Tony Cavanagh is a Director at Mullane & Lindsay in Newcastle and is one of LawCover’s panel solicitors.
The Federal Court recently considered the duties owed by employees to employers. In Permission Corp v Pegasus, two employees of the applicant Permission Corp (PC) set up their own company Pegasus and, without disclosing their interest in it to PC, arranged for Pegasus to enter into contracts with PC. As a result Pegasus was paid significant sums. Further, Pegasus did not provide the service for which the payment was made. PC later became aware of the situation; obtained orders ‘freezing’ Pegasus’ bank accounts, and sued Pegasus and the employees (who, unsurprisingly, were dismissed) for damages.
The claim was effectively undefended because one of the former employees became bankrupt; the other settled the claim against him and Pegasus admitted most of the factual allegations. Despite this, the case is instructive because the Court implicitly accepted the following propositions:
- The relationship between employee and employer is a ‘fiduciary’ relationship.
- A fiduciary is liable to account for a benefit that was obtained because the person took advantage of an opportunity that arose due to being in a fiduciary position.
- If a third party comes to own property that was obtained in breach of fiduciary duty, knowing of the breach, the third party is liable to repay as well.
The Court was satisfied that Pegasus knew the money it received from PC was received because of the breach of fiduciary duty by the two employees. Pegasus was ordered to repay the whole of the money it had received and was ordered to pay the costs of the proceedings.
The case is a salutary reminder that all employees owe “duties of good faith” to their employer and cannot seek to make a personal profit for themselves, at the expense of their employer.
Tony Cavanagh is a Director at Mullane & Lindsay, and practises extensively in commercial and other litigation; and employment law. If you require any assistance in these areas please contact Tony Cavanagh or contact our Newcastle office.