FEDERAL COURT OF AUSTRALIA

Allianz Australia Services Pty Limited v Wilson [2005] FCA 1783

PRACTICE AND PROCEDURE – separate determination of question of liability where there are alleged breaches of fiduciary duty and contraventions of the Corporations Act that may require accounts of profit

Corporations Act 2001 (Cth) ss 182, 183, 1317E, 1317H

Federal Court Rules Order 29 rule 2

Australian National Industries Limited v Spedley Securities Limited (in liq) (1992) 26 NSWLR 411

Reading Australia Pty Limited v Australian Mutual Provident Society (1999) 217 ALR 495

Rhone-Poulenc Agrochimie SA v UIM Chemical Services Pty Limited (1985) 10 FCR 567

Bathox Australia Pty Limited v PJ SAS Trading Pty Limited [2004] FCA 1082

Tepko Pty Limited v Water Board (2001) 206 CLR 1

United Dominions Corporation Limited v Brian Proprietary Limited (1985) 157 CLR 1

Hospital Products Limited v United States Surgical Corporation (1984) 156 CLR 41

ALLIANZ AUSTRALIA SERVICES PTY LIMITED & ANOR v PAUL WILSON

NSD 972 of 2005

GRAHAM J

5 DECEMBER 2005

SYDNEY

THE COURT ORDERS THAT:

1.         The question of liability be decided at a trial separately and before the trial of other questions in the proceedings.

2.         The costs of the application for relief contained in paragraph 1 of the Applicants’ Notice of Motion filed 25 November 2005 be costs in the trial of the separate question in the proceedings.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

REASONS FOR JUDGMENT

1                     What is presently before the Court is prayer for relief 1 in a Notice of Motion filed by the Applicants on 25 November 2005.  That prayer for relief seeks an order that issues of liability be heard prior to, and separately from, issues of quantum in this matter.

2                     The proceedings were commenced on 16 June 2005 by the filing of an Application and accompanying Statement of Claim occupying some 14 pages.

3                     On 29 July 2005 the Applicants filed an Amended Application and an Amended Statement of Claim also occupying 14 pages.

4                     On 14 October 2005 the Applicants filed a Further Amended Statement of Claim occupying 48 pages.

5                     On 15 November 2005 the Respondent filed his Defence to the Further Amended Statement of Claim.  This Defence occupied 10 pages.

6                     The Second Applicant, Club Marine Limited (“Club Marine”) has at all material times carried on business offering insurance and risk management products and services as a pleasure and commercial marine leisure craft underwriting agency.

7                     Between 26 April 1991 and 1 August 1997 the Respondent served as the managing director of Club Marine and between about 1 August 1997 and 13 April 1995 served as that company’s chief executive officer.

8                     The Respondent resigned from his employment on 13 April 2005.

9                     In April 2005 the Respondent commenced employment with Nautilus Marine Insurance Agency Pty Limited.  That company apparently commenced business operations on or about 21 July 2005.

10                  The Respondent is said to be a five per cent shareholder in Nautilus Marine Insurance Agency Pty Limited.

11                  In the Further Amended Statement of Claim, which has been extensively particularised, the Applicants allege that from at least August 2004 until 13 April 2005 the Respondent by himself and/or in concert with others including Mark Crockford and Wendy Dudley, persons employed to perform work for the benefit of Club Marine, the Hollard Insurance Company Pty Limited, I C Frith & Associates Pty Limited, Lexington Scott Underwriting Pty Limited and Nautilus Marine Insurance Agency Pty Limited inter alia engaged in certain conduct including:-

(a)        the drafting and development of business plans for a new business to be known as Nautilus Marine Insurance Agency which would offer insurance and risk management products and services as a consumer and commercial marine pleasure craft underwriting agency knowing that that business would compete with Club Marine and its products;

(b)        helped arrange and attended meetings for the benefit of Nautilus Marine Insurance Agency Pty Limited;

(c)        solicited, approached and/or procured for the benefit of Nautilus Marine Insurance Agency Pty Limited one or more dealers who had dealt with Club Marine;

(d)        took steps to financially assist Nautilus Marine Insurance Agency Pty Limited;

(e)        took steps to establish and equip Nautilus Marine Insurance Agency Pty Limited;

(f)         concealed from Club Marine his activities to establish and conduct a business to compete with Club Marine;

(g)        approached at least one competitor or potential competitor of Club Marine and sought its interest in supporting him in creating a new business which would be a competitor of Club Marine; and

(h)        offered to take critical staff from Club Marine to the new business until Club Marine would be unable to function.

