H & H CONSULTING ENGINEERS PTY LIMITED & ANOR v JASON KARL MYERS & ANOR [2011] NSWSC 4

Supreme Court New South Wales

Medium Neutral Citation: H & H CONSULTING ENGINEERS PTY LIMITED & ANOR v JASON KARL MYERS & ANOR [2011] NSWSC 4 Hearing dates: 22, 23, 24 November 2010 Decision date: 01 February 2011 Jurisdiction: Equity Division Before: Gzell J Decision: Employee in breach of fiduciary duty. His company liable to account as knowing participant and accessory. Account of profits assessed at $127,500. Equitable compensation assessed at $262,312. Catchwords: EQUITY - Fiduciary Obligations - employer directed employee to develop the business of a wholly owned subsidiary - whether employee entitled to refuse on basis not employed by subsidiary - employee developed the business of his company and other companies rather than the subsidiary - whether a letter allowing him to continue efforts of a further company extended to the companies benefited - calculation of equitable compensation and account of profits Cases Cited: LED Builders Pty Ltd v Eagle Homes Pty Ltd [1999] FCA 584; (1999) 44 IPR 24 Consul Development Pty Ltd v DPC Estates Pty Ltd (1974/1975) 132 CLR 373 at 397 Club of the Clubs Pty Ltd v King Network Group Pty Ltd (No 2) [2007] NSWSC 574 at [58]). Category: Principal judgment Parties: H&H Consulting Engineers Pty Ltd (Plaintiff) Jason Karl Myers (Defendant) Representation: Counsel: N Manousaridis (Plaintiff) Solicitors: Baker and McKenzie File Number(s): 2008/282177

Judgment 1The first plaintiff, H&H Consulting Engineers Pty Limited, was a multidisciplinary consulting engineering company. It employed the first defendant, Jason Karl Myers, from 18 September 2006 until 24 April 2008 as a business development engineer. It claims that Mr Myers promoted his personal interests and those of the second defendant, Renewed Water Solutions Pty Ltd, and other companies in breach of his fiduciary duty as an employee of H&H. 2H&H claims an account of profits and equitable compensation. But since they are alternative remedies, H&H will need to elect between them before judgment ( LED Builders Pty Ltd v Eagle Homes Pty Ltd [1999] FCA 584; (1999) 44 IPR 24). 3The Rochem group of companies is headed by a German-based company and has subsidiaries worldwide. Port Marine Pty Limited was its representative in Australia. Port Marine was Mr Myers' father-in-law's company. It ultimately passed to Jeffrey Bardsley. The name Rochem Technical Services was registered to Port Marine. 4In early 2006, Mr Myers was seeking to set up a project related to Rochem in Australia that provided renewed water solutions. He used the names Rochem Technical Services and RTS Renewed Water Solutions although they had not been incorporated or registered to him. 5Ray Josip Kusturin, a director of H&H, interviewed Mr Myers on a number of occasions during his recruitment process. Mr Myers claimed that he told Mr Kusturin that he was assisting Rochem Technical Services to develop the business of Renewed Water Solutions and he would not want to be precluded from continuing his professional relationship with the people developing Renewed Water Solutions if he became an employee of H&H. Mr Kusturin denied this conversation took place. I accept his evidence and reject the evidence of Mr Myers on this issue. Mr Myers sent an email to the recruitment firm that contained the statement: "Letter required from H&H confirming an understanding of my continued involvement with Rochem." It said nothing about the development of Renewed Water Solutions and the letter that emanated from Mr Kusturin was limited to Rochem Pty Ltd. 6Mr Kusturin signed Mr Myers' terms and conditions of employment and the covering letter on 19 July 2006. 7Clause 11.2 of the employment contract provided that Mr Myers agreed that he would not engage directly or indirectly in any other business or occupation whatsoever during his employment with H&H without the prior written consent of H&H. He would not accept any payment or any other benefit in money or in kind from any person as an inducement or reward for any act or forbearance or in connection with any matter or business transaction by or on behalf of H&H without the prior knowledge and written authorisation of H&H. He would not make any representations or give any warranties regarding the business other than those representations and warranties contained in published literature regarding H&H or as were approved by H&H. And he would not enter into or sign any agreement or contract on behalf of H&H or make any promise or representation on behalf of H&H without its prior approval. 