Scottish Court of Session Decisions

[1] The pursuers are a company engaged in light engineering and manufacturing. The first defender was employed by them from 1984, being promoted in or around October 1995 to the position of buyer (or senior buyer). His employment was terminated in or about September 1999. The third defender was employed for some years as a sales manager by Tayside Metals Limited. His employment with that company was terminated in about August 1999. The pursuers and Tayside Metals Limited had from at least 1995 extensive commercial dealings one with the other. In the course of those dealings the first and third defenders had personal contact.

[2] From at least October 1995 the third defender, in addition to his employment with Tayside Metals Limited, traded on his own account under the style Alloy & Metal. On or about 8 April 1999 that business was taken over by a company styled Alloy & Metal Limited (the second defender in this action). The third defender had an interest in that company as did his father.

[3] In this action, which was remitted from the Sheriff Court, the pursuers seek damages under two craves. The first of these is directed jointly and severally against the first and third defenders; the second is directed jointly and severally against the first and second defenders. In the course of proceedings in this Court the second defender failed to be duly represented at a peremptory diet and decree passed against it. The first defender continues to resist both craves and the third defender the first crave.

[4] The bases of the pursuers' claims are that they sustained substantial damages by reason of alleged breaches by the first defender of his contract of employment with them (for which they seek reparation from him) and by reason of wrongful inducement of such breaches by the third defender (in respect of the period between December 1997 and early April 1999) and by the second defender (in respect of the period between 8 April 1999 and early September of that year). During these respective periods the pursuers, through the first defender as their buyer, purchased goods (parts for equipment manufactured by the pursuers) from the third defender trading as Alloy & Metal and from Alloy & Metal Limited. The damages are quantified by the difference between the prices at which the third defender and Alloy & Metal Limited respectively purchased these goods from suppliers to them and the prices at which they resold them to the pursuers. The information to allow such calculations to be made apparently proceeds on documents recovered by the pursuers under a commission and diligence granted while the case was still in the Sheriff Court.

[5] The first defender's contract of employment is averred by the pursuers to have contained an express term that he was not permitted to engage in any activity involving, or which might involve, a conflict of interest with the pursuers. The pursuers' averments (in Article 3) continue -

The pursuers plead that they relied on the ability and integrity of the first defender in the conduct of buying parts, that he was not subject to detailed supervision, that he occupied a position of trust within their organisation and that he was responsible for placing orders for parts at competitive prices. The pursuers further aver

(in Article 4) -

Reference is then made to an investigation carried out by the pursuers' managing director in 1999. The averments continue -

[6] In Article 5 the pursuers aver -

[7] In Article 6 the pursuers aver -

[8] In Article 7 the pursuers aver that the average mark-up by the third defender on the goods purchased by him and resold to the pursuers was 67% and that the average mark-up by the second defender was 55%.

[9] Mr Webster for the first defender submitted that the case directed against the first defender in so far as laid on the first crave was irrelevant and should to that extent be dismissed. The critical duty predicated in Article 3 (whether based on the express or the implied term) was dependent on the propositions (1) that those who had supplied the goods to the second and the third defenders at certain prices would have sold these or equivalent goods to the pursuers at the same prices and (2) that at the material times the first defender actually knew that to be so. No case was made that, if he did not actually know, he ought somehow to have discovered it. The only attempt on averment to specify any relevant basis for knowledge on the part of the first defender was that on or about 7 April 1999 the managing director of Teelux Limited had informed the first defender by fax that "he had become aware of the possibility that the third defender was charging excessively high prices for parts which had been supplied on the third defender's behalf by Teelux Limited. In spite of this warning, to which he did not respond, the first defender took no steps to investigate whether in fact the third defender was charging excessive prices for parts purportedly supplied by him to the pursuers". Mr Webster was content to accept that that averment would justify a proof before answer being allowed in respect of transactions in the period from 7 April 1999 until the termination of the first defender's employment in September of that year. This coincidentally related to the period when the pursuers purchased goods from the second defender. However, in respect of any earlier period (being that to which the first crave related) no basis on averment was laid of the facts and circumstances on which the pursuers proposed to prove that the first defender had the critical knowledge.

[10] The third defender, who appeared on his own behalf, made various submissions in support of his motion that the first crave (in his case in effect the action) should be dismissed in so far as directed against him. Among those was the proposition that, if that crave fell for lack of a proper basis for the critical knowledge on the part of the first defender, the action must inevitably fail against the third defender whose alleged liability was premised on his having induced a breach by the first defender based upon that knowledge.

