Of Fiduciary Obligations – a ray of hope for employers
AUTHOR: Ron Galea Cavallazzi; Marisa Vella; Edward Mizzi
In a judgement delivered by the First Hall of the Civil Court on 28 September 2017, the court found an ex-director who was also general manager, liable to pay €350,000 after the court found that fiduciary obligations had been breached.
The case, instituted by Mekanika Limited, revolved around an employee who had been employed from 13 May 1982 as sales executive within the Gasan Group of companies. In 1994, M.A.I.N Services Limited (which was later amalgamated into Mekanika Limited) was set-up and the individual was one of the first 4 directors on the company and was employed also as general manager.
The employment contract contained a general prohibition on the use of information relating to the business, management affaires, dealings or finances of the company. During his tenure, the individual used to run the commercials and would negotiate with suppliers and would have, as a result, established a relationship with them.
On 20 November 2006, the individual submitted his resignation. He resigned from the post of Director on 1 December 2006 and his last day of work as general manager was 23 January 2007. The employee informed the company that he was terminating his employment for personal reasons however, it later transpired that, during his notice period, the employee applied for a VAT number to operate an import business of plant machinery (identical to the business carried out by Mekanika).
On 2 February 2007 however, the company received a notification from one of its long standing suppliers that it was terminating its contract with the company (which was subject to a three month notice period in the event of termination for convenience). It then entered into an exclusive distribution agreement with the defendant.
At the time, Mekanika suspected that the reason behind the individual's resignation was not, as he said, for personal reasons and strongly suspected that his resignation was somehow linked to the termination of a very long standing relationship forthcoming from the supplier.
The suspicions were confirmed when the foreign supplier informed the company that its representative in Malta was going to be the defendant. The appointment was effective on the first day following the expiry of the three month notice period which the supplier was obliged to give the company in case of termination for convenience. The company proceeded against the defendant under the articles of the Civil Code which lay down the fiduciary obligations on the basis that the defendant breached his fiduciary obligations and the trust that the company had placed in him over the years.
In its considerations, the Court considered a number of foreign and local judgements on the matter which pivoted around the principles of fiduciary obligations and fidelity that arise in the context of an employment contract. Foreign judgements emanating from common law jurisdictions, such as the UK for example, hold that a fiduciary duty should not be confused with a duty of fidelity.
The duty of fidelity may be expressly laid out in the contract but, if not, it is implied. All employment contracts contain an implied term that an employee will serve their employer in good faith and with fidelity, meaning that employees, during their employment, should act in the best interests of their employer. A fiduciary obligation exists where there is a fiduciary relationship such as between a director and the company of which the director is an officer.
Summarising the findings, the obligations of an employee, especially in executive roles, are such that the employee cannot do anything to harm the company or act in such way to the detriment of the company or its interests and that these obligations had to be regarded in addition to the contractual ones included in an employment contract.
While this concept is quite acceptable in the context of an employment relationship, it is quite another to say that it applies once the employment has terminated. So, does it? UK company law specifically caters for this and states that fiduciary obligations persist even after the person is no longer part of the company. Their courts hold that directors may be found liable for the misuse of information obtained and used for their own personal advantage.
This line of thought has also been applied in this judgment. In fact, the court found that the employee was a fiduciary of the company with a number of obligations which remained in force even after he resigned as a director of the company. It stated that the employee got to know of the foreign supplier due to his dealings with it as director and general manager of the company.
It also brought out his intent when it gave due consideration to the fact that he had applied for the VAT number while serving his notice (implying that there was the intention to take on the business). It said that there was nothing wrong with the resignation but starting up an identical business to that of his previous employer, especially when he still had access to sensitive data, was unacceptable.
On examining the evidence, the court felt assured that the defendant wanted to take the place of Mekanika as the exclusive importer and distributor of the foreign supplier's products violating, as a result, his fiduciary obligations.
Interestingly, when quantifying the amount due to the applicant company, the court made a landmark statement to the effect that in these cases, the courts should not only base the monetary award on the damages suffered but should assure that the person who breached their fiduciary obligations do not continue to benefit from the breach.
It also held that the company would not necessarily have had to suffer a loss but the fiduciary is liable to account for the profits connected with or arising from the breach of duty, even if no loss is proven.
At the time of this publication, the period within which to appeal is still running.