FEDERAL COURT OF AUSTRALIA AON Risk Services Australia Limited v Duffy [2003] FCA 940 PRACTICE and PROCEDURE – strike out application – cause of action for unauthorised use of confidential information of business competitor arising in context of retainer of former employees or agents of that competitor – absence of pleading material facts giving rise to cause of action. Copyright Act 1968 (Cth), ss 14(1)(a), 115(4) Federal Court Rules, Order 11 Rule 16(a) G E Dal Pont, Law of Agency, Butterworths, Australia, 2001 R P Meagher, J D Heydon, M J Leeming, Equity Doctrines and Remedies, 4th edn, Butterworths, Australia, 2002 Najjar v Haines & Ors (1991) 25 NSWLR 224 Permanent Trustee Australia Limited & Anor v FAI General Insurance Company Limited (In Liq) (2003) 197 ALR 364 Spotwire Pty Limited v Visa International Service Association Inc & Anor [2003] FCA 762 Trade Practices Commission v David Jones (Australia) Pty Ltd & Ors (1985) 7 FCR 109 Wright v Gasweld Pty Ltd (1991) 22 NSWLR 317 AON RISK SERVICES AUSTRALIA LIMITED v GAVIN DUFFY, TENET RISK SERVICES PTY LIMITED AND HEATH LAMBERT AUSTRALIA PTY LIMITED N 327 OF 2003 CONTI J 5 SEPTEMBER 2003 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N 327 OF 2003 BETWEEN: AON RISK SERVICES AUSTRALIA LIMITED APPLICANT AND: GAVIN DUFFY FIRST RESPONDENT TENET RISK SERVICES PTY LIMITED SECOND RESPONDENT HEATH LAMBERT AUSTRALIA PTY LIMITED THIRD RESPONDENT JUDGE: CONTI J DATE OF ORDER: 5 SEPTEMBER 2003 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The statement of claim filed herein on 19 March 2003 be struck out in relation to the third respondent Heath Lambert Australia Pty Limited. 2. The applicant be granted leave to file an amended statement of claim in relation to Heath Lambert within 28 days, or such longer period as AON can demonstrate should be the case. 3. The applicant to pay the third respondent's costs of the strike-out application. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N 327 OF 2003 BETWEEN: AON RISK SERVICES AUSTRALIA LIMITED APPLICANT AND: GAVIN DUFFY FIRST RESPONDENT TENET RISK SERVICES PTY LIMITED SECOND RESPONDENT HEATH LAMBERT AUSTRALIA PTY LIMITED THIRD RESPONDENT JUDGE: CONTI J DATE: 5 SEPTEMBER PLACE: SYDNEY REASONS FOR JUDGMENT 1 These proceedings were commenced on 19 March 2003 by application and statement of claim filed by the applicant ('AON'). By notice of motion filed on 27 June 2003, the third respondent ('Heath Lambert') made application to the Court that the statement of claim ('S/C') be struck out in its entirety as against Heath Lambert. Both AON and Heath Lambert are well known insurers and reinsurers in areas of complex risks, and are remunerated on a commission basis. The first respondent ('Mr Duffy') is the corporator or controller of the second respondent ('Tenet Risk'). No such strike-out application has been brought by Mr Duffy or Tenet Risk. 2 The causes of action purportedly brought by AON against Heath Lambert may be summarised as follows: (i) the unauthorised use by Heath Lambert of confidential information belonging to AON as an incident of Heath Lambert's insurance and reinsurance business activities, for which general damages are claimed; that is the principal cause of action; (ii) infringement of copyright by Heath Lambert in literary works comprising four species of insurance documentation of AON, for which additional compensation pursuant to s 115(4) of the Copyright Act 1968 (Cth) is claimed; (iii) contravention of s 1317H of the Corporations Act 2001 (Cth). The submissions of counsel were focused essentially upon the confidential information issue. In the course of the hearing, AON stated to the Court that relief against Heath Lambert under the Corporations Act was not sought. There was apparent dispute as to whether Heath Lambert had been so notified prior to the hearing of the application. 3 As appears from pars 8 and 9 of the S/C, the foundation of the cause of action for breach of confidentiality pleaded against Heath Lambert is the giving of reinsurance knowledge and information belonging to AON by Mr Duffy and Tenet Risk to Heath Lambert. That knowledge was alleged to appertain to the insurance or reinsurance affairs of a number of Australian and London based reinsurance syndicates. 4 Par 5 of the S/C pleads that Tenet Risk was an agent of Heath Lambert between 22 October 2001 and 30 June 2002 for the purpose of procuring new insurance clients, being activity 'which included purchasing reinsurance from a number of Australian and London based reinsurance syndicates to facilitate procuring clients from [AON]', and further that 'Heath Lambert has been remunerated on a commission basis for each individual insurance policy written by a member of the London Syndicate and placed with its retail facility'. 