Introduction

8.1 This chapter continues from chapter 7 the summary of civil remedies available in Australian courts under Australian law. It covers the remaining four of the six types of claim identified in the inquiry's terms of reference: misappropriation of assets, breach of contract, negligence and breach of fiduciary and statutory duties. As in chapter 7, this chapter discusses each of those claims in three sections

  • first, the remedies available as a matter of general principle, disregarding the particular international features of the claim

  • then, the territorial limits to those remedies

  • third, the extent to which those remedies are enforceable outside Australia.

To simplify the analysis the chapter considers only the remedies available to a party in the District and Supreme Courts of New South Wales and the Federal Court of Australia.

Misappropriation of assets

The claim

8.2 This section considers the remedies available for recovery of property that has been misappropriated and transferred overseas. The following example reflects section 3 (c) of the terms of reference of the inquiry.

Misappropriation example

This example concerns an employee in Australia who steals money from his Australian employer. In order to delay or avoid detection the employee remits the funds offshore by electronic transfer through a series of accounts to a bank outside Australia in a country with strict bank secrecy laws. The receiving bank is then instructed to forward the funds to a bank in a third country to which the employee then travels to enjoy the fruits of his fraud.

 

The range of remedies available

8.3 Where a party has had certain of its property improperly taken by another party it may seek to recover the property through a number of equitable, restitutionary or legal claims. These include actions for

  • money had and received

  • a declaration of constructive trust

  • a declaration of equitable lien

  • an account of profits

  • damages.

8.4 These remedies may need to be supported by other orders such as Mareva injunctions and Anton Piller orders to ensure that the misappropriated property is not lost or dissipated.

8.5 Many, but not all, of these remedies will require the claimant to establish that it was owed a fiduciary duty and that the transfer of the property breached this duty. Some of the remedies will also require the claimant to establish that the property can be traced' through the various transfers and accounts so that the equitable or legal claim can still be attached to it. These fiduciary and tracing requirements add considerable complexity to the employer's claim for restitution or compensation. They are discussed below in the context of particular remedies.

8.6 A major consideration in exploring the remedies available to the employer is the extent to which it has an action against a third party, such as one or more of the intervening banks. In practice it may be difficult to find the employee or, once found, the employee may have no money left. In those circumstances the employer will often wish to focus on the liability of the banks and other parties involved in the transactions. Remedies against third parties are discussed separately below.

8.7 Generally the jurisdictional issues relate to discretionary powers of the court. For most of these remedies the court will have jurisdiction to grant the remedy in relation to both the employee and third parties, and in relation to assets located outside Australia. However the court, in its discretion, will take into account the assistance and form of relief available in the relevant jurisdictions outside Australia. The court will also consider whether it is the most convenient forum for the proceedings. These issues are discussed below as territorial limits and enforcement issues.

8.8 A further factor affecting the analysis is the relationship between these civil remedies and any criminal proceedings taken against the employee. It is possible that criminal proceedings will have been instituted and these could affect the evidence available, the property available to be recovered (bearing in mind proceeds of crime legislation) and whether the employee returns to Australia (for example, under extradition proceedings).

Money had and received

8.9 In an action for money had and received the obligation to account is imposed on the defendant by the common law as a personal obligation upon receipt of the plaintiff's money. The basis of the action is in restitution or unjust enrichment.[cdlxxvii] It is therefore a claim the Australian employer may make against the fraudulent employee.

8.10 The advantage of this remedy is that it is simply a personal obligation on the employee to repay the money he or she has misappropriated. The usual problem with such a claim, however, is that the fraudulent employee does not have sufficient personal funds to make the required repayment.

8.11 This is a significant problem because the defendant to an action for money had and received generally must be the immediate recipient of the money from the owner or from someone who should have paid it to the owner.[cdlxxviii] The remedy is only available against third parties in the rare cases where the third party has received money which the plaintiff can still identify as his own and the third party is not a bona fide purchaser for value.[cdlxxix]

Equitable remedies

8.12 Equitable remedies provide other grounds for recovery from the fraudulent employee. More importantly they also provide a basis for recovery from third parties, such as the banks involved in the misappropriation example.

Fiduciary relationship

8.13 It is useful to start with an outline of the relevant features of fiduciary relationships since these lie behind the possible equitable remedies. Beneficiaries who are owed a fiduciary duty by a party who has misappropriated, received or acted as an accessory to the misappropriation of, the beneficiary's property, including money, may assert that

  • they have never been divested of the right to the assets they seek, or

  • they have a right to undo previous dispositions of the property.

This is particularly important where the property has been transferred to a third party and it is sought to recover the property from that third party.

8.14 Fiduciary relationships arise in two ways in the misappropriation example. First, an employee is in a position of trust in relation to money received and controlled on behalf of his or her employer, thus giving rise to a fiduciary relationship.[cdlxxx] Secondly, a fiduciary relationship comes into existence whenever money is stolen. Such money becomes trust money in the hands of the thief and that person is unable to divest it of that character.[cdlxxxi]

8.15 There has been a clear breach of fiduciary duty in the misappropriation example. The employee has misappropriated the beneficiary employer's money and has taken private benefits or advantages from, and as a consequence of, his or her fiduciary office. Breach of the fiduciary relationship by way of misappropriation of the beneficiary's property may give rise to personal remedies against the former employee such as an account of profits and damages or proprietary remedies such as a declaration of constructive trust or an equitable lien.

Constructive trust

8.16 Where a fiduciary has misappropriated property of a beneficiary the beneficiary can seek a declaration from the court that the relevant property or gain is held by the fraudulent fiduciary on constructive trust for, and vests in, the beneficiary and also an order that the fiduciary surrender the property to the beneficiary.[cdlxxxii] A beneficiary seeking to recover property that the fiduciary has misappropriated by asserting a constructive trust needs to establish both

  • that the beneficiary has an equitable interest in the property misappropriated, and

  • that the interest can be followed into that or other property in the hands of the defendant fiduciary (the equitable doctrine of tracing).

This issue of tracing is addressed separately later in this chapter.

8.17 To establish the necessary equitable interest the beneficiary must have had a pre-existing property interest in the property misappropriated. This then entitles the beneficiary to seek to have that property returned or some other remedy of account for its value. It is arguable that it is also necessary to show that

  • the defendant fiduciary has been enriched by the receipt of a benefit

  • that benefit has been gained at the expense of the beneficiary and

  • it is unjust that the defendant fiduciary retain that benefit.

8.18 On the facts outlined in the misappropriation example and subject to the question of tracing, it is clear that the Australian employer can establish these elements in relation to the employee.

Equitable lien

8.19 The equitable lien is similar to the constructive trust except that it does not confer any property rights in the things to which it applies, nor does it confer a right to obtain possession of those things.[cdlxxxv] Equitable liens operate as judicially imposed charges to secure personal obligations owed by the current legal owner of the relevant property. In cases where money is misappropriated and then unidentifiably mixed with a larger fund, the fund can be charged to the amount of the beneficiary's money entitlement so long as that fund is sufficiently identifiable.[cdlxxxvi] As a consequence equitable liens do not depend on tracing in the same way as constructive trusts.

