COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM QUEEN'S BENCH DIVISION (Commercial Court)
HHJ Seymour QC (sitting has a High Court Judge)
Strand, London, WC2A 2LL
B e f o r e :
LORD JUSTICE RIX
LORD JUSTICE MOSES
| Foster Bryant Surveying Limited
|- and -
(2) Savernake Property Consultants Limited
WordWave International Ltd
A Merrill Communications Company
190 Fleet Street, London EC4A 2AG
Tel No: 020 7421 4040 Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
Mr Charles Douthwaite (instructed by Messrs Awdry Bailey Douglas) for the Respondents
Hearing date : 2 February 2007
Crown Copyright ©
Lord Justice Rix :
"141…It was not a case of Mr Foster identifying a maturing business opportunity, or even a possible business opportunity, and trying to divert it to himself secretly. Rather it was a case of a customer-led initiative with a view to the identification of a solution to the problem arising from the departure from the Company of Mr and Mrs Bryant which was acceptable to the customer, Alliance. It was a very unusual situation…
144…If one regarded the Alliance work as a package as an asset of the Company (which it fact it was not), the intention of Mrs Watts at that stage was to divide it more or less equally between the two major participants in the Company. The only reason, as I find, why that did not happen, was the truculent attitude of Mr Foster and his decision to seek to extract a very substantial sum from Alliance by way of compensation…
147. In the particular circumstances of the present case it seems to me that Mr Bryant was not guilty of a breach of his fiduciary duties to the Company by going along with the suggestions of Mrs Watts that he should establish his own company and then undertake such work as Alliance was minded to give him. This aspect of the claims in this action therefore fails…
160. Alliance did in fact offer to provide Mr Foster with as much work as he could handle. Mrs Watts told me that she was not prepared to entrust all of Alliance's work to the Company if the Company was going to sub-contract what Mr Foster could not deal with personally. I accept that evidence. I find that the maximum amount of work which Alliance was prepared to offer to the Company, in a situation in which Mr and Mrs Bryant had left and Mr Foster remained the only employee of the Company able to offer professional services, was that which was in fact offered to him, but which he did not in fact get because of his reaction to Alliance's position.
168…On my findings there would have been no loss, because after the departure of Mr and Mrs Bryant, Alliance was never going to place with the Company more work than Mr Foster as an individual could cope with. That amount of work was offered, but came to nothing for reasons which I have explained.
169. Thus, so far as damages are concerned, had it been necessary to consider what damage the Company or Mr Foster had sustained as a result of some breach of fiduciary duty or breach of the Shareholders' Agreement on the part of Mr Bryant, I should have found that no damage had been suffered."
The law on a director's fiduciary duties
"1. A director, while acting as such, has a fiduciary relationship with his Company. That is he has an obligation to deal towards it with loyalty, good faith and avoidance of the conflict of duty and self-interest.
2. A requirement to avoid a conflict of duty and self-interest means that a director is precluded from obtaining for himself, either secretly or without the informed approval of the Company, any property or business advantage either belonging to the Company or for which it has been negotiating, especially where the director or officer is a participant in the negotiations.
3. A director's power to resign from office is not a fiduciary power. He is entitled to resign even if his resignation might have a disastrous effect on the business or reputation of the Company.
4. A fiduciary relationship does not continue after the determination of the relationship which gives rise to it. After the relationship is determined the director is in general not under the continuing obligations which are the feature of the fiduciary relationship.
5. Acts done by the directors while the contract of employment subsists but which are preparatory to competition after it terminates are not necessarily in themselves a breach of the implied term as to loyalty and fidelity.
6. Directors, no less than employees, acquire a general fund of skill, knowledge and expertise in the course of their work, which is plainly in the public interest that they should be free to exploit it in a new position. After ceasing the relationship by resignation or otherwise a director is in general (and subject of course to any terms of the contract of employment) not prohibited from using his general fund of skill and knowledge, the 'stock in trade' of the knowledge he has acquired while a director, even including such things as business contacts and personal connections made as a result of his directorship.
7. A director is however precluded from acting in breach of the requirement at 2 above, even after his resignation where the resignation may fairly be said to have been prompted or influenced by a wish to acquire for himself any maturing business opportunities sought by the Company and where it was his position with the Company rather than a fresh initiative that led him to the opportunity which he later acquired.