12                  The Further Amended Statement of Claim also alleges that when he left Club Marine he took a Vodaphone SIM card with him which he had extracted from a mobile phone which had been provided to him by Club Marine which SIM card contained lists of names and telephone numbers of Club Marine customers and contacts.

13                  The Further Amended Statement of Claim also alleges that when the Respondent left Club Marine he took diaries with him which were the property of Club Marine.

14                  The Further Amended Statement of Claim also alleges that when the Respondent left Club Marine he took with him management accounts and files which were the property of Club Marine.

15                  The Applicants contend that by engaging in the conduct briefly summarised above the  Respondent contravened ss 182 and 183 of the Corporations Act 2001 (Cth).  These sections provide as follows:-

“182(1)           A director, secretary, other officer or employee of a corporation must not improperly use their position to:

(a)        gain an advantage for themselves or someone else; or

(b)        cause detriment to the corporation.

…

183(1)              A person who obtains information because they are, or have been, a director or other officer or employee of a corporation must not improperly use the information to:

(a)        gain an advantage for themselves or someone else; or

(b)        cause detriment to the Corporation.

…”

16                  If a Court is satisfied that a person has contravened one or other of those provisions it must make a declaration of contravention under s 1317E of the Corporations Act.

17                  Section 1317H of the Corporations Act provides for the making of compensation orders as follows:

“1317H(1)      A Court may order a person to compensate a corporation … for damage suffered by the corporation … if:

(a)        the person has contravened a corporation/scheme civil penalty provision in relation to the corporation …; and

(b)        the damage resulted from the contravention.

The order must specify the amount of the compensation.”

(2)        In determining the damage suffered by the corporation … for the purposes of making a compensation order, include profits made by any person resulting from the contravention …

…”

18                  By the Amended Application the Applicants seek the making of a compensation order under s 1317H in respect of alleged contraventions by the Respondent of ss 182 and 183 of the Corporations Act.  In addition, the Applicants seek an account of profits or an inquiry as to damages in respect of alleged breaches by the Respondent of his fiduciary duties to the Applicants.

19                  The Applicants also seek damages for breaches of contracts said to have been made by the Respondent with them or one of them.

20                  In support of their application for a separate hearing of liability ahead of quantum the Applicants have relied upon affidavits of Guy Hamilton Foster sworn 30 November 2005 and 2 December 2005.  The Respondent has relied upon affidavits of Charles Mendel sworn 1 December 2005 and 2 December 2005.

21                  Mr Foster is a partner in Allens Arthur Robinson, the solicitors for the Applicants and Mr Mendel is a partner in Phillips Fox, the solicitors for the Respondent.

22                  Apart from the evidence contained in the said affidavits, the exhibits thereto became exhibits on the hearing of the motion.  In addition, brief oral evidence was given by Mr Foster who was required to attend for cross-examination by the Respondent.

23                  It goes without saying that each of the solicitors has extensive experience in commercial litigation matters.  Through their affidavits each has argued the advantages and disadvantages and fairness of separating liability from quantum in the current proceedings.  I will not attempt to set out in these reasons each of the matters advanced in those affidavits.

24                  One of the points made by Mr Foster is that the full extent of the Applicants’ loss and damage said to have been suffered as a result of the Respondent’s wrongful conduct will continue to emerge over time as existing customers of Club Marine do not renew their annual policies and potential customers do not purchase policies from Club Marine when they acquire marine craft.

25                  Mr Mendel has made several points in support of his client’s opposition to the proposed segregation of liability from quantum.  He points to the Respondent’s position as a mere individual who happens to be an employee of Nautilus Marine Insurance Agency Pty Limited.  He says that the proceedings are causing the Respondent great stress and anxiety, that the Respondent, who is a Type One diabetic, has suffered a deterioration of his health since the commencement of the proceedings, that the Respondent’s wife has suffered great stress and anxiety as a result of the proceedings, that their marriage has suffered and that his need for medication has increased.