Account of profits and claim for interest

8.20 A defaulting fiduciary has a personal obligation to account for gains from use of the beneficiary's property as well as the misappropriated property itself. Any party that has made a profit by breaching the property rights of another party may be called to account to that party for that profit.[cdlxxxvii] In effect the party owing the duty must account to the owner of the property for any accretion to the property it was entrusted with resulting from that party's breach of duty.[cdlxxxviii] The basis of such a remedy is that such a wrongdoer should be stripped of all profits which it would be unconscionable that it retain.[cdlxxxix]

8.21 For this remedy to apply the gain must be identified. All that is required to be shown is that the fiduciary made the profit or gain, not that he or she still holds it.[cdxc] In the misappropriation example the amount of gain obtained by the fraudulent employee from use of the misappropriated funds would appear to be any interest earned on the funds while they were deposited in the bank account(s). If for some reason it is difficult to determine the amount of interest earned by the employee on the funds the courts will award interest representing the presumed profit that should have been enjoyed by the rightful owner which the employee had made from its misuse of the property.[cdxci] The rate of interest to be applied is the 'current mercantile rate',[cdxcii] and is awarded at the discretion of the court[cdxciii] and solely for compensatory purposes.[cdxciv]

Damages in equity

8.22 The case law suggests that where there is a breach of a fiduciary duty the wronged party is entitled to recover compensation from the fiduciary as an alternative to restitution of the actual assets removed by the fiduciary.[cdxcv] There is however some commentary rejecting the case law in support of this proposition as doubtful authority.[cdxcvi] Notwithstanding this, there are a large number of categories of misconduct by fiduciaries that have been the subject of equitable compensation claim.[cdxcvii]

8.23 Equitable compensation is viewed as an alternative to the declaration of a constructive trust as a method by which recalcitrant fiduciaries can be made to account for gains that are obtained at the expense of beneficiaries. If the transaction that breaches the fiduciary duty cannot be reversed it will be necessary for equity between the parties that monetary compensation be awarded in accordance with general equitable principles of restitution.[cdxcviii] This form of compensation will be the only remedy available in such cases to ensure that the beneficiary is returned to the same position it would have been in at the time of the hearing if no breach had been committed.[cdxcix]

8.24 Where assets are not able to be restored in specie the restitution by money is to be quantified as at the date of recoupment, not before.[d] In this sense equitable damages are essentially intended to reverse an unjust enrichment by the award of a money equivalent of the assets misappropriated. By awarding suitable compensation equity is attempting to restore the plaintiff as far as possible to the same position as if the disputed transaction with the fiduciary had never taken place.

8.25 Equitable compensation awarded in New Zealand and Canada has included an element similar to exemplary damages to act as a deterrent to fraudulent fiduciaries.[di] Equitable compensation on that basis has not been awarded in Australia to date.

Mareva injunction

8.26 Mareva injunctions are discussed in chapters 4 and 7. The comments in those discussions apply also in this chapter. In this case the employer would be seeking Mareva injunctions

  • directed to the employee to prevent the employee from directing the bank to transfer the funds from the current account, and

  • directed to the relevant bank to prevent the bank from releasing the money held in the relevant account.

Such injunctions may be granted against the banks themselves whether or not they are defendants to the proceedings. However, special considerations apply to the granting of a Mareva injunction against a bank. It is a general principle that the Mareva injunction does not and should not confer any security interest on the plaintiff. It has been held that such an injunction cannot be framed so as to prevent the bank from paying its creditors and customers its due debts.[dii] Thus any such Mareva injunction will be ordered only on terms that permit the relevant bank to meet its obligations to its customers.

Anton Piller order

8.27 To assist in and prove the tracing of the employer's funds it may be possible for the employer to obtain an Anton Piller order for the inspection of relevant bank records to follow the movement of the employer's funds once they were misappropriated by the employee. This form of order is also discussed in chapter 7.

8.28 There are several cases where the courts have granted Anton Piller orders in relation to matters involving tracing of misappropriated funds.[diii] In such cases the plaintiff is entitled to inspect records and require the defendant to do other such things as the court orders with a view to preserving and securing evidence relating to the action until trial of the action before the court. The orders are subject to various conditions: the relevant undertakings as to costs must be given by the party seeking the order, the order must be directed to a party in the proceedings and the investigations must only be used for the purposes of following and tracing the misappropriated funds.[div]

8.29 A number of English cases have made it clear that, as with Mareva injunctions, such orders can be obtained against the relevant bank operating the accounts of the defendant fiduciary notwithstanding that the bank is not a party to the proceedings.[dv] Other English cases have suggested that there may be an equitable duty to disclose on the part of a bank if it has handled funds which are the subject of a claim of misappropriation.[dvi]

Tracing in equity

8.30 Tracing' refers to the equitable principle of following property misappropriated as it is mixed with other property or passes from one party to another. Tracing is ancillary to most equitable proprietary remedies with the exception of the equitable lien. The courts will only identify funds by way of tracing where

  • the funds have been remitted from the beneficiary seeking relief by a party in breach of a fiduciary relationship, and

  • there is no intervening bona fide purchaser for value without notice of the beneficiary's legal interest in the relevant property.

8.31 If the money claimed by the beneficiary seeking restitution is part of a mixed fund in the hands of the fraudulent fiduciary (located, for example, in a bank account), then there may be certain limits to the amount of money the beneficiary may claim out of this fund as its own. Firstly, the party cannot claim more than the lowest intermediate balance of the relevant fund as the fund is deemed to have been spent in excess of that amount.[dix] Secondly, tracing is only possible so long as money continues to exist in a fund (regardless of whether it is mixed or not) which can be located and clearly identified.[dx]

8.32 The nature of the mixing will determine the extent to which the wronged party's funds may be traced and identified as its own.[dxi] For example, where the mixing takes place in a continuous and active bank account the first funds deposited are presumed to be the first funds withdrawn unless there is a contrary intention by the account operator.[dxii]

Tracing at common law

8.33 This is a limited form of remedy because of the strict requirements to be met before the misappropriated assets may be traced. As a general principle where a party has had legal title to property (other than money) removed from its control without consent and it can establish its ownership of the property immediately before being deprived, the party is still the legal owner of the property and able to make a proprietary claim for the property. This will be regardless of who has possession of the property, including bona fide purchasers for value without notice. This proprietary claim against the party finally in possession of the property is known as common law tracing and does not require the existence of a fiduciary relationship with any party in order to be established.

8.34 The main exception to this principle is money. Where money is stolen property in the notes or coins does not pass to the thief. But if the thief passes the money into currency, by making payment with it, ownership will pass with possession notwithstanding the thief's lack of title providing the transaction was bona fide and for valuable consideration.[dxiii]

8.35 In the misappropriation example the employee did not initially make payment with the stolen money but instead deposited it with a series of banks. It was ultimately transferred to a deposit in a bank outside Australia. If it is still in that bank account and has not passed into currency, then it may still be recoverable through common law tracing.[dxiv] However this is unlikely. It would require not only that it has not been mixed with other money when transferred through the successive accounts but also that it has not been exchanged into a different currency.[dxv]

Common law remedies against third parties

8.36 If the stolen money can be traced at common law to the bank with which the money is now deposited and the bank is not a bona fide purchaser for value, then this will be one of the rare situations where the employer can take an action against the bank for money had and received. The bank will be liable to repay the money and this may cause it some loss which it may seek to recover from the employee or, if it can identify a cause of action some other party involved in the series of transactions.

