Edgewater Homes Pty Ltd v Donohoe

1. [1]

   Edgewater Homes Pty Ltd builds residential homes.

2. [2]

   Between 2002 and 12 October 2017, Edgewater employed Mr David Donohoe as its Building Manager.

3. [3]

   One of Mr Donohoe’s responsibilities as Building Manager was to approve the payment of invoices rendered to Edgewater by contractors who supplied goods and services to Edgewater.

4. [4]

   Edgewater alleges that Mr Donohoe:

   1. (1)

      caused false invoices to be submitted to Edgewater by NDH Building Services Pty Ltd, Flatout Excavations Pty Ltd and Riverside Bricklaying Services Pty Ltd;

   2. (2)

      approved those invoices for payment; and

   3. (3)

      once the invoices were paid, received cash payments from those companies equal to a proportion (usually 27 per cent, but in the case of one of the companies, for some time 50 per cent) of the payments made by Edgewater to those companies in response to those false invoices.

5. [5]

   Edgewater alleges that it thereby paid the following amounts for goods and services not in fact received by it:

6. [6]

   On 8 June 2018, Edgewater and a related company commenced these proceedings against Mr Donohoe, NDH Building Services (and its directors and shareholders Mr and Mrs Saric), Flatout Excavations (and its sole director and shareholder Mr Pellizzon) and Riverside Bricklaying (and its director Mr Gibbons).

7. [7]

   Edgewater alleges that by engaging in the conduct I have described, Mr Donohoe acted in breach of:

   1. (1)

      his contract of employment, which is alleged to have included a term that he would act in the interests of Edgewater with good faith and fidelity, would exercise reasonable care and skill and act in Edgewater’s interest, and not his own, when approving payment of invoices; and

   2. (2)

      his fiduciary duty to Edgewater to not obtain any unauthorised benefit from performing his duties and not to place himself in a position where his personal interest conflicted with Edgewater’s interests.

8. [8]

   Edgewater alleges that NDH Building Services and the other defendants:

   1. (1)

      induced Mr Donohoe to act in breach of his contract of employment; and

   2. (2)

      knowingly received the fruits of that breach of duty and were knowing participants in Mr Donohoe’s breach of fiduciary duty within the meaning of the first and second limbs of Barnes v Addy (1874) LR 9 Ch App 244.

9. [9]

   By deeds of release dated 27 August 2018 Edgewater settled with each of NDH Building Services (and Mr and Mrs Saric), Flatout Excavations (and Mr Pellizzon) and Riverside Bricklaying (and Mr Gibbons) on the basis of those parties repaying to Edgewater an amount almost equal to the amounts paid by Edgewater pursuant to the allegedly false invoices (the total amount is slightly less but the difference does not matter) and on the basis that Edgewater released those parties from liability.

10. [10]

    The monies have been paid, those parties have been released, and the proceedings have been dismissed against them.

11. [11]

    Mr Donohoe contends that he also has been thereby released from all liability to Edgewater.

12. [12]

    In those circumstances, on 9 November 2018, Ball J ordered that the following question be determined as a separate question pursuant to Uniform Civil Procedure Rules 2005 (NSW) r 28.2 prior to determination of any other issues in the proceedings:

13. [13]

    Argument before me proceeded upon the basis that I should assume, for the purpose of determining the separate question, that the matters alleged in the Commercial List Statement are true. Accordingly, I will, for the most part, refer to the allegations as if they were the facts. It should be borne in mind, however, that none of the matters alleged in the Commercial List Statement is proven, and all are denied.

14. [14]

    I should add that in written submissions delivered shortly before the hearing by Mr Weinberger on behalf of Edgewater, it was suggested that, on the proper construction of the 27 August 2018 deeds, “there was an objective intention to maintain the claims” against Mr Donohoe and that the deeds should “be construed as covenants not to sue rather than releases”. Mr Ashhurst SC, with whom Mr Weinberger appeared before me, did not press that submission. Argument before me proceeded on the basis that Edgewater had released each of NDH Building Services and the other parties to the deeds.

The questions

1. [15]

   The separate question raises the following questions:

   1. (1)

      Does the release by a party, wronged by an errant fiduciary, of those who have knowingly received the fruits of the fiduciary’s breach of duty or to have knowingly assisted the fiduciary, also release the errant fiduciary? And;

   2. (2)

      Does the release by an employer, wronged by an employee’s breach of his or her contractual duty of fidelity, of those alleged to have induced that breach, also release the employee?