26                  Mr Mendel says that the respondent is “anxious for the entirety of the proceedings to be finally determined as soon as possible”.

27                  The Respondent urges the view that the Applicants shouldn’t have started the proceedings when they did if they weren’t then ready to take the proceedings through to a final hearing on both liability and quantum.  The Respondent also submits that, inevitably, the Judge charged with responsibility for determining the question of liability in a split trial would have to disqualify him or herself from dealing with the issue of quantum given that, inevitably, that Judge will have to make findings on credit in respect of the Respondent, Mr Crockford and Ms Dudley whose evidence may well be common to both parts of the proceedings.

28                  In this regard I have been referred to helpful passages from the judgments in Australian National Industries Limited v Spedley Securities Limited (in liq) (1992) 26 NSWLR 411.  I have also been referred to a number of principles governing when split trials should and should not be ordered.  In Reading Australia Pty Limited v Australian Mutual Provident Society (1999) 217 ALR 495 Branson J declined to order that the question of liability be determined separately from the question of damages in that matter and later gave reasons for judgment in respect of her decision. In the course of her reasons for judgment her Honour referred to cases in which  Order 29 rule 2 of the Federal Court Rules had been considered.

29                  One of these cases was Rhone-Poulenc Agrochimie SA v UIM Chemical Services Pty Limited (1985) 10 FCR 567.  Her Honour referred to that decision as one supporting the making of an order by requiring that the question of the respondents’ liability be tried separately and that any question as to the quantum of any damages to be paid by the respondents, or any of them, to the applicants, or as to the taking of any account of the respondents’ profits, be tried separately and at a date to be fixed after the determination of the question of liability.  In her Honour's reasons for judgment at [8] she enumerated several principles referable to circumstances in which the discretion conferred by Order 29 rule 2 should and should not be exercised.  These included:-

“(f)      factors which tend to support the making of an order under O 29 r 2 include that the separate determination of the question may:

(i)         contribute to the saving of time and cost by substantially narrowing the issues for trial, or even lead to disposal of the action; or

(ii)        contribute to the settlement of the litigation (CBS Productions Pty Ltd v O’Neill per Kirby P at 607);

(g)        factors which tell against the making of an order under O 29 r 2 include that the separate determination of the question may:

(i)         give rise to significant contested factual issues both at the time of the hearing of the preliminary question and at the time of trial (GMB Research & Development Pty Ltd v Commonwealth [1997] FCA 934(.

(ii)        result in significant overlap between the evidence adduced on the hearing of the separate question and at trial – possibly involving the calling of the same witnesses at both stages of the hearing of the proceeding:  GMB Research & Development Pty Ltd v Commonwealth; Arnold v Attorney-General (Vic) (unreported, Fed C of A, Sundberg J, Nos VG629-37 of 1995, 8 September 1995, BC9502745).  This factor will be of particular significance if the court may be required to form a view as to the credibility of witnesses who may give evidence at both stages of the hearing of the proceeding; or

(iii)       prolong rather than shorten the litigation (GMB Research & Development Pty Ltd v Commonwealth).”

30                  In Bathox Australia Pty Limited v PJ SAS Trading Pty Limited [2004] FCA 1082 Stone J stated that the general principle as follows:

“In the ordinary course all issues of fact and law should be determined at the one time; Tallglen Pty Limited v Pay TV Holdings Pty Limited(1996) 22 ACSR 130 at 141-42.  For the Court to depart from this position the party seeking the separate determination of issues must satisfy the court that it would be ‘just and convenient’ for the order to be made; Reading Australia Pty Limited v Australian Mutual Provident Society [1997] FCA 718 at [8]-[9], see also Energy Australia v Australian Energy Limited [2001[ FCA 1049.”

31                  I have also been helpfully referred to a passage from the joint judgment of Kirby and Callinan JJ in the High Court in Tepko Pty Limited v Water Board (2001) 206 CLR 1 at 55 where at [168] their Honours said:

“The attractions of trials of issues rather than of cases in their totality are often more chimerical than real.  Common experience demonstrates that savings in time and expense are often illusory, particularly when the parties have, as here, had the necessity of making full preparation and the factual matters relevant to one issue are relevant to others, and they all overlap.”