[11] Mr Brailsford for the pursuers accepted that, if their case against the first defender failed for lack of a proper basis of knowledge by him, the case against the third defender failed with it. He submitted that a sufficient basis for the requisite knowledge was averred. The legal context in which the pursuers' averments required to be judged was explained in the Stair Memorial Encyclopedia, the relevant chapter in Volume 9 on Employment having been reissued separately in 2000. Paragraph 85 of the reissue dealt with express terms and paragraph 86 with implied terms. There was implied a general duty to refrain from any activity which would injure the employer's business. Reference was made to Malloch v Duffy (1882) 19 S.L.R.697 and to Graham v R & S Paton 1917 S.C.203 especially Lord Mackenzie at p209. Mr Brailsford accepted that "knowingly" might have to be read into the second of Lord Mackenzie's propositions at the foot of that page. Reference was also made to Wessex Dairies Ltd v Smith [1935] 2 K.B.80, especially per Greer, L.J. at p84. It was a question of the facts of each particular case as to how far the duty of fidelity extended (Hivac Limited v Park Royal Scientific Instruments Ltd [1946] 1 Ch.169, per Lord Greene, M.R. at p174). The general duty of fidelity precluded an employee from acting in any way which he knew was detrimental to the interests of his employer. The law did not circumscribe how that general duty might be breached in a particular case. In the present case there was, in furtherance of the general duty of fidelity, a particular duty on the first defender not to harm his employer by buying from a supplier whom he knew was charging more than was justified (namely, at a price greater than that at which the goods or equivalent goods could be obtained elsewhere). As regards breach of that duty, the pursuers relied on the averred circumstances (1) that the first defender was their buyer, (2) that he and the third defender were known to each other, (3) that there had been no dealings between the pursuers and the second or third defenders prior to December 1997 and (4) the systematic purchase by the first defender from the second and third defenders at prices which overall far exceeded the prices which the sellers to the second and third defenders would normally charge for selling and delivering such goods, together with an inference which the pursuers would invite the court to draw on proof of certain additional matters. These matters were (1) the discovery in the first defender's office after termination of his employment of a number of blank delivery notes of the third defender, (2) the absence of any response by the first defender to the fax sent to him by the managing director of Teelux Limited and (3) the absence of any investigation by the first defender pursuant to the information in that fax or the reporting of that information to his superiors within the pursuers. The inference which after proof could properly be drawn was that the first defender was well aware that he was purchasing from the third (and subsequently the second) defender at prices much higher than would have been charged by other suppliers. The pursuers were not in a position to aver more. In particular, they were not in a position to aver that the first defender received any benefit from so acting or had any other motive for doing so. That was unnecessary. If the inference suggested could on proof of the pursuers' averments be drawn, a breach of duty would be established. The inferences sought to be drawn was that the first defender had the requisite knowledge from the outset of his dealings on the pursuers' behalf with the third defender. A proof before answer should be allowed.

[12] In my view the pursuers' averments are insufficient to justify an inquiry being allowed on their claim in so far as laid on the first crave of the Initial Writ. It was not suggested that the express term of the first defender's contract of employment extended for present purposes beyond the scope of the duty of fidelity implied in all contracts of employment. In the circumstances of this case the latter duty depends for relevant particularisation of the duty and for breach of that particularised duty on an offer to prove actual knowledge on the part of the first defender that his dealings with the third defender were to the detriment of his employers. In particular, it requires a relevant and specific basis for proof that, at the time when the first defender committed his employers to a purchase from the third defender, the first defender knew that the same or equivalent goods could be obtained from an alternative source at a materially cheaper price (but otherwise on broadly equivalent terms). The pursuers' averments do not, at least as regards the period prior to April 1999, begin, in my view, to lay a proper basis for these necessary elements of proof. There is nothing on averment to suggest that at any time during that period the first defender knew that the suppliers to the third defender would have been able and willing to supply directly to the pursuers, far less that he knew that they would have been willing and able to do so at the prices and otherwise on the terms on which they supplied those goods to the third defender. The discovery of blank delivery notes in the first defender's office in or about September 1999 of itself yields no adverse inference in circumstances in which the third defender had been delivering goods to the pursuers and the first defender was responsible for their purchase; there is nothing to suggest that delivery notes were improperly used or, if they were, that the first defender had any hand in it. Nor does the absence of a response by the first defender to the fax from the managing director of Teelux Limited or any other inaction on his part justify any inference of actual knowledge had by the first defender prior to receipt of that fax that he was purchasing goods on the pursuers' behalf at excessive prices. (As Mr Webster was prepared to accede to a proof before answer in respect of the period subsequent to that fax, I say nothing at this stage about any inference which might legitimately be drawn in relation to the period subsequent to 8 April). The other factors relied on by Mr Brailsford take one no further than a regular course of ex facie legitimate transactions between the third defender and the first defender as the pursuers' employee responsible for the purchase of goods for manufacturing purposes. There is nothing, for example, to suggest that, when the first defender began purchasing goods from the third defender, the prices charged were to any extent higher than those charged by suppliers from whom any equivalent purchases had previously been made or that, to the first defender's knowledge, any material differential subsequently emerged. I should add that, although there are averments by the pursuers to the effect that the second defender (and possibly the third defender) did not manufacture goods or provide delivery or other services, Mr Brailsford did not suggest that this circumstance was of any materiality for present purposes.