8. In considering whether an act of a director breaches the preceding principle the factors to take into account will include the factor of position or office held, the nature of the corporate opportunity, its ripeness, its specificness and the director's relation to it, the amount of knowledge possessed, the circumstances in which it was obtained and whether it was special or indeed even private, the factor of time in the continuation of the fiduciary duty where the alleged breach occurs after termination of the relationship with the Company and the circumstances under which the breach was terminated, that is whether by retirement or resignation or discharge.
9. The underlying basis of the liability of a director who exploits after his resignation a maturing business opportunity 'of the Company is that the opportunity is to be treated as if it were the property of the Company in relation to which the director had fiduciary duties. By seeking the exploit the opportunity after resignation he is appropriating to himself that property. \he is just as accountable as a trustee who retires without properly accounting for trust property.
10. It follows that a director will not be in breach of the principle set out as point 7 above where either the Company's hope of obtaining the contract was not a 'maturing business opportunity' and it was not pursuing further business orders nor where the director's resignation was not itself prompted or influenced by a wish to acquire the business for himself.
11. As regards breach of confidence, although while the contract of employment subsists a director or other employee may not use confidential information to the detriment of his employer, after it ceases the director/employee may compete and may use know-how acquired in the course of his employment (as distinct from trade secrets – although the distinction is sometimes difficult to apply in practice)."
The facts (1): the parties' relationship and its breakdown
"He will not within a period of one year from his Succession Date either on his own account or jointly or in conjunction with or on behalf of any other person firm or company whether directly or indirectly solicit business entice clients or interfere with the relationship between the company and its clients or any of them in each case for any services supplied by the company at any time during the period of three years prior to his Succession Date."
The facts (2): the aftermath of Mr Bryant's resignation
"It does, however, put me into direct conflict with Mark as Alliance helped him to set up the business initially and so I would be taking work off of him. I understand that he is not happy but all-in-all he has brought it on himself. There is not a lot he can do about it either as Alliance approached me and so I did not solicit them for work."
"3) It is ALS's intention not to continue working with FBS on an exclusive basis and also to remove the many projects listed above committed with FBS as a direct result of Graham Bryant's recent resignation from FBS and ALS's intention to employ him direct on a capped retainer basis.
4) It is not currently ALS's intention to use parties other than Graham or FBS in connection with future projects…
6) FBS will provide details of a new framework agreement and also terms of appointment for individual projects, as agreed, including a schedule of fees for future potential project works. Duncan also confirmed that it is not the intention of ALS to negotiate fees down by comparing fee levels against employment costs of Graham under a capped retainer…"
The judge's disposal of the claims
"was not eased by the knowledge, which I am confident Mr Foster nursed in his heart, that if he had been more conciliatory towards Mrs Watts at the beginning of 2005 the Company would still have had as much Alliance business as would have kept Mr Foster personally occupied full-time" (at para 129).
"145. As I have indicated, the authorities to which I have been referred all emphasise that in relation to the issue whether in particular circumstances a director of a company has acted in breach of his fiduciary duties to the company is fact-sensitive. The circumstances of the present case are very individual. After Mr Bryant told Mr Foster on 25 November 2004 that he was resigning as a director of the Company Mr Foster ceased to treat him as a director in the manner in which he had before. There were no more management meetings of directors and no discussions between them about matters which would otherwise have been considered appropriate to be discussed between directors, such as the proposal to sub-contract Alliance work to Mr Binnie or the issue of whether a sum on account of dividend should be paid to shareholders in January 2005. Mr Foster simply made his own decisions on behalf of the Company on these questions. He treated Mr Bryant as having ceased to be a director of the Company as from 30 November 2004, as shown by the Form 288b dated 21 December 2004 which he completed and despatched to the Registrar of Companies. After this action had been commenced, and no doubt in the light of a consideration of the possible implications of that notification, a so-called "amending" Form 288b dated 13 July 2005 showing the date of termination of the appointment of Mr Bryant as a director of the Company as 28 January 2005 was submitted to the Registrar of Companies by the solicitors acting for the claimants in this action. However, an indication of the real understanding of Mr Foster was to be found in the annual report and accounts of the Company for the period ended 30 June 2005, signed by Mr Foster on 8 March 2006, in which, in the report of the Directors to the Members of the Company, Mr Bryant was recorded as having resigned on 30 November 2004. As from 30 November 2004, as I find, Mr Bryant was excluded from discharging his role as a director of the Company and for practical purposes continued his association with the Company only as an employed chartered surveyor. As I have said, he performed the latter role conscientiously and efficiently. In other words, although prevented from acting as a director, he continued as a loyal and effective servant of the Company in relation to the discharge of the day-to-day tasks of his employment.