8Clause 12 of the employment agreement dealt with confidentiality. Clause 13 contained a post-employment restraint and cl 18 related to intellectual property rights. 9Mr Kusturin's letter of 19 July 2006 was in the following terms: "Dear Jason, RE: EMPLOYMENT CONTRACT Further to clause 11.2 of your employment contract, we write to confirm that H&H Consulting Engineers do not object to an ongoing professional relationship being maintained between yourself and Rochem Pty Ltd. We make this offer on the basis that: ·For all purposes other than your relationship with Rochem Pty Ltd, clause 11.2 shall be binding. ·With respect to clauses 12, 13 & 18 of the employment contract, we would expect your dealings with Rochem Pty Ltd to be carried out ethically, honestly and in a manner that would not disadvantage H&H Consulting Engineers. If otherwise, the details of the foregoing clauses would be binding. ·We would expect wherever possible that relationships can be formed between Rochem Pty Ltd and H&H Consulting Engineers that could benefit the ongoing development of both enterprises. In conclusion: H&H Consulting Engineers do not wish to curtail the ambitions, endeavours and imagination of any of its employees. Our business philosophy is to recognise the strengths of its employees and allow them to grow and prosper under the umbrella of H&H Consulting Engineers so that we may all benefit and grow as a whole. In return, we only ask for honesty, integrity and an ethical approach to our day to day working environment. If you have any further questions do not hesitate to give me a call. Yours faithfully, RAY KUSTURIN For, and on behalf of, H&H Consulting Engineers Pty Ltd." 10Mr Myers signed the terms and conditions of employment on 24 July 2006 and commenced working for H&H on 18 September 2006. On 12 September 2006 he registered Renewed Water Solutions Pty Ltd in which he and Belinda Lois Myers, his wife, were the shareholders and directors. 11In December 2006, Mr Myers conducted workshops discussing Renewed Water Solutions ('RWS')and Rochem Technical Services('RTS'). He explained to the directors of H&H that RTS was the exclusive Australian distributor of Rochem equipment and services providing solutions for the recovery of high quality water and the removal of toxic containments from industrial and process wastewater streams. He proposed that RWS become a consortium of H&H, Cullys, a Western Australian electrical and mechanical engineering company and Tricomms, a telecommunications industry company operating in the eastern States. 12H&H had incorporated Innaco Pty Limited as a wholly-owned subsidiary early in 2006 for the purpose of designing and constructing large continuous span structures. That was unsuccessful and the company lay dormant for a few months until it was revived to become H&H's water department business. The directors had resolved to establish a water-engineering department to develop a presence in the market for the supply of engineering and related services. 13The H&H directors rejected Mr Myers' consortium proposal because they thought it would provide the sort of services that H&H and Innaco would provide through the water-engineering department. 14Mr Myers had developed a Business Plan 2007 Revision. It reflected the position Mr Myers put to the workshops. It spoke about H&H having formed a strategic alliance with Cullys and Tricomms and that the alliance partners were in the process of establishing RWS. It was sent to all the directors of H&H for approval. 15From the business plan, Mr Myers developed an action plan. Following H&H's rejection, it recorded the strategic alliance partnership with RWS as being on hold. But it stated that heads of agreement were to be obtained by Mr Myers for strategic alliance partnerships with Tricomms and Cullys. 16I should say that there was a great deal of material assembled in court books that had no, or peripheral, relevance to the issues. 17Mr Myers maintained that he was under no duty to promote Innaco as a water department. His employment contract was with H&H. There was no mention of Innaco during employment discussions. He was involved in dealing with commercial and financial management of new and existing businesses and in their development. He said his role was specific to H&H. It did not involve him working for Innaco. He said that although Stuart Tan and Rodney Boss, the directors of Innaco, were also principals of H&H, Innaco and H&H were run as separate businesses. He had business cards for H&H but not for Innaco. He had an H&H email address but did not have an Innaco email address. He was paid by H&H. He received group certificates from H&H. No payments were made by Innaco nor were group certificates issued by it. Innaco employed managers specifically to develop that company. 