Equitable remedies against third parties: constructive trust

8.37 If the action for money had and received is not available the employer may seek to recover from one or more of the banks on an equitable basis. To do so it must establish some level of culpability on the part of the bank as a constructive trustee. Generally the bank must know or be deemed to know of the fiduciary relationship between the employer and the employee, and must receive some benefit from its receipt of the money (for example, repayment of a debt) or assist others to receive trust property.

Constructive trust: knowing receipt

8.38 In the misappropriation example the bank will be taken to have sufficient knowledge of the fiduciary relationship for it to be required to hold the money on constructive trust for the employer if

  • the bank knew of the trust relationship between the employer and employee concerning the stolen money and the breach of the ensuing trust relationship, or

  • the bank wilfully ignored the obvious breach of fiduciary duty, or wilfully and recklessly failed to make inquiries that an honest and reasonable person would have made.

In such a case, the bank need not know all matters concerning the nature of the trust relationship and the circumstances of its breach but it must have sufficient knowledge to make it dishonest for it to have received the property.[dxvi] The mere fact that a recipient has some suspicion or feels some anxiety as to the origins of the property it receives is not sufficient knowledge.[dxvii] The requisite amount of knowledge will also be assumed where the bank is negligent in regard to the rights of the beneficiary in relation to the property. An example of this would be where the officers of the 'recipient' bank have knowledge of the facts leading to the conclusion that a fiduciary relationship exists but these officers do not give any consideration to those facts and act in contravention of the trust relationship.[dxviii]

Constructive trust: accessories

8.39 Alternatively, a party such as a bank may not actually 'receive' property misappropriated from beneficiaries but still be liable to account on the basis that it is an 'accessory' to the breach of the fiduciary relationship. Accessories' in such a case are held liable for their participation in the breach of trust. To establish this the bank must have

  • assisted in the breach, and

  • possessed sufficient knowledge of what was happening.

8.40 To establish this liability the accessory (that is, the bank) must assist the fiduciary with the intention of furthering the breach of duty,[dxx] and the acts on the part of the accessory must be part of the fiduciary's intention and design and not things of minimal importance.[dxxi] It is not sufficient that the bank simply permitted or allowed the fraud to occur.[dxxii] The bank must also be aware that the fiduciary owed obligations to the beneficiary. The bank will be taken to have sufficient knowledge if, given the facts that were within the knowledge of the bank, a reasonable person would have concluded that there was fraud or breach of a trust. A bank that consciously refrains from inquiry for fear of learning of the fraud will have sufficient knowledge.[dxxiii] Knowledge of circumstances which indicate a breach of trust to an honest and reasonable person is sufficient. There is insufficient information in the facts given in the misappropriation example to determine whether any of the banks would be liable on these grounds.

Territorial limits

8.41 The Australian courts will have jurisdiction over the actions taken against the employee because the breach of fiduciary duty occurred within Australia. This applies notwithstanding that the employee may now be outside Australia and notwithstanding any of the other extra-territorial elements.[dxxiv] The cause of action will be taken to arise within the jurisdiction where the breach of duty occurred. It is not necessary that all of the events necessary to complete the cause of action have occurred within the relevant jurisdiction.[dxxv]

8.42 The Australian courts' jurisdiction over the banks outside Australia is less clear. As pointed out in chapter 4 there is no specific provision in any of the rules of court in Australia giving the court jurisdiction over a party located outside Australia on the basis that it is a constructive trustee for a beneficiary located within Australia.[dxxvi] Case law in the United Kingdom suggests that a court will be likely to exercise jurisdiction in relation to an extra-territorial constructive trustee if a substantial part of the acts of the fiduciary employee and the defendant bank(s), viewed as a whole, took place within the relevant jurisdiction of the court.[dxxvii] It is not a requirement for an action to be maintained against an offshore bank that the misappropriated funds have been transferred into an account which it operates in Australia. It is therefore arguable that the relevant court in Australia has jurisdiction to hear the matter against the foreign bank(s) as defendant constructive trustee(s) since the proceedings are founded on a cause of action arising out of acts substantially performed within Australia.

Forum non conveniens

8.43 In cases such as the misappropriation example there is a real possibility that there may be more than one appropriate forum for determining the claim for unjust enrichment.[dxxviii] Thus it is possible that even where there is jurisdiction in the relevant Australian court the matter still may be unable to be heard in Australia because another forum is more appropriate.

8.44 It is likely that the most appropriate forum will be the place with which the obligation for restitution has the strongest connection. On that test it is likely that Australia would be deemed the most appropriate forum for the misappropriation example on the basis that the employee is apparently resident in Australia, the employee was working for the employer in Australia, and the original breach of duty occurred in Australia.[dxxix]

Enforcement of remedies outside Australia

8.45 The enforcement outside Australia of remedies ordered in relation to the claims discussed in this chapter raises issues about debt recovery, damages, Mareva injunctions and Anton Piller orders. However the major practical issue is the difficulty of identifying where the money has gone, particularly when there are strict bank secrecy laws involved. This is discussed below.

Debt recovery

8.46 For most of the claims discussed in this chapter (including money had and received, constructive trust and equitable lien) the remedy ordered by the Australian court will be payment of a certain sum of money by the defendant to the employer, that is, a money judgment. The enforcement of the money judgment outside Australia will be subject to the same considerations as those discussed in relation to debt recovery in chapter 7.

Damages

8.47 The claim for damages in equity and for an account of profits are subject to a further qualification. In each case, if the Australian judgment needs to be enforced outside Australia, the amount awarded will be determined by the jurisdiction in which enforcement is sought.

Mareva injunction

8.48 As discussed in chapter 7 a court may grant a Mareva injunction against assets located outside Australia provided the court is satisfied that there is a case to be answered within its jurisdiction. The court will be more disposed to granting such an injunction where the defendant employee is resident or domiciled within the local jurisdiction but this is not an essential requirement. So long as the main proceedings have been commenced and there is a case to be answered in the local jurisdiction the relevant court can be expected to issue a Mareva injunction against the misappropriating employee.[dxxx] This will be the case even where the funds are located in a bank account outside the relevant jurisdiction and the employee is currently outside the jurisdiction.

8.49 In the case of proceedings commenced within Australia against any or all of the banks in which the employer's misappropriated funds have been or were deposited or are now currently located, a Mareva injunction would also usually be granted by the courts in Australia. This is notwithstanding that the funds have been deposited in the accounts of banks located outside the jurisdiction. This is on the basis that although the relevant defendant bank is outside the jurisdiction and the relevant funds are also outside the relevant jurisdiction, a cause of action in which the relevant Australian court has jurisdiction has been commenced or is in the process of being commenced.[dxxxi]

8.50 As indicated elsewhere, a Mareva injunction is likely to be framed so as not to be enforceable until so declared by the court in the country in which enforcement is sought.