146. For the reasons which I have explained, the idea of accepting any work from Alliance was not that of Mr Bryant, but that of Alliance. There was no plan to take any such work at the time when Mr Bryant resigned as a director and not even any thought that it might be possible. When a plan did emerge, so far as Alliance was concerned it was not one to divert all of the Alliance work to Mr Bryant's new company, but one to share the work between the individuals who had previously largely carried it out in such proportions as would ensure that each was fully occupied with the relevant work. The matter was not dealt with in secret. Although Mr Foster and the Company were not employed in the negotiation of commercial terms proposed, Mr Foster and the Company did appreciate that negotiations of some sort were taking place or would take place between Mr Bryant and Alliance and they realised they would have to counter the commercial initiative. They endeavoured to do that first at the meeting between Mr Foster and Mr Watts on 30 November 2004 and then at the meeting on 16 December 2004 at which the presentation was made. In essence, therefore, the Company's complaint is that its counter-measures taken to resist the commercial threat from Mr Bryant were not as successful as it would have wished, in that Mrs Watts was not prepared to leave all of Alliance's business with the Company, but only that amount which Mr Foster as an individual could handle. That could have been the outcome in the event of any competition for the business of Alliance once the exclusivity had expired. In the circumstances the only way in which a better outcome for the Company would have been if Mr Bryant had declined to entertain the prospect of doing any work for Alliance at all. Thus that is precisely the step which Mr Woolgar submitted due performance by Mr Bryant of his fiduciary duties to the Company required.
147. In the particular circumstances of the present case it seems to me that Mr Bryant was not guilty of a breach of his fiduciary duties to the Company by going along with the suggestions of Mrs Watts that he should establish his own company and then undertake such work as Alliance was minded to give him. This aspect of the claims in this action therefore fails."
"172…Perhaps the single most important [material factor] is that Mr Foster and the Company by their own actions deprived themselves of the work which Alliance was otherwise prepared to put in their direction. It would, as it seems to me, be totally inequitable for Mr Bryant and Savernake to be held accountable for profits made on work which came to them only because Mr Foster and the Company in effect rejected it. Alliance was only ever at best going to place with the Company as much work as Mr Foster as an individual could handle. The balance of Alliance's work, had Mr Bryant ruled himself out as some one to do it, would not have come to him, but it would not have gone to the company either. The significance of that is that in Warman International Ltd v. Dwyer the High Court of Australia emphasised that the rule requiring a fiduciary to account for profits should not be applied in a manner which makes it a vehicle for unjust enrichment of the claimant…"
"…the purchase is not permitted in any case however honest the circumstances; the general interests of justice requiring it to be destroyed in every instance; as no court is equal to the examination and ascertainment of the truth in much the greater number of cases."
And in the words of James LJ speaking in Parker v. McKenna 10 Ch App 96 at 124/125 (cited by Lord Wright at 155) –
"…the rule is an inflexible rule and must be applied inexorably by this court which is not entitled, in my judgment, to receive evidence, or suggestion, or argument as to whether the principal did or did not suffer any injury in fact by reason of the dealing of the agent; for the safety of mankind requires that no agent shall be able to put his principal to the danger of such an inquiry as that."