5 Par 6 of the S/C pleads that since about 1 July 2002, Duffy has been an employee of Heath Lambert, and also an agent of Heath Lambert for the purpose of procuring new insurance clients 'which includes purchasing reinsurance from the London Syndicates…'; the basis of Heath Lambert's remuneration is said to be 'on a commission basis for each individual insurance policy written by a member of the London Syndicate and placed with its retail facility'. 6 Par 7 of the S/C pleads that 'it has been and continues to be part of [Duffy's] duties as an employee and agent of Heath Lambert to procure new insurance clients, which [duties] include purchasing reinsurance from a number of Australian and London based reinsurance syndicates to facilitate procuring clients from [AON]'. 7 Par 8 of the S/C pleads that it is by reason of the said matters pleaded in par 5 in respect of 'carrying out its duties as agent (ie between 22 October 2001 and 30 June 2002), that 'the knowledge of [Tenet Risk] became the knowledge of [Heath Lambert]'. 8 Par 9 of the S/C pleads that it is by reason of the said matters set forth in pars 6 and 7 of the S/C, concerning Duffy carrying out his said duties as an employee and agent, that the knowledge of Duffy became the knowledge of Heath Lambert. 9 From paras 10 to 25 of the S/C, there is pleaded a substantial measure of detail concerning activities, conducted mainly between AON, Duffy and Tenet Risk, concerning the previous insurance business transactions in which they mutually engaged from December 1991. 10 In largely the foregoing context, par 26 of the S/C pleads that in the course of Duffy's employment or other engagement with AON, Duffy was given access to, and was required to have knowledge of, the following confidential information belonging to AON: (i) premiums charged for certificates of insurance issued; (ii) paid claims showing details of losses and related expenses settled, recoveries and salvages; (iii) postal codes and 'Cresta Zonal Aggregates' of those insured through AON; (iv) summary of account showing premiums declared and amounts declared on the paid claims; and (v) summary of commission earned by AON and AON's London Reinsurance Agent. 11 Particulars of the foregoing so-called 'confidential information' were as follows: '[Duffy] had access to the information set out in paragraph 26 hereof in order to carry out his duties as required in his employment by [AON]. The information set out therein had the necessary quality of confidence in that it was not information that was public property or public knowledge.' 12 Pars 30 and 31 of the S/C pleads that Duffy resigned his employment with AON on 21 September 2001, and further that between 22 October 2001 and 30 June 2002, Duffy on behalf of Tenet Risk performed for Heath Lambert similar duties to those he performed for AON. 13 Par 32 of the S/C pleads that on 1 July 2002, Duffy commenced employment with Heath Lambert and performed for Heath Lambert similar duties to those he had performed for AON. 14 Par 33 of the S/C pleads that prior to the termination of his employment with AON, and during the time of that employment, Duffy collected and stored confidential information of AON, and communicated the same to [un-named] third parties, and prepared for acquisition by a future employer, when he would leave AON, the AON Reinsurance Facility, and other material for future use comprising confidential information of AON. 15 Par 35 of the S/C enters a more critical stage for present purposes. It pleads that after 18 September 2001, Duffy: (i) communicated the confidential information to persons not employed by AON; (ii) as an employee of Tenet Risk, performed services for Heath Lambert; (iii) commenced employment with Heath Lambert; (iv) as an employee of Tenet Risk and Heath Lambert, assisted Heath Lambert to obtain the so-called AON Reinsurance Facility in competition with and to the detriment of AON; (v) as an employee of Tenet Risk and Heath Lambert, assisted Heath Lambert to compete with AON for other business activities which arose; (vi) as an employee of Tenet Risk and Heath Lambert, used the confidential information to his own benefit and to the benefit of Heath Lambert; (vii) failed to return to AON all of the confidential information. 16 Par 38 of the S/C thereafter provides as follows: 'In the course of his employment by the Third Respondent, the First Respondent has: (a) used the confidential information and the literary works of the Applicant to promote, and develop the Third Respondent's said business; and (b) has otherwise made available or provided the confidential information to the Third Respondent for use by it.' 17 Par 39 of the S/C pleads that by reason of the matters referred to in par 38 of the S/C, Heath Lambert has received the confidential information and the literary works, and by reason of such receipt and knowledge, Heath Lambert: (i) holds the confidential information and literary works on trust for AON; (ii) holds all profits and benefits derived by it by reason of its conduct on constructive trust for AON; (iii) is liable to compensate AON for all loss and damage suffered by it by reason of Heath Lambert's receipt of the confidential information and literary works and the use of the same for competing against AON's business; and (iv) is liable to account to AON for all benefits derived by reason of its receipt of the confidential information and literary works. 