The High Court yesterday enshrined the ‘but for’ causation threshold in Barnes v Addy claims for knowing assistance of breaches of fiduciary duty.
In Ancient Order of Foresters in Victoria Friendly Society Limited v Lifeplan Australia Friendly Society Limited [2018] HCA 43, the parties each marketed and provided funeral plans. Two employees of Lifeplan approached Foresters with a proposal to assist Foresters to capture Lifeplan’s customers, divulging Lifeplan’s confidential information to Foresters. Foresters accepted the proposal and was found to have knowingly assisted the employees’ breach of their fiduciary duties to Lifeplan. Foresters was held liable to account to Lifeplan for the gains of what became a profitable business.
The Court held that in deciding whether to order an account, no distinction should be drawn between accessorial and primary liability for breach of duty. Both wrongdoers are held liable to prevent unjust enrichment and to remove a fiduciary’s incentive to act otherwise than in the interests of the principal. So, Foresters as knowing participant in the employees’ breach, was liable to account for its profits.
Two questions then arose on the remedy of an account of profits:
1. to establish liability to account, what is the necessary causal nexus between breach and profit?
2. can future profit streams be taken into account in assessing the profits to be disgorged?
Foresters lost on both questions. The Court rejected Forester’s efforts to distinguish gains that could have been made honestly from those arising directly from the breach of duty. Instead, the much looser ‘but for’ nexus was applied. It was enough to show that the Foresters business would not have flourished but for the dishonest wrongdoing. So, it followed, all of the profits of Forester’s business were to be disgorged.
The Court confirmed that once an account is ordered, the onus shifts to the wrongdoer to establish any just allowances for costs incurred in making the profits or any gains that were not ill-gotten.
A majority (Nettle J dissenting as to the result but not as to principle) upheld Forester’s cross-appeal, allowing it to recover the net present value of future profits. All five members of the Court accepted that whether the net present value of future profits should form part of the account will depend on the facts.
What is clear is that those seeking to profit from breaches of fiduciary duty must beware. Not only will they be held liable for direct proceeds of wrongdoing, but those proceeds may infect ‘honest’ gains, potentially leaving those knowingly assisting a breach liable for much more than they stood to gain by participating in the breach.
Travis Mitchell and Christie Jones
Christie is a junior barrister practising in all areas of commercial litigation
This post originally appeared on Travis Mitchell's Blog, see below:
