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||Neutral Citation Number:  EWHC 399 (Ch)
||Case No: 2LS30278
IN THE HIGH COURT OF JUSTICE
||Leeds Combined Court
1 Oxford Row
B e f o r e :
MR JUSTICE NORRIS
VICE-CHANCELLOR OF THE COUNTY PALATINE OF LANCASTER
|| Breitenfeld UK Ltd
||- and -
||(1) Harold John Harrison
(2) John George Harrison
(3) Gemma Lucy Harrison
(4) Harrison Special Steels Limited
Aidan Casey (instructed by Chadwick Lawrence LLP) for the Claimant
Gregory Pipe (instructed by BHP Law) for John Harrison, Gemma Harrison and Harrison Special Steels Ltd
Helen Gardiner (instructed directly) by Harold Harrison
Hearing dates: 24-27 and 30 June, 1-3 July 2014
Written Submissions 14 and 23 July 2014
HTML VERSION OF JUDGMENT
Crown Copyright ©
Mr Justice Norris:
- The first question that arises in this case concerns the extent to which (if at all) a managing director who causes his company to enter into contracts and to undertake dealings with a newly founded company owned by his son and his daughter-in-law is liable to account to (or otherwise compensate) the company to whom he owes duties. The second group of questions relates to the liability of the son and the daughter-in-law (who are both employees of the original company and are the proprietors of the new company) to pay damages or compensation arising out of those self same dealings, through breach of contractual obligations or the commission of torts, or because they dishonestly assisted the managing director to breach his duties.
- Harold John Harrison ("Mr Harrison") was the managing director of Forge-Met Steel Company Limited ("ForgeMet") a small company which operated in Sheffield as a stock holder and supplier of high grade steel for use in the engineering industry. It would purchase blocks of tool grade steel of various specifications, and then would cut that steel to the size requirements of its engineering company customers for them to machine.
- ForgeMet became a wholly owned subsidiary of Schmiedetechnik Breitenfeld GmbH ("Breitenfeld") which was itself a wholly owned subsidiary of Breitenfeld Edelstahl AG ("AG"), both of which are Austrian companies. Late in the day ForgeMet changed its name to "Breitenfeld UK Limited", but in this judgment I will refer to it either as "ForgeMet" or as "the Company". Breitenfeld had one representative on ForgeMet's board: that was Mr Kurt Ternegg. But the Breitenfeld personnel who generally dealt with ForgeMet were Dr Kailbauer and Dr Hackl (and Dr Hackl replaced Mr Ternegg as a director of ForgeMet in March 2011).
- Mr Harrison became the managing director of ForgeMet on the 26 January 2004; and remained such until the 30 June 2011. Mr Harrison's son John ("John Harrison") was on the 22 January 2004 employed by ForgeMet as a purchasing and sales assistant; he later became Works and Office Manager and continued as such until the 29 April 2011. John Harrison's wife ("Gemma Harrison") became employed by ForgeMet on the 1 November 2008, also as a purchasing and sales assistant; and she continued as such also until 29 April 2011. The three of them were the sole management staff.
- 10% of the shares in AG were held by a company called "Fortis". Fortis was in the control of Mr Herbert Buhl ("Mr Buhl"): Mr Buhl was a member of the management board of AG from 2004 until 31 December 2008: and thereafter he was a member of the supervisory board of AG until the 14 January 2010. Mr Buhl had no direct interest in ForgeMet, held no office and took no part in the management of ForgeMet: nor did he have any direct interest in Breitenfeld. Mr Buhl had a son ("Markus Buhl"): and Markus Buhl himself had a company in the steel business called "Steel Trading & Technology GmbH". From June 2010 John Harrison was looking for industrial premises in the Selby area. He was doing so in connection with a new company that he was looking to set up which it was intended that Gemma Harrison would join (and so, eventually, would Mr Harrison, albeit on a part time basis). The new company was to operate in the same line of business as ForgeMet. John Harrison sought investment for that company (including from Markus Buhl). The new company was incorporated on the 3 September 2010 as Harrison Special Steels Limited ("HSS"), with John Harrison and Gemma Harrison as its sole directors and shareholders. On the 29 November 2010 HSS took a lease of industrial premises for the term of 10 years at an initial rental (from 29 November 2010 to 28 May 2011) of £4000 per annum and thereafter at the rate of £8000 per annum subject to review (plus a service charge of £2000 per annum).
- Dealings between ForgeMet and HSS started at the beginning of December 2010. It is those dealings that lie at the heart of the complaints now made by ForgeMet against Mr Harrison (as managing director), against John Harrison and Gemma Harrison (as employees) and against HSS.