18 Par 40 pleads that Heath Lambert knowingly assisted Duffy and/or Tenet Risk Services to use the confidential information and literary works to promote and develop Health Lambert's business; particulars of this allegation are as follows: '[Duffy] was and is the employee and an agent of [Heath Lambert]. The knowledge of [Duffy] was the knowledge of [Heath Lambert]. [Tenet risk] was an agent of [Heath Lambert]. The knowledge of [Tenet Risk] was the knowledge of [Heath Lambert].' 19 Par 41 pleads that by reason of Duffy's infringement of copyright and breach of fiduciary and other duties owed to AON, the respondents including Heath Lambert, have been in breach of statutory and fiduciary duties, and have obtained profits and remuneration to which they are not entitled, and have thereby been unjustly enriched by the alleged misconduct. Par 41 does not identify those statutory and fiduciary duties. 20 In the context of AON's cause of action for breach of confidential information, which as later appears in these reasons, Heath Lambert contends to be the only cause of action pleaded by AON against it, Heath Lambert contends that the circumstances merely that Duffy is an agent and employee of Heath Lambert for the purpose of procuring new insurance clients for Heath Lambert's business, and that the procuring of such clients is thereby part of Duffy's duties, cannot even arguably, without more, give rise to the conclusion that all of Duffy's knowledge, in areas having any relationship with the subject matters of Duffy's agency and employment duties, is deemed to be within Heath Lambert's knowledge as well. 21 Heath Lambert further submitted in that context that there is no 'blanket rule' that the knowledge of an agent is deemed to be within the knowledge of the principal, and referred me to Law of Agency by G E Dal Pont (Butterworths Australia 2001). At pages 246-247 under the heading 'Duty to communicate information relevant to the agency', the author sets out the nature of that duty, which includes the following in particular: '11.7 Agents owe a duty to disclose, or perhaps more accurately, communicate, to their principals all the material information they possess that pertains to the agency relationship. What is "material" is a matter of judgment on the facts of each case, though if an agent is unsure of the materiality of information, disclosure should be made... (246) … 11.9 Agents' duty to communicate to their principals also applies in respect of information communicated within the scope of the agency by a third party to the agent in confidence, for an agent cannot be absolved from responsibility to his or her principal by citing a legal duty owed to a third party, except with the principal's consent...' (247) The underlined words represent the author's emphasis. 22 Subsequently under the main heading 'Imputing to principal knowledge of the agent', and the sub-heading 'Limits on the operation of the presumption', Heath Lambert drew attention at pp 626-627 to the following qualifications to the general principle, which are asserted to be critically relevant in the present context: '[22.48] The presumption does not operate without exception. In fact, it was noted late in the nineteenth century by an Australian judge that it was erroneous to state categorically that "knowledge of the agent is the knowledge of the principal", in that were this a blanket rule "it would work great hardship and injustice, for in all cases where the principle applies the person is admittedly ignorant in fact of that which the law presumes him to know". Limitations on the presumption had been judicially recognised earlier still, as is evident from the following statement of principle by Lord Westbury LC in 1863: "To affect the principal with notice, [1] the agents' knowledge must have been derived in the particular transaction in hand or [2] be shewn to have been in that transaction present to his mind; and further, [3] it must have been knowledge of something material to the particular transaction; and [4] something which it was the agent's duty to communicate to his principal, the whole doctrine of constructive notice resting on the ground of the existence of such a duty on the part of the agent. [22.49] Hence, the rationale for the presumption does not apply in circumstances where there is no legal duty on the agent to disclose the information in question. It is the duty of an agent to disclose to his or her principal information gained by the agent "in the course of, and which is material