ipp J. However, I think there are reasons why in this case the general rule should not apply. Southern Real Estate's loss was incurred in early 2001. If Ms Dellow had acted conscionably and with due regard for her duties as a director and had negotiated to purchase part of the rent roll, the price would have been paid in January or February 2001. There is no evidence that Southern Real Estate intended to sell the rent roll. For those reasons, I think the price in 2001 is the appropriate measure of the loss. The company is entitled to interest under s 30C of the Supreme Court Act 1935 and that compensates it for not having its money in January or February 2001. There is no reason, therefore, to depart from the multiplier of 1.8 used by the trial judge.

53 Exhibit P4 is a list of persons on the rent roll of Southern Real Estate who transferred their business to Ms Dellow's business which was called Domain Management. The list is numbered 1-59. However, two clients have been removed resulting in a list of 57 clients who transferred their business to Ms Dellow's business. Between February 2001 and 14 March 2002 these 57 clients had given notice to Southern Real Estate that they had intended to transfer their business. They in fact transferred their business at different times between 11 April 2001 and 14 May 2002. It is, I think, appropriate to exclude clients who transferred their business after 30 June. This may a little generous to Ms Dellow and Mr Arnold because as Street CJ noted in Re Dawson (supra) at 215 - 216 questions of remoteness may be irrelevant. By closing the list at 30 June 2001 the list of clients who transferred their business is reduced to 43. The annual return from those customers totalled $33,941. Applying a multiplier of 1.8, the result is $61,093.80.

54 It is apparent that the real value of the rent roll is influenced by factors such as a restraint of trade clause and, more relevantly for present purposes, whether the property manager takes up employment with the purchaser or remains with the vendor. In this case it is clear that Ms Dellow had established a very good working relationship with many of the landlords on the rent roll. For the whole of the time since Southern Real Estate commenced its business she had been the property manager, a period of over six years. She had in that time established a degree of personal goodwill. As Mr Robertson, a director of Southern Real Estate, said in his evidence, Ms Dellow had built up the rent roll.

55 As Ms Dellow was intending to establish a property management business in competition with Southern Real Estate, the value of the rent roll would be discounted by that fact. She obviously had the capacity to attract clients. Unfortunately, the question as to what discount should have been allowed for this basis was not examined fully at the trial. In all of the circumstances I think it is appropriate to make a discount of one third from the value of the rent roll to reflect that factor. That reduces the value of the customers list to $40,626, say $40,500. For these reasons, I would assess the loss to Southern Real Estate at $40,500.

56 Southern Real Estate contends that interest on the judgment debt should be compounded at monthly rests. I do not think that there is any ground for calculating interest on the basis different from that which is usually adopted. I would allow interest in the sum of $4,250.

57 Southern Real Estate has succeeded in this action. In all the circumstances, it is appropriate that it should have the costs of the action.

58 On the cross appeal, it was contended on behalf of Ms Dellow that she had not acted in breach of her duties as a director. For the reasons already expressed, that contention must plainly fail. The cross appeal must be dismissed.

59 For these reasons, I would allow the appeal. I would hold that Ms Dellow acted in breach of her statutory and fiduciary duties as a director of Southern Real Estate. I would set aside the assessment of damages made by the trial judge and in lieu thereof order that Ms Dellow pay $40,500 damages to Southern Real Estate together with the interest in the sum of $4,250. I would set aside the order as to costs and in lieu thereof order that Ms Dellow pay Southern Real Estates costs of the action. I would dismiss the cross appeal.

60 NYLAND J I agree with the reasons of Debelle J. I agree with the orders proposed by him.

61 LANDER J I agree with the reasons of Debelle J and the orders he proposes.

SOUTHERN REAL ESTATE PTY LTD v VALERIE DELLOW & WAYNE ARNOLD No. SCCIV-02-1275 [2003] SASC 318

At a glance

Court

Decision date

Before

Source

Judgment (74 paragraphs)

SOUTHERN REAL ESTATE PTY LTD v VALERIE DELLOW & WAYNE ARNOLD No. SCCIV-02-1275 [2003] SASC 318 (10 September 2003)

Parties

Cases Cited (13)