Decision

1. [16]

   The answer to these questions is:

   1. (1)

      Yes; and

   2. (2)

      No.

The claim for breach of fiduciary duty

1. [17]

   For convenience, I shall refer to each of NDH Building Services, and the other released parties, as the “Assistants”, unless the context otherwise requires.

2. [18]

   In their submissions, Mr Ashhurst SC, and Mr Pritchard SC, who appeared with Mr Glasson and Mr Macauley for Mr Donohoe drew a distinction between the Assistants’ obligation to compensate Edgewater for the loss it suffered by reason of their knowing assistance on the one hand, and their obligation to account to Edgewater for the money they knowingly received on the other.

3. [19]

   I shall do the same. Each of the corporate Assistants both knowingly assisted Mr Donohoe’s breach of fiduciary duty and knowingly received the fruits of that breach of duty. The individual Assistants knowingly assisted Mr Donohoe’s breach of fiduciary duty, but did not themselves receive any of its fruits.

4. [20]

   The principles governing actions for knowing receipt and knowing assistance are well established. There was no dispute about them before me.

5. [21]

   They were summarised by Emmett AJA in Lewis Securities Ltd (in liq) v Carter [2018] NSWCA 118; (2018) 355 ALR 703 as follows (at [183]-[187]):

The Assistants’ liability to compensate Edgewater

1. [22]

   In Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296; [2012] FCAFC 6 the Full Court of the Federal Court (Finn, Stone and Perram JJ) observed that there “are subsisting uncertainties as to whether and/or when the liabilities of the knowing assistant or recipient are only several, or are joint and several, with those of the delinquent fiduciary or trustee” (at [553]).

2. [23]

   However, before me it was common ground that a defaulting fiduciary and a knowing assistant are jointly and severally liable to compensate for loss sustained by reason of breach of fiduciary duty.

3. [24]

   Thus Mr Ashhurst commenced his submissions stating:

4. [25]

   A different view has been expressed by the authors of the latest edition of Meagher, Gummow & Lehane’s Equity: Doctrines & Remedies, who state that “the liability of a knowing participant for loss suffered by the principal is now several only”: J D Heydon, M J Leeming and P G Turner, Meagher, Gummow & Lehane’s Equity: Doctrines & Remedies (5th ed, 2015, LexisNexis Butterworths) at [23-555] fn 419, citing the observations of the High Court in Michael Wilson & Partners Ltd v Nicholls (2011) 244 CLR 427; [2011] HCA 48 at [106].

5. [26]

   In that passage the High Court said:

6. [27]

   I do not see that passage as providing authority for the specific proposition set out at [25].

7. [28]

   Rather the passage is authority for the more narrow proposition set out in Grimaldi at [557]:

8. [29]

   Nonetheless, the Full Court said that they were inclined to the view that a knowing assistant’s obligation to “restore the trust fund by way of monetary compensation” was several, rather than joint and several with that of the “wrongdoing trustee” (at [559]).

9. [30]

   However, Mr Pritchard pointed to a good deal of authority pointing to the proposition that the liability is joint and several including:

10. [31]

    There is also considerable academic support from the proposition that the relevant liability is joint and several, for example:

11. [32]

    I need not resolve this vexed question. That is because even if the general rule is that the liability of a knowing assistant or recipient to compensate the victim is merely several with that of the errant fiduciary, there is an exception where the fiduciary and the assistant acted “in concert to secure a mutual benefit”.

12. [33]

    That exception was described by the Full Court in Grimaldi at [558] as follows:

13. [34]

    In this case, Edgewater alleges that Mr Donohoe and the Assistants did, in effect, act “in concert”. Edgewater claims that Mr Donohoe made the payments to the corporate Assistants “as part of a dishonest and fraudulent design” and that the Assistants “knew, or ought to have known” of that dishonest and fraudulent design. If Edgewater’s allegations about Mr Donohoe’s conduct were made out, it is hard to see how the Assistants, or at least some of them, could have resisted a finding that they actually knew of that design.

14. [35]

    Mr Donohoe and the Assistants did not “secure a mutual benefit” in the sense of each receiving the same benefit from the scheme. The Assistants received some 73 per cent and Mr Donohoe with some 27 per cent of the proceeds of the scheme. But each achieved the “mutual benefit” of receiving a payment from Edgewater to which they were not entitled.