Ancillary orders

8.51 It is open to a court in Australia to grant ancillary orders in conjunction with other relief such as Mareva injunctions. Such ancillary relief includes Anton Piller orders (permitting persons to enter premises to obtain documents and items), orders for discovery, orders for cross examination of deponents and any other orders that are appropriate. For these purposes the court takes into account the extent to which ancillary orders are desirable in order to render the primary relief sought more effective and also the need to minimise hardship and prejudice to the defendant and other persons who may be affected.[dxxxii] Such orders could be sought against a foreign bank requiring disclosure of documents and other information in relation to an action involving tracing of misappropriated funds. Such an order would be drawn up in a similar fashion to a Mareva injunction to be served in a foreign jurisdiction. It is possible, however, that the courts of the foreign jurisdiction will regard this as over-reaching by the Australian court and will not directly enforce the order. Unless the circumstances are exceptional an Australian court might decline such an order.[dxxxiii]

8.52 It is possible that there is a branch of one or more of the relevant overseas banks located within the Australia. However this will not entitle a plaintiff in Australia to require the local branch to make available relevant account details for investigation. Each branch of the bank is treated as a separate entity for these purposes.[dxxxiv]

8.53 The relevant consideration for identifying the bank and the branch to which the order is to be addressed is not where the funds may be located but rather the jurisdiction which governs the debtor/creditor relationship between the bank and the customer.[dxxxv] Usually this will be where the account is opened notwithstanding that funds are currently located in another account in another country.[dxxxvi]

8.54 As a consequence the plaintiff employer may need to obtain Anton Piller orders against a number of banks in a number of different countries in order to obtain and secure relevant transaction records. Where these are granted they will be framed in a similar way to the Mareva injunction to be served outside the jurisdiction. That is, their operation in respect of the foreign jurisdiction will not take effect until approved by the relevant court of that jurisdiction.

8.55 Because of potential differences in judicial recognition of these orders between jurisdictions this requirement has the potential to frustrate the employer's attempts to obtain information through use of these orders.

Finding the evidence

8.56 The main problem for the employer relates more to the collection of evidence than to the enforcement of the ultimate remedy. To establish its claim the employer will need to evidence the transfer of the funds through the accounts of the various banks involved in the transaction.

Banker's duty of confidentiality

8.57 However, information about bank accounts is generally confidential. It is an implied term of the banker/customer relationship that the bank will keep the customer's account information confidential. The English courts have laid down a number of exceptions to this principle, including disclosure under compulsion of law, disclosure in the public interest and disclosure in the best interests of the bank.[dxxxvii] These may be interpreted strictly. In FDC Co Ltd v Chase Manhattan Bank, NA, the Hong Kong Court of Appeal held that an order directed to a bank by a foreign court to disclose information was not sufficient to constitute a requirement for disclosure under compulsion of law'.[dxxxviii]

8.58 When exercising its discretion, an Australian court making such an order will consider the sanctions that will apply if the branch of the bank located outside the jurisdiction fails to comply. In FDC Co Ltd v Chase Manhattan Bank, NA, failure to disclose in compliance with the orders meant that the office of the bank located within the local jurisdiction was liable to daily fines for non-compliance with the order directed to the overseas office.[dxxxix]

8.59 In Nanus Asia Company Inc v Standard Chartered Bank[dxl] the United States Securities and Exchange Commission required disclosure of information by an overseas branch of a local bank with the sanction that if the information was not disclosed the funds of the local bank in the United States would be frozen. The High Court in Hong Kong concluded that such orders represented an improper exercise of the foreign penal jurisdiction of a foreign court which the rules of English conflict of law would not permit except in special circumstances.

Bank secrecy laws

8.60 These difficulties are compounded where a bank is within a jurisdiction that has strict secrecy laws. The bank secrecy laws in Switzerland provide an illustrative example. A number of different Swiss statutory provisions limit the availability and disclosure of information which may be made by a Swiss financial institution to an outside inquirer.[dxli]

  • Article 162 of the Swiss Criminal Code prohibits the disclosure of commercial secrets by those legally or contractually obligated to maintain their secrecy.

  • Article 273 of the Swiss Criminal Code aims to protect Swiss sovereignty and the Swiss economy by making it a crime to reveal manufacturing or business secrets to a public or private foreign authority or its agents.

  • Article 28 of the Swiss Civil Code allows private parties to recover damages for pecuniary losses caused by disclosure of confidential commercial or business activities, manufacturing processes or information regarding a business organisation.

  • Article 47 of the Swiss Federal Banking Law prohibits disclosure by bank employees or agents of confidential customer information without the customer's consent, punishment for which includes a fine or imprisonment for six months.

8.61 These provisions combine to prevent disclosure of banking information held within Swiss jurisdiction on the basis of the interests of public policy and maintaining the confidentiality of such information. The effect of these laws has been that courts outside Switzerland often refuse to make orders requiring disclosure by a Swiss bank on the grounds that

  • any such order for disclosure is likely to be ineffective and not acknowledged in Switzerland

  • to require such disclosure would mean that witnesses in Switzerland would face civil and criminal consequences for making the disclosure, and

  • if the order was not likely to be complied with, the local branch of the bank to which the order for disclosure had been directed would not be in contempt unless it controlled the relevant account held abroad.

Nonetheless courts outside Switzerland have found that this Swiss legal regime has the legitimate purpose of protecting commercial privacy inside and outside Switzerland'.[dxliii] The United States Federal Court has noted that to insist that such orders be carried out would be extremely harmful to international comity.[dxliv]

Implications of bank confidentiality and secrecy for remedies

8.62 This discussion suggests that although a plaintiff may seek Anton Piller or similar orders, and an Australian court has capacity to make such orders, a great deal of consideration will have to be given to the exact nature of the orders in relation to foreign banks. In the case of an attempt to seek information regarding an account held by a bank in a country with strict secrecy laws such as Switzerland, it is likely that the Australian court will not make the orders sought by the plaintiff. This will present significant barriers to plaintiffs such as the employer in the misappropriation example. Without such assistance it may never be able to trace successfully the stolen money either into the hands of the fraudulent employee or the bank. This may frustrate its ability to obtain any effective remedy.

Breach of contract

The claim

8.63 This section considers the remedies available for a cross border breach of contract. The following example reflects section 3 (d) of the terms of reference of the inquiry.

Breach of contract example

This example concerns a dispute about a distribution agreement. An Australian company appoints a local agent in an APEC country to distribute the Australian company's products in that country. There is a disagreement. The agent does not remit to the Australian company the proceeds of sales when due and the Australian company terminates the agency agreement and seeks to recover the unpaid proceeds. The agent cross claims for wrongful termination and unpaid commission.

 

The range of remedies available

8.64 After terminating the agreement the Australian company could seek one or more of the following remedies in relation to its claim that the agent has breached the contract

  • recovery of proceeds of sale

  • damages

  • a Mareva injunction

  • a final injunction

  • declaratory relief.

Each of these remedies is considered in turn.

Recovery of proceeds of sale

8.65 Termination of the contract releases the Australian company from its future rights and obligations pursuant to the contract. Termination will not of itself compensate the Australian company by returning the proceeds of sale owed to it by the agent pursuant to the contract nor will it compensate the Australian company for any losses suffered as a result of the agent's failure to pay such sums.

8.66 To recover the amounts the agent was meant to remit to it under the contract the Australian company will first have to quantify the amount outstanding and due for payment. It must then commence an action against the agent for this amount as a debt. The resulting judgment debt, when granted by the relevant court, may be enforced by the Australian company against the agent in the manner described in chapter 7 if payment is not made by the agent within an appropriate time after the order of the court.

8.67 The fact that the Australian company has terminated the contract does not affect its right to sue for the debt owed. The right to recover the debt from the agent arises prior to the act of termination.[dxlv] It would be usual for this action to be heard together with a claim for damages and a declaration that the contract has been validly terminated.