18At the request of the directors and principals of H&H he gave Mr Damien Holiday, the Innaco manager, a sample business plan to help him prepare a plan for Innaco. 19Mr Myers was not an employee of Innaco. But that did not entitle him to ignore instructions given by its holding company to develop it as a water department. 20When the directors of H&H determined not to become part of a strategic alliance, Robert Fletcher, a director of H&H said that he told Mr Myers that what was proposed was what the directors wanted Innaco to be doing and they did not want to invest in a venture that would effectively be in conflict with Innaco or at least they did not want to waste resources when they should be focusing on Innaco. 21Mr Myers denied this conversation took place, saying it was not until February 2007 that it was agreed that H&H would not proceed with RWS on the project. He said he was not advised that there would be any future focus by Innaco on water and wastewater. I reject Mr Myers' evidence on this issue. Mr Tan's evidence supports that of Mr Fletcher, as does the 07-08 Half Year Business Plan Review prepared by Mr Myers. 22In about December 2006, Mr Myers told Mr Fletcher that he had a potential business partner that could bring in a lot of good work. The partner was EcoNova Operations Pty Ltd ('EcoNova"). 23Mr Tan said that in February 2007 he told Mr Myers that companies such as EcoNova just wanted to supply a box to a client and have someone else do all the construction work and that Innaco was well placed to do that. According to Mr Tan he said that they had the engineering background and backup of H&H and could use Innaco as a construction project management company. It could submit tenders and allow flexibility to hire more people including sub-contractors to do work they could not do. 24Mr Myers sought to downplay this evidence without challenging it by saying in cross-examination that he declined to do some tendering for Innaco. But it was more than that. In the 07-08 Half Year Business Plan Review, Mr Myers included himself as the first person in the team structure for the establishment of Innaco and its service of water and industrial industries. 25In cross-examination it was put to Mr Myers that he recognised that he was to be involved in developing Innaco in water as well as industrial industry services. I found his answer in cross-examination, that it was only related to the establishment of Innaco and not to its operation, to be far too glib to stand against the evidence that he had declined to follow instructions, not merely with respect to a couple of tenders, but instructions to establish Innaco as a water-engineering department. 26This fits in with Mr Myers utilisation of RWS after H&H declined to be involved. In cross-examination the following exchange took place: "Q: What I suggest to you is that after having been told by H&H that they were not interested in the RWS proposal, what you then undertook to do without informing H&H is to continue with the RWS project in conjunction with Cullys and Tricomms? A: Yes. Absolutely. Make no mistake that when I presented that Renewed Water Solutions' business opportunity H&H and they decided not to be part of it, of course Cullys and Tricomms saw the interest and we did continue. Absolutely." (T 136). 27The directors of H&H agreed with Mr Myers that EcoNova and H&H could be a good fit. Heads of agreement were executed between them on 13 April 2007. The purpose of the agreement was that the parties wished to cooporate in the acquisition of customers, design of buildings/developments, design of all water related infrastructure and the realisation (construction and delivery) of the same. 28H&H would introduce EcoNova's water solutions to their potential customers while EcoNova would introduce H&H to their potential customers on a national basis and would promote H&H as the consulting services provider for those projects. The agreement provided that H&H would not act as a reseller of EcoNova equipment and would not receive any commission or kickback from projects/sales. But if H&H issued a quote to the end-customer as the main contractor, EcoNova would provide H&H with a binding quote for the project and H&H could choose the sales price. 