Corporate Disputes: Fiduciary Duties owed to an Employer

In this latest article in our series on corporate disputes (our earlier briefing on derivative actions can be found here), we look at a recent Commercial Court case, which considered the legal framework governing fiduciary duties and the circumstances in which fiduciary obligations to a corporate employer can arise.  

In Victoria Hall Management Ltd & Ors v Cox & Ors [2024] IEHC 674, it was claimed that the first defendant, in breach of his fiduciary duties to the plaintiffs, concealed and diverted an opportunity to develop student accommodation at Gardiner Street in central Dublin (Scheme).

Background

The first defendant’s relationship with the O’Flynn Group (Group), and later with other plaintiffs, spanned a period of over eight years, first in a consultancy role and from 2010, as a full-time senior employee of Group company, Tiger Developments. He was, during this time, also engaged in the activities of other Group companies and provided consultancy services to non-group (described as parallel) companies, including the first plaintiff. He resigned in April 2015.

The first defendant’s role included finding and progressing potential development opportunities on behalf of the plaintiffs. It was claimed that in the course of performing those functions he had access to and was entrusted with information on ongoing and planned projects of the plaintiffs. Evidence before the court outlined his engagement with universities and other stakeholders on behalf of the plaintiffs in relation to the student accommodation sector.

In 2014 the first defendant learnt of the Gardiner Street opportunity. This information was not disclosed and instead the option to purchase the site was acquired and the Scheme was developed through inter alia the first defendant’s own companies.

Who owes Fiduciary Duties? 

The first defendant argued that the relevant services provided were in a consultancy capacity, which attracts none of the duties or obligations of fidelity and loyalty which would be associated with an employment relationship, while the plaintiffs submitted that pursuant to a contract of employment with one group company, the first defendant owed certain duties to the Group as a whole and the other parallel companies.

The court, however, held that labels are not definitive and all encompassing. The court’s view was that it is the circumstances of the relationship and the conduct of the parties that is relevant and not a focus on a person’s employment status. Fiduciary obligations can arise where one party places confidence in the other, who in turn gains both confidence and influence and the court held that such a party cannot be allowed to profit from abuse of that position.

The court held that the plaintiffs had good reason to believe that the first defendant was acting in their best interests, and they, therefore, placed trust and confidence in him. This rendered them vulnerable to his actions in pursuing a business opportunity in a sector, namely student accommodation, which he knew was part of their business plans and ambitions.

The court held that the first defendant owed fiduciary duties to the plaintiffs, continuing at least up to the time he resigned in 2015.

The Nature of the Fiduciary Duties

The Companies Act 2014 sets out fiduciary duties owed by a director to a company, which include a duty to act honestly and responsibly in relation to the conduct of the affairs of the company, to act in good faith in what the director considers to be in the interests of the company and to act in accordance with a company’s constitution.

The Commercial Court held that the categories of fiduciary duties are not closed and in this case, the duties owed by the first defendant to the plaintiffs were duties: -

• not to compete with the plaintiffs without their informed consent;

• to disclose to the plaintiffs any opportunity which came to his attention in the sector in which the plaintiffs conducted business and in which, to his knowledge, the plaintiffs were seeking new opportunities;

• not to divert such opportunities and the profits thereof for his own benefit and the benefit of others; and

• to respect the confidentiality of business records and information of the plaintiffs, and not without their informed consent to divulge such information to others.

Waiver of Fiduciary Duties

The court held that a waiver of fiduciary duties can only arise where there is fully informed consent, with all of the facts disclosed by the fiduciary to the person to whom the duties are owed. It was claimed that the first defendant was granted approval in writing to engage in property development but the court held that all material facts had not been disclosed in relation to his active pursuit of the Scheme.

Confidential Information

After his resignation, the first defendant took a copy of the content of a server comprising over 36,000 files. The confidential information was then shared with some of the other defendants. The plaintiffs claimed that this amounted to a breach of confidentiality.

For an actionable breach of confidentiality to exist (as per Mahon v Post Publications Ltd [2007] IR 388);

• the information must have the necessary quality of confidence about it;

• the information must have been imparted in circumstances conferring an obligation of confidence; and

• there must be an unauthorised use of that information to the detriment of the party communicating it.

While it was held that the first defendant’s knowledge of and access to this information derived from the senior position which he held, the plaintiffs were unable to properly evidence who was the true owner of most of the documents or that the documents had the necessary characteristics of confidentiality.

As such, the court held that the criteria for a breach of confidentiality had not been met. However, the court, having held that the fiduciary duties owed to the plaintiffs included  a confidentiality obligation, determined that the actions of the first defendant in taking and sharing the material from the server amounted to a breach of this duty.

Remedy

By way of a remedy for the breaches identified, the court directed that the first defendant account to the plaintiffs for the profits earned in the Scheme together with interest.

Following expert evidence to the court on the profits earned, it was ordered that €11.33 million be held on trust for the first five plaintiffs.

Conclusion

The Commercial Court held that the first defendant was a fiduciary of the plaintiffs and acted in breach of those duties when he concealed the opportunity to develop the Scheme and diverted the profits. He also acted in breach of his fiduciary duties in taking and retaining documents of the plaintiffs without their consent and sharing those documents with his co-defendants.

Two key takeaways from this judgment are that it is not a person’s job title or role that will determine their obligations to a company but instead an examination of the circumstances of the relationship and the conduct of the parties must be undertaken to ascertain the existence and scope of the duties owing. It is also noteworthy that the court confirmed that the categories of fiduciary duties are not closed, with scope for the courts to consider fiduciary duties in the context of the level of trust and confidence placed with a person.