#6637 - Warman International V. Dwyer - Commercial Remedies BCL

Warman International v. Dwyer

Facts

The first respondent, Mr. Dwyer (“Dwyer”), was the general manager of the Queensland branch of the first appellant (“Warman”). Warman's principal business was the manufacture and distribution of slurry pumps, although before 1988 it had been involved in a number of other activities, including an agency for the distribution of gearboxes manufactured in Italy by the Bonfiglioli group together with some related products.

In August 1986 Mr. Carboni, Bonfiglioli's overseas sales manager, visited Australia and said to both Warman's Sydney management and management of the Queensland branch that Bonfiglioli wished to enter into a joint arrangement, preferably with Warman, for the local assembly of its products in Australia. The trial judge found that the Sydney management (who were Dwyer's superiors) made it very clear that Warman would not be interested in participating in such a venture. It seems that that response provoked Dwyer, together with Mr. Jarvis, the former Queensland sales manager for Bonfiglioli products, to sign a letter dated 28 August 1986 addressed to Mr. Bonfiglioli.

During the next year Bonfiglioli explored the possibility of Australian operations with other companies, including Lucas Fluid Power, Gibson Battle & Co. and Muir Engineering. Towards the end of 1987 the proposal of a joint operation with Dwyer was raised again by Bonfiglioli. At around the same time, Mr. Lockhart, Warman's Australian sales manager and Dwyer's immediate supervisor, visited Queensland and asked Dwyer whether he would be interested in leaving Warman and purchasing the agencies division for himself. Dwyer declined. Instead, he maintained his own secret negotiations with Bonfiglioli and, to that end, arranged for the two corporate respondents, Bonfiglioli Transmission (Aust.) Pty. Ltd. (“B.T.A.”) and Engineering Transmission Agencies Pty. Ltd. (“E.T.A.”), to be incorporated. On 24 February 1988, Dwyer wrote to Mr. Bonfiglioli, setting out detailed suggestions concerning share ownership and control of the proposed business, including bringing in as shareholders existing Warman staff in Queensland.

In June 1988 Warman's management received written notice dated 26 May from Bonfiglioli terminating the agency agreement. Under the terms of the agreement, either party was entitled to bring the agency to an end on three months' notice. Despite their efforts, representatives of Warman were unable to persuade Bonfiglioli to reverse its decision. At this point, Dwyer revealed that he had accepted a proposal to enter a joint venture with Bonfiglioli. On 20 June he gave notice of resignation and he stopped working for Warman on 30 June. It would seem to be common ground that the agency agreement between Warman and Bonfiglioli came to an end on 26 August.

In August 1988, shares of B.T.A. were issued to Dwyer and his wife (jointly) and to Fin-Bonfiglioli Sp.A., a member of the Bonfiglioli group, with the result that B.T.A.'s share-holding was equally divided between Mr. and Mrs. Dwyer and Bonfiglioli. E.T.A. remained wholly owned by Mr. and Mrs. Dwyer (separately) and distributed some Bonfiglioli products and the range of complementary non-Bonfiglioli products in conjunction with the joint venture. Warman had abandoned the non-Bonfiglioli products because their turnover depended substantially on their complementary status to Bonfiglioli products. On 12 September, FinBonfiglioli Sp.A. and B.T.A. executed a joint venture agreement with Dwyer and Mrs. Dwyer, which provided for the assembly and distribution of Bonfiglioli gearboxes in Australia for a twenty year term. The range of Bonfiglioli stock was substantially increased and the local assembly venture was set up. B.T.A. took over the agency business in Australia which included the assembly and the distribution of gearboxes. The businesses have been successful, with net profits (before tax) of some $1.6 million over the four years preceding the trial.

Warman commenced proceedings against Dwyer and the corporate respondents on 25 October 1988, seeking relief including an account of profits.