Damages

8.68 Where a breach of contract occurs the party not in breach is prima facie entitled to recover damages.[dxlvi] Thus, on proving that the agent has breached the contract by failing to remit amounts due, the Australian company may also seek an award of damages in its favour. This award can be made by the court independently of whether the contract is terminated.[dxlvii] Under Australian law the Australian company's claim for damages may include

  • the sum owing (if not separately recovered)

  • interest on that amount from the date the cause of action arose to the date of judgment

  • loss of the value of the bargain with the agent

  • loss of market opportunity

  • loss of establishment costs (that is, reliance damages)

and any other foreseeable loss that was within the contemplation of the parties, was directly related to the defaulting party's breach of contract[dlii] and is not too remote.[dliii] For each item of compensation claimed there will have to be sufficient evidence that the loss flowed from the agent's breach of contract. The court will be careful to avoid double counting of losses. The Australian company must also take all reasonable steps to mitigate its losses.[dliv]

Mareva injunction

8.69 Where the Australian company is concerned that there are still certain of its goods in the hands of the agent it may consider requesting that the court grant a Mareva injunction to prevent these goods being sold by the agent pending final outcome of the proceedings. Alternatively, it may be concerned that the proceeds of sale of the goods it has supplied may be located in an identifiable account and about to be dissipated by the agent. The comments in chapter 7 relating to Mareva injunctions apply in this context.

Final injunction

8.70 If the Australian company considers that an injunction of this kind is also needed after the proceedings have been completed, it may seek as a permanent order

  • a prohibitory injunction preventing the agent from selling any more of the Australian company's goods in its possession or that come into its possession or control, or

  • a mandatory injunction requiring the return of any of the Australian company's goods that are currently in or come into its possession or control.

However, these remedies are discretionary and will usually only be granted where damages are an inadequate remedy.[dlvi] Damages will only be an inadequate remedy if the goods concerned are unique and cannot otherwise be replaced.[dlvii]

Declarations

8.71 The cross claims by the agent that the contract has been wrongfully terminated and the Australian company has failed to pay due commissions would most likely be heard as part of the proceedings dealing with the Australian company's claims against the agent. To resist those cross claims the Australian company may seek declarations that the Australian company has validly terminated the contract and the agent is not entitled to any unpaid commission.[dlviii] Declarations are at the discretion of the court.[dlix]

Territorial limits

8.72 The Federal Court and the Supreme and District Courts of New South Wales have jurisdiction over claims arising out of a contract, even where the facts are not entirely confined to the State or the Commonwealth, provided there is sufficient connection with the relevant Australian jurisdiction. There will generally be taken to be sufficient connection where[dlx]

  • the contract is made within the jurisdiction

  • there is a breach of the contract (regardless of where the contract is made) in the jurisdiction

  • the contract is specified to be governed by the law of the jurisdiction

  • the contract is made by or through an agent residing or carrying on business within the jurisdiction on behalf of a principal trading or residing outside the jurisdiction, or

  • the subject matter of the proceedings is property in the jurisdiction.

The facts outlined in the breach of contract example are not sufficient to determine whether the Australian courts would have jurisdiction in this case. Nevertheless, some further comments can be made on determining where the contact was made and where the breach occurred.

Contract made within Australia

8.73 The contract will be considered to have been made within Australia if

  • the Australian company accepted, in Australia, an offer from the agent to act as its agent in the relevant country (however communicated), or

  • the contract was reduced to writing and was executed within Australia or the last party to execute was within Australia.

Breach of contract in Australia

8.74 To establish jurisdiction on the ground that there has been a breach of contract in Australia it is necessary to show that there has been a breach of some part of the contract that was required to be performed in Australia.[dlxi] It is not necessary that the entire breach of contract take place within Australia nor does the breach have to be substantial. In the given scenario the agent has failed to remit the proceeds of sales to the Australian company. As a general principle, failure to perform a money obligation is considered to be a breach at the place where the money is due and payable.[dlxii] If the proceeds of sale were payable directly to the Australian company in Australia, the agent's failure to do so constitutes a breach of the contract in Australia and the relevant courts in Australia have jurisdiction to hear the matter.

Enforcement of remedies outside Australia

8.75 Enforcement outside Australia of the remedies outlined in this chapter is subject to a number of constraints that have been discussed in earlier chapters.

  • If the Australian company wishes to recover the proceeds of sale or its damages award outside Australia, it will need to follow the procedures for the enforcement of judgment debts outside Australia.

  • Damages will only be enforceable in the relevant foreign jurisdiction to the extent that the heads of damage comprised in the Australian judgment are recognised in the foreign jurisdiction. In addition the amount payable under each recognised head of damage will be calculated in accordance with the rules of the foreign jurisdiction.

  • Injunctions will generally be framed on the basis that they will only have effect if they are declared to be enforceable or are enforced by the foreign court.

Parallel proceedings

8.76 A further set of enforcement issues may arise if the agent chooses to commence proceedings in its own jurisdiction disputing the termination of the agreement. The Australian court orders are directed primarily at recovery of amounts owing and damages on the basis that the termination is valid. They do not deal with any continuing obligations of the Australian company that would arise if the termination was not valid. There is potential for conflicting judgments if there were parallel proceedings and this would complicate enforcement. In particular, parallel proceedings could raise the prospect of anti-suit injunctions.

Negligence

The claim

8.77 This section considers the remedies available for torts arising in an international commercial context. The following example reflects section 3 (e) of the terms of reference of the inquiry.

Negligence example

This example concerns negligence outside Australia that causes loss to an Australian company. A New South Wales construction company enters into a joint venture with a number of non-Australian joint venturers for the construction of a major infrastructure project in South East Asia. Due to negligent preparatory work on site by one of the non-Australian joint venturers, the New South Wales company's crane is damaged beyond repair. The New South Wales company seeks a remedy for its loss.

 

The range of remedies available

8.78 As a general principle there are two remedies the New South Wales company could seek: damages and injunctive relief. Relevant categories of damages include compensatory, aggravated, exemplary, nominal, contemptuous and equitable damages. These are subject to certain limits. The injunctive relief might be directed at preventing further damage or compelling the performance of a particular act. Each of these remedies is discussed below.

Damages - general principles

8.79 Damages may be constituted by a sum of money payable by way of compensation, appeasement or civil fine for the loss or injury inflicted by a tortfeasor. The principal remedy for a tort is compensatory money damages. Compensible losses recoverable in tort may either be pecuniary or non-pecuniary. Pecuniary loss includes lost profits, lost earnings, losses incurred in restoring damaged property to its original condition or in replacement of damaged property, and expenses incurred by the injured party in mitigating the loss. Damages for all losses, past and future, must be assessed once and for all in a lump sum award. The application of this rule means that

  • an award of damages must encompass all losses, past and future

  • a plaintiff cannot seek review of an award where material circumstances affecting the award later change, and

  • an award of damages bars subsequent claims founded upon the same cause of action.

The different categories of damages that are relevant to the negligence example are discussed below.

Compensatory damages

8.80 Damages are generally intended to compensate for loss. The aim is to compensate persons who have suffered loss by awarding them a sum of money that will put them in the same position as they would have been in had the wrong not occurred.[dlxiii] Pecuniary losses, such as property loss, permit precise calculation. However future economic loss, such as loss of expected profit, is more difficult to assess because it depends on contingencies and requires the court to predict future events. Compensation for future loss on this basis is recognised as necessarily inexact but the overriding requirement of calculation of damages to restore the plaintiff to the pre-injury position, insofar as money is able to achieve this aim, still applies.