15. [36]

    In light of this authority and material, and in view of Mr Ashhurst’s concession, I proceed on the basis that the Assistants’ liability to Edgewater was joint and several with that of Mr Donohoe.

16. [37]

    At common law, the general rule is that a release granted to a party jointly and severally liable with others, releases those others.

17. [38]

    Thus, in Thompson v Australian Capital Television Pty Ltd (1996) 186 CLR 574; [1996] HCA 38, Gummow J (with whom Gaudron J agreed) said at 608:

18. [39]

    The liability in question in Thompson was in tort, the question being whether two television channels were joint tortfeasors by reason of a broadcast of allegedly defamatory material.

19. [40]

    Thus, in the same case, Brennan CJ, Dawson and Toohey JJ (at 581) quoted with approval (as did Gummow J at 609) in Smith LJ’s dictum in Duck v Mayeu [1892] 2 Q.B. 511 at 513:

20. [41]

    The operation of the common law rule in relation to joint tortfeasors has been ameliorated by statute, albeit not in a manner presently relevant by (in NSW) s 5 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW).

21. [42]

    The common law rule identified by Gummow J in Thompson, and applied in that case in relation to joint tortfeasors, also applies to parties jointly liable in contract: Walker v Bowry (1924) 35 CLR 48; [1924] HCA 28 at 56 (Isaacs ACJ with Rich J agreeing) and at 57-58 (Starke J).

22. [43]

    In that case, Starke J said at 58 that it was a well-established common law rule that when a creditor released one of two or more sureties who had contracted jointly and severally, the others were discharged, because the joint suretyship is the “essential condition of the liability” of each and “part of the consideration of the contract of each”. By releasing one surety, the creditor “has broken the essential condition of liability of the other sureties and thereby discharged them”.

23. [44]

    The Victorian Court of Appeal has recently held that the reasoning in Thompson governing the position of joint, or joint and several tortfeasors applies equally to joint or joint and several debtors; Harplex Pty Ltd v Konstandellos (2018) 54 VR 174; [2018] VSCA 67 at [60] (McLeish and Hargrave JJA and McDonald AJA).

24. [45]

    Thus, at common law, a release of a party jointly and severally liable in tort or in contract “contractually discharges the others”.

25. [46]

    The question is whether that principle should also apply here, with the effect that Edgewater’s release of the Assistants, being parties jointly and severally liable with Mr Donohoe in respect of his breach of fiduciary duty, had the effect of releasing Mr Donohoe.

26. [47]

    There is no direct binding authority on the question.

27. [48]

    Mr Ashhurst submitted that there was no “principled” reason why the common law rule concerning the release of joint tortfeasors and persons jointly liable in contract should also apply in a case of breach of fiduciary duty.

28. [49]

    There is, however, academic and other support for the proposition that the release by a beneficiary of the primary wrongdoer releases those with whom the primary wrongdoer would otherwise be jointly and severally liable.

29. [50]

    Thus in P Birks and A Pretto (eds), Breach of Trust (2002, Hart Publishing) Prof Mitchell stated in his chapter on “Assistance”, 139 at 208:

30. [51]

    Similarly, the learned authors of Lewin on Trusts, (19th ed, 2015, Thompson Reuters) said at p 1904 [39-100]:

31. [52]

    Lewin cites as authority of that proposition Thompson v Harrison (1787) 2 Bro. CC 164; 29 E.R. 94. In that case Thurlow LC held that the release by the beneficiary of the trustee had the result that “it seemed impossible to give him any relief” against knowing recipient of the trust property.

32. [53]

    In Yeshiva Properties No. 1 Pty Ltd v Marshall [2005] NSWCA 23 Bryson JA, with whom Mason P and Beazley JA agreed, said in obiter at [80]:

33. [54]

    McLaughlin AsJ appears to have reached an inconsistent conclusion in Coulton v Coulton [2008] NSWSC 910, albeit in the context of a summary judgment application and in circumstances where it appears that Bryson JA’s observations in Yeshiva were not drawn to McLaughlin AsJ’s attention.

34. [55]

    If, as these authorities suggest, the release of the primary wrongdoer releases his or her assistant, I see no reason why the converse should not apply.

