England and Wales High Court (Chancery Division) Decisions

In the High Court of Justice
Chancery Division

		Royal Courts of Justice Strand London WC2A 2LL

Background

1. This is the trial of the issues relating to liability only in a claim by Item Software (UK) Limited ("Item") against the first defendant ("Mr. Fassihi"). The claims against the other defendants have been settled.
2. Item is a supplier of reliability software, which is concerned with the management and prevention of the risks of equipment failure. An example of the application of reliability software is its use to predict the mean timed failure of an electronic, electrical or other component, such as a component in an aircraft, by reference to detailed and complex statistical information; the component can then be replaced as part of a maintenance programme in advance of the likely time of failure.
3. Item's business was previously carried on by another company called Item Software Limited, which was part of a group called OMI Logistics. The business was sold to Item in May 1995. Item is a subsidiary of a Swiss company called Cofinco SA, which is controlled by Mr. Marc Degani. Mr. Degani was the Chairman of Item until December 1999, when he was replaced by Mr. Daniel Palumbo; however Mr. Degani remained involved in Item's affairs. Item's managing director is Mr. Degani's cousin, Mr. Mehdi Dehghani.
4. Mr. Fassihi joined OMI Logistics in November 1993 and was the Central Sales Support Office Manager, responsible for managing the support team for the software division's sales. Concerned to keep the team together when OMI Logistics decided to sell the business, it was he who approached Mr. Amir Dehghani, another cousin, and this led to Cofinco's purchase of the business.
5. Mr. Fassihi became a director of Item, and entered into a contract of employment as its Sales and Marketing Director. He was responsible for the sales team, which included several members of his former team from OMI Logistics, in particular the second defendant, Mandy Liddiard, who was the sales administrator, Graham Coe, who was the database manager and Lawrence Weaver, who provided technical support. Mr. Fassihi was summarily dismissed on 26^th June 2000.
6. Mr. Fassihi's contract of employment included a term relating to confidentiality:-

"CONFIDENTIALITY

In order to safeguard the legitimate interests of the Company …, it is necessary to regard certain information as confidential and as trade secrets of the Company. The Company consider the following categories of information as examples of confidential and valuable trade secrets of the company:

Company databases, customer lists, business strategy, sales strategy, sales agreements, agency agreements, suppliers agreements, technical "know how" and investigations not within the public domain, employee records and financial records.

This list is intended as a guide and is not exhaustive.

…

You may not, either before or after the termination of your employment with the Company, use for your own benefit or for the benefit of any other person, firm or company or disclose any trade secrets or confidential information belonging to or relating to the business of the Company (including, but not limited to the information referred to above) which may come to your knowledge during your employment. All notes, memoranda, or other information whatsoever relating to the business of the Company shall be and shall remain the property of the Company and shall (together with any copies) be returned to the Company on demand and in any event when you leave the service of the Company"

7. The major part of Item's business was the distribution of reliability software products for the fourth defendant ("Isograph"). Certain of these products had been developed by Isograph at Item's request, others were Isograph's pre-existing products. Item paid Isograph royalties on sales; between 1995 and 1999, there was a consistent and substantial increase in turnover from £400,000 to £1.25 million. Cofinco also incorporated a company in the United States ("Item US"), which acted as a sub-distributor of Item and in which two brothers, Kamran and Kamyar Nouri, had an interest. Item was responsible to Isograph for royalties on Item US's sales.
8. Initially, Item acted as Isograph's distributor on the basis of an informal letter of appointment, but formal non-exclusive distribution agreements were concluded on 26^th September 1996. In November 1998, Item decided to try to negotiate more favourable terms. The negotiations failed and this led to 12 months' notice of termination given, first conditionally by Item on 6th April 1999 and then by Isograph on 12th May 1999, resulting in a termination of the agreement on 11th May 2000.
9. During the notice period, there were negotiations between the second defendant ("RAMS"), a company controlled or ostensibly controlled by Mr. Sayed-Nasser Sayed-Rezai ("Mr. Rezai"), who was a friend of Mr. Mehdi Dehghani and a close of friend of Mr. Fassihi. There were abortive negotiations between September and December 1999. Negotiations resumed in April 2000 and a distribution agreement was entered into on or about 7^th June 2000. This was terminated in September 2000 in consequence of these proceedings.

The claims in the action

10. Item's claims against Mr. Fassihi are principally for breach of his duties as a director and as an employee, and may be summarized as follows:-

(a) Sabotaging Item's contract with Isograph by inducing Mr. Dehghani to negotiate unwisely and by seeking to gain the contract for himself, resulting in Isograph giving 12 months notice of termination in May 1999.

(b) During and after the notice period, establishing or assisting in establishing RAMS and negotiating or assisting in the negotiations for the RAMS/Isograph agreement.

(c) During and after the notice period, persuading staff to leave and join RAMS.

(d) During and after the notice period, using information on Item's database and other confidential information to divert customers to RAMS.

11. There are also claims for breach of copyright and database rights, breach of confidence, inducing breach of contract and wrongful interference with property, all based on essentially the same facts.
12. Mr. Fassihi's claims against Item are for damages for wrongful dismissal, arrears of salary and holiday pay and damages and other relief relating to the sale of a Mercedes car purchased in part with a contribution of £5,000 by him.

The loss of the Isograph agreement

13. On 12th November 1998, Mr. Dehghani wrote to Isograph, in relation to a projected meeting to be held the following month, indicating that Item would be seeking a 10% reduction of royalties on all sales with the exception of sales of two products. He followed this up with a more detailed letter on 23rd November, setting out his justification for this.
14. Mr. Dehghani's evidence as to how this came about was that, following a weekend in November 1998 which Mr. Fassihi and his wife spent with Dr. Pullen, one of the main directors of Isograph, Mr. Fassihi referred to an expensive house which Dr. Pullen had bought and said that he and his co-director, Dr. Flanagan, were doing extremely well out of Item's efforts as distributors without doing much work themselves. He convinced Mr. Dehghani that, because Item possessed the customer goodwill (Isograph did not know who the customers were), there was no risk of Isograph terminating the agreement, and that Item could afford to take an aggressive stance in negotiations.
15. Mr. Fassihi, on the other hand, said that, when he told Mr. Dehghani about Dr. Pullen's new house, it was not his but Mr. Dehghani's reaction that Item was paying Isograph too much money and that the sales were all the result of Item's hard work and investment; Mr. Dehghani insisted on trying to reduce the royalties, whilst he, Mr. Fassihi, considered that the existing level of royalties was reasonable and said so.
16. I do not accept either of these diametrically opposed versions of events. When Dr. Flanagan came to give evidence, he made it clear that a reduction in royalties had been suggested before 1998 albeit less persistently. In my view in late 1998 Mr. Fassihi and Mr. Dehghani were in agreement that an attempt should be made to persuade Isograph to accept a reduction in royalties. At all events, as is common ground, at the meeting which was held on 10th December 1998, Isograph refused to reduce the royalties.
17. There matters rested until 25th February 1999, when Item wrote to Isograph suggesting that Isograph should invoice Item US directly for all sales made by Item US, in order to ease the strain on Item's cashflow resulting from the current arrangements. This suggestion was repeated in a letter dated 6th April 1999, in which further issues were raised in relation to a Marketing Agreement between Item and Isograph (to replace the existing Distributorship Agreement) and a Marketing Agreement between Item US and Isograph. This letter ended by inviting Isograph, if it considered that "these issues did not need addressing", to accept the letter as 12 months' termination notice of the existing Distributorship Agreement.
18. Isograph responded on the same day, accepting part of what was suggested as to the new Marketing Agreement with Item and proposing that, in relation to the United States, Item US should be split into two companies dealing separately with software marketing and software development, and that Isograph should take an equity stake. On 13th April, Item responded in turn by proposing an Exclusive Sales and Marketing Agreement for both Item and Item US. This was followed up by a letter of 20th April stating that, unless there was a reply within 7 days, the termination of the existing agreement by the fax of 6th April "still stands and we would appreciate acknowledgment to this effect in writing". Isograph asked whether this communication meant that, unless all the points made in the fax of 13th April were accepted, Item was serving notice of termination; Item's response of 21st April avoided answering this directly, and sought a prompt reply "with your concrete proposals".
19. On the same day, Isograph replied to the fax of 13th April, stating that they were willing to discuss an exclusive agreement (except in relation to the USA) and that they accepted many but not all of the detailed points raised in relation to Item UK; however, one of the points which they were not prepared to accept was a reduction in their "commission" (i.e. royalties). In relation to the United States, they said that they were proposing a radically new set-up in the USA and that they would not enter into a distributorship agreement similar to that relating to the United Kingdom.
20. At this point, on Saturday, 24th April 1999, Mr. Fassihi sent a remarkable fax from his home to Isograph, addressed to Dr. Pullen and Dr. Flanagan. It opened as follows:

"Dear Richard and Steve

The recent developments have finally confirmed what all three of us have known for a while but did not want to accept. I am sure that you will both agree with the fact that it is not possible to achieve what we can achieve under the current set up. On the personal level, I have nothing against any of the Deganis but they have proved time and time again that they care more about the FAMILY POLITICS than the success of our business. For the sake of our mutual success, this needs to be stopped NOW. I have outlined 4 possible options in order to start the ball rolling and I believe the later ones are the better options for all of us.

I do believe that the best way to move forward will be to keep the Development and Sales as separate entities with Isograph responsible for the Development sale and the NEW COMPANY responsible for the Sales and Marketing."

21. There followed four different possible structures for arrangements with "the new company" headed "Options 1 to 4" and the letter then closed as follows:

"Please rest assured that all Staff and Agents will be fully supportive of any of the above options. We can jointly make this happen and we should not settle for any compromises from ITEM UK as we will only be delaying matters and we will be faced with the same old problems in the months/years ahead.

Finally, I have discussed the current situation with my financial backer and I have his full support and he is looking forward to meeting you both once things start moving.

I know that you will both be discussing the current situation and will be responding to ITEM UK on Monday with your decision/proposal/etc. Please bare the following points in mind when responding.

Do we really want a compromise or are we going to put an end to all the uncertainties and work together and achieve the FULL POTENTIAL of this growing Market.

Acknowledge and accept the receipt of ITEM UK's Termination Notice

Ensure any response is always copied to Marc."

22. Mr. Dehghani's evidence is that he only discovered this fax after Mr. Fassihi had been dismissed when, in the course of these proceedings, it was disclosed by Isograph. He said that he was appalled at the extent of Mr. Fassihi's duplicity.
23. Of course, on the face of it, this letter was a gross breach of duty. Mr. Fassihi, while still a director and employee of Item, was suggesting that he would establish his own company to take over its main contract and its staff. Mr. Fassihi, however, says that he was instructed by Mr. Dehghani to write the letter. Mr. Dehghani had said that he wanted "to cover all angles". What he meant by this was that, if the problem with the negotiations was Isograph's dissatisfaction with Mr. Dehghani and his cousin, Isograph might be prepared to negotiate more favourably with a company ostensibly run by Mr. Fassihi, although in reality Mr. Dehghani and his cousin would still be behind it. Mr. Fassihi said that this made no sense to him, and that he told Mr. Dehghani so, but that Mr. Dehghani insisted and they then drafted the letter together. Although the opening paragraph suggested that there had been previous discussions between Mr. Fassihi and Dr. Pullen, in which Mr. Fassihi had said that "the Deganis" were hampering progress, there had in fact been no such discussions.
24. Dr. Flanagan's evidence on this was that he had no recollection of seeing the fax until it emerged in the course of discovery in litigation between Isograph and Item US in about February 2001. When he saw it, he discussed it with Dr. Pullen and both were confused by it; they thought it might have been some kind of trick by Item.
25. I reject Mr. Fassihi's evidence on this issue. This communication, as a gambit in the negotiations, would have made no sense at all. There is no hint in the correspondence that Mr. Dehghani and his cousin, as opposed to the terms they were insisting on, were a problem. The "options" proposed in the fax would have given the "new company" no better a deal than was in any event on offer to Item. Nothing would therefore be achieved by the letter, even if its terms led to a deal with another company, except to put Mr. Dehghani and his cousin in the position of being secret owners of a business, which had negotiated terms which could have been accepted directly. Further, if the letter had been intended to have any effect at all, it would not have opened with a passage suggesting that there had been previous conversations between Mr. Fassihi and Dr. Pullen and/or Dr. Flanagan which in fact had never taken place. This would have meant nothing to Dr. Pullen or Dr. Flanagan. Mr. Dehghani came across as a perfectly rational and sensible businessman, and I find the suggestion that he insisted on this senseless communication incredible. Furthermore, when Mr. Fassihi's was asked about this fax in the course of proceedings between Isograph and Item US in February 2001, he did not give this far-fetched explanation but purported not to have any recollection of it at all; had it come about in the way which he described in his evidence in this case, he could hardly have forgotten it. Nor did he disclose the fax in this action; it came to light in Isograph's discovery.
26. I do not entirely accept Dr. Flanagan's evidence either. He had been in the United States for the previous week, attending to the setting up of an Isograph company there. Two days later, on Monday, 26th April, he wrote a further response to Item's proposals which amongst other things proposed a joint venture in the United States which, he said, in the course of his evidence, had become a good idea now that Isograph's new company was being set up. I cannot imagine that Dr. Pullen would not have shown him this fax and the letter of 26th April appears to respond in its first paragraph to Mr. Fassihi's suggestion that Isograph should "acknowledge and accept the receipt of Item UK's Termination Notice". Dr. Flanagan said that, when he returned from the United States, he would have had more important matters to concern himself with arising from his trip, but it seems to me that the fax was of great relevance to those matters, that is the new U.S. subsidiary. Further, again I can see no sensible explanation for the opening paragraph of Mr. Fassihi's fax, other than that he had indeed had conversations with Dr. Pullen and/or Dr. Flanagan which were critical of Mr. Dehghani and his cousin and had referred to the possibility of breaking away and starting up his own new company. I think that the truth is probably that there were such conversations, but that Dr. Pullen and Dr. Flanagan did not wish to respond to them or to the fax, or to bring them to the attention of Mr. Dehghani; they therefore did nothing about them and awaited events.
27. Negotiations between Isograph and Item continued until 11th May, and indeed on that date Isograph's view was that they were "tantalisingly close to an agreement". But in the end agreement was not reached, because Item insisted on its terms and Isograph was not prepared to agree to them unless Item revealed more information about its customers. This Item was not prepared to accept: "Your request for full access to Item's Database would be the same as Item having full access to Isograph's programme source codes". Item repeated its earlier offer; Isograph responded by serving its own notice of termination. Thus the agreement came to an end, in circumstances in which both parties in fact wished it to continue. Mr. Dehghani referred to all this in the course of his oral evidence as "a bluff which went wrong".
28. Clearly, on the facts as I have found them, Mr. Fassihi had by the later stages of the negotiations (exactly when is not clear) put himself in a position in which his personal interest conflicted with his duty. I am satisfied that he nevertheless continued to encourage Mr. Dehghani to press for improved terms. I do not believe his evidence that he tried to restrain Mr. Dehghani, or to persuade him to accept the terms offered by Isograph.

Item's claim for the loss of the Isograph agreement

29. Item's case is that, by this point in time, Mr. Fassihi was in breach of his duty as a director and as an employee to act in good faith in Item's best interests in three respects and that this resulted in termination of the Isograph agreement, with the consequence that Mr. Fassihi is liable for Item's loss of profit. Their allegations are in my view sufficiently pleaded, if only just, at para. 93(c),(i),(n) and (o) of the Particulars of Claim. This section is preceded by a general statement that it contains the best particulars which can be given until after receipt of witness statements and disclosure. Following disclosure of his fax of 24^th April, more detail was given in Mr. Delghani's 2^nd witness statement paras. 32-42. Whilst it would have been better if further particulars had been given more formally, Mr. Fassihi did not seek them either by his solicitors when he was still represented or subsequently. I consider that the Particulars of Claim are adequate to cover Item's case and that there is no question in any event but that Mr. Fassihi was given fair notice of it when he received Mr. Dehghani's second witness statement.
30. The first two breaches of duty alleged by Item are (a) that Mr. Fassihi sought (as evidenced by the fax of 24th April) to divert its important contract with Isograph to his "new company" and (b) that having done so he continued to press Mr. Dehghani to take a hard line in the negotiations for a new agreement between Item and Isograph, in order to improve his own prospects of securing the business following a termination of the existing agreement. On the facts as I find them, Mr. Fassihi was clearly in breach of duty in these two respects. The question, however, is whether the termination of the Isograph agreement and the consequent loss to Item resulted from either of these breaches of duty.
31. So far as the attempt to divert the Isograph agreement to his "new company" is concerned, Item contends that the knowledge that there would be an alternative distributor of Isograph's products available in the event of a termination of the agreement led Isograph to take a harder position in the negotiations, and ultimately to terminate the agreement; had Mr. Fassihi not acted in this way, Isograph would or at least might have accepted Item's terms. This point depends upon what effect the breach of duty had on the actions of a third party, Isograph. Therefore, it is not necessary for Item to prove its case on the balance of probabilities. If there is a realistic chance that, but for Mr. Fassihi's attempt to secure the business, Isograph would not have terminated the agreement, Item is entitled to recover the appropriate percentage of any loss suffered as a result of the termination, whether it is more or less than 50%: see Allied Maples Group v Simmons & Simmons [1995] 1 WLR 1602.
32. In my view, the possibility that Mr. Fassihi's attempt to secure the contract for himself made a difference to Isograph's position in the negotiations is negligible. There is no evidence that Isograph ever seriously considered Mr. Fassihi's proposals at this time, and they continued to negotiate intensively with Item. Apart from the reference to the termination notice which I have already mentioned, I do not think that anything in the letter of 26th April or in the subsequent correspondence is in any way attributable to the fax of 24th April. The slightly stiffer tone in the letter of 26th April was a perfectly natural reaction to the aggressive stance taken by Item. The suggestion that there should be a joint venture of some kind in the United States is to some extent foreshadowed in the earlier correspondence, and is attributable to the fact that steps had by this date been taken to set up an Isograph company in the United States. In the end, the negotiations failed, despite the fact that both parties wished to continue the agreement, because Item insisted on terms which Isograph was not prepared to accept.
33. Mr. Quiney submitted that the subsequent course of events showed that Isograph was in fact prepared to negotiate with RAMS, knowing or strongly suspecting (notwithstanding Dr. Flanagan's denial) that Mr. Fassihi had an interest in that company. I agree with this, but I do not think that it follows that Isograph's position in the negotiations in April-May 1999 was influenced by the possibility then held out by Mr. Fassihi. Mr. Fassihi had not, at that stage, done anything or organize his "new company" and Isograph could not have known whether he would be able to set it up, or what legal difficulties might ensue from his doing so. It is inherently probable that, in April-May 1999, Isograph would have preferred to resolve the differences with Item and continue to have them as their distributors. The tenor of the correspondence strongly supports this and I am satisfied that it was so. The fax of 24th April did not influence Isograph. Therefore Item has not established that any loss resulted from this breach of duty.
34. In relation to the second breach of duty, Item contends that it was because Mr. Fassihi, for ulterior motives, pressed Mr. Dehghani to take a more aggressive stance in the negotiations that Item insisted on the terms which Isograph ultimately rejected. Left to himself, Mr. Dehghani would have accepted the terms offered by Isograph. This is not a 'loss of a chance' point; since what is here in issue is what Item itself would have done, it must establish its case on the balance of probabilities: see again the Allied Maples case. Whilst I do not feel any certainty on this point, I think it more likely than not that both Mr. Fassihi and Mr. Dehghani believed at the outset that Item's success in selling Isograph's products, and the fact that Isograph did not have access to the customer database, made Isograph dependent on Item and justified its negotiating stance. I am not satisfied that Mr. Fassihi's later advice to Mr. Dehghani would have been any different even if he had not been simultaneously trying to secure the contract for himself. Nor, more importantly, am I satisfied that Mr. Dehghani would have negotiated any more cautiously even if Mr. Fassihi had not been egging him on. I think that he was throughout determined to obtain better terms. Therefore, I do not find that any loss resulted from this breach of duty on the part of Mr. Fassihi either.
35. Item contends that Mr. Fassihi was in breach of his duty to act in the interests of Item in a third respect, namely by failing to disclose what he had done. Clearly, the fact that he, Item's Sales Director and the person who had the closest contact with Isograph, had sought to undermine its position was of great potential importance to the continuing negotiations, irrespective of whether it actually influenced Isograph. Therefore, it is submitted, it was a fact which he was obliged to bring to Item's notice, in accordance with the implied terms in his contract to act in good faith and in its interests and his similar duties as a director. On this point, Item again submits that, if Mr. Fassihi had disclosed what he had done to Mr. Dehghani at any stage between 24th April and 11th May, Mr. Dehghani would have adopted a different attitude to the negotiations and would have accepted Isograph's terms; the rather equivocal notice of 6^th April given by Item would have been of no effect and there would have been no reason for Isograph to give its notice on 11th May. Again, since this point essentially concerns what Item would have done, I have to consider (if the non-disclosure was a further breach of duty) what would have happened on the balance of probabilities.
36. In my view it is highly probable that, had Mr. Fassihi disclosed what he had done, this would indeed have changed Mr. Dehghani's attitude to the negotiations with Isograph radically. It is likely that he would have dismissed Mr. Fassihi summarily, but in any event it would have made him feel far more vulnerable than before. In the end, the main difference between Item and Isograph was very narrow. Item wanted an increase of 60% in royalties above a target figure of £350,000, whereas Isograph offered an increase of 75% above a target of £400,000 (or £330,000 excluding USA in relation to which they proposed different alternative arrangements still to be discussed). I have little doubt that Mr. Dehghani would have been severely shocked by Mr. Fassihi's conduct and that this would have led him to accept Isograph's proposal instead of indulging in the further brinkmanship which caused Isograph to lose patience and serve notice of termination.
37. I therefore find that, if Mr. Fassihi had told Mr. Dehghani of his misconduct, the agreement would not have been terminated, but varied so that royalties on sales (otherwise than in the United States) would have been paid at the existing rate up to £330,000 p.a. and thereafter with an uplift of 75%. Mr. Fassihi is liable to Item for the loss of the Isograph agreement on this basis if, but only if, his failure to disclose his own misconduct was a further breach of duty. So far as the United States is concerned, Isograph suggested three alternative types of agreement in its fax of 7th May. I am not able to say, on the balance of probabilities, whether agreement would have been reached in relation to United States or if so on what terms. It follows that Mr. Fassihi is not, in any event, liable for any loss suffered by Item as a result of the termination of the agreement in respect of sales in the United States.
38. Given my conclusions on what caused the termination of the agreement, the crucial issue of law arising on this aspect of the case is whether, in addition to Mr. Fassihi's breach of duty in seeking to divert Item's main contract to his new company, the failure to disclose that misconduct to Item was a further breach of duty. This is a difficult issue, involving consideration of the well-known decision of the House of Lords in Bell v. Lever Brothers [1932] AC 161 and subsequent authorities. What has to be considered is whether an employee or director of a company is ever, and if so in what circumstances, obliged to disclose his own misconduct to the company which is a victim of it.
39. The facts in Bell v. Lever Brothers were that the appellants had been employed by the respondent to act as the chairman and vice-chairman respectively of one of their subsidiaries and had been involved, in breach of their respective contracts, in secret dealings for their own personal benefit. The dealings related to cocoa, which was the subsidiary's principal business, and involved the diversion of trading opportunities which properly belonged to the subsidiary. The appellants were therefore obliged to account for their profits: see the judgment of Wright J. [1931] 2 K.B. 557 at 562-3, 573. Subsequently, an agreement was entered into between the appellants and the respondents to terminate their contracts of service in return for substantial sums, which were actually paid. When the respondents learned of the secret dealings, they claimed repayment of the sums which they had paid, contending that they would not have entered into the agreements to compensate the appellants if they had known that they were entitled to dismiss them summarily. It is important to bear in mind that the appellants were not directors of the respondents, and that the jury, in answer to special questions, found that they had not acted fraudulently at the time the agreements were entered into. The House of Lords by a majority allowed the appellants' appeal, holding (insofar as is relevant to the present case) that the appellants owed no duty to disclose their prior misconduct and that the agreements accordingly could not be set aside on the ground of its non-disclosure. Lord Blanesburgh agreed with Lord Atkin and Lord Thankerton; the minority (Viscount Hailsham and Lord Warrington) expressed no view on this point.
40. There was a difference of approach between Lord Atkin and Lord Thankerton on the question of the time when a duty of disclosure, if there was one, would arise. Lord Atkin considered mainly whether the duty of disclosure arose at the time the agreements terminating the contracts of employment were entered into. He held that, save in the limited categories of contracts of the utmost good faith in which material facts must be disclosed, caveat emptor applied and there was no duty of disclosure and that neither the contracts of employment nor the contracts to terminate the employment were such contracts. However, he added at 228:

"The servant owes a duty not to steal, but, having stolen, is the super added duty to confess that he has stolen? I am satisfied that to imply such a duty would be a departure from the well established duty to mankind and would be to create obligations entirely outside the normal contemplation of the parties concerned. If a man agrees to raise his butler's wages, must the butler disclose to the master that he received a secret commission from the wine merchant; and if the master discovers it, can he, without dismissal or after the servant has left, avoid the agreement for the increase in salary and recover back the extra wages paid?… If he gives the cook a month's wages in lieu of notice can he, on discovering that the cook has been pilfering the tea and sugar, claim the return of the cook's wages? I think not. He takes the risk; if he wishes to protect himself he can question his servant, and will then be protected by the truth or otherwise of the answers."

41. Lord Thankerton reached the same conclusion, but approached the matter rather differently at 230-2:

"The learned judges of the Court of Appeal appear to regard the duty to disclose as arising at the time of negotiating the contract, but I am unable to see that any such duty could arise out of the circumstances of these agreements; in my opinion, the first question must be whether the appellants incurred a duty to disclose these transactions at the time they were completed. A failure to account for the profits to (the subsidiary of Lever Brothers), on which some of the learned judges lay stress, was an integral part of the breach of duty to that company. The appellant have just as much – or just as little – right to continue drawing their salaries without disclosure as they had to negotiate two years later for the commutation of the same salaries. In truth, the negotiations (for the termination agreement) were at arms length, and not on the footing of the relationship of master and servant, but for the termination of that relationship, and, if there was not an already existing breach of an obligation to disclose, I am unable to see how the circumstances or (these agreements) could be held to create such an obligation.

In the absence of fraud, which the jury has negatived, I am of the opinion that neither a servant nor director of a company is legally bound forthwith to disclose any breach of the obligations arising out of the relationship, so as to give the master or the company the opportunity of dismissal; on subsequent discovery, the master or company will not be entitled to hold a dismissal as operating from the date of the breach, but would be liable for wages or salary earned by the servant during the intervening period…

Accordingly I am of opinion that the appellants have no legal duty to disclose their cocoa transactions either at the time of their commission or in negotiation for the agreements of March, 1929."

42. Thus Lord Thankerton clearly held that there was no duty of disclosure either at the time of the misconduct or at the time of the agreements to terminate the appellants' employment. The principal ground on which Lord Atkin decided the case was clearly that there was no duty of disclosure at the time of entering into the agreements. However, the sentence "… having stolen, is there a super added duty to confess that he has stolen?" should probably be taken to refer to the time of the theft, rather than to the time of the subsequent negotiations, and certainly it appears to have been accepted in the later authorities discussed below that he did not consider that a duty of disclosure arose at either point in time. Neither Lord Atkin nor Lord Thankerton addressed directly the point made by Lawrence L.J. in the Court of Appeal, supra at 592 that, since the appellants admittedly owed a duty to account for the profits from their illicit transactions, it followed that they were under a duty to disclose the transactions which gave rise to the profits.
43. The emphasis given to the jurors' answer negativing fraud, in the passages relating to this issue in the speeches of both Lord Atkin and Lord Thankerton, is puzzling. The questions put to the jury are set out in the speech of Lord Blanesburgh at 185-6. The jury found that the defendants did not fraudulently conceal their earlier dealings with the object and effect of inducing Lever Brothers to enter into the termination agreement and that they did not, during the interviews prior to the agreements, have the earlier dealings in mind. In other words, what was negatived was fraud at the time at the time of the agreements, not fraud at the time of the misconduct. However, since there was no duty to disclose the dealings at all at the time of the agreements, it is difficult to see how the non-disclosure could have been regarded as fraudulent non-concealment, even if the appellants had had them in mind and had perfectly well appreciated that, unless they kept silent, the respondents would not pay them any compensation for loss of profits. These questions seem to have much more relevance to the issue of unilateral mistake; had they been answered differently, the respondents might have been able to argue that they entered into the agreement under a mistake of fact which was known to the applicants.
44. There is a further difference between Lord Atkin and Lord Thankerton on the question of whether a director would have owed a duty of disclosure. Lord Atkin (at 228) referred to the fact that Bell was not a director of Lever Brothers and owed no fiduciary duty, presumably to indicate that apart from this he would or might have had a duty of disclosure. Lord Thankerton said (at 231) that in the absence of fraud, negatived by the jury, neither a servant nor a director of a company was legally bound forthwith to disclose any breach of the obligations arising out of the relationship "so as to give the master or company the opportunity of dismissal". However, in relation to the time of the misconduct, which Lord Thankerton considered to be the relevant time, the jury did not negative fraud. Further, disclosure at that time would have given the employer, not merely the opportunity of dismissal, but also the opportunity to benefit from the cocoa trading.
45. In Horcal Limited v. Gatland [1983] B.C.L.C. 60, in which a similar issue arose, Glidewell J. held, obiter, that the failure by a director of a company (as opposed to an employee) to disclose an earlier breach of fiduciary duty would render an agreement terminating his service contract void on the ground of mistake. In reaching this conclusion, he relied on obiter dicta of Lawrence and Greer L.JJ. in Bell v Lever Brothers in the Court of Appeal at [1931] 1 K.B. 557 at 592 and 600, and on the passage to which I have already referred in the speech of Lord Atkin, recognising however that Lord Thankerton's view was to the contrary. He further relied on the decision of the House of Lords in Regal (Hastings) Limited v. Gulliver [1942] 1 All ER 378, which establishes that directors who made an undisclosed secret profit are obliged by reason of their fiduciary duties to the company to account for such profit. However, having held (at 68B) that, if the defendant had acted in breach of his duty to the company, he would have been under a further duty to disclose the breach before entering into the agreement to terminate his contract of service, Glidewell J. went on to find that there had in fact been no breach by the time of the agreement but only later. The Court of Appeal upheld his decision at [1984] B.C.L.C. 549, on the ground shortly expressed by Lawton L.J. at 556A:

"He (the defendant) may have had evil thoughts but he has done no evil deeds. The law is concerned with deeds, not thoughts."