Holding

A fiduciary must account for a profit or benefit if it was obtained either (1) when there was a conflict or possible conflict between his fiduciary duty and his personal interest, or (2) by reason of his fiduciary position or by reason of his taking advantage of opportunity or knowledge derived from his fiduciary position. The stringent rule that the fiduciary cannot profit from his trust is said to have two purposes: (1) that the fiduciary must account for what has been acquired at the expense of the trust, and (2) to ensure that fiduciaries generally conduct themselves “at a level higher than that trodden by the crowd”. The objectives which the rule seeks to achieve are to preclude the fiduciary from being swayed by considerations of personal interest and from accordingly misusing the fiduciary position for personal advantage.

Thus, it is no defence that the plaintiff was unwilling, unlikely or unable to make the profits for which an account is taken or that the fiduciary acted honestly and reasonably.

Profits from Business v. Specific Asset

But a distinction should be drawn between cases in which a specific asset is acquired and cases in which a business is acquired and operated. Such a distinction was drawn by Upjohn J. in In re Jarvis (decd) in the context of considering a defence of laches, acquiescence and delay. However, in our view, the distinction is also relevant in the context of the fiduciary's liability to account for profits. In In re Jarvis (decd) Upjohn J. said (42):

“In dealing with [a] business, the principles applying are quite different from those in the case of a specific asset, such as a renewed lease.”

In the case of a business it may well be inappropriate and inequitable to compel the errant fiduciary to account for the whole of the profit of his conduct of the business or his exploitation of the principal's goodwill over an indefinite period of time. In such a case, it may be appropriate to allow the fiduciary a proportion of the profits, depending upon the particular circumstances. That may well be the case when it appears that a significant proportion of an increase in profits has been generated by the skill, efforts, property and resources of the fiduciary, the capital which he has introduced and the risks he has taken, so long as they are not risks to which the principal's property has been exposed. Then it may be said that the relevant proportion of the increased profits is not the product or consequence of the plaintiff's property but the product of the fiduciary's skill, efforts, property and resources. This is not to say that the liability of a fiduciary to account should be governed by the doctrine of unjust enrichment, though that doctrine may well have a useful part to play; it is simply to say that the stringent rule requiring a fiduciary to account for profits can be carried to extremes and that in cases outside the realm of specific assets, the liability of the fiduciary should not be transformed into a vehicle for the unjust enrichment of the plaintiff.

It is for the defendant to establish that it is inequitable to order an account of the entire profits. If the defendant does not establish that that would be so, then the defendant must bear the consequences of mingling the profits attributable to the defendant's breach of fiduciary duty and the profits attributable to those earned by the defendant's efforts and investment, in the same way that a trustee of a mixed fund bears the onus of distinguishing what is his own.

Whether it is appropriate to allow an errant fiduciary a proportion of profits or to make an allowance in respect of skill, expertise and other expenses is a matter of judgment which will depend on the facts of the given case. However, as a general rule, in conformity with the principle that a fiduciary must not profit from a breach of fiduciary duty, a court will not apportion profits in the absence of an antecedent arrangement for profit-sharing but will make allowance for skill, expertise and other expenses.

Account of Profits even against BTA and ETA – knowing participation

In the present case, Dwyer, B.T.A. and E.T.A. have, in different capacities, all knowingly profited from Dwyer's breach of fiduciary duty. There is no acceptable basis for depriving Warman, as the majority in the Court of Appeal did, of any right to elect to have an account of profits and thereby allowing Dwyer, B.T.A. and E.T.A. to retain any benefit flowing from Dwyer's breach of fiduciary obligation over and above the amount which represents equitable compensation for the loss actually sustained by Warman. As already explained, it is firmly established that the liability of a fiduciary to account for a profit or gain made in breach of fiduciary duty does not depend upon the person to whom that obligation is owed suffering a loss or injury; and it is ordinarily immaterial to the fiduciary's liability to account that the person to whom the fiduciary obligation is owed could not have earned the profit or gain.

The learned trial judge found that “those who constituted the minds of” B.T.A. and E.T.A. “were...