AMP Services Ltd v Manning (No 2) [2007] FCA 82

FEDERAL COURT OF AUSTRALIA

AMP Services Ltd v Manning (No 2) [2007] FCA 82

DAMAGES – breach of fiduciary duties – loss of clients – compensation for lost income – how assessed – loss of chance of retaining clients – capital value – how assessed Target Holdings Limited v Redferns (a firm) [1996] 1 AC 421 In the matter of AMP Services Ltd and Arrive Wealth Management Ltd AMP SERVICES LTD AND ARRIVE WEALTH MANAGEMENT LTD v ANGELA MANNING AND POLLIANNA HARKNESS NSD 983 of 2004

FINKELSTEIN J

9 february 2007 MELBOURNE IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY NSD 983of 2004

In the matter of AMP Services Ltd and Arrive Wealth Management Ltd

BETWEEN: AMP SERVICES LTD and

ARRIVE WEALTH MANAGEMENT LTD

Plaintiffs

AND: ANGELA MANNING and

POLLIANNA HARKNESS

Defendants

JUDGE: FINKELSTEIN J DATE OF ORDER: 9 february 2007

WHERE MADE: melbourne

THE COURT ORDERS THAT:

1. The first defendant pay the second plaintiff compensation fixed in the sum of $45,000. 2. Costs reserved. 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 NSD 983 of 2004