"…Mr Brown put the point well when he said that what the defendant did in May, June and July [ie while still a director] was to substitute himself as an individual for the company of which he was the managing director and to which he owed a fiduciary duty. It is upon the ground I have stated that I rest my conclusion in this case. Perhaps it is permissible to say that I have less reluctance in reaching that conclusion on the application of this basic principle of equity since I know that what happened was enabled to happen because a release was obtained by the defendant from a binding contractual obligation by the dishonest and untrue misrepresentations…"
"In holding that on the facts found by the trial Judge, there was a breach of fiduciary duty by O'Malley and Zarzycki which survived their resignations I am not to be taken as laying down any rule of liability to be read as if it were a statute. The general standards of loyalty, good faith and avoidance of a conflict of duty and self-interest to which the conduct of a director or senior officer must conform, must be tested in each case by many factors which it would be reckless to attempt to enumerate exhaustively. Among them are the factor of position or office held, the nature of the corporate opportunity, its ripeness, its specificness and the director's or managerial officer's relation to it, the amount of knowledge possessed, the circumstances in which it was obtained and whether it was special or, indeed, private, the factor of time in the continuation of fiduciary duty where the alleged breach occurs after termination of the relationship with the company, and the circumstances under which the relationship was terminated, that is whether by retirement or resignation or discharge."
"An examination of the case law…shows the pervasiveness of a strict ethic in this area of the law. In my opinion, this ethic disqualifies a director or senior officer from usurping for himself or diverting to another person or company with whom or with which he is associated a maturing business opportunity which the company is actively pursuing; he is also precluded from so acting even after his resignation where the resignation may fairly be said to have been prompted or influenced by a wish to acquire for himself the opportunity sought by the company, or where it was his position with the company rather than a fresh initiative that led him to the opportunity which he later acquired." [emphasis added]
"It would, it seems to me, be surprising to find that directors alone, because of the fiduciary nature of their relationship with the company, were restrained from exploiting after they had ceased to be such any opportunity of which they had acquired knowledge while directors. Directors, no less than employees, acquire a general fund of knowledge and expertise in the course of their work, and it is plainly in the public interest that they should be free to exploit it in a new position."
"In my judgment an intention by a director of a company to set up business in competition with the company after his directorship has ceased is not to be regarded as a conflicting interest within the context of the principle, having regard to the rules of public policy as to restraint of trade, nor is the taking of preliminary steps to investigate or forward that intention so long as there is no actual competitive activity, such as, for instance, competitive tendering or actual trading, while he remains a director."
"Nor do I consider that the negotiations by the three with Mr Ingall, at a time when the group was in negotiation with Rathbone, of the remuneration package that they could expect to receive on joining Rathbone was in itself, with or without disclosure to FIM, a breach of any general duty of good faith owed by them to FIM. In the absence of some special circumstance (for example a prohibition in a service contract) a director commits no breach of his fiduciary duty to the company of which he is a director merely because, while a director, he takes steps so that, on ceasing to be a director (and, if he is one, an employee of the company), he can immediately set up business in competition with that company or join a competitor of it. Nor is he obliged to disclose to that company that he is taking those steps. See Balston Ltd v Headline Filters Ltd  FSR 385 at 412."
"The phrase "possibly may conflict" requires consideration. In my view it means that the reasonable man looking at the relevant facts and circumstances of the particular case would think that there was a real sensible possibility of conflict; not that you could imagine some situation arising which might, in some conceivable possibility in events not contemplated as real sensible possibilities by any reasonable person, result in a conflict."
"However, a broad rule like this must be applied with common sense and with an appreciation of the sort of circumstances in which, over the last two hundred years and more it has been applied and thrived. It must be applied realistically to a state of affairs which discloses a real conflict of duty and interest, and not to some theoretical or rhetorical conflict."
"a director who resigns his office to take advantage of a business opportunity of which he has knowledge as a result of his having been a director" (at para 87).
"There must be some relevant connection or link between the resignation and the obtaining of the business."
"95. In English law a director's power to resign from office is not a fiduciary power. A director is entitled to resign even if his resignation might have a disastrous effect on the business or reputation of the company. So also in English law, at least in general, a fiduciary obligation does not continue after the determination of the relationship which gives rise to it (see A-G v Blake (Jonathan Cape Ltd, third party)  1 All ER 833 at 841,  Ch 439 at 453, varied on other grounds  4 All ER 385,  1 AC 268 (HL)). For the reasons given in Island Export Finance Ltd v Umanna a director may resign (subject, of course, to compliance with his contract of employment) and he is not thereafter precluded from using his general fund of skill and knowledge, or his personal connections, to compete.
96. In my judgment the underlying basis of the liability of a director who exploits after his resignation a maturing business opportunity of the company is that the opportunity is to be treated as if it were property of the company in relation to which the director had fiduciary duties."
