Account of profits and accessorial liability: the Federal Court gives guidance on both

The Full Court of the Federal Court has recently determined an appeal relating to an order for an account of profits and a finding of accessorial liability for the conduct giving rise to those profits. The case of Lifeplan Australia Friendly Society Ltd v Ancient Order of Foresters in Victoria Friendly Society Limited[1] involved a situation where the profits had arisen from the use by a business’ former employees of confidential employer information when setting up a competitor business. The Court’s decision is noteworthy for the way in which it:

  • enunciates and applies the principles of the remedy of an account of profits; and

  • discusses the distinction, and whether there is a distinction at all, between the equitable and the statutory tests for accessorial liability.

The facts

Lifeplan ran a funds management and investment business. Some of the products Lifeplan offered were investment in the funeral industry by way of funeral bonds and pre-paid funeral contracts. Foresters offered similar products, albeit on a smaller scale; its annual inflow from such products was about 5 percent of Lifeplan’s.

The conduct calling for an account of profits arose in the context of the resignation in 2010 of two employees of Lifeplan and breaches of their fiduciary duties to Lifeplan. The offending conduct included instances where one or both of the employees (depending on the particular breach):

  • emailed confidential information about Lifeplan’s business to a private email address;

  • met with a funeral director business and provided false and misleading statements about Lifeplan to that business;

  • solicited the business of other funeral directors on behalf of themselves and Foresters;

  • developed their new business, to be carried on as a venture with Foresters, while employed at Lifeplan; and

  • accessed and used a customer database for their own new business.

The primary judge found that Foresters had knowingly assisted the employees in the breaches so far as the employees’ preparation of documents was concerned, but not so far as use of confidential information for the employees’ own advantage (and to the detriment of Lifeplan) was concerned. For the primary judge, further active involvement by Foresters was required to support a finding that it had been knowingly involved in those other breaches.

The primary judge also found that although Foresters was knowingly involved in some of the breaches and had based its decision to employ the two individuals on the basis of confidential information which they had obtained while at Lifeplan, there was no causal connection between those breaches and the profit which Foresters ultimately made.

Lifeplan appealed the decision, primarily on grounds that the primary judge:

  • failed to take account of the cumulative and ongoing effect of the various breaches of fiduciary duty and Foresters’ participation in those breaches;

  • took too strict a view of causation in equity;

  • failed to formulate an account of profits that responded to the nature and circumstances of the case; and

  • failed to address an alternative case as put forward by Lifeplan at trial.

The Full Court’s consideration

In a unanimous decision, Allsop CJ, Middleton and Davies JJ considered that:

‘Central to the resolution of this appeal is the identification and application of the appropriate causal connection … between dishonest breaches of fiduciary duty by two employees … of the first appellant (Lifeplan) who became employees of the respondent (Foresters) in which Foresters was knowingly involved, and the profit said to be required to be accounted for by Foresters for its knowing involvement in such breaches.’[2]

Their Honours went on to state, by way of introduction, that they disagreed with the primary judge’s conclusion about causation but that ‘[t]he difference of opinion is as to the application of principle, not its fundamental expression’.[3]

How, then, did the Court reach a different conclusion about ‘the application of principle, not its fundamental expression’?

Account of profits — principles of causation

The Court dealt at some length with the principles relevant to the remedy of an account of profits. The Court held:

‘As can be seen from the analysis of the jurisprudence by the primary judge, the causal relationship between the breach and the profit has been variously expressed: profits made attributable to the breach (Colbeam Palmer 122 CLR at 42-43; approved in Dart v Decor 179 CLR at 120-1); “profits obtained by the infringement” (Dart v Decor 33 FCR at 407, approved in the High Court 179 CLR at 120); “the particular benefits which flowed ... in breach of ... duty” (Hospital Products 156 CLR at 110 (per Mason J)); “by reason of (the breach)” (Warman 182 CLR at 557); “by reason or by use of (the breach)” (Howard 253 CLR at 107 [62]).’[4]

Their Honours considered that:

‘The correct approach to questions of causal connection in Equity between an equity and a relevant remedy depends upon the nature and character of the relevant rule of responsibility, and of the remedy sought.’[5]

In adopting that approach to the remedy for breach of fiduciary duty, the Court held that ‘[t]he remedial rules concerning breaches of fiduciary duty are structured to enforce, not undermine, the strictness of the duty’.[6]

Tackling the position the primary judge had adopted regarding the causal connection between the breaches and the profit made, the Court held:

‘In Warman, the relevant expression of the causal connection between the breach and the profit was a profit obtained by reason of the fiduciary position or by reason of taking advantage of opportunity or knowledge derived from the fiduciary position … . There is nothing narrow in this causal connection. There is no call to require a strict, or direct or proximate relationship between each particular transaction from which the profit in a business is derived and some particular breach. There is no call to generalise about the adequacy or not of the so-called but-for test. The facts should be examined to ascertain the causal relationship between the breaches and the profits to assess whether it is sufficient to conform with the policy of the rule to attribute a liability to account for those profits. This enquiry involves an assessment of whether the rule and its policy would be undermined if the causal connection or relationship were to be adjudged inadequate and a liability to account not attributed.’[7]

With these principles and matters of policy in mind, the Court considered plainly that had there not been any breaches in which Foresters had been knowingly involved and had the employees not taken advantage of their positions in obtaining and using confidential information, Foresters would not have made the profits that it did.

