Employment Singapore Client Alert December 2015 Employee in Breach of Fiduciary Duties Suffers Further Blow as Court of Appeal Increases Damages Payable to Employer In a recent judgment, i the Singapore Court of Appeal (“CA”) held that an employee’s breach of fiduciary duties would not ipso facto disentitle him from claiming any unpaid salary due to him from the company. The CA also opined that the company would be able to claim the loss of future profits from the employee even though the loyalty of the company’s clients lay with the employee and the clients would not have retained the company’s services following the termination of the employee’s employment. An earlier client alert that we had prepared (which can be found here) sets out in greater detail the decision of the High Court (“HC”) which is the subject of this appeal. Facts Antonius Martinus Mattheus Schonk (“Mattheus”) was formerly employed by Enholco Pte Ltd (“Enholco”). Without Enholco’s knowledge or consent, Mattheus incorporated a competing company (the “Company”) with a view to luring away Enholco's business and customers, and diverting retainer fees from Enholco’s clients to the Company. Enholco commenced legal proceedings against Mattheus on the grounds that he acted in conflict of Enholco’s interests and had also breached his fiduciary duties to Enholco. Mattheus asserted that there was no breach of his obligations and duties because Enholco knew of the Company's existence and had agreed for him to take over the assets, business and undertakings of “Unit 2”, which was a division of Enholco. Mattheus counterclaimed for wrongful termination of his employment and his unpaid salary. At first instance, ii the HC allowed Enholco’s claim against Mattheus for breach of fiduciary duties. Mattheus’ counterclaim was dismissed. On the assessment of damages, iii however, the HC only awarded Enholco a sum of S$313,454, which included general damages for Mattheus’ breaches of his fiduciary duties, the diversion of consultancy fees and commissions to the Company, and the diversion of some of Enholco’s business. Enholco had claimed a further sum of between S$2.8m to S$4.2m for the loss of its future profits, but this claim was dismissed by the HC on the basis that Enholco had failed to establish causation. Mattheus appealed against the HC’s finding of liability and the HC’s dismissal of his counterclaim for unpaid salary. Enholco appealed against the HC’s dismissal of certain heads of losses, including the loss of its future profits. For further information please contact Celeste Ang +65 6434 2753 [email protected] Clarence Ding +65 6434 2662 [email protected] Baker & McKenzie.Wong & Leow 8 Marina Boulevard #05-01 Marina Bay Financial Centre Tower 1 Singapore 018981 www.bakermckenzie.com 2 Client Alert December 2015 Decision Mattheus’ Liability Mattheus’ appeal against the HC’s finding of liability was dismissed. The CA was satisfied that the HC did not err in finding that Mattheus was, at all material times, an employee of Enholco and had breached his fiduciary duties by diverting business and customers away from Enholco. Unpaid Salary The CA allowed Mattheus’ appeal in relation to the dismissal of his counterclaim for unpaid salary. Enholco’s position at trial was that, as Mattheus had breached his duties from April 2012 onwards, he was precluded from claiming his salary from that date. Mattheus asserted that, regardless of his breaches, he remained an employee of Enholco at the material time and should have been paid his salary until the termination of his employment. The CA found that, as a matter of law, Enholco’s contention was untenable. While an employer may claim damages for any breach of duty by its employee, such a breach would not, in and of itself, disentitle the employee to his or her salary. The employer may only withhold the payment of salary if it is permitted by statute or by the employment contract itself. In exceptional situations, the employer may also withhold payment of salary where there is a total failure of consideration due to the employee doing nothing at all during the period of employment. This was not the case here. Loss of Future Profits The CA also allowed Enholco’s appeal regarding the claim for the loss of future profits. The quantum of loss was calculated on the basis of the loss of two client accounts. At trial, the HC noted that Enholco faced difficulties in establishing causation. Both clients appeared to be willing to contract with Mattheus only and not with Enholco. Enholco had failed to prove that it would have retained those accounts after the termination of Mattheus’ employment. However, the CA disagreed with the HC on this point and found that factual causation was clearly established. When determining whether there is a causal nexus between the employee's breach and the loss of future profits incurred, the court must ask what would have happened if the duties had not been breached. Were it otherwise, the defaulting employee would be unduly rewarded since the consequences of his breach would be assessed on the footing that the breach would have taken place in any event. Accordingly, had Mattheus not breached his duties, he would have remained an employee of Enholco and the two accounts would have remained with Enholco. The CA therefore allowed Enholco’s appeal. Although Enholco had claimed between S$2.8m and S$4.2m for the loss of its future profits, the CA found that this was based on an unsatisfactory expert report. A sum of S$355,680 was awarded for the loss of future profits instead. Unauthorised Expenses Finally, the CA allowed Enholco’s claims against Mattheus for unauthorised expenses incurred which were reimbursed by Enholco. On the facts, Mattheus was found to have been authorising his own expenses. In addition, there was nothing to show that Enholco was aware of how these expenses had been incurred so as to establish waiver or implied authorisation. It was also inconceivable that these expenses, which included personal shopping expenses, could have been treated as legitimate employment claims. 3 Client Alert December 2015 Comments The CA’s judgement maintains a clear distinction between an agent-principal relationship and an employment relationship. A principal may not be required to pay his agent a commission for transactions that are in breach of his or her fiduciary duties. For instance, the courts have previously forfeited the commissions of real estate agents and building development project managers due to a breach of fiduciary duties. However, as a general principle an employee is, as a matter of law, entitled to his salary for as long as he is employed by the employer. In the present case, although Enholco submitted that an employee in breach of his fiduciary duties should only be entitled to his salary where it would be disproportionate to withhold it, this was rejected by the CA. Further, the CA’s judgment also mitigates the potential challenges an employer might face in recovering damages. Although both the CA and the HC had applied the “but for” test in determining causation, the CA stated that the appropriate enquiry would be to ask what would have happened if the duties had not been breached. Although there was evidence to suggest that these clients remained with Enholco only because of their relationship and loyalty to Mattheus, and would have left of their own accord without the need for Mattheus to lure them away, this was not a material factor to be considered. The employee would be liable not only for the losses actually incurred by reason of the breach of duties, but for the loss of future profits as well. i Schonk Antonius Martinus MAttheus and another v. Enholco Pte Ltd and another appeal  SGCA 65 ii Enholco Pte Ltd v. Schonk, Antonius Martinus Mattheus and another  SGHC 20 iii Enholco Pte Ltd v. Schonk, Antonius Martinus Mattheus and Another  SGHC 108 ©2015. All rights reserved. Baker & McKenzie.Wong & Leow is a member of Baker & McKenzie International, a Swiss Verein with member law firms around the world. 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