35. [56]

    A knowing assistant or recipient should not necessarily be seen as being less culpable or blameworthy than the defaulting fiduciary he or she is assisting.

36. [57]

    As Prof Ridge pointed out in the article to which I referred at [31(c)] above, depending on the facts, the knowing assistant may well be the “instigator of the breach” of fiduciary duty. The role of the assistant and the fiduciary can doubtless vary greatly. The applicable general principle should not depend on competing levels of culpability in the facts at hand.

37. [58]

    The liability of a knowing assistant has been described as “ancillary” to or “derivative of” that of the defaulting fiduciary. However, as I have mentioned at [26], the High Court has pointed out in Michael Wilson & Partners Ltd v Nicholls at [106] that “does no more than recognise that the assistant’s liability depends upon establishing, among other things, that there has been a breach of fiduciary duty by another”.

38. [59]

    In those circumstances, I accept Mr Pritchard’s submission that there is “no principled reason (in light of the liability being joint and several) why any distinction should be drawn between the operation of a release in favour of the defaulting fiduciary and a release in favour of a third party accessory”.

39. [60]

    Accordingly, my conclusion is that, so far as concerns Mr Donohoe’s liability to compensate Edgewater for loss suffered by reason of his breach of fiduciary duty, the release by Edgewater of the Assistants had the effect of releasing Mr Donohoe.

The Assistants’ liability to account to Edgewater for profits obtained from the breach of fiduciary duty

1. [61]

   Mr Pritchard accepted that in respect of benefits or profits derived from a breach of fiduciary duty, the position differs from the liability to compensate for loss arising from the same breaches.

2. [62]

   Mr Pritchard accepted that, generally speaking, a defaulting fiduciary, a knowing assistant and a knowing recipient are only severally liable for the profits that each of them, in fact, earned or made from the breach of the fiduciary duty.

3. [63]

   However, as Mr Pritchard submitted, this principle is a general one only, and is subject to the “in concert to secure a mutual benefit” exception to which I have referred at [32] to [35] above.

4. [64]

   It follows that, consistently with Grimaldi, Mr Donohoe and the Assistants were jointly and severally liable to Edgewater to account for the profit each made.

5. [65]

   It follows from that, that the release by Edgewater of the Assistants of their obligation to account, has also released Mr Donohoe from his corresponding obligation.

The claim for breach of contract and of inducing breach of contract

1. [66]

   On Edgewater’s case, Mr Donohoe acted in breach of his contract of employment and the Assistants committed the tort of inducing that breach of contract.

2. [67]

   I do not see how a release by Edgewater of its claim of inducing breach of contract against the Assistants has any effect on its claim of breach of contract against Mr Donohoe.

3. [68]

   Mr Pritchard in effect accepted that the liabilities of Mr Donohoe for breach of contract and the Assistants for inducing that breach of contract were not joint liabilities. Thus Mr Pritchard, without demur, cited Young J’s evident approval of the statement of McLaughlin M to that effect in Sky Channel Pty Ltd v Tszyu [2000] NSWSC 838 at [4].

4. [69]

   In light of Sky Channel Mr Pritchard accepted that:

5. [70]

   In oral submissions the only basis upon which Mr Pritchard sought to justify the proposition that the release by Edgewater of the Assistants of the inducing breach of contract claim operated to release Mr Donohoe from his liability for breach of contract was that both the Assistants’ tort and Mr Donohoe’s breach of contract had caused the same loss to Edgewater.

6. [71]

   But concurrent tortfeasors “are persons whose acts concur to produce the same damage” (Baxter v Obacelo Pty Ltd (2001) 205 CLR 635; [2001] HCA 66 at [18]), and yet their liability is several not joint.

7. [72]

   It must follow, as Mr Ashhurst submitted, that the mere fact that the Assistants’ inducement of breach of contract and Mr Donohoe’s breach of contract caused the same damage does not affect the several nature of their respective liabilities to Edgewater.

8. [73]

   Accordingly, Edgewater’s release of the Assistants did not release Mr Donohoe from his liability for breach of contract.

Conclusion

1. [74]

   For those reasons, my answer to the separate question is that the release by Edgewater of its claim against the Assistants has released Mr Donohoe from Edgewater’s claim against him for breach of fiduciary duty, but not Edgewater’s claim for breach of contract.