to, a transaction in which the agent is employed on behalf of the principal", and so it is knowledge of this information which the law imputes to the principal. Hence, it is the scope of the agent's actual and ostensible authority which determines what information known to the agent is imputed to the principal. In that cases involving the imputation of knowledge by definition presuppose that the principal lacks the knowledge in question, it is appropriate that "[t]he knowledge so imputed is… strictly limited to the particular transaction in which the agent acts, and is not to be imputed to the principal generally". The wider the scope of the agency, the more extensive is the agent's duty to communicate and the corresponding imputation of knowledge.' Again, the underlined words represent the author's emphasis. Authority is duly cited for those critically important principles to the present context of AON's statement of claim. 23 In the light of those statements of established legal principles, Heath Lambert submitted that it would be necessary for AON to plead, 'at the very least': (i) the facts and matters said to make Duffy's knowledge material to the duties he has carried out and continues to carry out on behalf of Heath Lambert; (ii) the facts and matters said to give rise to a duty on the part of Duffy to disclose to Heath Lambert the confidential information in respect of which claims have been made by the S/C against Heath Lambert; and (iii) the nature of that duty. 24 Heath Lambert formally reserved moreover the right in any event to re-apply for similar summary relief in the future, once any amended pleading provided by AON addresses Heath Lambert's pleading concerns, upon the additional basis of the general rule that the knowledge of an agent derived prior to that person acquiring agency status cannot be imputed to his or her principal (see Dal Pont, furtherat p 629 par 22.54 for discussion of that principle, and see also Najjar v Haines & Ors (1991) 25 NSWLR 224 at 243-244, and the authorities there cited by Clarke JA). That is of course a prospective area of pleading controversy upon which I cannot of course rule at this stage. I should further record that if there is to be any reliance upon imputed knowledge in any recast statement of claim, Heath Lambert will contend that the pleading thereof must be made referrable to each part, or at least each category, of the alleged confidential information. 25 In purported response to those submissions of legal principle of Heath Lambert, AON submitted that there is no 'blank rule' as to the imputation of knowledge on the part of an agent, the state of the law in this area being described by AON as complex and unsettled. I was referred to the following passage in the joint judgment of Gummow and Hayne JJ (dissenting in the result, but related to a point not discussed by the majority) in Permanent Trustee Australia Limited v FAI General Insurance Company Limited (In Liq) (2003) 197 ALR 364 at 383: 'It is not always easy for a court to decide whether, at some time in the past, a person knew something. Cases like He Kaw Teh v The Queen and Vines v Djordjevitch consider some difficulties that can arise. The apparently irresistible urge to classify "knowledge" by the use of epithets like "actual", "constructive", "imputed", or by the use of metaphors like "Nelsonian knowledge" emphasises that the task can be difficult. When the person whose "knowledge" is being considered is an inanimate legal construct, like a company, the difficulties may seem to be all the greater.' I do not think however that the above dicta assists AON at least in relation to the shortcomings in the S/C purportedly exposed by Heath Lambert, upon the basis of the principles which Dal Pont has drawn for authority, and with which the applicant was required to address by its pleading of a cause of action for breach of confidential information propounded against Heath Lambert. 26 Counsel for AON further referred to me the decision of the Court of Appeal in Wright v Gasweld Pty Ltd (1991) 22 NSWLR 317, where it was held by a majority (Kirby P and Samuels JA, Gleeson CJ dissenting) that information as to the identity of reliable suppliers of an employer, used by that employer at the time the employee ceased his employment, was confidential and as such liable to be protected by express agreement between the parties. Counsel for AON cited at length pp 334-335 and 340-341 respectively from the reasons for judgments of the majority, where a number of authorities were reviewed, being authorities which do not appear to be at odds with the passage from Dal Pont upon which Heath Lambert generally relies. 