[13] In all the circumstances I am satisfied that the pursuers' case in so far as directed to the first crave is irrelevant for want of necessary specification of requisite knowledge on the part of the first defender. Accordingly, the action in so far as laid on that crave must be dismissed. It is conceded that in these circumstances the action in so far as directed against the third defender must also be dismissed.

[14] In these circumstances it is unnecessary to consider any other grounds on which the action in so far as directed against the third defender might fall to be disposed of to the same effect. Part of what the third defender said in argument bore on factual issues which could not be resolved at debate. He did, however, also submit that the pursuers had no averments which could form a basis of proof that, in transacting as he did with the first defender, he knew that the first defender was acting in breach of his contract of employment with the pursuers. He also submitted that the pursuers had no averments of what he was alleged to have done to cause the first defender to breach his contract or of any basis for the proposition that those who had supplied to him would have been prepared to sell direct to the pursuers on the terms (including price) which the third defender with his commercial skills had been able to secure.

[15] In response to this part of the argument Mr Brailsford first drew attention to the relevant law. He referred to the Stair Memorial Encyclopedia Vol.15, para.576, to British Motor Trade Association v Gray 1951 S.C.586, especially per Lord Russell at p603, and to Rossleigh Ltd v Leader Cars Ltd 1987 S.L.T.355, especially per Lord Mayfield at p360. He also referred to Merkur Island Corporation v Laughton [1983] 2 A.C.570, especially per O'Connor L.J. (in the Court of Appeal) at p582D and per Lord Diplock (in the House of Lords) at pp.608-9. The third defender was aware that the first defender was employed by the pursuers. The express term was not uncommonly found in contracts of employment and the implied term was one implicit in all such contracts. The pursuers had an averment to that effect. The averments on which the pursuers relied as against the third defender relative to knowledge were otherwise the same as those relied on against the first defender.

[16] In my view, even if there had been relevant averments directed against the first defender in respect of the period to April 1999, there are no relevant averments to found breach by the third defender of the economic delict alleged against him. The third defender knew that the first defender was employed by the pursuers and may be taken to have had sufficient knowledge at least of the implied term of fidelity incumbent upon such an employee. It may also be taken that the third defender was aware that the first defender in the course of his employment with the pursuers was buying goods on their behalf at prices significantly higher than the third defender had himself purchased those goods. It by no means follows, however, that the third defender wrongfully induced the first defender to enter into those transactions. There is no suggestion on averment that the third defender induced the first defender by means of some personal benefit or other improper reward to enter into those transactions or any of them. There is nothing to suggest that the third defender was aware that the first defender knew (if he did know) that he could acquire those goods elsewhere at significantly cheaper prices. The third defender owed no duty to the pursuers or to the first defender to advise the latter that he (the third defender) was applying a substantial, even an extravagant, mark-up on the resale of goods which he had purchased. The imposition of such a duty would have remarkable consequences for the operation of modern commerce. The pursuers' averments do not begin to approach the statement of a relevant case that the third defender knowingly or intentionally induced the first defender to breach his contract of employment. (For the alternative formulations of "knowingly" and "intentionally" reference may be made to British Motor Trade Association v Gray, per Lord President Cooper at p600 and Lord Russell at p603; the English tort may require elements of both - see Merkur Island Corporation v Laughton (a case of the closely related tort of actionable interference with contractual rights), per Lord Diplock at p608). For these reasons also the pursuers' action against the third defender must be dismissed.

[17] Mr Webster submitted that, in so far as concerned the second crave, it was impossible to reconcile the pursuers' averments of loss with the schedule lodged by them purportedly giving details of the relevant transactions and how the loss was particularised. The first defender, he argued, was entitled to fair notice of the particular transactions relied on and how the pursuers' claim against him was computed. Mr Brailsford acknowledged that there were apparent inconsistencies between the pursuers' averments and the schedule produced. He sought leave to lodge an amended schedule within seven days. Mr Webster was content with this course, subject to any question of expenses.

[18] While taking other aspects of the case to avizandum, I allowed the pursuers to lodge a new schedule with an opportunity to the first defender to respond, if so advised. A new schedule has been lodged and no response made.

[19] In the whole circumstances I shall sustain the first defender's first plea-in-law to the extent of dismissing the action against him in so far as laid on the first crave of the Initial Writ; I shall sustain the third defender's first plea-in-law and dismiss the action in so far as directed against him; quoad ultra I shall allow to the pursuers and the first defender a proof before answer of their respective averments on record subject to an agreed exclusion, namely, of the sentence "During said period ... goods delivered" in Article 4. I shall put the case out By Order for discussion of preparation for that proof.