29The agreement clearly contemplated that H&H could be the lead contractor with a customer and could set a margin to ensure it made a profit. But that did not happen. EcoNova became the lead contractor and H&H was relegated to performing consulting engineering services alone. This was achieved by Mr Myers and RWS preferring EcoNova to H&H and building up its position. 30On 8 November 2007 RWS entered into heads of agreement with EcoNova. The purpose was: "The parties wish to cooperate in the acquisition of customers, Design Build Operate of water & wastewater infrastructure and the realisation (design, system manufacture, site infrastructure construction, system integration, commissioning, training and O&M) of the same." 31The agreement provided that RWS would introduce EcoNova solutions to their potential customers and specify equipment in their projects and RWS would act as the agent for EcoNova equipment and would receive commission or kickback from project sales. 32On 5 March 2008 Mr Myers and RWS entered into a service agreement with EcoNova under which RWS was to use its best efforts to procure that Mr Myers was available to perform the services of a commercial business manager. 33I leave that agreement to one side, however, because it may well be that it did not come into effect until Mr Myers left H&H. 34Mr Myers maintained that H&H was not disadvantaged because it would perform the consulting engineering services. He maintained that Inacco was not in a position to act as a lead contractor because it had no finance, it had no insurance, it had no personnel, it had no track record. 35Mr Tan said these matters could be put in place and Innaco had the backing of H&H, which had provided a guarantee when EcoNova could not. Furthermore, EcoNova lacked a position of credibility until Mr Myers developed it for them. Christian Uhrig was general manager and a director of EcoNova. When Mr Myers left H&H on 25 April 2008 and joined EcoNova, Mr Uhrig sent a general email which contained the following: "Please welcome Jason Myers as our "new" National Business Development Manager. He is actually not "new" at all - he worked with us as the liaison officer for H&H and most of you would have met him. Jason has been instrumental in EcoNova's transition from a System Supplier to a Total Water Cycle Management service company." (Vol 2 Tab 64 p 550). 36Mr Myers said that he regarded the reference to Rochem Pty Ltd in Mr Kusturin's letter of 19 July 2006 as applying to the general business of RWS that was being developed in affiliation with companies associated with the Rochem group. He said he believed that H&H permitted him to carry on the business of developing RWS and this permitted him to incorporate and trade through RWS and to conduct the activities the subject of heads of agreement. 37I do not regard the letter as going so far. It was limited to Rochem Pty Ltd and said nothing of RWS. When the directors of H&H rejected Mr Myers' proposal for RWS as a consortium vehicle, Mr Myers had a duty not to prefer the interests of RWS to those of H&H. 38In doing so, and in particular in building up EcoNova at the expense of H&H, and in causing RWS to enter into the heads of agreement with EcoNova on 13 November 2007, Mr Myers breached his fiduciary duty not to promote personal interests of persons other than H&H by making or pursuing a gain for such persons where there was a conflict, or a real substantial possibility of a conflict, between the interests of those other persons and the interests of H&H and Innaco that Mr Myers had a duty to promote as business development engineer of H&H. 39I am satisfied that Mr Myers conducted activities through EcoNova that were not the subject of informed consent by H&H or Innaco. In that regard I accept the evidence of Mr Fletcher and Mr Tan. 40Mr Myers tendered for work on behalf of EcoNova. He also tendered for work on behalf of Cullys. 41Mr Myers said that he had secured in excess of $2million in committed contracts for H&H for consulting engineering services, the majority of which were secured through EcoNova. But had Innaco been developed by Mr Myers in the way he developed EcoNova and had Mr Myers caused Innaco rather than EcoNova to be the lead contractor there was the chance to earn profits that may have been greater than $2million. 