27 AON referred me also to the recent decision of Bennett J in Spotwire Pty Limited v Visa International Service Association Inc & Anor [2003] FCA 762, where her Honour undertook a thorough and useful exegesis of the authorities relating to summary dismissal. I do not think however that her Honour's researches afford the assistance to AON which it needs for the resolution of its present pleading dilemma. In grappling with the prospect of balancing the instinctive perception of an aggrieved business operator that a rival is using its business information of a confidential character, in pursuance and by virtue of that rival's engagement of the operator's former agent or employee, no juridical presumptions arise merely from the fact of such engagement. However great may be suspicions, an aggrieved party, such as AON in its present circumstances, may well have to await the outcome of its litigation against its former agent or employee before securing a basis for adding the business rival as an additional party to the litigation. 28 I have therefore been unable to discern from the principles assembled in Spotwire any viable basis for an answer to Heath Lambert's complaints in principle concerning the cause of action presently pleaded by the S/C against Heath Lambert for breach of confidential information. Nor have I been able to distil any assistance to AON's justification for its pleading of its further cause of action for breach of confidential information from the principles restated comprehensively in Equity Doctrines and Remedies – Meagher, Heydon and Leeming (4th ed) para 41-100, to which AON has also referred in the course of its submissions. Heath Lambert is correct in its submission that the S/C does not plead that Heath Lambert was at any material time appraised of the truth of the alleged circumstances that information introduced by Duffy and Tenet Risk was confidential. 29 Nor do I accept the proposition advanced by AON that '… much of the complaint that is made in respect of the pleading is, or are matters that can be resolved by a request for particulars'. As rightly pointed out by counsel for Heath Lambert, it is not the function of particulars to take the place of averments required to be formulated in a statement of claim by way of fulfilment of the elements of a viable cause of action. That principle was emphasised by Fisher J in his frequently cited reasons for judgment in Trade Practices Commission v David Jones (Australia) Pty Ltd & Ors (1985) 7 FCR 109. 30 That leaves for consideration the applicant's cause of action against Heath Lambert for breach of copyright. That cause of action is expressed to relate to the following documents: '(a) A spreadsheet entitled "2001/2002 Hail Facility Bordereaux as at 13 September 2001" ("the spreadsheet"); (b) A list of AON Hail Declarations 2000/2001 returns for July 2001; (c) A list of AON Hail Declarations 2000/2001 returns for August 2001; (d) A list of hail forms compiled on the Applicant's spreadsheet using AON data.' Those documents are characterised by the S/C as the literary copyright of AON. 31 Nothing however is pleaded in the S/C on behalf of AON as to the facts and circumstances constituting the statutory characterisation of literary copyright, nor of the facts and circumstances constituting infringement of copyright on Heath Lambert's part, whether (incidentally) as to a substantial part thereof (s 14(1)(a) of the Copyright Act) or otherwise. Counsel for Heath Lambert explained that it was because of those fundamental omissions that no submissions had been advanced in chief, written or oral, on Heath Lambert's part as the entitlement of AON, asserted by par 44 of the S/C, to '…additional compensation for each of the [r]espondents pursuant to section 115(4) of the Copyright Act…'. It is no answer to the deficiency in pleading for counsel for AON to content that '[w]hether at the end of the day the court takes the view that the information set out in [28] above are the literary works of the applicant and whether in fact there has been a breach of the Copyright Act will be matters turning on evidence and no doubt a debate as to the law in the substantive proceedings…'. 32 In its present form, for the reasons I have explained, the S/C does not plead any viable cause of action against Heath Lambert, and should therefore be struck out as against Heath Lambert. I would grant leave to AON to file an amended statement of claim in relation to Heath Lambert within 28 days, or such longer period as AON can demonstrate should be the case in the particular circumstances presently known to AON. It follows that AON must pay the costs of Heath Lambert in relation to the present strike-out application. I certify that the preceding thirty-two (32) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Conti. Associate: Dated: 5 September 2003 Counsel for the Applicant: A Moses and A Macinnis Solicitor for the Applicant: Phillips Fox Solicitor for the First and Second Respondent P Karp Counsel for the Third Respondent: A Leopold Solicitor for the Third Respondent Eakin McCaffery Cox Date of Hearing: 30 July 2003 Date of Judgment: 5 September 2003