8.81 For tortious damage to goods and chattels (as in the case of the negligence example) the normal measure of compensation is the amount by which the value of the goods is reduced because of the damage. That amount is usually calculated by adding the cost of repair to any residual diminution in value which may exist after repair. There may also be consequential losses such as the cost of hiring another chattel during the repair period.

8.82 Where the plaintiff's goods are destroyed the normal starting point for the measure of loss is their market value at the time of the loss. However, if it is reasonable for the plaintiff to wait some time before purchasing a substitute (for example, if it is waiting until the defendant's insurer declares the chattel a total loss'), then the date for assessment of value may be extended. In all cases of destruction the value awarded is reduced by the scrap value of the destroyed chattel.[dlxiv]

8.83 For profit earning chattels, the value of the goods to be compensated includes the chattel's ability to earn a profit as well as its capital value.[dlxv] As mentioned earlier, loss of the opportunity to make a profit may often be difficult to establish with certainty but once it is established by the plaintiff as a probable loss of some substance then the plaintiff is entitled to fair compensation for the loss.[dlxvi] Costs of adaptation of a replacement chattel to perform fully the functions of the destroyed chattel may also be recovered.[dlxvii] Damages for loss of use of a destroyed chattel in the period between destruction and replacement are calculated in the same way as damages for loss during repairs and include loss of profits,[dlxviii] hire charges,[dlxix] and other consequential losses.[dlxx]

8.84 On these principles the Australian company can be expected to be compensated for the following

  • damage done to its equipment or replacement cost of the equipment (depending on whether the equipment is completely destroyed)

  • any interim costs such as hiring of replacement equipment and other consequential losses, and

  • loss of future profits arising from the damage to the equipment.

Aggravated damages

8.85 Aggravated damages are awarded as compensation for injury to the plaintiff's feelings caused by the defendant's insulting or humiliating conduct.[dlxxi] Negligence may, in limited circumstances, justify aggravated damages but as a rule any impact of the circumstances in which damage occurs is taken into account when calculating compensatory damages.[dlxxii] The facts set out in the negligence example do not suggest any basis for an award of aggravated damages.

Exemplary damages

8.86 Exemplary damages are intended to punish the defendant for conscious wrongdoing in contumelious disregard of another's rights'.[dlxxiii] In addition to the punishment of the defendant, an award of exemplary damages may be intended to demonstrate the court's disapproval of the conduct and to deter the defendant and others from similar behaviour,[dlxxiv] or to prevent unjust enrichment by subtracting a profit made by the defendant and passing it to the plaintiff. Exemplary damages may apply to any particular category of negligence.[dlxxv] The cause of action is irrelevant. The critical factor is the fact of the defendant behaving with sufficient wanton disregard for the plaintiff's welfare.

8.87 In the negligence example if the negligent joint venturer acted wantonly and recklessly with regard to the New South Wales company's equipment, actual malice on the part of the negligent joint venturer is not required to be established by the New South Wales company before an award of exemplary damages can be made. It is not clear on the facts whether the requisite behaviour on the part of the negligent joint venturer has actually occurred.

Nominal damages

8.88 Nominal damages are awarded in recognition of the fact that a tort has been committed but there has been no consequent injury or loss.[dlxxvi] This form of damages is now rarely awarded and in any case there is no need for it in the New South Wales company's case as there is clear evidence of actual damage having been suffered.

Contemptuous damages

8.89 Contemptuous damages are awarded to record the court's disapproval of a plaintiff's claim and its view that the action should never have been commenced. The New South Wales company appears to have a legitimate claim in negligence and therefore an award of this kind is unlikely.

Equitable damages

8.90 A court exercising jurisdiction in equity has the discretion to award equitable damages either in addition to, or in place of, a specific order. If equitable damages are awarded, the court will normally follow the common law principles of assessment and the damages will be the same as if they had been obtained at common law.[dlxxvii] Equitable damages are likely to be more advantageous to the plaintiff than damages at common law if there are continuing wrongs because equitable damages may include compensation for prospective losses which may be occasioned by future wrongdoing.[dlxxviii] There is no evidence in the given scenario of such continuing wrongs on the part of the negligent company and consequently this form of damages will offer no advantage over pursuit of common law damages by the New South Wales company.

Limits on compensation

8.91 In all cases involving a claim for damages by a plaintiff on the basis of a tortious act of the defendant the plaintiff has to overcome a number of limits to the recovery of damages.

  • Causation - a requirement that the plaintiff establish a connection between every aspect of its loss and the defendant's tortious act or omission is a prerequisite to the recovery of damages.

  • Certainty - a requirement that the losses claimed by the plaintiff must be established with sufficient certainty to satisfy the court, both of their existence and extent. Entirely speculative losses are not recoverable.

  • Remoteness - a requirement that in negligence actions, the plaintiff must show that there was a real risk' of the damage occurring, and that the actual damage occurring could not be brushed aside as far fetched. The precise damage need not be foreseen.

  • Mitigation - the requirement that the plaintiff take all reasonable steps to avoid losses as a result of the defendant's tort. The doctrine of mitigation relieves the defendant from paying that portion of the loss over which the plaintiff had full control and should prudently have avoided.

  • Contributory negligence - the obligation of the court to reduce a plaintiff's damages on a percentage basis where the defendant can establish that the plaintiff's negligent conduct either wholly or partly caused the loss or injury it suffered.

The New South Wales company will need to address all of those issues in order to claim the full value of its loss.

Injunctions

8.92 In the case of tortious acts by a defendant, injunctions are usually ordered for two purposes.

  • Specific injunctive relief is ordered to protect proprietary interests. If it appears that the negligent company may continue to act negligently, an injunction may be granted to prevent further damage to the property, in this case the equipment.

  • Quia timet injunctions or mandatory injunctions are granted to compel the performance of some positive act or acts, such as returning the property to the plaintiff.

If relief by way of an injunction is ordered by the court, the right to common law damages may still be pursued. A Mareva injunction may also be granted by the court in order to preserve the equipment pending the resolution of proceedings. This form of relief is more fully discussed in chapter 7.

8.93 Depending on the continuing conduct of the negligent joint venturer and whether the equipment is worth preserving or has been destroyed beyond repair, the New South Wales company may request the court to award both forms of injunction. This will prevent the negligent joint venturer from continuing to use the equipment in a destructive manner and require the equipment to be returned forthwith. While proceedings are on foot the New South Wales company should also consider the possibility of a Mareva injunction to prevent the negligent joint venturer continuing to use the equipment and thus tampering with any evidence.

Territorial limits

8.94 The negligence example contemplates a tort being committed outside Australia with damage done to the New South Wales company's equipment located outside Australia and a defendant outside Australia. There are therefore significant extraterritorial elements to the claim.