46. On the issue which is relevant in the present case, Robert Goff L.J. said that there was much force in the argument that there was no general duty on directors or employees to disclose a breach of duty on their part, and that the argument that directors had such a duty

"…could lead to the extravagant consequence that a director might have to make what counsel for the defendant has called a 'confession' as a pre-requisite of such an agreement."

However, he went on to say that it was not necessary to decide the point.

47. In Sybron Corporation v. Rochem Limited [1984] Ch. 112, which was decided shortly before the decision at first instance in Horcal but was not cited to Glidewell J., the Court of Appeal had to decide whether the company which had been the victim of a fraudulent conspiracy by a number of its officers and employees could recover part of a payment made pursuant to the terms of a life assurance scheme on the retirement of one of them. Under the rules of the scheme if the member was dismissed for fraud or serious misconduct, he would be entitled only to the benefits secured by his own contributions to the scheme, and not the higher benefits derived from the company's contributions. At the time of the employee's retirement, the company paid him the full benefit in ignorance of the conspiracy and now sought to recover the part attributable to their contribution on the basis that they had made a payment under a mistake of fact which had been induced by the employee's breach of duty in failing to disclose the misconduct of the other employees. The issue was therefore whether there had been a duty of disclosure at the time of, or following, the misconduct.
48. The Court of Appeal held that the employee's position was such that he was under a duty to disclose the misconduct of his fellow employee, even if this would inevitably disclose his own misconduct. Stephenson L.J. pointed out that Lord Atkin had said [1932] A.C. at 228 that a servant might be under an obligation to report a fellow servant who was wrongfully dealing with the employer's property and said that it was "puzzling" that it never seemed to have occurred to counsel or to the judges at any level that each of the appellants in Bell v Lever Brothers might have owed a duty to report the misconduct of the other. Having considered the earlier decision of the Court of Appeal in Swain v. West (Butchers) Limited [1936] 3 All E.R. 261, Stephenson L.J. held, at 126H-127A, that whether there was a duty to report a fellow servant's misconduct depended upon the terms of his employment and his position in the hierarchy of the company. On the facts of the case, there was such a duty. Fox and Kerr L.JJ. agreed and Kerr L.J. at 130 C-F said that he was far from convinced that Bell v Lever Brothers applied, even in relation to the disclosure of the employee's own misconduct, where the concealment was fraudulent, referring in this regard to the passages in the speeches of Lord Atkin and Lord Thankerton where the absence of fraud was stressed and holding that the concealment in the instant case was indeed fraudulent.
49. The decision of the House of Lords in Bell v. Lever Brothers was also discussed by Lightman J. at first instance in Bank of Credit and Commerce International S.A. v. Ali [1999] I.C.R. 1068. In that case, the employees who had been made redundant by BCCI had signed an agreement which released all claims of whatsoever nature which they might have against it and now sought to set it aside on the ground that the bank had not disclosed its own illegal and dishonest conduct of its business, which had now emerged. The employees wished to bring 'stigma' claims, alleging that they had been disadvantaged in the job market by reason of their association with BCCI. Lightman J. held that recent developments in the law of employment, culminating in the decision of the House of Lords in Mahmud v. Bank of Credit and Commerce International S.A [1997] ICR 606 did not support the proposition that Bell v. Lever Brothers Limited was no longer the law, and he pointed out that the existence of such a duty would impose standards which were intolerable and in practice unattainable e.g. a duty to confess taking a day off when not genuinely ill or using the employer's telephone stationery for private purposes: see at 1082, para. 19. Of some relevance to the present case is what Lightman J. said at 1080, para. 16 on the question of fraudulent concealment:

"Kerr L.J. in the Sybron case, at p.819, referred to the reservations made in Bell v. Lever Brothers Ltd [1932] AC 161 in case of fraudulent representation or concealment intended and effective to induce the employer to enter a compromise and expressed the view that such conduct would entitle the employer to avoid the compromise. I shall consider later the separate head of misrepresentation advanced by the employees in this case. I shall only say here that the reservation as to fraudulent concealment can be of no assistance in this case. First, I cannot see how questions of fraudulent can arise unless the bank is held to have been under a duty to disclose."

50. Finally, in University of Nottingham v. Fishel [2000] ICR 1462 at 1485-6 Elias J. did not decide a question as to whether a clinical embryologist, who did outside work abroad in breach of the terms of his service contract, was in further breach by failing to disclose his misconduct. The argument was advanced in order to support a claim that, had he disclosed what he was doing, the plaintiffs could have availed themselves of the opportunity of doing the work and that the defendant was therefore liable for damages to compensate the plaintiffs for their loss of profits, but Elias J. held that, even if that was so, the damages arose from the original misconduct and the alleged failure to disclose would add nothing. He further held that the argument was not supported by the decision of Lord Jauncey, acting as the Visitor to Westminster Abbey, and as arbitrator, in Neary v. Dean of Westminster [1999] I.R.L.R. 288, and it is apparent from reading the judgment in that case that the significance of Dr. Neary's failure to disclose his earnings from concerts and recordings was principally evidential; it was relevant to whether the misconduct was of sufficient gravity to justify summary dismissal. Lord Jauncey did not refer to the decision in Bell v. Lever Brothers, let alone consider whether the case before him was one in which there was, exceptionally, a duty to disclose misconduct.
51. The present position on the authorities may in my view be summarised as follows:

(1) Bell v. Lever Brothers is authority for two quite different propositions in relation to the disclosure of misconduct.

(2) The first proposition is that an employee's duty to act in good faith and in the interests of his employer does not require him to disclose his own misconduct at or after the time it is committed, even where it may be in the employer's interests to know of it so as to be able (a) to take action against the employee and/or (b) to prevent further misconduct and/or (c) (where this is the nature of the misconduct) to secure for themselves the business, or the profit from the business, which the employee has wrongly appropriated. The principal reason why the law does not impose such a duty is that to do so would be at odds with generally accepted standards, as illustrated by the examples of peccadilloes commonly committed by butlers and cooks in 1932 and by office workers in 1998 to be found in the speech of Lord Atkin and the judgment of Lightman J. in BCCI respectively.

(3) The second proposition is that the employee will still owe no duty to disclose his own misconduct, if he later enters into a contract with the employer to vary or terminate his contract of employment, even if the misconduct would be a material matter to be taken into account by the employer. The principal reason for this is that such a contract is not within the categories of contracts requiring utmost good faith, but it may be that additional considerations are (a) that when negotiating such a contract the employee is acting on his own behalf, and not in his capacity as an employee, and therefore does not owe the duty which he would ordinarily owe to disclose facts which it is in the interests of his employer to know and (b) that the employer can ask appropriate questions and/or require appropriate terms of the agreement which would provide him with redress if broken and if he chooses not to do so has no ground for complaint.

(4) As to the first proposition, whilst the departure from normal standards which would be involved in imposing a duty will normally override the more rigorous view that an employee should be obliged to disclose his misconduct since it is in the interests of the employer to know it, in order to take appropriate action, it is not an absolute rule. There are cases in which particular aspects of the employee's functions in the business require disclosure of the relevant facts, even if this involves owning up to misconduct. The position was summarised by Hobhouse J. in The Good Luck [1988] 1 Lloyd's Reports 514, at 550 when he said:

"… in the law of master and servant the Courts have been extremely cautious in finding a duty of a servant to speak, particularly with regard to matters which are to the servant's disadvantage … The facts of each case (including the actual relationship) must be individually considered."

Sybron is an example. The employee's duties included disclosure of the misconduct of other employees, and he was not absolved from it because its performance would result in his having to disclose his own misconduct as well. There was an additional and independent reason why he was obliged to disclose the information and he could not rely on his own misconduct to justify non-disclosure.

(5) It is possible that the general rule will also inapplicable if, in the circumstances, the concealment of misconduct is fraudulent: see Bell per Lord Atkin at 227 and per Lord Thankerton at 231 and Sybron per Kerr L.J. at 130. However, in relation to this (a) apparently it is not fraudulent for an employee to fail to disclose that he has personally profited from contracts which he ought to have made on behalf of the company: see Bell (b) concealment cannot be fraudulent if there is no duty to disclose and (c) where there are other facts, over and above the misconduct itself, which result in a duty being imposed, it will not matter whether its breach is fraudulent or not: see per Lightman J. in BCCI v. Ali, at 1080 para. 16.

(6) It is not clear on the authorities whether the position of a director is the same as that of an employee: see the references to Horcal at paras. 45-6 above. The case for saying that there is a duty of disclosure at the time of the misconduct, when the director owes fiduciary duties, is perhaps stronger than the case for saying that there is such a duty at the time of negotiating an agreement with the employer, when the director is then acting for himself and when the other matters set out at (3) above apply just as they do in the case of an employee.

52. I hold that in this case Mr. Fassihi's misconduct did give rise to a "super added" duty of disclosure. I do so principally because, as in Sybron, there was a separate and independent aspect of his duties which required him to disclose the facts. He was involved in the negotiations between Item and Isograph and his contractual obligations of fidelity and care required him to disclose important information known to him which was relevant to those negotiations. If he had learned that a rival distributor had been trying to sabotage the negotiations with Isograph, it would have been his duty to tell Mr. Dehghani; the fact that it was himself cannot relieve him of the duty. That it would have been in Item's interest to know of the misconduct in order to deal with Mr. Fassihi would not have justified the imposition of a duty; what justifies it is its relevance to the ongoing negotiations with Isograph. This therefore seems to me to be a case in which a duty of disclosure was owed.
53. Further, this seems to me to be a clear case of fraudulent concealment. Mr. Fassihi's failure to tell Mr. Dehghani of what he had done, while remaining involved in the negotiations with a third party apparently acting as a Sales Director, was part and parcel of his dishonest scheme to rob his employers of the business. For these reasons too I think that Bell v. Lever Brothers is distinguishable, and that the non-disclosure of his misconduct was a breach of duty.
54. If this is correct, it is not necessary to decide whether Bell v. Lever Brothers is distinguishable for the additional reason that Mr. Fassihi was a director of Item as well as an employee, which is the issue on which different views were expressed by Glidewell J. and Robert Goff L.J. However, in case the matter goes further, in my opinion Mr. Fassihi did owe a duty of disclosure by virtue of his position as a director, for the following reasons:

(a) It is necessary to distinguish between the two propositions established by Bell v. Lever Brothers set out at para. 51(1) and (2) above. They relate to two quite different duties.

