An expensive lesson in breaching a Contract of Employment

When you hire someone to do a job it is natural to expect them to not only do the job but to not help a direct competitor. Failure to do this proved to be an expensive error.

The Facts of Dinte v. Hales & Anor [2009] QSC 63 (25 March 2009)

Dinte, the Plaintiff in this action, hired Hales and Campbell to provide services to his business trading as Skycomm.  Hales held the position of “Service Manager” which included responsibilities for selling and servicing mobile communications equipment as a “premier dealer” for Motorola.

In the course of, and after his engagement with Skycomm, the Defendants entered into a partnership trading under the name of Dapcomm. Dapcomm operated in common areas of business as Skycomm; The two business were competing.

The claim was brought by Hales alleging that Hales had breached his implied term of Contract of Employment and his equitable duties owed to the Plaintiff as his employer.  Furthermore it was alleged that upon termination of employment, Hales retained copies of confidential information including lists of clients and customers together with commercially sensitive information which was used for the purposes of Dapcomm. It was alleged that Cambpell knew and approved of and assisted Hales in the impugned conduct and benefited from it.

Recovery of Damages more than loss of sales

The Plaintiff sued for damages. The Judge found that Hales was in breach of his obligations to Dinte and dishonestly diverted custom to the Dapcomm partnership through opportunities that were made available to him by virtue of his employment with Dinte.

This case is interesting because not only did the Court, having found liability, make an award of damages in the sum of $67,533.19 for loss of the diverted business but the Court also considered, as a consequence of the business diverted away from the Plaintiff’s business, that he should be compensated for loss of value of the business.  The loss of value of the business was calculated by using the amount of diverted business in the last financial year ($38,000) and taking the multiplier of 3.8 x EBIT which equated to $144,400.

Comment from Mark Streeter Sydney Lawyer

There are some important lessons to be learned from this case. This is an important decision in assessing and quantifying damages for recovery of Fraud in businesses.  Employees may divert business opportunities to themselves or other parties or merely destroy business opportunities. This may result in damages in excess of just the lost revenue for that financial year.

In this case the business was sold within a year after the Defendants had diverted the business but before the case went to hearing.  Accordingly the “loss” of goodwill was realised by the lower sale price obtained as a consequence of the reduced earnings because of the diverted business.

This case is consistent with the principles set down in To Robinson v Harman (1848) where Baron Parker said:
Where a party sustains loss by breach of a contract, he is, as far as money can do it to be placed in the same position, with respect to damages, as if the contract had been performed.

In this case the Plaintiff had lost the business but had also lost value in his business by way of goodwill (calculated as a multiple of EBIT) and suffered a reduced price in the sale of the business as a consequence.
 

Quick Action and Freezing Order in $300K Fraud Case

The Facts of Norco Co-Operative Limited v Kelly [2010] NSWSC 719

HK worked for Norco from 26 March 2001 to 10 February 2009.  In the course of her employment she fraudulently and dishonourably misappropriate amounts totaling at least $316,657.98!

These funds were used to pay off mortgages on properties she owned and also mortgages on properties she jointly owned with her life partner.

Upon discovery of the misappropriation, Norco made an urgent application for a “freezing order” which was granted on 19 March 2009.  This order prevented HK from removing from Australia or in any way disposing of or dealing with or diminishing the value of any of her assets in Australia up to the unencumbered value of $375,000.00.

Shortly before the “discovery”, HK transferred to her life partner title in one of the properties for nil consideration. His Honour Justice Lindgren found that Norco had an “equitable charge” over these properties but found the amount of the charge was limited to the amount of the misappropriated funds that had paid off the mortgage over the particular property.  It did not amount to a charge over each property for the full amount of the misappropriated funds.

Comment from Mark Streeter, Sydney Lawyer

This case uses the principle of constructive trust to “trace” the proceeds of the fraud.  As her life partner had not taken the property as a “bona fide” purchaser without knowledge and for fair value, the life partner did not have a basis for resisting a claim by Norco.

This case teaches an important lesson. Act quickly to firstly freeze and then recovery misappropriated monies or property or assets.  It may be possible to “trace” monies and obtain a secured position under an equitable charge (as illustrated by the Norco decision).




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