Whether the common law fiduciary duty or duty of fidelity and good faith gives adequate protection foir employers in the modern era?

[I]n determining whether a fiduciary relationship arises in the context of an employment relationship, it is necessary to identify with care the particular duties undertaken by the employee, and to ask whether in all the circumstances he has placed himself in a position where he must act solely in the interests of his employer. It is only once those duties have been identified that it is possible to determine whether any fiduciary duty has been breached.

Universal to all approaches is the scale of importance and seniority of the employee to the employer. Continuing with the family unit as an analogy, seniority of siblings comes with greater responsibility given higher levels of discretion and trust they are afforded by their parents. Likewise applied here, the higher an employee is within the organizational hierarchy, the greater the undertaking “to act on behalf of, or in the interests of the employer.” Generally therefore, those who hold positions of seniority and decision making, discretion and responsibility are likely to owe fiduciary obligations to their employer, whereas the more junior employees will not.

At this juncture, it is worth repeatedly acknowledging the key themes that are central to whether employers are adequately protected by the common laws attitudes to fiduciary duties, fidelity and good faith- the notions of trust and confidence or confidential relationships.

Hence, it remains evident that employers today are protected by the obligations of employees through their fiduciary duties to the extent that they are not to profit from their position at the expense of the employer and to avoid conflicts of interest and duty.

This rule requiring that an employee as fiduciary avoid conflicts of interest and duty does not apply in cases of possible conflict unless there is a “real and sensible, rather than theoretical and abstract” possibility of conflict. As it was put by the Privy Council in Queensland Mines Ltd v Hudson:

…the facts have to be examined to determine whether the fiduciary acted in a way in which ‘there was a real sensible possibility of conflict’ between his interest and the interest of the principal. 

Contrastingly, Elias J prefers a more liberal approach which on the surface may undermine the level of protection extended to employers by suggesting that “employees are not obliged to pursue their employers interests at the expense of their own.” This point in reality does open the door to potential conflicts of interest and in a practical sense, undermine the motivation and focus of employees in performing their duties diligently on behalf of their employer, especially “as an employee’s discretion and ability to affect his employers interests increases.”

In reality, the notions of freedom of choice illustrate today’s common law approach to the obligations employees owe to their employers thorough choosing to enter the relationship in the first place. Therefore if we accept that “it is repeatedly said by the courts that the employment relationship is fiduciary in nature” and that employees do in fact owe a fiduciary responsibility, then we can deduce that such breaches will lead the courts to apply suitable protection devices through the application of appropriate remedies.

Authorities suggest that where an employee acquires a specific asset in breach of a fiduciary duty, they will be found to hold the asset upon constructive trust for the benefit of the employer. This is also applied even though the benefit was acquired by means of the skill and expertise of the employee and would not otherwise have been available to the employer.

There are also traces of authority for the protection of the employer that suggest there are fiduciary obligations upon employees not to profit from and pursue business opportunities which their employer is either pursuing or could pursue or might have reasonably been expected to be interested. 

Ultimately, the extent of protection extended to employers today will be reflected as accurately as possible through the true measure of the benefit obtained by the employee through the breach of their duty. Therefore, if an employee has acquired or established a business in breach of their duty, but a significant proportion of the profits of the business results from the skill, efforts, property and resources of the employee, it tends to be recognized that it would be inequitable to compel the employee to account for all of the profits of that business.

PART B- DUTY OF FIDELITY AND GOOD FAITH.

The duty of fidelity and good faith is a term covering the range of obligations owed by an employee to protect the interests of their employer in the course of their honest and faithful employment service. Included in the spread of these obligations are implied contractual duties of honesty, loyalty, confidentiality and trust. Put simply, the duty is that an employee serve the interests of the employer, not against them.