(b) There is no reason why proposition (2), that an employee owes no duty to disclose his own misconduct as a material fact which affects or may affect a contract he is negotiating with his employer to vary or terminate his employment, should not apply equally to a director. The rationale, that the contract is not one of the utmost good faith, is the same, and the additional considerations to which I have referred apply equally.

(c) However, the position with regard to proposition (1) is quite different. The director owes fiduciary duties to the company and for the reasons given by Glidewell J. in Horcal it is difficult to see how a director who was making a profit by appropriating the company's contract for his own benefit would not be under a duty to disclose what he had done, not least as part of his duty to account for the profit. To hold otherwise seems to me, as it did to Glidewell J., inconsistent with the decision of the House of Lords in Regal. Nor in my view does a duty on a company director to disclose his own dishonesty impose an intolerable or unattainable standard of conduct.

(d) The objection raised by Robert Goff L.J., that a director might have to make a "confession" before entering into a contract with his employer, supports the view that proposition (2) applies equally to a director, but is not relevant in relation to proposition (1). No question of a contract with the employer is involved. In Horcal the misconduct and the negotiation of the termination of the contract of employment appear to have been more or less simultaneous, but it is still necessary to consider the two quite different kinds of duty separately.

55. In summary, on this part of the case I hold:

(a) that Mr. Fassihi was in breach of duty, (i) in seeking to persuade Isograph to terminate that agreement and to employ his 'new company' and (ii) in nevertheless continuing to encourage Mr. Dehghani's unyielding stance in the negotiations but that no loss resulted from either of these breaches;

(b) that Mr. Fassihi was in further breach of his duties, both as an employee and as a director, in failing to disclose his own misconduct; and

(c) that Item is entitled to recover from Mr. Fassihi as damages for the latter breach any loss suffered as a result of the termination of the Isograph agreement, otherwise than in relation to sales in the United States, and on the basis that royalties would have been increased by 75% in respect of any sales above the level of £330,000 p.a.

56. Further, it is clear that Mr. Fassihi's claim for wrongful dismissal must fail. Even though Mr. Dehghani was not aware on 26th June 2000, when he dismissed Mr. Fassihi on other grounds, of what Mr. Fassihi had done in April 1999, Item is entitled to rely upon this as justification for the dismissal, irrespective of whether the other grounds justified it: see Boston Deep Sea Fishing Co. v. Ansell (1888) 39 Ch D 339 (C.A.).

The notice period

57. Immediately after notice had been given, Item began to develop its own software under the names Reliability Toolkit and Fault Tree. There is a fax from Mr. Kamyar Nouri at Item US to Item dated 17th May 1999, setting out detailed cost estimates. Item intended to market these instead of Isograph's products and, in relation to maintenance contracts obliging them to provide upgrades as and when available, to provide the new software as upgrades instead of any upgrades produced by Isograph, which after 11th May 2000 would not be available to them. A 'beta' or promotional version of Toolkit was available by about January 2000, but there were delays in developing the final version; it was not ready by May 2000.
58. I am satisfied that Item intended, at all times up to the termination of the Isograph agreement on 11th May 2000, and at all times up to Mr. Fassihi's dismissal on 26th June 2000, to continue in the business of supplying reliability software, providing their customers with their new products as "upgrades" as and when they became available and in the meantime providing maintenance and technical support in accordance with current contracts, which were renewed from time to time. Because of the delay in providing upgrades reduced rates were offered. I am also satisfied, on the basis of Mr. Weaver's evidence, that Item was in a position to provide technical support even after the termination of the Isograph agreement, by virtue of his own ability to deal with virtually all enquiries. There were some occasions when a customer had urgent needs which could not be fulfilled, who would have to be directed to some other supplier, but there was an ongoing reliability software business at all relevant times.
59. I do not accept the evidence given by Mandy Liddiard (Mrs. Haynes) in answer to Mr. Fassihi to the effect that Mr. Dehghani told her on more than one occasion in or about March 2000 that Item now did not want to sell to existing Isograph customers, in which it was no longer interested, and that if any such customers telephoned they were to be diverted to Isograph. This answer was given in a noticeably hesitant manner, it is not consistent with any other evidence and there is no earthly reason why Mr. Dehghani should have wished to cease supplying his existing customer base with reliability software services.
60. In relation to the new products, Mr. Fassihi's witness statement contains the following passage:

"A few months before the termination notice, Item UK had accidentally got hold of the source code for one of Isograph's more successful programs, Reliability Workbench. As soon as Isograph terminated our contract, Mehdi Dehgani remembered about the source code and the next plan of action was for him to e-mail this to Kamyar Nouri of Item USA Inc for him to start using and/or changing these codes in order to develop an equivalent program. This was decided during a telephone conference held at Marc Degani's office in London between Item UK and Item USA. …

This was obviously not a path I wanted to take and I did make my feelings quite clear. As usual, important decisions were agreed between the family members and hence Mehdi Dehghani e-mailed the source code to Mr. Kamyar Nouri for him to evaluate and report back on the amount of work involved. This was done and we received an e-mail from Mr. Kamyar Nouri with regard to the likely costs and time involved. Also Mehdi Dehghani sent a fax summary of this meeting and plan of action for the parties involved to Kamran and Kamyar Nouri. This fax was copied to myself and Marc Degani."

61. In his oral evidence, Mr. Fassihi amplified this. He said that he had himself received the source code by e-mail from Isograph in February 1999 and that, not being sure what it was, he had taken it to Mr. Dehghani and they had realised that it was the Reliability Workbench source code. He or Mr. Dehghani said "silly Richard" or something to that effect and forgot about it until after the termination of the agreement, when Mr. Dehghani decided to use it to develop a new product. However, once Mr. Fassihi realised (from Mr. Kamyar Nouri's fax referred to above), that Item intended to use Isograph's source code, he protested and continued to protest throughout his remaining year at Item. However, he did not leave because there was still a legitimate job to do until 12th May 2000, and by then there were discussions about transferring the business to a new company and he was hanging on in the hope of getting a substantial redundancy payment. He sought to justify such assistance as he admitted having provided to RAMS on the basis that Item no longer had any legitimate business deserving of protection beyond May 2000.
62. Early in 2000, Isograph obtained a copy of a promotional version of Item's new Toolkit software and began proceedings against Item US, alleging that the source code had been copied from Reliability Workbench. Item US denied this, and there were, as I understand it, expert reports on both sides; the proceedings were ultimately settled. Mr. Fassihi called Dr. Flanagan to give evidence, and he said that, when he saw the Toolkit software, he concluded without hesitation that Isograph's source code had been used. Furthermore, he said, the work authorised in the fax of 17th May 1999 would be insufficient to develop new products, and some of its wording indicated that they were to be based on Isograph's software. Mr. Dehghani strongly denied the allegation of copying.
63. I do not believe Mr. Fassihi's account of this aspect of the matter. The e-mail to which he referred has not emerged on discovery either in this action or in the U.S. action. The suggestion that he and Mr. Dehghani realised in February 1999 that the source code was accidentally sent by Isograph to Item, but that nothing was done about it, makes no sense in the light of the remainder of his evidence. If as he says he was not prepared to act unscrupulously then he would surely have told Isograph what had happened at the time and taken steps to remove the source code from any Item system. He did not give a satisfactory explanation as to why that did not happen. Further, it is clear on the evidence, as I explain later in this judgment, that Mr. Fassihi was involved in setting up RAMS and in its negotiations with Isograph as early as September 1999, when he concedes he was the Sales Director of a legitimate business. I do not believe that Mr. Fassihi was concerned about the allegation of copying while he remained with Item; in my view he has latched on to the allegation in the US action in an attempt to justify his conduct in relation to the matters with which I am about to deal.
64. Mr. Fassihi seeks to support his allegation of copying by reference to the fax of 17^th May 1999, which sets out preliminary costings and time estimates. These, he said, would be inadequate for the development of new software from scratch and show that Isograph's source code was going to be used. I am unconvinced by this. In the first place, these were preliminary estimates made just after the loss of the Isograph agreement. Secondly, it is clear that the time estimates at least were very optimistic; far from being complete within 3-6 months as predicted, the Reliability Toolkit software was still months off completion in May 2000, a year later. This is at least consistent with it indeed being the case that the cost and time was underestimated and in Item having to spend considerably more on the proper development of its own software. Thirdly, the extent to which Item really did have to start from scratch is unclear; they may have been able to rely on parts of MS-DOS (as opposed to Windows) versions of sections of the programs.
65. Mr. Fassihi also seeks to support the allegation of copying by reference to screenshots which he claims to have taken surreptitiously from Mr. Dehghani's computer because of his concerns about Item's activities while he was still there. However it is perfectly possible that Mr. Fassihi himself created these screenshots and there is no evidence as to the contents of the underlying documents. It is quite surprising that, if Mr. Fassihi wished to protect himself in some way by securing evidence of Item's illegitimate copying of the source code, he did not simply take a copy of the source code itself. The significance of the screenshots as evidence depends in essence on Mr. Fassihi's credibility, and he is not a credible witness.
66. Since I do not consider that the fax of 17^th May 1999, or the screenshots, or Mr. Fassihi's evidence provide substantial support for the allegation of copying, I am left only with the oral evidence of Dr. Flanagan on the one hand (as to which I have considerable reservations on other points: see paras. 26 and 37 above and paras. 71 and 91 below) and of Mr. Dehghani on the other. Perhaps because of the way the issue acquired increasing prominence in the course of the trial, there was no detailed evidence as to the time that development of the software should have taken, or how long it did take, or how far Item could have used its own earlier programs.
67. I cannot exclude the possibility that Item copied Isograph's source codes, but I am far from satisfied, on the balance of probabilities, that they did. This is an issue which, if it was to be raised at all, should have been pleaded and dealt with on the basis of detailed factual witness statements and proper discovery, as well as expert evidence. At the time that the original Defence and Counterclaim was settled, Mr. Fassihi was legally represented. As from April 2001 he acted in person.