Taking a step back somewhat from the technicalities of any ‘but-for’ test, their Honours considered that:

‘Equity here is concerned broadly with the enforcement and support of fidelity, conscience and trust and the stopping of the gain from infidelity, breach of trust and fraud. There is no reason in principle or logic why this concern should not extend to the person participating in the breach of duty.’[8]

It appears, then, that the Court elected to apply the test of causation in order to capture more broadly the link between the offending conduct and the profits gained, and in order to honour the principles and policy of the account of profits as a remedy.

Account of profits — quantifying the account

Lifeplan submitted that given the employees’ new business would not have proceeded had the employees not breached their fiduciary duties, Lifeplan should be entitled to the value of the whole business that the employees went on to found (less any allowances that might be justly proven).

Their Honours considered that Lifeplan’s submission was flawed by reason of its ‘architectural brutalism’ and that quantifying an account of profits is not so simple a task and is ‘not a matter of logic alone’.[9] The Court considered the an account of profits is should not be penal and should not go so far as to unjustly enrich the party seeking the remedy.

The Court considered a distinction between circumstances where those in breach of their duty obtain a specific asset, as distinct from where a business is acquired and operated. The Court held that the present case was akin to the latter situation.

In quantifying the account, much like in drawing the link of causation, the Court stressed the need for the remedy to ‘support and fortify the underlying principles being vindicated: fidelity, trust and honesty’.[10] In the case at hand, the employees had devised a five-year business plan. The Court held it appropriate that the account be quantified by reference to the profit at the close of the five-year period (to the year ended 30 June 2015), with a ‘modest deduction’ of six months.[11] The Court considered that this quantum ‘sets an account for the period of planning for the new business that was the central focus of the behaviour that constituted the breaches [by the employees] and the participation [by Foresters].’[12]

Foresters’ involvement in the breaches

The case against Foresters was brought on the basis of the ‘knowing participation’ doctrine of Barnes v Addy[13] and pursuant to section 79 of the Corporations Act 2001 (Cth) (the Act). The former is the second limb of a test formulated in England which attributes accessorial liability to a person who provides knowing assistance to a fiduciary who dishonestly and fraudulently breaches his or her fiduciary duties. The latter attributes liability to a person who is involved in a contravention of the Act, including, as was relevant here, the provisions relating to misuse of an employee’s position or misuse of information obtained by that employee.

Foresters had been found at trial to have been involved in the employees’ breaches by operation of section 79 of the Act. Relevant to the present case, that provision applies to a person who has been involved in a breach if that person was ‘in any way, by act or omission, directly or indirectly, knowingly concerned in ... the contravention’.

Addressing the requirement in section 79 that the person involved in the breach have actual knowledge, the Court considered that ‘[w]hether actual knowledge exists for the purposes of s 79 will be a question of proof and evidence. If circumstances are such as to indicate to an ordinary, decent person that the relevant facts exist, that may be open as an evidential conclusion’.[14] Notwithstanding the reference to the ‘ordinary, decent person’, the Court insisted that the test was not one of constructive knowledge.

In addition, their Honours considered both the test for knowing involvement in section 79 of the Act and the test in equity under Barnes v Addy for accessorial liability and concluded that ‘[l]ittle is to be gained by a comparison between the textual expression’ of the two.[15]

The Court differed in its view to that of the primary judge. Whereas the primary judge did not consider that Foresters had had sufficient active involvement in some of the breaches relating to the employees’ use of confidential information, their Honours held that the Foresters board was more than a mere ‘passive observer’; the board had used the confidential information in its decision-making processes.[16]

Consistent with the Court’s view that practical differences between the Barnes v Addy approach at equity and the statutory approach under the Act were perhaps academic, the Court saw the breaches of both tests as ‘running together’.[17]

Conclusion

In formulating an appropriate account of profits remedy and in determining the question of accessorial liability — whether under the Barnes v Addy test or pursuant to statute — the Full Court in Lifeplan Australia Friendly Society Ltd v Ancient Order of Foresters in Victoria Friendly Society Limited arguably took an holistic approach. The Court resisted adopting a purely ‘logical’ approach to reach its decision, and instead chose to look at the facts and circumstances relating to the way the particular fiduciary obligations were breached and how that led a rival business to profit unjustly, and to bear in mind the broader policy underlying the remedy of an account of profits.

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Postscript

Subsequent to me writing this blog post, Foresters appealed the Full Court’s decision to the High Court. The High Court dismissed Foresters’ appeal — see Ancient Order of Foresters in Victoria Friendly Society Limited v Lifeplan Australia Friendly Society Limited [2018] HCA 43.


[1]: [2017] FCAFC 74.

[2]: Ibid [1].

[3]: Ibid [3].

[4]: Ibid [59].

[5]: Ibid [62].

[6]: Ibid [63].

[7]: Ibid [64] (original emphasis).

[8]: Ibid [67].

[9]: Ibid [82].

[10]: Ibid [87].

[11]: Ibid [88].

[12]: Ibid.

[13]: (1874) LR 9 Ch App 244.

[14]: Lifeplan Australia Friendly Society Ltd v Ancient Order of Foresters in Victoria Friendly Society Limited [2017] FCAFC 74 [106].

[15]: Ibid [107].

[16]: Ibid [112].

[17]: Ibid [114].