A useful starting point in understanding the scope of an employees duty under these obligations are the comments by Dixon J in reference to the conduct of employees that would breach such duties:

Conduct which in respect of important matters is incompatible with the fulfillment of an employee’s duty, or involves an opposition, or conflict between his interest and his duty to his employer, or impedes the faithful performance of his obligations, or is destructive of the necessary confidence between employer and employee, is a ground for dismissal. But the conduct of the employee must itself involve the incompatibility, conflict, or impediment, or be destructive of confidence. An actual repugnance between his acts and his relationship must be found. It is not enough that ground for uneasiness as to its future conduct arises.

Although his Honors’ comments appear quite comprehensive, employers should not assume that they are shrouded with a blanket of protection, as each case will turn on its facts and the specific nature of the breach itself. Furthermore, it is important to note for the sake of better distinction that there is an overlap between the employee’s duty of fidelity in not using or disclosing confidential information and the equitable duty of confidence.

The duty of fidelity applies to information but only restricts the use of information while an employment relationship exists. Once the employment is terminated the duty of fidelity no longer applies. This is contrasted to the equitable duty of confidence which applies both during and after the employment relationship. Some assistance to the distinction is found when the case involves the use of  “secret” information not in the public domain. It does not apply to knowledge or skills and experience that are accumulated during the period of employment.

In Independent Management Resources Pty Ltd v Brown, Marks J ruled in favor of the defendant employee who had during the course of employment attained a request for tender document for the provision of electronic alarm systems for the Metropolitan Fire Brigade. The defendant was at the time of receiving the document in the employ of the plaintiffs Public Relations firm, however then resigned prior to submitting a tender in its own right. At first glance, it would appear to be a clear breach of the components of a duty to serve with fidelity and good faith, however, it was held that there was no such breach, as “the mere request by the defendant for the brief did not amount to breach of fidelity. She did not lodge her tender until she was no longer an employee of the plaintiff.”

Quite frankly, I believe that the decision is a harsh one and does not appear to adequately protect the interests of employers since it appears that the defendant whilst in the course of employment was at least thinking of the opportunity to the extent that a tender document was requested. Employers in the course of risk and profit pursuit would hardly be comfortable knowing their staff were being distracted through thought of commercial dreams and opportunities whilst being paid to perform their specified duties.

This point was addressed in the context of fraudulent activity whereby his Honor quoting from a passage by Hawkins J concludes that “the essence of the matter is that the plaintiff must satisfy me there was some conduct on the part of the defendant which ‘fraudulently undermined’ the plaintiff whilst the defendant was in its employ.” 

Unfortunately I am not convinced that such necessity for fraudulent behavior satisfactorily protects the investment of time, money and effort exposure the employer faced.

In order to better grasp to what extent employers are protected by the duty of fidelity and good faith, it is helpful to look at one of the more common instances of how the applications of general principles relate to certain fact patterns in the authorities.

Solicitation of customers and destruction of goodwill

As noted earlier, the courts have distinguished between the obligations on employees during and after employment. Usually, if an employee solicits customers for the purpose of establishing a competing business whilst in the course of employment, then this would amount to a breach of the employee’s duty of fidelity and good faith.

The leading authority on this question of protecting the employer’s trade secrets or confidential information is Faccenda Chicken v Fowler  which confirms setting the template as the ‘locus classicus’ for the way in which the courts deal with employees as recipients of confidential information. The case also examines the distinction between during the course of employment and post employment restraint of trade issues.

Importantly, the case instructive to understand that the duty is only breached by the misuse of secret information. Where the employer has made no particular effort to prevent the information from freely circulating within or outside the enterprise, a claim against an employee will usually fail. It is sufficient for this purpose to show the relativity of how secret the information is; compared to the ease or difficulty others may be able to acquire it.

By briefly contrasting two separate Australian cases, this distinction becomes clearer.

