By Stefan Chelper, Lawyer
Last week the High Court released a judgment in relation to the account of profits against a knowing participant in a dishonest and fraudulent breach of fiduciary duty.
A fiduciary relationship is where a party knowingly undertakes to act for another party such that they are in a position of trust and confidence and are required to put the other party’s interests ahead of their own. Common examples are the relationships between a trustee and beneficiary, lawyer and client, board of directors and company or even teacher and student.
There are higher obligation on the trusted party to a fiduciary relationship, such as to avoid a conflict of interest and not to profit from their position in the relationship without the knowledge or consent of the vulnerable party. These obligations are taken very seriously and in fact a fiduciary duty is the highest standard of care in equity or law.
In this case, the High Court was concerned both with the conduct of the trusted party in the fiduciary relationship, but also with a third party (soon to be known as the ‘knowing participant’). In this case, the third party was in cahoots with the fiduciary, knew what they were up to, allowed them to do it and stood to gain a substantial benefit from the conduct.
The fiduciaries here were Mr Woff and Mr Corby. They were employees of Lifeplan Australian Friendly Society Ltd (Lifeplan) who through its wholly owned subsidiary, Funeral Plan Management Pty Ltd (FPM), engaged in the business of providing funeral products.
Each held senior positions at FPM; Mr Woff was a senor manager with direct oversight of its marketing and distribution arm while Mr Corby was the national sales manager.
The ‘knowing participant' was Ancient Order of Foresters in Victoria Friendly Society Ltd (Foresters) who also engaged in the business of providing funeral products, though on a scale much smaller than that of Lifeplan and it appeared not to have been generating profit from providing funeral products.
The conduct that the High Court found to be in breach of Woff and Corby’s fiduciary duty to Lifeplan involved a proposal to Foresters to develop its funeral products business in such a way that would capture most, if not all of FPM’s business. This proposal was made while Woff and Corby were still employed by Lifeplan. The two would move to Foresters, enter into a marketing agreement with a company that they would form (called Funeral Planning Australia Pty Ltd (FPA)) and through this company, win over the funeral directors FPM was using to distribute its funeral products.
The proposal culminated in a detailed five-year business plan presented to the directors of Foresters and included valuable confidential information of Lifeplan used to present a detailed strategy to take Lifeplan’s business, win its clients and replicate its success for the benefit of Foresters, a direct competitor and new prospective employer of Woff and Corby.
Foresters accepted and implemented the proposal and its inflows and profits from funeral products increased dramatically, mirroring the corresponding decline in inflow and profits enjoyed by Lifeplan. In two years, Foresters’ annual inflows increased from approximately $1.6 million to $24 million, while Lifeplan’s had fallen from $68 million to $45 million. The correlation between increased profitability after implementing the strategy and the decrease in Lifeplan’s profitability was compelling.
Foresters knowingly took advantage of Woff and Corby’s dishonest and fraudulent design, which involved breaches of fiduciary duty, to enhance its business by appropriating the business connections of its competitors.
The High Court agreed with the Full Court’s decision except as to the amount of the benefit Foresters should account to Lifeplan. The High Court held that in these circumstances, equity requires Foresters to account for the full value of the enhancement.
The Full Court had limited Foresters accountability to just the five-year period that the business plan had covered by the High Court disagreed with this approach.
The majority of the High Court looked to the overall effect of Foresters’ wrongful conduct, rather than each act of knowing assistance and its direct consequences because the practical effect of the particular interactions resulted in the procurement of the business connections that Lifeplan had, which were essential to the business, as Foresters were aware.
Foresters did not demonstrate that any increased profitability was generated by matters other than the business connections appropriated from Lifeplan or that the connections expired after five years or where likely to soon after.
The High Court distinguished this matter from cases such as Warman International Ltd v. Dwyer (1995) 182 CLR 544 and Kao Lee & Yip v. Koo Hoi Yan  3 HKLRD 296 where profits and the advantage appropriated lasted only a short period of time.
Further, the High Court identified that Foresters were not merely the passive recipient of the benefits of the success of the Woff and Corby strategy, it provided the commercial vehicle to acquire and exploit the business connections that were appropriated from Lifeplan. Woff and Corby’s strategy could only have succeeded by reason of the knowing participation of Foresters.
The Court noted that it was relevant in this instance the profits were from deliberate and dishonest conduct and that conduct was what the parties sought to achieve in their dealings.
The Court explained that the knowing participation of a non-fiduciary in the dishonest and fraudulent breach of a fiduciary duty attracts the same kind of remedies in equity against the knowing participant as those against the fiduciary themselves. Doing so prevents the unjust enrichment of the knowing participant and to remove the incentive to act other than in the sole interest of the vulnerable party, that s, the same reasons used to justify holding the fiduciary to account.
The Court determined that if the reasons for holding the parties to account are the same, then there is no reasons why the principles used to determine their liability to account should not be assessed in the same manner.
The High Court consequently held that Foresters be ordered to account to Lifeplan and FPM in equity for the total capital value of the business being, $14,838,063, increased from the Full Court decision which ordered Foresters to account $6,558,496, being for the benefit derived from the five-year plan (the figures were derived from a joint expert report adduced at trial).
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