• The impact of this case on ATO policy is discussed in Decision Impact Statement: Howard v Commissioner of Taxation (Published 14 August 2014).

HOWARD v FC of T

Judges: French CJ
Hayne J
Crennan J

Gageler J
Keane JJ

Court:

MEDIA NEUTRAL CITATION: [2014] HCA 21

Judgment date: 11 June 2014

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GAGELER J.

107. I agree that the appeal should be dismissed. I agree with Hayne and Crennan JJ as to the effect of the litigation agreement. I agree with French CJ and Keane J as to the deduction of legal costs. I prefer to state my own reasons for concluding that the appellant, Mr Howard, received and held the sum of equitable compensation awarded to him by the Supreme Court of Victoria on his own account.

108. Mr Howard would have been liable to account to Disctronics for the sum of equitable compensation awarded to him only if obtaining or retaining that sum would have breached an obligation of loyalty Mr Howard owed to Disctronics as an incident of his fiduciary relationship as a director of Disctronics. The " overlapping themes " informing that liability to account were identified by Deane J in
Chan v Zacharia ^[101] (1984) 154 CLR 178 at 198 – 199; [ 1984 ] HCA 36 . See also Warman International Ltd v Dwyer (1995) 182 CLR 544 at 557 – 558; [ 1995 ] HCA 18 . :

" The first is that which appropriates for the benefit of the person to whom the fiduciary duty is owed any benefit or gain obtained or received by the fiduciary in circumstances where there existed a conflict of personal interest and fiduciary duty or a significant possibility of such conflict: the objective is to preclude the fiduciary from being swayed by considerations of personal interest. The second is that which requires the fiduciary to account for any benefit or gain obtained or received by reason of or by use of his fiduciary position or of opportunity or knowledge resulting from it: the objective is to preclude the fiduciary from actually misusing his position for his personal advantage. "

109. Mr Howard relied on the first of those themes. He disavowed reliance on the second. His counsel said of the second:

" That theme does not arise in the present case because the opportunity did not come to [ Mr Howard ] by reason of his office. It is rather a matter of him having brought the opportunity to the company. "

110. Mr Howard ' s reliance solely on the existence of a conflict between his personal interest and his fiduciary duty as the basis of his asserted liability to account to Disctronics invites attention to the nature and scope of the fiduciary duty on which he relies. As the Full Court of the Federal Court (Finn, Stone and Perram JJ) explained in
Grimaldi v Chameleon Mining NL (No 2) ^[102] (2012) 200 FCR 296 at 345 – 346 [ 179 ] , citing Birtchnell v Equity Trustees, Executors and Agency Co Ltd (1929) 42 CLR 384 at 408; [ 1929 ] HCA 24 . See also Boardman v Phipps [ 1967 ] 2 AC 46 at 127 ; Industrial Development Consultants Ltd v Cooley [ 1972 ] 1 WLR 443 at 451; [ 1972 ] 2 All ER 162 at 173 . :

" The concept of ' duty ' in the ' conflict of duty and interest ' formula of the first of these [ themes ] is convenient shorthand. It refers simply to the function, the responsibility, the fiduciary has assumed or undertaken to perform for, or on behalf of, his or her beneficiary. What that function or responsibility is, is a question of fact. It may be narrow and circumscribed, as is often the case with specific agencies; it may be broad and general, as is characteristically the case with the functions of company directors; its scope may have been antecedently defined or determined; it may have been ordained by past practice; it may be left to the fiduciary ' s discretion to determine; and it may evolve over time as is commonly the case with partnerships. Put shortly the actual function or responsibility assumed determines ' [ t ] he subject matter over which the fiduciary obligations extend ' for conflict of duty and interest and conflict of duty and duty purposes " .

111. Here, the identification of the subject matter over which Mr Howard ' s fiduciary obligations extended for conflict of duty and interest purposes requires identification of the relevant undertaking in which Disctronics was engaged. It was in respect of that undertaking that Mr Howard, as a director, had the responsibility of acting for and on behalf of Disctronics. It was in discharging that responsibility that Mr Howard was obliged to act in Disctronics ' interest to the exclusion of his own interest.

112. Mr Howard sought to characterise the undertaking of Disctronics as the pursuit of a " maturing business opportunity " ^[103] Cf Canadian Aero Service Ltd v O ’ Malley [ 1974 ] SCR 592 at 607 . for investment in the golf course. That characterisation, for present purposes, is too broad and imprecise.

113. Disctronics never became a party to the joint venture and was never pursuing a business opportunity commensurate with that which was being pursued by the joint venture to which Mr Howard in his personal capacity had always been a party. The more limited business opportunity brought to and taken up by Disctronics was that mapped out for it by Mr Howard and the other joint venturers who were directors of Disctronics, as recorded in recital B to the litigation agreement. That business opportunity was for Disctronics to become the end-purchaser of the golf course and to receive a rebate of any entitlement the directors might have as a result of their participation in the joint venture if two contingencies were fulfilled: the equity contribution of the end-purchaser did not exceed $ 1.5 million; and the other joint venturers agreed.

114. Through no failure on the part of Mr Howard to act in Disctronics ' interest, those two contingencies were not fulfilled. The business opportunity of Disctronics did not come to fruition, and had been irrevocably lost by the time of the commencement of the proceedings against Mr Edmonds and Mr Cahill in the Supreme Court of Victoria.

115. In the proceedings in the Supreme Court of Victoria, again through no failure on the part of Mr Howard to act in Disctronics ' interest, Mr Howard was successful in his claim that Mr Edmonds and Mr Cahill had breached fiduciary duties they owed to him ^[104] Disctronics Ltd v Edmonds [ 2002 ] VSC 454 at [ 156 ] , [ 178 ] ; Edmonds v Donovan (2005) 12 VR 513 at 539 [ 62 ] . , while Disctronics was unsuccessful in its claim that Mr Edmonds and Mr Cahill owed fiduciary duties to Disctronics ^[105] Disctronics Ltd v Edmonds [ 2002 ] VSC 454 at [ 179 ] - [ 180 ] ; Edmonds v Donovan (2005) 12 VR 513 at 549 – 550 [ 95 ] . . The sum of equitable compensation awarded to Mr Howard was compensation to Mr Howard for Mr Edmonds ' and Mr Cahill ' s breach of their fiduciary duties to him, calculated as Mr Howard ' s one sixth share of what Mr Edmonds and Mr Cahill gained in breach of their fiduciary duties to Mr Howard and to the other three joint venturers ^[106] Disctronics Ltd v Edmonds [ 2002 ] VSC 454 at [ 216 ] ; Edmonds v Donovan (2005) 12 VR 513 at 544 – 545 [ 80 ] - [ 81 ] . . It was not compensation for any loss to Disctronics.

116. There was in those circumstances no conflict, and no substantial possibility of conflict, between the personal interest of Mr Howard in obtaining or retaining the sum of equitable compensation awarded to him and the fiduciary duty of Mr Howard as a director of Disctronics to act in the interest of Disctronics.