Dispute Resolution Singapore Client Alert April 2015 Employer Successfully Claims Against Employee for Breaches of Fiduciary Duties but Faces Challenges in Proving Damages In a recent action brought before the Singapore High Court, an employer, Enholco Pte Ltd ("Enholco"), asserted that an ex-employee, Antonius Martinus Mattheus Schonk ("Mattheus"), acted in conflict of interest and in breach of his fiduciary duties to Enholco. Mattheus counterclaimed for wrongful termination and for the reimbursement of certain expenses incurred. The Court allowed Enholco to claim against Mattheus for losses incurred by reason of the breaches of duties, as well as a claim for loss of profits, and dismissed the counterclaim. Facts Enholco is a company in the business of the sale of spare parts and provision of consultancy services in the oil and gas industry. Its managing director is Haank Jan Gerhard ("Gerhard"). Mattheus was employed by Enholco from 1989 to 2012. Without Enholco's knowledge or consent, Mattheus incorporated a competing company (the "Company") as its sole shareholder and director whilst employed by Enholco, with a view to luring away Enholco's business and customers and diverting retainer fees from Enholco's clients to the Company. Enholco eventually discovered his misconduct and dismissed him. Enholco commenced an action on the basis that Mattheus was acting in conflict of Enholco's interests and that Mattheus had also breached the fiduciary duties he owed to Enholco. In defence, Mattheus asserted that there was no breach of his obligations and duties as an employee because Enholco had known of the Company's existence and that, in any event, there had been an oral agreement between Enholco and himself in 2001 for Mattheus to take over the assets, business and undertakings of "Unit 2", which was a division of Enholco. He also counterclaimed for wrongful termination. Decision On the facts, the Court1 found that Mattheus had indeed been in charge of Unit 2. However, the Court expressed doubt on the veracity of his evidence in relation to his assertions as to the oral agreement for him to take over Unit 2. The Court concluded that Mattheus was an employee of Enholco at all material times and that he did not own Unit 2, even if he had control over its business 1 Enholco Pte Ltd v. Schonk, Antonius Martinus Mattheus and Another  SGHC 20 For further information please contact Celeste Ang +65 6434 2753 firstname.lastname@example.org Kelvin Poa +65 6434 2524 email@example.com Clarence Ding +65 6434 2662 firstname.lastname@example.org Ng Zhao Yang +65 6434 2701 email@example.com Baker & McKenzie.Wong & Leow 8 Marina Boulevard #05-01 Marina Bay Financial Centre Tower 1 Singapore 018981 www.bakermckenzie.com 2 Client Alert April 2015 and assets. The Court found that his intention in incorporating the Company was twofold: first, to avoid having to pay Gerhard money to buy over his shares in Enholco; and second, to lure away the business and customers of Enholco whilst he was still an employee of the company. To this end, the evidence adduced confirmed that Mattheus had, amongst other things, diverted retainer fees from Enholco's clients to the Company. Additionally, Mattheus had also surreptitiously installed software into Enholco's computers in order to delete Enholco's records and remove any trace of evidence against him. Damages At the stage of assessment of damages2 , Enholco sought to claim various heads of damages, including both the diversion of business and the loss of future profits. In respect of the diversion of business, which had been pleaded as a form of equitable compensation, the Court observed that Enholco had failed to discharge the evidential burden of proving that Mattheus had diverted away the bulk of Enholco's clients. In fact, there was some evidence to suggest that these clients were only willing to contract with Mattheus and would have followed him in any event. In respect of the account of future profits, the Court also disallowed this claim as Enholco had already elected common law damages and it was not open to it to claim both. Of an initial claim of a sum of S$1.67m for losses suffered by reason of Mattheus's breaches of his duties and a further sum of between S$2.8m - S$4.2m for the loss of profits, the Court only awarded a sum of S$313,454 to Enholco. This included general damages for the breaches of Mattheus's duty to Enholco, damages for the loss of Enholco's company car, the diversion of consultancy fees and commissions, and the diversion of some of Enholco's business by Mattheus. Comments It is fairly well established that an employment relationship gives rise to reciprocal rights and obligations even if such terms are not expressly included in the employment agreement. This would include, for example, the implied term of mutual trust and confidence, pursuant to which both the employer and the employee are obliged not to behave in a way that would undermine the employment relationship. Senior employees may also owe fiduciary duties (notwithstanding that they are not holding any office as a director), which carry a higher standard of care in equity and law. These would include, amongst other things, the following duties: (1) to act bona fide and in good faith in the best interest of the employer in the discharge of all duties, powers, responsibilities, obligations and functions assigned or vested; (2) to act for the proper purpose of the employer in relation to its affairs; (3) not to use his fiduciary position to gain and/or make any unauthorised profits; 2 Enholco Pte Ltd v. Schonk, Antonius Martinus Mattheus and Another  SGHC 108 3 Legal Update April 2015 1468208-v1\SINDMS (4) to ensure that the employer's affairs are properly administered and that its assets and property are not dissipated or exploited to its prejudice; (5) to serve the employer faithfully and dutifully and not to advance or promote his own or other external interests to the prejudice of or contrary to or in conflict with the employer's interests; (6) not to place himself or allow himself to be placed in a situation or position whereby any of his duties and obligations to the employer conflict or may conflict with his own personal interests (i.e. not to permit a conflict of interests); (7) to manage and deal with the employer's property in a proper and honest manner, being the purpose for which they were conferred, and not for any collateral purpose; and (8) to properly account and to pay to the employer all monies or property received by him on behalf of or for the credit or the account of the employer. It is apparent that the actions of the employee, in incorporating a competing business (whilst still an employee of the employer) for the purpose of luring away his employer's business and customers and to divert retainer fees from the employer's clients to the competing business, were detrimental to the employer. In the absence of the employer's consent for the employee to do so, such acts would clearly be in breach of the employee's duties and obligations to the employer. However, the case also illustrates potential challenges in establishing damages. In order for the employer, Enholco, to recover the sums claimed by way of damages, it needed to establish a causal nexus between the employee's breaches and the losses incurred. In other words, Enholco had to demonstrate that the losses incurred would not have arisen but for the breaches of duties and obligations by the employee. As can be seen, this is not always easy to prove in practice, particularly as there was evidence to suggest that these clients remained with Enholco only because of their relationship with Mattheus, and would have left of their own accord without the need for Mattheus to lure them away. ©2015 Baker & McKenzie. All rights reserved. Baker & McKenzie.Wong & Leow is a member of Baker & McKenzie International, a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a “partner” means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an “office” means an office of any such law firm. This may qualify as “Attorney Advertising” requiring notice in some jurisdictions. Prior results do not guarantee a similar outcome.