A recent case (Andrews Advertising Pty Ltd v David Andrews & Ors  NSWSC 318) in which the NSW Supreme Court found a senior employee’s wife liable for knowing assistance in a dishonest breach of fiduciary duty by her husband under the principles laid down in the 19th century case Barnes v Addy.
The case is one of only a handful of recent such cases in which the Courts have been prepared to impose liability on third parties who have participated with knowledge in a dishonest and fraudulent design by a fiduciary.
The case related to an advertising agency, Andrews Advertising Pty Ltd (Company), which had a majority of its shares acquired by Adcorp in mid-2006. Mr David Andrews, who had previously been a controller of the Company, was from that time employed as a senior executive of the Company, as was his son, Mr Dean Andrews. Both men had contracts of employment that contained post-employment restraint clauses in respect of their involvement with other advertising businesses and solicitation of the Company’s clients.
The Company’s two major clients were Lowes – Manhattan and Sleep City. In July 2010 both David Andrews and Dean Andrews ceased their employment with the Company and at about the same time the Company lost both Lowes Manhattan and Sleep City as clients.
The Company brought proceedings against David Andrews and Dean Andrews in respect of breaches of their employment contracts and breaches of fiduciary and other duties, and against Dean Andrews’ wife Danielle Andrews and three companies allegedly involved in the conduct of David or Dean Andrews so as to give rise to accessorial liability. It contended that Dean Andrews breached contractual, statutory (sections 182 and 183 of the Corporations Act 2001) and fiduciary duties which he owed to the Company as an employee by diverting advertising work from Sleep City away from the Company and to Andrews Media and Creative Pty Ltd (AMC), a company owned and controlled by Mrs Andrews and by providing advertising services to Sleep City which generated income which benefitted Mr and Mrs Andrews. The Company sought an account of the profits derived by reason of the breach of duty.
The proceedings were resolved as against David Andrews and one of the companies, and one of the other companies (AMC) went into liquidation. The matter proceeded against Dean Andrews, Danielle Andrews and the company Smart Retail Pty Ltd, of which Mrs Andrews became general manager in October 2010 and the sole director and shareholder in May 2011.
The Court analysed the factual circumstances surrounding Mr Andrews’ departure from Andrews Advertising in July 2010, and his subsequent interactions with Sleep City in some detail. One telling finding was that Mr Andrews resigned from the Company on 1 July 2010 and that by 5 July 2010 he was negotiating the terms of a draft heads of agreement with Sleep City on substantially the same terms as the heads of agreement between the Company and Sleep City.
On the breach of fiduciary duty claim the Court noted that since about September 2009 Mr Andrews was aware that some of Sleep City’s media placement requirements were being met by AMC rather than by the Company, even though the Company’s Heads of Agreement with Sleep City provided for such work to be performed entirely by the Company.
Mr Andrews unsuccessfully argued that Mrs Andrews, and not he, performed the media placement work. In fact the work diverted by Mr Andrews to AMC for the period September 2009 to July 2010 was worth over $795,000.
The Court was satisfied that Mr Andrews’ actions, occurring without the knowledge or consent of his employer, were readily describable as a dishonest and fraudulent design on his part.
The Court found that Mrs Andrews was not involved, except in a very minor way, in the media placement work. However it did find that Mrs Andrews knew of her husband’s breach of duty and participated in that conduct because Mrs Andrews was the sole director and shareholder of AMC at the time that AMC accepted the diverted work - she accordingly made AMC available as the vehicle which accepted and carried out the diverted work. The Court was also satisfied that Mrs Andrews had the requisite level of knowledge of her husband’s wrongdoing.
The Court noted that there was little direct evidence of Mrs Andrews’ knowledge. However the factors the Court took into consideration in imposing knowing assistance liability included that:
Mr and Mrs Andrews were apparently on good terms.
Mrs Andrews had considerable social contact with personnel from Sleep City.
It was very likely that Mrs Andrews knew that Sleep City was an important client of the Company, and from her husband’s point of view, his main client. The Court placed some weight on the fact that in January 2009 Mrs Andrews received an email regarding negotiations between Sleep City and the Company which provided that Sleep City’s advertising requirements were to be exclusively sourced from the Company.
The Court also inferred that Mr Andrews would have informed Mrs Andrews at least in general terms about important events involving Sleep City. It inferred that Mrs Andrews would have appreciated that her husband was obliged to loyally serve the Company and that the provision of services to Sleep City “on the side”, via a company associated with his own family would be a serious breach of his employment contract. The Court was confident in making these inferences in circumstances where Mrs Andrews did not give evidence.
The Court found each of Mr and Mrs Andrews liable to account to the Company for the benefits they obtained as a result of fiduciary duties committed by Mr Andrews when he was an employee.
The Court also found that Mr Andrews breached the restraint clause in his employment contract by carrying out work for Sleep City in the six months after his employment with the Company ceased. The Court found that the relevant restraint clause was valid and was not contrary to public policy, as had been submitted by Mr Andrews.
The case is important because it not only shows the circumstances in which individuals can be liable for their spouses’ breaches of duty but it has wider implications for individuals and companies that are knowingly involved in breaches of duties, and which stand to benefit by reason of those breaches: they can and will be held to account.