32                  I might observe that in the present case there has not been full preparation on all issues at this stage and the factual matters relevant to the issue of liability do not appear to overlap with the factual matters likely to arise in relation to quantum.

33                  In evaluating the merits and demerits of a split trial considerable emphasis has been placed upon the impact of a split trial on the parties’ respective obligations in respect of discovery going to issues of quantum.

34                  As the parties have been unable to agree on categories of documents in respect of which discovery should be given by the Applicants on quantum and liability and by the Respondents on quantum it is impossible to assess what, if any, costs savings may be involved.  Suffice it to say that if there is but one trial of all issues the task of giving discovery and inspection and gathering of other documentary evidence will allow “the entirety of the proceedings to be finally determined”, but they will not be finally determined in the near future.  The Respondent’s wish to have them finally determined “as soon as possible” will, as I see it, be some time in 2007.

35                  I am satisfied that the preparation for and ascertainment of an appropriate amount in respect of which relief should be granted, in the event that the Applicants are successful, will be an exercise which will consume a considerable period of time and involve considerable cost.

36                  In the course of his submissions, Dr Bell of counsel referred, amongst other things, to the approaches that may be adopted to the quantification of profits for which the Respondent may be liable to account. 

37                  When a party to a fiduciary relationship acts in breach of his fiduciary obligations and obtains an advantage for himself at the expense of and without the knowledge or consent of the party to whom the duty was owed, the party in breach is bound to account to the other party for the improper advantage which he obtained (per Gibbs CJ in United Dominions Corporation Limited v Brian Proprietary Limited (1985) 157 CLR 1 at 8).

38                  The form of inquiry which ought to be directed to determine the extent of the “improper advantage” will vary according to the circumstances of the case.  In each case the form of inquiry to be directed is that which will reflect as accurately as possible the true measure of the profit or benefit obtained by the fiduciary in breach of his duty.  One approach more favourable to the fiduciary, is that he should be held liable to account as constructive trustee not of the entire business but of the particular profits which flowed to him in breach of his duty.  Another approach, less favourable to the fiduciary, to which Dr Bell referred, is that he should be held accountable for the entire business and its profits, due allowance being made for the time, energy, skill and financial contribution that he has expended or made (per Mason J in Hospital Products Limited v United States Surgical Corporation (1984) 156 CLR 41 at 110).

39                  One only has to reflect on the implications of the last mentioned approach to which Dr Bell made reference if, indeed, that be the proper approach in the circumstances, to realise that matters of quantum will not be an easy issue to determine in an economic time and manner.

40                  In his affidavit sworn 30 November 2005 Mr Foster opined that a hearing limited to liability would last approximately five days.  In cross-examination he suggested that a hearing on quantum would occupy a like time.

41                  Whilst I would readily accept that Mr Foster is, at this stage, better seized of the issues and the nature and extent of the tasks that will have to be undertaken to bring the matter to finality, I must say that I view his time estimates with some scepticism.  I suspect that liability will occupy much more than five days of hearing time and quantum will occupy much more than that.

42                  In my opinion the best interests of justice will be served in the present case by having a split trial.  Mr Mendel is of the opinion that once judgment on liability is delivered there will likely be an appeal irrespective of which party is successful.  I do not take this suggestion as an expression of any lack of confidence in the Court as presently constituted.  If Mr Mendel is correct in his surmise then it would seem to me desirable for the liability issue to be finally resolved before the considerable expense involved in quantification is addressed.  It would be a tragedy to have both liability and quantum determined with all the attendant preparation costs in one trial in which the Applicants may be successful if, in the end result, the Respondent were to succeed on liability in a later appeal.

43                  Taking all the competing considerations into account I am of the opinion that the Applicants should be granted the relief which they seek.  My expectation would be that, with a split trial, the question of liability should be capable of being heard and disposed in the first half of 2006, subject, of course, to any appeals that may be brought.

Associate:

Dated:              15 December 2005