September 1999 to May 2000

68. The evidence as to what happened in this period consists in part of the evidence of Mr. Coe, Mr. Weaver, Mandy Liddiard (now Mrs. Haynes) and Mr. Christian Imbach, who became Item's European Sales Manager in November 1998 and in part of the documentary evidence relating to the negotiations between Isograph and RAMS.
69. I accept the evidence of Mr. Weaver, Mr. Coe and Mr. Imbach from which the following picture clearly emerges:

(a) Item's employees were not told of the termination of the Isograph agreement until September 1999. There was then a staff meeting at which Mr. Dehghani and Mr. Fassihi were present (Mr. Weaver believes that Mr. Dehghani was away, but I do not think that he is right on this), at which the employees were told of the termination and that a new product was being developed in the United States, which Item intended to sell after May 2000.

(b) This was followed by a less formal meeting, in the absence of Mr. Dehghani, at which Mr. Fassihi said that the product which was being developed in the United States was no good or "crap", but that he was negotiating to set up a new company to carry on marketing Isograph products, that they would be re-employed by the new company and that their jobs were safe; he made it clear without explicitly saying so that this was not to be discussed in the presence of Mr. Dehghani.

(c) From that time on, Mr. Fassihi persistently told the employees that Item would shut down after May 2000, and denigrated the new product and Mr. Dehghani personally. Occasionally, he told them in general terms how the negotiations between the new company and Isograph were proceeding; they understood that it was his company.

(d) After a time, Mr. Weaver, Mr. Coe, Mr. Imbach and another employee Janet Stainsby (who did not give evidence because she was away on holiday) noticed signs indicating that contrary to what Mr. Fassihi was saying, Item was not going to close down, for example, new accountants were appointed, and they therefore began to feel that Mr. Fassihi was acting disloyally in his own interests. However they did not feel that they could approach Mr. Dehghani without any proof. They noticed that Mr. Fassihi, Mandy Liddiard and another employee called Jo Hinton frequently held whispered discussions within the corner of the office. Also Mr. Fassihi spent less and less time in the office.

70. As I have already said, there were negotiations between Isograph and RAMS between September and December 1999. The tenor of the correspondence suggests that Isograph at least strongly suspected that RAMS was connected with Mr. Fassihi. It is difficult otherwise to account for Isograph's concern that RAMS would not employ anyone previously employed by Item. Also some of Isograph's letters seem to assume that RAMS knew of its dispute with Item; this too is difficult to understand unless Isograph realised that it was really dealing with Mr. Fassihi and not with Mr. Rezai, who was previously unknown to them. Mr. Fassihi came to Isograph's first meeting with Mr. Rezai on 7th December 1999, but at least ostensibly only to introduce Mr. Rezai to Dr. Flanagan and Dr. Pullen; after the introduction, they asked him to leave. The negotiations were then broken off, but resumed in April 2000, and resulted in an agreement on 7th June 2000. This of course coincided with the termination of Item's distributorship.
71. Item's case is that RAMS was a front for Mr. Fassihi, or at least that he had some arrangement with Mr. Rezai to participate in RAMS once it got going. Alternatively, they contend, even if this is not so, what Mr. Fassihi did to promote the contract between Isograph and RAMS, which was by this stage a competitor of Item, was inconsistent with his duties as a director and an employee. Mr. Fassihi's case is that RAMS was Mr. Rezai's company and that he had no interest of any kind in it. He did no more than what he was entitled to do by way of giving informal advice and assistance to a close friend, and he had no interest in the business. If that had been so, one might have expected him to be able to call Mr. Rezai to give evidence in support of his case on this point, but he was not called.
72. There is a considerable amount of documentary evidence to support Item's case. First there is a screenshot of the documents found on Mr. Fassihi's computer with the file name RAMS on the date on which he was dismissed, 26th June 2000. Item was able to open some of these in September 2000 with the assistance of a website service which discovered that Mr. Fassihi's year of birth, 1962, was a password which protected the document on the computer. The documents included for example one named RAMSfax2 dated 7th September 1999 last modified at 11.32 on that day, which coincides with a fax undoubtedly sent by RAMS to Isograph at precisely that time on that date, in which RAMS responded to a letter sent the previous day commenting on contractual proposals and dealt at length with what they said were the advantages of their proposals. Other documents identified on the screen shot coincide with later negotiations and there are also drafts of the RAMS/Isograph agreement and correspondence relating to orders by Item customers which were being diverted to RAMS.
73. Mr. Fassihi does not dispute the authenticity of the screenshot. His case on these documents is that Mr. Dehghani must somehow have managed to break into Mr. Rezai's Hotmail account, retrieved the documents now relied upon and placed them on his computer so as to incriminate him. He points out that, although Mr. Dehghani says that the screenshot was obtained in the presence of the police on 26th June 2000, there is no evidence to support this from the police officers. He says that there may well have been documents called by the same name on his computer, but of an entirely different and innocent character. For example RAMSFAX 1 to 4 may be four different versions of a logo which Mr. Fassihi had asked Mr. Weaver to design for Mr. Rezai. I reject this explanation. Apart from its inherent probability, and my view of other aspects of Mr. Fassihi's evidence, certain of the incriminating documents on the screenshot coincide precisely in time with documents which Item only obtained on discovery after it had been exhibited to Mr. Dehghani's first witness statement dated 11^th July 2000 in support of Item's application for an interim injunction. This applies for example to the fax of 7th September 2000 already referred to and to a later fax of 29^th September 1000.
74. Therefore, Mr. Fassihi's case on this issue requires one to believe (a) that Mr. Dehghani found some means of breaking into Mr. Rezai's Hotmail (b) that there were innocent documents with an identical file name and created on the same date and at the same time as the documents disclosed by Isograph and (c) that following this disclosure Mr. Dehghani opened the files, erased the innocent documents and substituted accurately typed replicas of the faxes. Even without taking into account the other incredible aspects of Mr. Fassihi's evidence, I do not believe this.
75. In addition to the specific documents which Item has shown to have been on Mr. Fassihi's computer, Item points out that Mr. Rezai was a property developer and had had no experience in the reliability software field, or any other computer business, before the RAMS/Isograph negotiations began. Item submits that the correspondence between RAMS and Isograph displays more knowledge on the RAMS side than Mr. Rezai could have possessed and there is considerable force in this submission, given the detail in some of the letters. Further, I do not see how Mr. Rezai could have been in the position, without considerable assistance from somebody more experienced than he in the field, to evaluate the detailed terms of the agreement eventually entered into between Isograph and RAM.

Item's claim in respect of the setting up of RAMS

76. Item claims that, in breach of his duty as a director and an employee to act in Item's interests, Mr. Fassihi set up a rival company, which was a competitor in the reliability software field. Although Mr. Fassihi was careful to be neither a director nor a shareholder of RAMS while still employed by Item, I have no doubt that he had reached some kind of agreement with Mr. Rezai that they would set up the company together with finance provided by Mr. Rezai and that Mr. Fassihi would run it and have a substantial interest in it. This conclusion is based on (a) the fax of 24th April relating to the "new company" which indicates precisely this albeit without naming Mr. Rezai, (b) the documents which I am satisfied were found on his personal computer and were not 'planted' there by Mr. Dehghani, (c) the understanding at the time of Item's employees, Mr. Weaver, Mr. Coe and Mr. Imbach that Mr. Fassihi was talking about his own company, (d) the improbability of Mr. Rezai going into the reliability software business without a knowledgeable partner and (e) the evidence as to what happened after 12th May 2000, set out below. I hold that Mr. Fassihi's actions in establishing RAMS were in breach of his duties, both because they took a significant part of his time and energy and because RAMS was intended to be in direct competition with Item in the reliability software field.

Post 12th May 2000 events

77. There is overwhelming evidence establishing that Mr. Fassihi continued the process of setting up RAMS after the termination of the Isograph agreement on 12th May 2000 and that, having steadily over the previous months told employees that the future at Item was bleak, he then sought to recruit them for RAMS.
78. Mrs. Haynes' evidence is that Mr. Fassihi told her about RAMS. He did not say in terms that he had a job for her there, but told her that it had placed an advertisement in a local newspaper. He told her which newspaper to buy and on what day. She then wrote to RAMS applying for the job, and was sent an offer without any interview or other prior communication from RAMS. She then asked Mr. Dehghani to agree to her leaving on short notice on 9th June, taking until 20th June as her holiday period. She told him that she wanted to find a job nearer her home. On Monday 12th June, she started work at RAMS. Mr. Fassihi gave her a laptop which belonged to Item. He told her that the laptop contained the Item UK database and said that she could use it. The database contained the names of Item's customers, product details, renewal dates and other details, which enabled her to contact Item's customers in the knowledge of what their requirements were and at the appropriate date in advance of the time for renewal of their contracts. Item later obtained copies of a number of letters written by her on behalf of RAMS to Item's customers, including BAE Systems, Simoco Telecommunications, CSC Purchasing, Celsius Tech Systems AB and Thomson CSF.
79. Mr. Weaver referred in his evidence to a dinner given by Mr. Dehghani and Mr. Fassihi on Friday, 16th June 2000 at a restaurant called Kams Palace, to which all the employees were invited. Before the dinner, Mr. Fassihi, Mr. Coe and he met for a drink at a pub. Just before then, he had been contacted by a German customer called Nord Micro GmbH, who had received a letter from Mrs. Haynes at RAMS and who, he said, appeared to know exactly what products they had purchased and when maintenance contracts were due for renewal. Mr. Weaver had spoken to Mr. Fassihi, who had said that he would deal with it. Against that background, Mr. Fassihi openly said to Mr. Weaver at the pub that he should leave Item, take another job and then, when everything had calmed down, Mr. Fassihi would re-employ him at RAMS. This would make it look as if Mr. Weaver had not left in order to join RAMS. On the same occasion, Mr. Weaver learned that Mr. Coe was leaving to go to work for RAMS and that RAMS had a backlog of £25,000 orders for Isograph products. Mr. Weaver said that he listened, without committing himself.
80. Then, on Sunday, 25th June, Mr. Fassihi telephoned him at home and said that he was having all sorts of problems with Mrs. Haynes at RAMS, because she was unable to provide the technical support needed by the customers. He offered Mr. Weaver a job to start as soon as possible, in the same technical support role as he fulfilled at Item, and told him to apply through the Isograph home page on the Internet. Mr. Fassihi said that this was how he had covered himself; if the application was made in this way, Mr. Fassihi could not be tied to the company.
81. Mr. Coe's evidence is that towards the end of May, Mr. Fassihi telephoned him and said that he was close to signing a deal with Isograph and wanted to meet him to discuss possible employment with his new company, RAMS. They arranged to meet after work on Tuesday, 30th May at a pub. When he arrived, Mrs. Haynes was also there. Mr. Fassihi said that the deal with Isograph had been close to collapse around Christmas time, but that he was now about to start trading with his new company selling Isograph products. They were looking at offices in Eastleigh and Mrs. Haynes was going to join the new company. Mr. Coe, believing from Mr. Fassihi's comments over the previous months that Item was not likely to continue in business, said that he was prepared to consider an offer. A couple of days later, Mr. Fassihi told both Mrs. Haynes and himself to buy a copy of The Southern Evening Echo, where there would be an advertisement by RAMS for sales and technical staff. He assumed, although Mr. Fassihi did not say so explicitly, that this procedure was needed in order for it to appear that he and Mrs. Haynes had joined RAMS independently and not because they had been offered jobs by Mr. Fassihi. Two days later, Mr. Coe received an unsigned offer letter dated 7th June concealed inside a customer file in a sealed envelope, handed to him by Mr. Fassihi. The letter referred to an interview, but he had not attended one.
82. Mr. Coe was not happy with the terms of the offer. Mr. Fassihi gave him further details, and agreed to take him to see the offices in Eastleigh. He said that he hoped to take on everyone from Item and that when the company took off he would be able to improve everybody's terms. On Monday, 12th June, Mr. Fassihi took him to the offices at Eastleigh, and said that if he did not join RAMS he was unlikely to have any job in a month's time; Mr. Coe was persuaded. Mr. Fassihi had a key to the office and Mr. Coe met Mr. Rezai. Mr. Fassihi and Mr. Coe helped Mr. Rezai take some computers in to the office.
83. On 13th June, Mr. Coe received a signed offer letter in another customer file, again handed to him by Mr. Fassihi. Mr. Fassihi also gave him a note which read:

"Graham

I am pleased to hear that you have decided to join RAMS and as mentioned previously we need there like YESTERDAY!! I am not sure when exactly you have decided to hand your notice to ITEM but it will be great if you ask ITEM to allow you to leave end of next week so we have you at RAMS on Monday 24th June 2000. Also, in your letter, make sure you calculate your Holiday entitlement so ITEM will have to pay you say up to 27th if you have 4 days left, etc.

Take for now!

PS Please drop me a line (kouroush@fassihi.com) to let me know if you can start on 24th ASAP. Thanks."

84. Mr. Coe then wrote a resignation letter, which Mr. Fassihi said that he would hang on to since there was a plan to close down Item UK and start up a new company, which would result in both of them securing redundancy money. Mr. Fassihi sent a note to Mr. Coe reading as follows:

"Graham

Thanks for the letter.


As you might have guessed the Accountant cancelled today's meeting! However, Mehdi is going to see him first thing tomorrow morning with a list of questions, so I will not notify him until I am 100% sure that you will not be losing out on anything. In any case I can not see any problems with you starting on Monday.

Regards

Kouroush

PS RAMS had about 12K worth of orders today thanks to you know who!! Bloody good start!

PPS Table is also booked for Saturday night. We will sort out the details later."

85. Mr. Coe assumed that "you know who" meant Mrs. Haynes.
86. Mr. Fassihi told Mr. Coe to take two weeks' holiday at Item, during which time he could work at RAMS, and then collect his redundancy money after the holiday. On Saturday, 25th June, Mr. Fassihi, Mr. Rezai and their respective wives, Mrs. Haynes and her husband (then her boyfriend) and Mr. Coe had a celebration meal together to mark the opening of the new company, and on Monday, 26th June, Mr. Coe went to work at the Eastleigh office.
87. Mr. Fassihi also tried to interest Mr. Imbach in joining Isograph, but Mr. Imbach distrusted Mr. Fassihi and was not interested. However, he was concerned about Item's future, and bought a company so that he could set up his own business if Item folded as Mr. Fassihi said it was bound to. On Friday, 23rd June, Mr. Imbach told Mr. Fassihi of a customer in France who wanted to buy Isograph products, which Item by them could not supply. Mr. Fassihi gave him a piece of paper reading "All orders to be made & faxed to Isograph Limited c/o RAMS International Limited" with the fax number. He offered Mr. Imbach what the latter regarded as a derisory commission, and said that because his new company had just started up he could not pay more. Mr. Imbach asked him whether he was not concerned that Mr. Dehghani would find out about the diversion of customers to his new company, and Mr. Fassihi said that he had been very careful setting up the new company and that his name had not been used. It had been set up using the name of a friend who was also financing it. He said that he could not be linked to the company, because nothing was in his name. He asked Mr. Imbach not to give the piece of paper to Mr. Dehghani, because this would be very dangerous for him.
88. Mr. Dehghani discovered what was going on 24th June, when Janet Stainsby telephoned him and told him that Mr. Fassihi had been plotting to start up a new company for some time, but that she had had no proof until now. The reason she was now able to tell him was because of Mr. Hussein's telephone call. On Monday, 26th June, Mr. Dehghani called the police and Mr. Fassihi was escorted off the premises (although in the event no criminal proceedings were brought). His computer was kept and eventually examined. The news reached RAMS offices shortly afterwards and Mrs. Hayes understood that "the game was up" and that Mr. Fassihi had been arrested. Mr. Coe's first and only day at RAMS ended around lunchtime with his locking himself up in a room for safety.
89. Another document which confirms that Mr. Fassihi was intimately involved in setting up RAMS, and was one of its proprietors, is a fax dated 16th June 2000 to its accountants giving detailed instructions about selling up the payroll:

"As you are aware, RAMS International have now started trading. Therefore, I would be grateful if you could set up our payroll as soon as possible. In the long term, we will have two types of employees, some will be on salary only and some will be on Basic Salary + Commission. I will notify you of everyone's basic salary as and when they join, and once a month, I will fax you details of any commissions that may be due. The general format will be

Mr. X Basic Salary

Miss Y Basic Salary - £xxxx Commission

Etc.

Will the above be sufficient?


Can you send the Payslips to my Home Address and fax me the breakdown of salaries after Tax and NI to my fax number at home which is 02380 45 42 83. We are setting up an automatic bank transfer to the staff's account and I would like them to receive their salary on 25th of each month so I guess I need the breakdown from you a few days before allowing the Bank sufficient time to transfer the money. At the moment we only have one person on the payroll but another one should join us by 24th. …

… Please let me know if you have sufficient information to start the payroll with Mandy alone and I will contact you against as soon as Graham has started."

90. There is also a fax dated 26th June 2000 from Mr. Fassihi to "Graham & Mandy", that is Mr. Coe and Mrs. Haynes, starting "Hope you both had a nice weekend and welcome to RAMS International Graham", giving Mr. Coe various instructions and stating that he proposed to come into the office early on the following morning. This is timed at 7.49 a.m. and is on RAMS headed paper. Mr. Fassihi said in evidence that he must have been staying overnight with Mr. Rezai; in his deposition in the U.S. proceedings he said that he had borrowed a fax from Mr. Rezai.
91. On 29th June, RAMS' solicitors wrote to Item's solicitors stating that whilst Mr. Fassihi was a good friend of Mr. Rezai "he was not involved in the setting up our client company nor is he involved in the running of the company". This was untrue. On 5th July, Isograph's solicitors wrote claiming that "our client does not know of Mr. … Fassihi (other than in the context of past dealings with Item) and has never had negotiations with them, never mind any that are "underhand and devious"." This was untrue in at least two respects. Isograph was well aware that Mr. Fassihi had at least attempted to have negotiations with them on his own behalf and not on behalf of Item in an underhand and devious way. Subsequently he had attended a meeting in December 1999, at which he had introduced Mr. Rezai to Isograph. As I have already said, I consider that Isograph at least strongly suspected that Mr. Fassihi had a substantial interest in RAMS.
92. On 11th July, Arden J. granted an interlocutory injunction restraining Mr. Fassihi from using confidential information belonging to Item. Eventually, RAMS ceased business. The laptop was returned to Item, but information on it had been deleted.

Item's further claims

93. I accept Items's contention that, on the facts I have now found, Mr. Fassihi is liable for damages on each of the following bases:

(a) Breach of his duties as a director to act bona fide in the interests of the company and as an employee to serve the company with fidelity and not to set up in competition with it: Hivac Limited v. Park Royal Scientific Instruments Limited [1946] Ch. 169.

(b) Damages for breach of the express term as to confidentiality in his contract of employment, set out at para. 6 above.

(c) Damages for breach of confidence; even without such a term, the information on the database, containing precise details of customers and their requirements, was plainly confidential: see Wessex Dairies Limited v. Smith [1935] 2 K.B. 80; Lansing Linde Limited v. Kerr [1991] 1 All E.R. 418 at 425H-426A per Staughton L.J.

(d) Inducing Mrs. Haynes to breach the implied terms of her employment by competing with Item while still in its employment and by using the list of its customers on the database: cf. Robb v. Green [1895] 2 QB 315.

94. I also accept Item's contention that the selection of client information on the database rendered it a literary work within the meaning of the Copyrights Designs and Patents Act, and that Item's investment in obtaining, verifying and presenting the contents of the database was of sufficient substance to give it a database right under the Database Regulations in S.I. 1997/3032. Item is entitled to damages for breach of these rights.
95. Finally, Item is entitled to damages for wrongful interference with the laptop taken by Mr. Fassihi and given or "lent" to Mrs. Haynes.
96. As indicated at para. 59 et seq. above, Mr. Fassihi sought to justify his conduct, or such part of it as he admitted, by alleging that Item was infringing Isograph's copyright in its source code. The allegation was not pleaded and I have found that it was not made out on the evidence. However, even if had been pleaded and established, it would not in my judgment have provided Mr. Fassihi with any defence to Item's claims. It is possible to imagine circumstances in which the manner in which an employer carried out, or intended to carry out, its business might provide an employee who acted as Mr. Fassihi has done with a defence of illegality. This might be the case, for example, if the employer was supplying a mixture of legitimate goods and illegal substances to its customers. However, in the present case the position at the time of Mr. Fassihi's actions was that there was a dispute between Isograph and Item US which, if Isograph's claim was justified, meant that both Item companies were infringing Isograph's copyright. But even if that was the position, it was still open to Item US/Item to negotiate a settlement with Isograph which permitted them to continue to sell Item's new products (this is what eventually happened). Alternatively, it would have been open to them to negotiate with another supplier in the same field for the right to distribute other products. Mr. Fassihi's in effect contends that, whenever the employer is carrying on a business which involves the breach of some third party rights, its directors and employees are entitled to disregard all their normal duties of fidelity. I reject this contention.