Firstly, in Digital Pulse Pty Ltd v Harris & Ors, the defendant’s Mr. Harris and Mr. Eden were employed by the plaintiff (Digital Pulse), a firm in the business of providing computer based multi-media services to clients. The defendants decided to set up their own company called “Juice” while still employed by the plaintiff. They then diverted projects to their company ‘Juice’ that should have gone to the plaintiff. Furthermore, Mr. Harris emailed a copy of the plaintiffs business plan to his Juice email address to be used by their newly established entity.

It was held that the defendants were in breach of the duty of fidelity as the projects were diverted while they were still employed by the plaintiff. Also, the business plan forwarded via email was found to be confidential information, therefore the defendants also breached the duty to maintain confidentiality and as such exemplary damages were awarded to the plaintiff.

Contrastingly, in NP Generations (trading as LJ Hooker) v Feneley,  the defendant Feneley was a rental property manager with the plaintiff LJ Hooker. In the course of her employment, she recorded the contact details of the property owners in her diary and address book for work purposes. After the defendant left the employment of the plaintiff she later contacted the property owners to inform them that she was no longer working for her former employer. After a period of time, the Defendant began working for another real estate agent, which led to some of the property owners terminating their arrangements with the plaintiff and transferring their business to the defendant’s new employer.

It was held that the defendant did not breach the duty of fidelity as the contact details were recorded in the course of her employment and not for the purpose of competing with the plaintiff. However, the rent-roll/master list of all property owners was considered to be “confidential information.” The rent-roll had been copied into the address book.  Therefore the address book was also considered to be confidential information. It was noted in the decision that the defendant was not allowed to use the address book for the purpose of contacting clients, however she was allowed to use her own memory. It was held that there was not a breach of confidentiality if she remembered the contact details or looked them up in the phone book. This was based on the use of details in her diary which were not considered confidential as they had been recorded as a result of phone calls or appointments not copied from the rent-roll. The result meant that the defendant was required to return the address book but not the diary, and the

Plaintiff was entitled to damages to be assessed to compensate for their loss.

Thus, exploitation of information is considered to be no more than an extension of the original breach of faith. If information is attained with no special effort to retain it, either physically or mentally, then the employee is free to disclose or use whatever is later recalled of it, without being in breach of the duty. It is hardly surprising that such distinctions would be a cause for concern for employers as the question hinges on proving deliberate mental use of such information. Perhaps the best methods available to protect employers given these distinctions of during and post employment considerations would be to implement cautious yet logical measures such as express confidentiality clauses in their employment contracts that are specifically designating customer details as confidential information. In the case of NP Generations, perhaps a simple solution could have been the issuing of a company diary to employees that requires them to return it on the termination of employment.

Another available measure to better protect the interests of the employer could be the use of post employment restraint covenants. The difficulty in their use however stems in the doctrine of the restraint of trade, which requires that unreasonable restraints on liberty to trade (including the sale of personal labor) be rendered unenforceable. 

The essence of the common law doctrine of restraint of trade is described in the judgment of Lord MacNaghten in Nordenfelt v Maxim Nordenfelt Guns & AmmunitionCo Ltd :

The public have an interest in every person’s carrying on his trade freely; so has the individual. All interference with individual liberty of action in trading, and all restraints of trade of themselves, if there is nothing more, are contrary to public policy, and are therefore void. That is the general rule.

Essentially, the doctrine asserts that use of such restraints must not prevent the employee from utilizing ‘the general skill and knowledge which an employee must necessarily obtain as opposed to knowledge of any matter and skill in any process in which the employer could be said to have property.’ This concept of knowledge, matter and skill as trade secrets was dealt with in the American leading text, Milgrim on Trade Secrets, where it was suggested that ‘a person’s right to a trade secret is proprietary in nature’ and is therefore capable of being owned.’

Unfortunately, the use of these protective restraint measures are difficult to enforce as they are to be no wider than is reasonably necessary to protect the employers interests, when judged in terms of the duration and area of its coverage and the activities restrained. Essentially, if the scope of restraint exceeds this reasonableness, then it will not be enforced, even when the conduct in question would have fallen within the provision of acceptable scope.