"76. In the present case Mr Pyke, who was a sick man following his stroke, had been effectively expelled from the companies of which he was a director more than six months before any of the events occurred of which the claimants now make complaint. Although he had invested a large sum of money in the first and second claimants on interest free loan accounts, he was not being permitted to withdraw any of it. At the same time he was being denied any remuneration from the companies. When he entered into business with Constructive in the autumn of 1997 he was not using any of the claimants' property for the purpose of that business. Nor was he making use of any confidential information which had come to him as a director of any of the companies.
77. In these circumstances I consider that the judge was right when he held that Mr Pyke committed no breach of fiduciary duty in trading with Constructive. I do not think it is necessary to go any further than this in the present case."
"94. The unusual circumstances of the instant case, as recounted by Brooke LJ, seem to me to lead inescapably to the conclusion that the claim based on fiduciary duty fails. As Sedley LJ says, for all the influence Mr Pyke had, he might as well have resigned as a director. Had Mr Pyke formally resigned as a director in late 1996 or early 1997, his resignation would have done no more than reflect what had in practice already happened."
"The proposition [that a fiduciary must not place himself in a position where his duty and his interest may conflict] can, I think be amplified in two respects. First, the fiduciary must not only not place himself in such a position: if, even accidentally, he finds himself in such a position he must regularise or abandon it. Secondly, an objectionable position is not only one in which duty conflicts with interest but one in which duty conflicts with duty or interest with interest. Each is objectionable because it is capable of leading to a breach of fiduciary duty."
"108. What the cases show, and the parties before me agree, is that the precise point at which the preparations for the establishment of the competing business by a director become unlawful will depend on the actual facts of any particular case. In each case, the touchstone for what, on the one hand, is permissible, and what, on the other hand, is impermissible unless consent is obtained from the company or employer after full disclosure, is what, in the case of a director, will be in breach of the fiduciary duties to which I have referred or, in the case of an employee, will be in breach of the obligation of fidelity. It is obvious, for example, that merely making a decision to set up a competing business at some point in the future and discussing such an idea with friends and family would not of themselves be in conflict with the best interests of the company and the employer. The consulting of lawyers and other professionals may, depending on the circumstances, equally be consistent with a director's fiduciary duties and the employee's obligation of loyalty. At the other end of the spectrum, it is plain that soliciting customers of the company and the employer or the actual carrying on of trade by a competing business would be in breach of the duties of the director and the obligations of the employee. It is the wide range of activity and decision making between the two ends of the spectrum which will be fact sensitive in every case. In that context, Hart J [in British Midland Tool] may have been too prescriptive in saying, at paragraph  of his judgment, that the director must resign once he has irrevocably formed the intention to engage in the future in a competing business and, without disclosing his intentions to the company, takes any preparatory steps. On the facts of British Midland Tool, Hart J was plainly justified in concluding, in paragraph  of his judgment, that the preparatory steps had gone beyond what was consistent with the directors' fiduciary duty in circumstances where the directors were aware that a determined attempt was being made by a potential competitor to poach the company's workforce and they did nothing to discourage, and at worst actively promoted, the success of that process, whereas their duty to their company required them to take active steps to thwart the process."
"146…In the circumstances the only way in which a better outcome could have been obtained for the Company would have been if Mr Bryant had declined to entertain the prospect of doing any work for Alliance at all. Thus this is precisely the step which Mr Woolgar submitted due performance of his fiduciary duties to the Company required.
147. In the particular circumstances of the present case it seems to me that Mr Bryant was not guilty of a breach of his fiduciary duties to the Company by going along with the suggestions of Mrs Watts that he should establish his won company and then undertake such work as Alliance was minded to give him. This aspect of the claims in this action therefore fails." [Emphasis added]
"and for practical purposes continued his association with the Company only as an employed chartered surveyor. As I have said, he performed the latter role conscientiously and efficiently. In other words, although prevented from acting as a director, he continued as a loyal and effective servant of the Company in relation to the discharge of the day-to-day tasks of his employment."
The respondents' notice
Lord Justice Moses:
Lord Justice Buxton:
a customer-led initiative with a view to the identification of a solution to the problem arising from the departure from the Company of Mr and Mrs Bryant which was acceptable to the customer, Alliance. It was a very unusual situation.