42Between March and August 2007, Mr Myers negotiated with Cullys to provide business management services to it culminating in an email Mr Myers sent on 21 August 2007 as follows: "Confirming our agreement that commencing the 1 st of July 2007, I will be engaged by Cullys NSW on a Part-Time basis to assist with the establishment of Cullys NSW, provide strategic planning service for Cullys Group and manage Cullys involvement in the water industry, refer below for details. As agreed, RWS Pty Ltd will invoice Cullys NSW $3,750.00 + GST on a monthly basis as a retainer for my services. In addition to the monthly retainer, all related expenses will be reimbursed by Cullys and commissions will be agreed on a project basis." 43In performing these services for Cullys the letter of 19 July 2007 did not relieve Mr Myers from his obligation under cl 11.2 of his employment contract. Further, in engaging in such conduct without the knowledge or consent of H&H or Innaco there was a conflict or a real possibility of conflict between the interests of Mr Myers and RWS and those of H&H and Innaco that Mr Myers was duty bound to promote, and Mr Myers was in breach of fiduciary duty. 44RWS through Mr Myers was a willing participant in Mr Myers' breach of fiduciary duty. It made gains in connection with the tenders Mr Myers made on behalf of EcoNova and Cullys. 45A person who knowingly participates in a breach of fiduciary duty is liable to account to the person to whom the duty was owed for any benefit received as a result of such participation ( Consul Development Pty Ltd v DPC Estates Pty Ltd (1974/1975) 132 CLR 373 at 397). 46RWS was also an accessory and an accessory is fixed with transmitted fiduciary obligations. The accessory is treated as the fiduciary and must accordingly account to the same extent the actual fiduciary would have had to account if the fiduciary had made the profit ( Club of the Clubs Pty Ltd v King Network Group Pty Ltd (No 2) [2007] NSWSC 574 at [58]). 47So far as equitable compensation is concerned, H&H and Innaco sustained losses from Mr Myers' failure to promote Innaco as lead contractor. The losses were losses of the chance of making a profit. Mr Tan addressed this issue by taking the projects identified by Mr Myers as committed contracts for H&H for consulting engineering services and expressing his opinion of the profits that Innaco would have made if it were the lead contractor. While his affidavits on a number of occasions gave an estimate of what H&H would have made, he said in cross-examination that in each case Innaco should have been the lead contractor and H&H should have provided the consulting engineering services. 48At the time these projects were being worked upon Innaco did not have necessary personnel or infrastructure in place. But Mr Tan said they could have been put in place and subsequently they were put in place and projects were won. 49Mr Tan obtained no quotes when conducting this process and he conceded the estimates were rough. He could identify no contingency item in his cost figures. On the first flush treatment system for Patricks terminals Port Botany facility Mr Tan's estimate of costs gave rise to a profit margin of 46%. Neither Innaco nor H&H made a profit on a project at that level and he said Innaco's profit margin was 10% to 15%. He agreed that a loss might be made on a project and he agreed that had Innaco tendered as lead contractor it may not have won all the projects. 50Mr Tan's cost exercises produced an estimated profit, had Innaco been the lead contractor, of $1,074,407. If the 46% profit margin estimated for the Patrick's Project is reduced to 10% the resultant profit estimate becomes $981,507. The profit margins based on Mr Tan's exercise are otherwise reasonable at 15% for Cronulla, 22% for Camp Knox, 12 % for Cambridge, 15% for Liddell Mine and 14% for Perth Airport. 51EcoNova operated a NetSuite system. A person would log a lead for potential work for which an opportunity ID number was assigned. If a contract emerged the contract price was entered. The date the lead was logged was also registered, as was a probability of securing the job. If a commission was payable to a person who logged the potential customer in NetSuite it identified the appropriate recipient of the commission. 52A different exercise was carried out with respect to contracts won for which H&H, Cullys and RWS had entered the name of the customer as a prospective source in EcoNova's NetSuite system. A 10% and a 15% profit margin was calculated for each of these contracts. This produced a figure $1,535,512 at 10% and $2,303,268 at 15%. 