At a local level, Victorian employers can look grudgingly to their New South Welsh counterparts to witness a positive device that does afford some level of protection depicted in their Restraints of Trade Act 1976 (NSW), which gives an express power on courts to read down otherwise restrictive covenants and enforce them to the extent they are reasonable.

PART C- AN EMERGING TREND: THE DUTY OF MUTUAL TRUST AND CONFIDENCE.

Whilst it has been argued that the duty of fidelity and good faith can be shown to have successfully developed as a duty upon employees in order to protect the interests of their employer, there is an emerging doctrine in the courts of the United Kingdom that seems to apply the same types of duties and expectations upon employers which is slowly gaining acceptance here in Australia.

The early leading authority that has nurtured this direction is the decision of the Court of Appeal in Bliss v South East Thames Regional Health Authority.  The case centered upon the existence of an implied term in the Plaintiffs contract of employment whereby an employer was not to conduct itself in a manner likely to damage or destroy the relationship of confidence and trust between the parties to the contract. Today, the courts in the UK still appear to embrace the issue with the application and confirmation of its adoption into common law through the decision in Malik v BCCI.

As such, the implied term of Trust and Confidence is described as:

The employer would not, without reasonable and proper cause, conduct itself in a manner likely to destroy or seriously damage the relationship of confidence and trust between employer and employee.

The position in Australia is not dissimilar with the courts attempting to balance the employee’s duties of fidelity and good faith, weighted against a corresponding duty on the employer to behave reasonably.

In Patrick Stevedore’s (No 1) Pty Ltd v Vaughan the court affirmed that the employer’s duty to take care of employee’s safety is a corollary of the employer’s prerogative to exercise control over the lives of their employees by determining the nature and conditions of work. Similarly, further acknowledgement of the duty was suggested by Justice Kirby referring specifically to implied duties of ‘mutual trust’ in his judgment in Concut Pty Ltd v Worrell.

Furthermore, in Aldersea v Public Transport Corporation, it was conceded that:

In recent years, courts and tribunals presided over by a judge have been prepared to imply into employment contracts a term that the employer will not, without reasonable cause, conduct itself in a manner calculated and likely to destroy or seriously damage the relationship of trust and confidence between itself and the employee. 

Some commentators have raised the question of whether acknowledgement of the duty correlates to its ‘wholehearted acceptance and application’ in Australian law. Whilst others have argued that its application could expect to be confined by its own particular fact pattern.

What is not disputed however is the shift away from the traditional onus on an employee’s obligations to now a more balanced approach between Master and Servant. Or put a little more eloquently to better reflect the modern era, ‘the emergence of mutual trust and confidence …is in part because of the open textured nature of the term makes it an ideal conduit through which the courts can channel their views as to how the employment relationship should operate.’ Therefore, based upon the duties emergence, it is evident that the pendulum referred to in the introduction is beginning to find its mark-arguably away from the employer.

CONCLUSION

The traditional legal attitude to the employment relationship as the embodiment of the subordination of the ‘servant’ to the legitimate authority of the ‘master’ is now on a changing modern course to better reflect the times we live in. The recognition that management and labor have aims and objectives which, while they may sometimes coincide, more often than not will ultimately sharply diverge.The most obvious explanations for this is the synchronization of global marketplaces of differing ideals that are now harmonizing as standard workplace environments. This consolidation has been brought through the necessary recognition of the economies of scale that can be achieved through competitive and comparative advantages of economies. The demand for and provision of Labor is the source that ultimately answers the essential questions of what, when and how to produce. It is these questions when answered efficiently that provide the motives for taking a risk for a return.

The common law fiduciary duty and duties of fidelity and good faith have provided a solid foundation upon which employers have been able to build their commercial activities to date, however as has been argued, the shift away from employer protection toward recognition of employees freedoms and rights only strengthens the importance that employers must place upon their greatest resource if they wish to maximize their risk/return matrix. That resource is their people and to get the best out them, mutual trust, respect and confidence is vital.