8.95 To initiate proceedings in the Supreme Court of New South Wales against a defendant outside Australia for damages arising from negligence, the plaintiff's case must come within one of the categories specified in Pt 10 r 1A of the Rules of the Supreme Court of New South Wales.[dlxxxi] Paragraph (e) of that rule permits an initiating process to be served outside Australia where damage is suffered in New South Wales, notwithstanding that the tort occurred wholly outside Australia.[dlxxxii] The initial tendency was to construe this provision narrowly so that all damage had to be suffered within the State.[dlxxxiii] However subsequent decisions have made it clear that the provision will apply to a tort that has been committed outside the State where only part of the damage occurs within the State.[dlxxxiv] Damage' for the purposes of this provision is not to be confined to the immediate physical injury or loss suffered at the time the cause of action first accrued. This provision applies where the plaintiff has suffered or continues to suffer, within the forum, any physical, financial or social consequences of an injury or damage first received abroad.[dlxxxv]

8.96 Consequently, this rule applies where the damage suffered within the State is financial loss incurred by the New South Wales company in respect of repairs to property and loss of profit, even where both the actual damage to the property and the necessary repairs or replacement occur outside the State.[dlxxxvi] The position is the same in the Federal Court (subject to the requirement to obtain the prior leave of the Court).[dlxxxvii]

8.97 On the facts of the negligence example it appears that the New South Wales Supreme Court and the Federal Court of Australia may have jurisdiction to hear the matter. Damage in the sense of the consequential disadvantage or detriment such as loss of earnings or profits and the obligation to pay for repairs or replacement of the equipment are losses suffered by the plaintiff company in Australia.

8.98 The situation at the District Court level is somewhat different.

  • Under s 47(1)(b) of the District Court Act 1973 (NSW) the District Court will have jurisdiction to hear a matter arising from a tort committed wholly outside New South Wales, provided the foreign defendant was resident within New South Wales at the time of service of the document which commenced the plaintiff's action. This apparently is not the case in the given scenario as the negligent company appears to have been at all relevant times located outside the jurisdiction.

  • However s 47(a) also grants the District Court jurisdiction where a material part of the cause of action arose within New South Wales. This has been held to mean one or more of the essential elements of the claim which would entitle a plaintiff to succeed. Consequential loss suffered within the State is not sufficient.

Thus, for the Australian company to be able to argue that the District Court has jurisdiction to hear the matter it will have to argue that damage, as an essential part of the cause of action, is actually suffered by it in Australia.

Choice of law

8.99 The territorial limits to the court's jurisdiction are also affected by the governing law of the transaction. Effectively for claims of the kind in the negligence example, the governing law is the law of the place where the wrong occurred. The better view of the current position in Australia is that a plaintiff such as the New South Wales company may only sue in Australia in respect of a wrong occurring outside the jurisdiction if

  • the circumstances of the claim are such that had the matter arisen within Australia the plaintiff would be entitled to seek to enforce against the defendant a civil liability of the kind which the plaintiff is currently attempting to enforce

  • by the law of the place in which the wrong occurred, the circumstances of the case give rise to a civil liability of the kind the plaintiff is attempting to enforce, and

  • the civil liability under the law of the place in which the wrong occurred is a continuing liability.

Although this is the better view the law on this point is not yet settled. It should be noted that this view represents a stricter requirement than that which was previously applicable.[dxci]

8.100 In effect, this rule requires the Australian court to consider the kind of civil liability arising on the occurrence of the wrong in the foreign jurisdiction. The parameters of the Australian court's judgment will effectively be guided by the liability prescribed for the wrongs in the foreign jurisdiction. If a particular liability is denied in the foreign jurisdiction it is also to be denied to the Australian court on the basis that even if the Australian court gave the relevant award it would not be enforceable in the foreign jurisdiction. Thus Australian courts are only able to give judgment in respect of liabilities and remedies recognised in the foreign jurisdiction, but are entitled to form their own conclusions within these categories.[dxcii]

Enforcement of remedies outside Australia

8.101 Damages in tort will only be enforceable outside Australia to the extent that the heads of civil liability on which the award is based are recognised in the foreign jurisdiction. In addition the amount of damages for each head of liability will be calculated in accordance with the rules of the foreign jurisdiction.[dxciii] There have been some recent suggestions in a number of cases that calculating the amount of the award may be a matter of substance and not procedure, especially in matters of tort where the separation between the procedural and substantive issues regarding damages is rather narrow.[dxciv] Nonetheless it appears that the better view still is that quantum is a matter for the forum in which enforcement is sought and that such assessment by the foreign court should be made with reference to the heads of damage identified by the forum giving the original judgment.[dxcv] As indicated above, determination of the heads of damage is a matter for the forum hearing the action, subject to the overriding requirement that the heads on which a liability is found are heads which are recognised in the relevant foreign jurisdiction.

8.102 The discussion on Mareva injunctions in chapter 7 applies to this scenario. In particular while the Australian court may grant either a Mareva injunction or permanent injunction, the law of the foreign jurisdiction may not recognise such an order and the Australian court will only make such an order if it is satisfied that the court of the relevant jurisdiction will recognise it and provide a similar remedy. The Australian court will usually frame the order so that it will not be enforceable unless it is recognised by the foreign court.

Breach of statutory and fiduciary duties

The claim

8.103 This section considers the remedies available for breaches of statutory and fiduciary duties with an international element. The following example reflects section 3 (f) of the terms of reference of the inquiry.

Breach of duty example

This example concerns a breach of an Australian director's duties outside Australia. The director is a director of two companies: an Australian funds management company and a European insurance office. She is based in a financial centre in North America. She fails to act in the best interests of the Australian company in relation to certain futures transactions entered into in that financial centre between the Australian and European companies. The Australian company suffers a loss from the transactions and wishes to recover from the director for breach of duty.

 

The range of remedies available

8.104 In general terms, if the international components are disregarded and the two companies and the director were all based in Australia, the director would be taken to have breached her duties both under general law and under the Corporations Law. In particular she is likely to have breached her duties to

  • act in good faith for the benefit of the company as a whole

  • act honestly

  • act for proper purposes

  • exercise reasonable care, skill and diligence, and

  • avoid or disclose any conflicts of interest or duty.

The remedies available to the Australian company in relation to the breaches of those duties include

  • rescission of relevant contracts

  • equitable compensation

  • damages for breach of duty

  • compensation under the Corporations Law.

Each of these is considered in turn after first outlining the relevant statutory and fiduciary duties.

Duty to act in good faith for the benefit of the company

8.105 Directors owe a duty to act in good faith for the benefit of the company as a whole.[dxcvi] It is apparent that the director in the scenario has breached this duty by not acting in the best interests of the Australian company. This duty is echoed in the duty of officers of a corporation to act honestly in exercise of powers and discharge of duties, contained in s 232(2) of the Corporations Law. A director breaches s 232(2) of the Corporations Law if he or she consciously fails to act in the interests of the company, even where there is no intention either to deceive or to defraud.[dxcvii] There may be a requirement that the director be consciously aware that what he or she is doing is not in the best interests of the company.[dxcviii] However on at least one view the section is taken to mirror exactly the fiduciary duty and may not require actual dishonesty in order for there to be a breach.[dxcix]

Duty to act for proper purposes

8.106 Pursuant to s 232(6) of the Corporations Law an officer must not make improper use of his or her position to gain, directly or indirectly, a personal advantage or to cause detriment to the corporation. By securing an advantage to the overseas company and causing detriment to the Australian company the director is clearly in breach of the section.

Duty of care, skill and diligence

8.107 Directors owe a general duty of care to their company.[dc] In addition, if the director is an executive director under contract, there may be an express or implied term that he or she will exercise reasonable care, skill and diligence.[dci] It is not clear from the breach of duty example whether there has been a breach of these duties. Section 232(4) of the Corporations Law reinforces the general law position with a statutory requirement of care and diligence expected of officers. Under this provision an officer must exercise the degree of care and diligence that a reasonable person in a like position in a corporation would exercise in the circumstances.