In the matter of AMP Services Ltd and Arrive Wealth Management Ltd

BETWEEN: AMP SERVICES LTD and

ARRIVE WEALTH MANAGEMENT LTD

Plaintiffs

AND: ANGELA MANNING and

POLLIANNA HARKNESS

Defendants

JUDGE: FINKELSTEIN J

DATE: 9 february 2007

PLACE: MELBOURNE

REASONS FOR JUDGMENT 1 This is the second part of a "split" trial. In the first part Ms Manning was found to have breached the equitable duty of good faith she owed to her former principal, Arrive Wealth Management Ltd, for having induced Arrive's clients to transfer their business to her new employer, Goldman Sachs JBWere Services Pty Ltd. The purpose of this part of the trial is to determine what compensation Ms Manning ought to pay for the breach of that duty. 2 The principles according to which equitable compensation is to be assessed have been identified. They are set out in my reasons delivered at the conclusion of the first part of the trial. The parties had been invited at that time to make submissions and for their assistance were referred to several relevant authorities. The parties turned down the invitation. Nonetheless, during the hearing on damages Mr Braham, counsel for Arrive, made detailed submissions on the subject, which in some aspects depart from my description of the principles. 3 A convenient place to begin a consideration of the quantum of Arrive's claim is to explain how it arrived at the amount it claims. First it calculated the decline in its annual revenue since Ms Manning's departure. It said the drop was $1,636,130. It attributed this decline solely to Ms Manning's breach of duty by asserting that there was no other cause. (In fact, as will be seen, there were several other causes.) Then it placed a capital value on the lost revenue. The capital value was derived from prices paid by purchasers of similar businesses. An analysis of those prices showed that the prices represented a multiple of between 2.75 and 3.65 for recurring commission and a multiple of between 0.85 and 0.95 for fees for services revenue. By applying the multiples at the upper end of these scales Arrive calculated its capital loss to be around $4.3 million. 4 In my earlier reasons for judgment I said that Arrive is entitled to compensation that would "restore [it] to the position in which [it] would have been if there had been no breach [by Ms Manning] of [her] obligations". That makes it necessary to determine whether Arrive would have suffered any capital loss if there had been no breach of duty on the part of Ms Manning. Or, put another way, a fiduciary is liable to make good any loss suffered by her principal which, but for the breach of duty, the principal would not have suffered. In Target Holdings Limited v Redferns (a firm) [1996] 1 AC 421, a case dealing with a defaulting trustee, Lord Browne-Wilkinson put it this way (at 434): "[T]here does have to be some causal connection between the breach of trust and the loss to the trust estate for which compensation is recoverable". 5 There are three possible heads of compensation to which Arrive might be entitled: (i) the capital loss arising from the loss of clients to GSJBW; (ii) the income lost in the period between the time when the clients left Arrive as a result of Ms Manning's breach of duty and the time they would have left had there been no breach; and (iii) the value of the lost opportunity to retain the clients. Care must be taken when considering each of these heads to avoiding double counting. I will consider each head in turn. Capital Loss 6 Based on the evidence that had been tendered at the trial on liability I said that if Ms Manning had waited out the notice period before asking clients to follow her to GSJBW most would have done so, as they had when she moved from PriceWaterhouseCoopers to Arrive in mid-2002. That was a tentative finding, but if it stands it would be impossible to accept Arrive's claim to recover the capital value of its lost clients. It would be impossible because the clients would have been lost even if there were no breach. I will return to this issue after considering the other two possible heads of compensation. Income Loss 7 The second head of compensation is for the loss of income in the relevant period. In my reasons I suggested that the income to which Arrive was entitled was that which it would have received from the lost clients (that is those induced to go to GSJBW) in the period between 20 January 2004 (the day on which Ms Manning gave notice) and 16 February 2004 (the day on which her employment terminated). Mr Braham sought to persuade me that this period is too short because it usually took three to four weeks for a client to transfer his business from Arrive to GSJBW. However, it seems to me that this is nothing more than a delay. Precisely the same chain of events had to take place but should have taken place approximately one month later. Accordingly, the relevant period for the calculation of damages is the period between 20 January 2004 and 16 February 2004. For some type of revenue the true period is probably more like 13 February 2004 to 11 March 2004 but, in any event, it is a period of four weeks. 8 A more precise calculation of lost income might have been produced by working out the exact date upon which each client to which Ms Manning spoke decided to go to GSJBW, the date of actual transfer and what income was lost during that period. But the evidence does not permit such a detailed analysis. 9 Mr Meredith, an accountant, is a partner in Ferrier Hodgson. He has calculated Arrive's lost income from records provided to him by Arrive. The records did not permit Mr Meredith to determine how much lost income could be attributed to particular clients. He requested documents that would have established those figures but the documents were not provided. I am left to speculate whether or not the documents exist. 10 Without having access to those documents, the only method open to Mr Meredith to assess the loss was to compare Arrive's income before and after Ms Manning's departure, adjust for any differences that could be attributed to other causes and conclude that any remaining difference was due to her breach of duty. Accordingly, he first assessed Arrive's income for the year ending February 2004. The amount is $1,924,859. Next he estimated Arrive's income for the following year. This calculation was complicated by the fact that Mr Meredith did not have access to a full year's figures. He only had figures for the first nine months. By annualising those figures, Mr Meredith estimated the revenue for the year to February 2005 to be between $244,743 and $331,511. The difference in these amounts is explained by the fact that Mr Meredith made three separate calculations by annualising the first three months, six months and nine months of the year. Subtracting those figures from the income for the year to February 2004, he estimated the annualised lost revenue to be approximately $1,600,000. 11 This figure, however, had to be adjusted for losses caused by factors other than Ms Manning's breach, the most important of which was the loss of insurance broking commissions from AXA on behalf of VicSuper. VicSuper (via AXA) had been a client of Arrive's until it terminated their relationship on 19 March 2004. The termination was unrelated to Ms Manning's breach of duty. 12 On the basis of apparently incomplete records provided to him by Arrive, Mr Meredith calculated the annual income for the year ending 29 February 2004 from VicSuper to be $423,331 and therefore he adjusted the annual income to $1,501,530. 13 However, there is a dispute between the parties as to how much the VicSuper commissions were worth. Mr McCarthy, a former Arrive employee who had been responsible for the VicSuper account until January 2004, gave evidence that VicSuper commissions for the 2003 calendar year amounted to approximately $700,000. The problem with this evidence is that the VicSuper commissions were recorded in Arrive's accounts as "trailing commissions" and the total trailing commissions for 2003 was recorded as $790,842 of which $116,975 were non-VicSuper commissions. These figures would indicate that the VicSuper commissions could have been no more than $673,863 and are likely to have been much less because the non-VicSuper commissions that were recorded were only for four months. Mr McCarthy conceded the difficulty his evidence produced and suggested that Arrive's records must be incorrect. 14 I am left to guess at where the truth might lie. The choices are: (a) that the VicSuper commissions were recorded accurately by Arrive (which seems unlikely because, against the evidence, there are several months in which no commission is recorded); or (b) that the VicSuper commissions were higher than shown and accordingly the overall revenue is higher than shown (this will not assist the defendant because the adjusted revenue figure after subtracting the higher VicSuper figure from the higher revenue figure will be the same as before); or (c) that the VicSuper figures were higher than recorded because some revenue recorded as non-VicSuper was, in fact, from VicSuper (this will have the effect of reducing the adjusted revenue for the year to February 2004 and consequently reducing the loss suffered in the relevant period). 15 It is difficult to know which way to turn. Mr McCarthy obviously has direct knowledge of the rates of commission received from an important client, but his view that the commission was in the order of $700,000 is likely to be too high. On the other hand, I am satisfied that the commission was probably more than that reported by Mr Meredith. 16 If Mr Meredith's figures are accepted the annual revenue for the year to February 2004 after subtracting the VicSuper commissions was approximately $1,500,000. If Mr McCarthy's figures are accepted, the figure is nearer $1,200,000. There seems to be no dispute that the annual revenue for the following year was approximately $300,000 and so the difference between 2004 and 2003 is somewhere between $1,200,000 (on Mr Meredith's figures) and $900,000 (on Mr McCarthy's figures). Assuming that revenue is earned evenly throughout the year, the difference (ie loss) for the period between 20 January 2004 and 16 February 2004 (27 days) is between $87,096.77 (($1,200,000 / 12) x 27/31) and $65,322.58 (($900,000 / 12) x 27/31). 17 To this point I have not considered adjustments arising from factors other than the loss of the VicSuper business. There are several other reasons, besides Ms Manning's breach of duty, for Arrive's decreased revenue. These include: the fact that Ms Manning was placed on "gardening leave" as soon as she gave her notice and was not permitted to do any further work; the fact that several other Arrive employees left at around the same time as Ms Manning and many of their clients followed them; and, the fact that many clients not contacted by Ms Manning prior to 16 February 2004 left Arrive when they discovered she had moved on. I do not mean to downplay the effect that Ms Manning's breach had on Arrive's business: the evidence indicates that perhaps sixty to seventy clients took their business to GSJBW as a result of Ms Manning's approach and many of them were important clients. Nevertheless, the loss estimates outlined above will have to be adjusted down to account for these other factors which are not causally related to Ms Manning's breach. 18 To further complicate matters, it would appear that it cannot be assumed that revenue is earned evenly throughout the year. Doing so may present a false picture. Below are Arrive's revenue figures for the period January to April 2003 and for the corresponding months in 2004: From 1 January 2003 to December 2003 Jan-03 Feb-03 Mar-03 Apr-03 $ $ $ $ Initial Commission 0 0 0 0 Non-AMP Initial Commission 0 0 0 0 Non-AMP Trail Commission 70,958 41,918 34,793 17,228 Fee for Service 136,100 18,617 17,715 186,972 Monthly Revenue 207,058 60,535 61,797 204,200