53I do not regard this exercise as helpful in the assessment of equitable compensation for the lost chance of Innaco acting as lead contractor. There is nothing to establish that the contracts on the schedule additional to those contracts identified by Mr Myers as securing revenue to H&H for consulting engineering services were ones for which Mr Myers or RWS should have caused Innaco to lodge a tender. 54Damages for loss of a chance are difficult to estimate but in this case the chance was reasonably assured. Had Mr Myers done for Innaco what he did for EcoNova and Cullys, Innaco should have won the contracts the other two did. I would not discount Mr Tan's adjusted figure of $981,507 by much for the possibility of failure of tender or the making of a loss. 55The difficulty here is with the estimates of cost by Mr Tan. The project value of the contracts discussed by Mr Tan totalled $7,643,542. If his profit margins between 10% and 15% are used, the profit ranges from $764,354 to $1,146,531. Mr Tan's adjusted figure of $981,507 is in that range. I would discount it to $950,000. 56Mr Tan gave evidence of the actual revenue received from the projects identified by Mr Myers as his introduction of committed revenue to H&H. His figure was $2,008,673. Mr Tan's figure, which was not challenged in cross-examination, was $687,688. 57If Innaco was the lead contractor it would not have received these fees. It would have built in to its contract price an amount sufficient to return to it a desired profit margin taking account of any costs associated with H&H's consulting engineering services. 58Innaco would have priced itself out of the market if it included in its tender full profit charges by H&H and then escalated the price by its desired profit margin. Innaco's profit margin would need to be reduced if H&H was to achieve a significant profit margin. 59When the revenue that H&H did receive is deducted from the $950,000, the result is $262,312. 60So far as an account of profits is concerned, a sales register covering the period of Mr Myers' employment with H&H from 18 September 2006 to 24 April 2008 was in evidence. It showed the raising of a first invoice on 13 July 2007 and the raising of a final invoice on 10 April 2008. The invoices in the register totalled $216,187.62. 61Five invoices rendered by RWS to EcoNova were in evidence. The invoice amounts were included in the sales register. Some items in the invoices were cost recoveries. The items that were not and represented a fee for service totalled $10,017.44. The total of the amounts claimed in the invoices was $16,928.37. That means that service fees represented 59% of the amounts invoiced. 62The Cullys monthly retainers of $4,125 including GST were included in the sales register although one month's payment appears not to have been charged. 63Also in evidence was a draft profit and loss statement for the period July 2006 to May 2007 disclosing consulting fees of $55,239.19. But it relates to activity before Mr Myers commenced employment with H&H and before the first invoice was raised in the sales register. 64There was also a profit and loss account for the period July 2007 to June 2008 showing consulting fees of $233,618. But that extended beyond the end of Mr Myers' employment with H&H and much of the difference between it and the sales register is explained by two further months' retainer fees from Cullys. 65I find that the best evidence of revenue diverted to RWS is the sales register. Since costs in relation to service fees were recovered from EcoNova and Cullys, the profits that RWS made from Mr Myers' breach of fiduciary duty are the service fees it received less a deduction for invoices seeking cost recoveries. 66Assuming that the five invoices mentioned are a representative sample of the division between cost recovery and service fee, 59% of the total should reflect RWS's profit. That figure is $127,550.69. I would not discount it by any substantial amount. 67There was no evidence that any portion of this amount found its way to Mr Myers. His income tax return for the year ended 30 June 2008 showed income received from H&H alone. 68If H&H and Innaco elect to take an account of profits, I will award them jointly $127,500 against RWS but nothing against Mr Myers. 69If they elect to take equitable compensation, I will award them jointly $262,312 against Mr Myers and against RWS. 70I will put H&H and Innaco to their election. I will hear the parties on costs and on the form of orders to be made. To those ends I will stand the matter over.