BIBLIOGRAPHY

CASES

Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41

Breen v Williams (1996) 186 CLR 71

Turner v Australasian Coal & Shale Employees Federation (1984) 55 ALR 635

Chan v Zacharia (1984) 154 CLR 184

Concut v Worrell (2000) 176 ALR 693

University of Nottingham v Fishel [2000] IRLR 471

Warman International Ltd v Dwyer (1995) 182 CLR 544

Reading v Attorney General [1951] AC 507

Industrial Development Consultants Ltd v Cooley [1972] 1 WRL 443

Timber Engineering Co Pty Ltd v Anderson [1980] 2 NSWLR 488

Phipps v Boardman [1967] 2 A.C. 46

New Zealand Neyherlands Society “Orange” Incorporated v Kuys [1973] 1 WLR 1126

Consul Developments PL v DPC Estates PL (1975) 132 CLR 373

Queensland Mines Ltd v Hudson (1978) 18 ALR 1

NP Generations (trading as LJ Hooker) v Feneley (2001) 80 SASR 151

SEA Food International PL v Lam (1988) 16 ACLC 552

Keech v Sandford (1726) Sel. Cas.t. King 61 [25 ER 223]

Robb v Green [1895] 2 QB 315

Blyth Chemicals Ltd v Bushnell (1933) 49 CLR 66.

Boston Deep Sea Fishing and Ice Cov Ansell (1888) 39 Ch D 339

English and Australian Copper Co v Johnson (1911) 13 CLR 490

Shepherd v Felt and Textiles of Australia Ltd (1931) 45 CLR 359

Faccenda Chicken v Fowler [1986] All ER 61

Ansell Rubber Co Pty Ltd v Allied Rubber Industries Pty Ltd [1967] VR 37

Digital Pulse Pty Ltd v Harris & Ors (2002) 51 AILR 1

Attorney General v Blake [1998] 2 WRL 805

Independent Management Resources Pty Ltd v Brown [1987] VR 605

Nordenfelt v Maxim Nordenfelt Guns & Ammunition Co Ltd [1894] AC 535

Herbert Morris Ltd v Saxelby [1916] AC 688

Bliss v South East Thames Regional Health Authority [1987] ICR 700

Malik v BCCI [1997] IRLR 462

Patrick Stevedore’s (No 1) Pty Ltd v Vaughan [2002] NSWCA 275

Concut Pty Ltd v Worrell (2000) 176 ALR 693

JOURNALS

J Riley, Mutual Trust and Good Faith: Can Private Contract Law Guarantee Fair Dealing in the Workplace? (2003) 16 Australian Journal of Labor Law 1.

R Naughton, “The Implied Obligation of Mutual Trust and Confidence-A New Cause of Action for Employees?” (1997) 10 Australian Journal of Labor Law 287.

BW Napier, Judicial Attitudes Towards the Employment Relationship (1977) 6 Industrial Law Journal 1

D. Brodie, Mutual Trust and Confidence, (2001) 30 Industrial Law Journal 84

A. Stewart, Confidentiality and the Employment Relationship (1988) 10 Australian Journal Labor Law 181.

Millett, Equity's Place in the Law of Commerce (1988) 114 Law Quarterly Review 214

D Brodie, “Mutual Trust and the Values of the Employment Contract” (2001) 30 Industrial Law Journal 84

TEXTS

Roger Milgrim, Trade Secrets (1993)

Creighton, Ford, Mitchell, Labor Law: Text and Materials (1993)

B.Creighton & A. Stewart, Labor Law: An Introduction (2000)

Meagher, Gummow & Lehane, Equity: Doctrines and Remedies, 4th Ed.

Austin, Fiduciary Accountability for Business Opportunities in Equity and Commercial Relations (1987)

Heydon, The Restraint of Trade doctrine (1971)

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