Mr. Fassihi's claims

(a) Wrongful dismissal

97. Mr. Fassihi's claims for wrongful dismissal clearly fail on the facts which I have found. His various breaches of duty were of the most serious kind and clearly justified immediate dismissal.

(b) Arrears of salary

98. Mr. Fassihi also claims arrears of salary covering the period of 1st to 26th June 2000. This raises three issues of some difficulty, namely (i) whether arrears of salary are payable by virtue of sections 2 and 5 of the Apportionment Act 1870 where the director or employee works for part of a period (ii) if so, whether this applies in a case of justified dismissal and (iii) whether having regard to his breaches of duty Mr. Fassihi would be entitled to his salary in any event.

(i) Apportionment Act 1870

99. There is no doubt that at common law an employee whose salary is payable at the end of stated periods, and not expressed to be "at the rate of" a stated amount for each period, and whose service terminates for whatever reason before the end of a period, is not entitled to recover a proportionate part of the salary. This is because he has not fully performed his contract for the period: see Boston Deep Sea Fishing v. Ansell, supra, Goff and Jones on The Law of Restitution, 5th ed. p. 548.
100. However, section 2 of the Apportionment Act 1870 provides that "all rents, annuities, dividends and other periodical payments in the nature and income" are to be considered as accruing from day to day and apportionable in respect of time accordingly and section 5 provides that "annuities" is to include salaries and pensions. Section 3 provides that the apportionment part of any payment becomes due when the whole would have become due.
101. A straightforward reading of this provision suggests to modern eyes that a proportionate part of the salary can be recovered by an employee. Scott J. in Sim v. Rotherham Council [1987] Ch. 216 at 255A said obiter:

"Each month a contractual right to a salary payment vests in the teacher. By reason of section 2 of the Apportionment Act 1870, the salaries are deemed to accrue day by day. If a teacher's contract, were, in the middle of a month, to come to an end, by death, dismissal or some other event, section 2 would entitle the teacher, or his estate, to an apportioned part of the month's salary payment. So the salaries may be regarded as accruing day by day."

102. However, this is inconsistent with the decision of the Court of Appeal in the Boston Deep Sea Fishing case cited earlier, in which the Court of Appeal held that the dismissed employee could not recover a proportionate part of his unpaid salary for the current year of his service, not because he was justifiably dismissed but because on the proper construction of the contract nothing was due until a date after the date of dismissal: see per Cotton L.J. at 359-60, Bowen L.J. at 364 and per Fry L.J. at 371. This is not an isolated case: see also Re Central de Kaap Goldmines (1899) L.J. Ch. 18; McConnell's Claim [1901] Ch. 728; Healey v. S.A. Francais Rubastic [1917] 1 K.B. 947. In Miles v. Wakefield Metropolitan District Council [1987] AC 539 at 570, Lord Oliver referred to Boston Deep Sea Fishing as authority for the proposition that an employee who has been "rightly dismissed" cannot claim a proportionate part of his salary, but I do not think that the decision depended on whether he was rightly dismissed. The rationale of the decision was that the employee was no longer employed when the salary became due and payable.
103. On the other hand, the Divisional Court in Moriarty v. Regent's Garage & Engineering Company Limited [1921] 1 K.B. 423 consisting of Lush and McCardie JJ., held that the Apportionment Act 1870 did apply so as to entitle the director to a proportion of his salary in circumstances in which he ceased to be a director of the company part of the way through a period for which salary was payable. Certain of the earlier decisions to the contrary were overruled, in essence on the ground that the Apportionment Act had not been considered, or not considered properly: see per McCardie J. at 447-8. However, the decision of the Divisional Court was overruled by the Court of Appeal on procedural grounds at [1921] 2 K.B. 766 and the Court of Appeal left open the question whether the Apportionment Act applied. Scrutton L.J. referred to it at 779 as "a very arguable point" and see also per Younger L.J. at 782.
104. Clearly, I am bound by the decision of the Court of Appeal in Boston Deep Sea Fishing unless I am satisfied that it was given per incuriam, because the Court did not have the provisions of the Act in mind, a conclusion which should not be reached lightly. In an article written in 1982, 2 Legal Studies 302, Mr. Paul Matthews argues that the Apportionment Act 1870, like its predecessor the Apportionment Act 1834, was only intended to provide for apportionment in circumstances in which the person entitled to receive the payment changed in the course of the period, e.g. the paradigm case of rent payable to two different landlords where ownership changed the course of a quarter, and that it was not intended to cover circumstances in which the right to payment ceased altogether before the end of the period. Having considered this article, and bearing in mind that the point was deliberately left open by the Court of Appeal in Moriarty, I do not consider that I would be justified in assuming that the decision of the Court of Appeal in Boston Deep Sea Fishing was given per incuriam and I am therefore bound by it. Accordingly I hold that Mr. Fassihi is not entitled to arrears of salary as to the date of dismissal.

(ii) If the Apportionment Act applies, can a justifiably dismissed employee rely on it?

105. On this issue, Lush J. in Moriarty said 434:

"Take another case: supposing a servant were dismissed for misconduct during the currency of a quarter or half year, as the case may be. It is not necessary to decide whether the servant can, by virtue of the Apportionment Act, claim an apportioned part of his salary up to the day of his dismissal or at all events up to the day of discovery of the misconduct; but I should hesitate to agree with the suggestion that he can claim in such circumstances. It is quite true that the salary is to be considered as accruing from day to day, and it is quite true that a dismissed servant is entitled to salary that has already accrued at all event up to the date of the act of dishonesty, but the Act does not say that in such a case, or for all purposes, the salary shall be deemed to have accrued from day to day; it only says that it shall be considered as accruing from day"

106. McCardie J. took a somewhat different view at 449:

"It may well be said that no servant dismissed for misconduct can rely on that misconduct as a basis for invoking a remedial Act, just as no man can rely upon a self-induced frustration of a contract: see per Lord Sumner in Bank Line v. Arthur Capel & Co. (6) On the other hand I am not altogether satisfied as to the justice of denying the benefit of the Apportionment Act to a man who may have been guilty of misconduct. Suppose a salary is payable half yearly to a man, and suppose he has fulfilled his duties with absolute propriety up to the last week; that he then commits an act which justifies his master in dismissing him. Upon the law as it stands the man gets nothing for his five and a half months' work. Is it right that he should be deprived of remuneration for five and a half months' work because during the last fortnight he has done something for which he has been dismissed? I express no opinion upon that point."

107. If, contrary to what I have held, the Act applies I think, in common with Mr. Glanville Williams in an article at 57 L.Q.R. 381-3, that the more generous view is to be preferred. The Act does not expressly provide that it cannot be relied upon by a party whose wrongful conduct led to the severance of the period which gave rise to the apportionment. So to construe the statute would lead to the automatic and often capricious forfeiture of benefits earned irrespective of the proportionality of the loss of benefits to the loss caused by the breach. I can see no good reason why any such intention should be imputed to Parliament.

(iii) Could Mr. Fassihi claim arrears of salary in view of his misconduct?

108. If Mr. Fassihi were entitled to the arrears of salary claimed, by virtue of the Apportionment Act, I do not think that his misconduct would prevent him from claiming it. In Horcal the Court of Appeal held that the employee was entitled to his salary for a completed period, notwithstanding his breach of duty, unless this amounted to a failure of consideration, which has not been alleged. However, it may well be that, since Mr. Fassihi spent a great deal of his time both in this broken period and in earlier months working not for but against Item, that Item is entitled to claim part of any salary paid or still payable as damages: see Miles supra at 570 per Lord Oliver.

(c) Holiday pay

109. Mr. Fassihi also claims compensation for the loss of his accrued holiday entitlement. However, the right under a contract of employment to take paid holiday is on any view not covered by the Apportionment Act, and there is therefore no accrued right.

(d) The Mercedes

110. Mr. Fassihi preferred a more expensive car than Item was prepared to provide, and a Mercedes was bought for some £14,495, of which Mr. Fassihi contributed £5,000. The car was sold by Item on his dismissal, and he claims £5,000 or a rateable proportion of the sale proceeds. Mr. Quiney concedes that prima facie there is a resulting trust in favour of Mr. Fassihi which would entitle him the appropriate proportion of the sale proceeds: see Lewin on Trusts 17^th ed. para. 9.62. But he submits that, since it was the intention of the parties that Mr. Fassihi should gain certain tax benefits from structuring the purchase of the car in accordance with the advice of Item's accountants, the intention to create a resulting trust was negatived. In my view, Mr. Fassihi is clearly right on this. The fact that he intended to obtain such tax benefits as were available does not in any way negative an intention that the beneficial ownership of the car should follow the proportions in which Mr. Fassihi and Item contributed to the purchase price. Indeed, Mr. Fassihi's part ownership of the car was of much greater value than the relatively small tax benefits, so that on this issue Item's case makes no commercial sense. I therefore hold that Mr. Fassihi is entitled to a rateable proportion of the proceeds of sale.
111. Mr. Fassihi also complains that the car had a personalised number plate, which he has lost. Although no doubt in normal circumstances, with the parties on good terms, arrangements would have been made to transfer it to whatever alternative vehicle he bought, I do not think there was any legal obligation on Item to do so. To the extent that the number plate has a value, this will no doubt have contributed to the purchase price. If Mr. Fassihi paid for the number plate, he is entitled to have the amount paid taken into account in calculating the appropriate rateable proportion of the purchase price paid by him, and therefore of the proceeds of sale.

N Strauss Q.C.

Deputy Judge Ch. D

5^th December 2002