Duty to avoid or disclose conflicts of interest

8.108 The director's obligations to the Australian company in relation to the futures transactions are in conflict with her duties to the European company.[dcii] The director will be in breach of duty if she has not made full disclosure of her interest. Even if such disclosure had been made she may still be in breach of this duty if she negotiated or voted on the contract.[dciii]

Rescission

8.109 A transaction to which a company is a party may be voidable at the election of the company if it was brought about by a director acting in breach of his or her duties. The remedy would be sought against the other company which was party to the transactions rather than the director. Rescission or avoidance of a transaction is only possible where the rights of innocent third parties would not be prejudiced.

8.110 In the breach of duty example the remedy of rescission may be available against the European company since it had actual knowledge (through its mutual director) of the director's breach of her duties. It is necessary to impute such knowledge so as to prevent the European company from asserting that it is an innocent third party. However the knowledge of the guilty' director will only be imputed to the European company in certain circumstances. The European company will certainly be attributed with the knowledge of the director if the director is the controller and directing mind of the company rather than just one of several directors.

Equitable compensation

8.111 Equitable monetary compensation is available where a breach of fiduciary duty causes loss to the company. The breach of duty example is likely to involve breaches of one or more fiduciary duties and there is clear evidence of loss to the Australian company. Recovery of equitable compensation will be subject to the application of general equitable principles which may deny relief in certain circumstances, including where

  • the plaintiff does not itself have clean hands

  • the company has acquiesced in the breach

  • laches, or

  • it is not possible for the parties to be restored to their previous position.

Having found that there has been a breach of duty by the director and none of these equitable considerations apply, the court must then consider whether the loss sustained by the company would have occurred but for the director's breach before it will order equitable compensation.[dciv] On satisfying itself on all these questions and following the general principle of restitution in equity, the director will then be ordered to restore the Australian company to the same position that it would have been in if the breach of duty had not occurred.

8.112 On the facts given in the breach of duty example there appears to be sufficient evidence of a breach of duty by the director and no evidence of unacceptable conduct on behalf of the Australian company. It also appears that the loss to the Australian company flows directly from the actions of the director in breach. Consequently the members of the Australian company could expect the relevant Australian court to order compensation if rescission is no longer possible.[dcv] Where such an order for equitable compensation is obtained, the obligation for restitution is personally enforceable against a director in Australia in the usual manner in the form of a judgment debt. This procedure is discussed in chapter 7.

Damages for breach of duty

8.113 As an alternative to seeking equitable compensation, the Australian company may bring proceedings for a breach of the duty of care or on the basis of a breach of statutory duty. As indicated above, the Australian company can readily point to a breach of statutory duty by the relevant director and possibly the duty of due care and diligence. Accordingly it may seek compensation on this basis in the alternative to equitable damages.

Compensation under the Corporations Law

8.114 Directors owe certain statutory duties to their company under s 232 of the Corporations Law. Breaches of s 232 are subject to civil penalties,[dcvi] which may be imposed by the court on the application of the Australian Securities Commission[dcvii] or a person authorised by the Minister.

8.115 If an application for a civil penalty order is made on this basis, a corporation may intervene in the application to seek compensation.[dcviii] A corporation is entitled to be heard in such cases only if the court is satisfied that the person against whom the civil penalty order is being sought committed the contravention in relation to the corporation, and only then on the question of compensation.[dcix] If the court is so satisfied and the corporation has suffered loss as a result, the court may order the director to pay the corporation such compensation as the court specifies.[dcx]

8.116 If the proceedings are in a criminal court the court may also order the defendant to pay compensation to the company if it finds the defendant guilty of a breach of a civil penalty provision or that a person has contravened a civil penalty provision and it is satisfied that the relevant corporation has suffered loss.[dcxi] However, a corporation is not entitled to intervene in criminal proceedings.[dcxii]

8.117 In addition, under s 1317HD of the Corporations Law a corporation may recover compensation from a director who has contravened a civil penalty provision. The amount recoverable is equal to any profit acquired through the act or omission constituting the contravention as well as any loss or damage suffered by the corporation as a result of that act. The amount is recoverable as a debt and does not depend on a civil penalty order having been made against the director.[dcxiii]

Territorial limits

8.118 The breach of duty example involves a breach of duty by a director who apparently has no personal connection with Australia. The director is apparently neither a resident nor domiciled within Australia. Furthermore the futures transactions which have given rise to this breach of duty occurred entirely outside Australia.

8.119 In these circumstances the territorial limits to jurisdiction are significant. It is likely that Australian courts do not have jurisdiction to deal with the director's breaches of his or her non-statutory duties. The Federal Court and the Supreme and District Courts of New South Wales do not have jurisdiction because, on the facts given in the breach of duty example

  • the director is neither in Australia nor resident or domiciled in Australia

  • the breach of duty occurred outside Australia, and

  • there are no other relevant grounds of jurisdiction.

8.120 However it appears that an action can be maintained against the relevant director for the breach of statutory duties under the Corporations Law because of the express extraterritorial scope of the Corporations Law. As indicated above, it is likely that this director is in breach of the statutory duties set out in s 232(2), (4) and (6) of the Corporations Law. Section 110D of the Corporations Law deems these provisions to apply (as relevant to this case) to

  • natural persons, whether resident in Australia or not and whether Australian citizens or not

  • all bodies corporate and unincorporated bodies, whether formed or carrying on business in Australia or not, and

  • acts and omissions outside Australia.

This clearly gives the Federal Court and Supreme Court jurisdiction over the director in relation to these breaches of statutory duty.

8.121 However this is not an absolute jurisdiction to hear matters in relation to all directors of all corporations wherever they or the corporations are located in the world. There must be some connection with Australia for constitutional validity. This connection either has to be attracted through the substance of s 232(2), (4) and (6) of the Corporations Law or determined on the basis of constitutional limitations as applied to the particular facts.

8.122 Sections 232(2) and (4) apply to any exercise of powers or discharge of duties by a director of a corporation incorporated in Australia, whether within or outside Australia. Where the corporation is incorporated outside Australia those sections also apply to the exercise of powers or the discharge of duties by the director outside Australia but only if they are in connection with

  • the corporation carrying on business in Australia

  • an act the corporation does or proposes to do in Australia

  • a decision by the corporation whether to do or not to do an act in Australia.

The breach of duty example is within these limitations and accordingly the relevant Australian courts have jurisdiction over the breaches of s 232(2) and (4).

8.123 The same restrictions do not apply to s 232(6) which sets out the duty not to obtain any gain through improper use of position.[dcxvi] For this section it would appear that general constitutional considerations will determine the necessary connection. It can be expected, however, that since the matter involves the exercise of duties by the director of an Australian corporation to the detriment of that corporation, this will constitute a sufficient connection with Australia.

Enforcement of remedies outside Australia

8.124 The enforcement of compensation ordered under the Corporations Law depends on how it is characterised. If it is viewed as similar to damages in tort, then it will only be enforceable to the extent that this head of liability is recognised in the foreign jurisdiction and the quantum will be assessed in accordance with the rules of that jurisdiction. If it is viewed as similar to equitable compensation then it will be subject to the general enforcement issues relating to debt recovery.