- In December 2010 Mr Harrison gave 6 months' notice (effective on 30 June 2011). On 28 February 2011 John Harrison and Gemma Harrison gave notice of resignation effective on 29 April 2011.
- From December 2010 until May 2011 the relevant dealings between ForgeMet and HSS can be categorised as:-
a) Sales of steel by ForgeMet to HSS ;
b) Purchases of steel by ForgeMet from HSS for direct on-sale to ForgeMet's customers;
c) Provision of "cutting services" by HSS to ForgeMet on a subcontracted basis;
d) Provision of steel by ForgeMet to HSS
- On 6 June 2011 Mr Michael Rudkin ("Mr Rudkin") came to ForgeMet as the incoming Managing Director to replace Mr Harrison. Amongst the objectives given to him by Dr Hackl was to reorganise the stock and to ensure the accuracy of the stock records, to improve profitability and to control the growth in the inter-company debt. It was his investigation into these matters (and what he was told by continuing members of staff) that led to the instruction of lawyers on 26 July 2011 and to the formulation of the present claim.
- The claim seeks against
a) Mr Harrison: accounts, declarations and enquiries and/or equitable compensation for breaches of fiduciary duty;
b) John Harrison, Gemma Harrison and HSS: accounts, declarations and enquiries, and/or equitable compensation for dishonestly assisting in those breaches of fiduciary duty;
c) John Harrison and Gemma Harrison: damages for breach of contract;
d) Mr Harrison, John Harrison, Gemma Harrison and HSS: damages for conspiracy to injure by unlawful means and damages for conversion;
e) John Harrison and Gemma Harrison damages for breach of confidence.
- Each of the witnesses who gave evidence in relation to these claims was a decent, honest person. None of them came to tell me deliberate lies. John Harrison positively asserted that he had told lies in order to raise funding for HSS, and Mr Harrison accepted that he had adopted those lies and made them his own. But I do not on that account treat them as liars whose every word at trial is simply to be disbelieved. However, it does damage their credibility in the sense that their admitted willingness to lie warns me that a deep commitment to their new company might lead to a distortion of recollection, especially in relation to evidence about motive and intention. This distortion of recollection was evident, for example, in John Harrison's evidence about ForgeMet's customers not knowing that work had been done by HSS, and about there being very slack times before June 2011 at HSS; both of which assertions were, from a simple examination of documents, demonstrably wrong.
- Indeed, the evidence of all witnesses suffered to some extent from the circumstances of recollection. Some witnesses were being asked to recollect incidents which could have had no real significance for them at the time. Other witnesses were having to give evidence about events the significance of which was obvious and which they must have turned over in their minds time and again, so that recollection and reconstruction and justification became inseparable processes. At times the evidence of the Harrisons gave the impression that they were adhering to a family script: but this was not, I think, because they had colluded to fabricate evidence, but rather because entirely natural discussion had lead them to shared views which each genuinely believed to be their own individual recollection. All witnesses tried to help me to the best of their ability.
- The issues for my decision are these:-
a) What duties did Mr Harrison owe ForgeMet?
b) In what respect (if any) is he in apparent breach of those duties?
c) Does he have a defence to these apparent breaches?
d) If he is in breach, what remedy ought to be granted?
e) Did John Harrison and/or Gemma Harrison dishonestly assist in those breaches of duty?
f) What contractual duties did John Harrison and Gemma Harrison owe ForgeMet?
g) In what respect (if any) are they in apparent breach?
h) Do they have a defence to these apparent breaches?
i) Are Mr Harrison, John Harrison, Gemma Harrison and HSS liable in tort?
j) What loss has been suffered by reason of any breach of contract or the commission of any tort?
k) Is HSS otherwise liable?
- These are the facts I find that are relevant to the issues to be decided.
- ForgeMet was part of the Breitenfeld Group, but not an integrated part. It was run very much as a Harrison family company, although it did have one Austrian board member, Mr Ternegg. Its place within the group was under consideration from the end of 2009. The options were (a) to close the Company (b) to sell the Company and (c) to grow the Company. Dr Hackl (who made 8 visits to ForgeMet during the period with which I am concerned) said in evidence (and I accept) that the preferred option was (c) on account of a desire to maintain a global presence and to advance to the USA: but that during the review period investment in the Company would be postponed unless based on a real business plan and a clear business case which demonstrated the products to be developed, what investment was needed and what the "payback" time would be. In the meantime a structural issue relating to financial performance had to be addressed. ForgeMet acquired steel from Breitenfeld, but built up a large and increasing inter-company debt. By January 2011 it stood at over 1 million. ForgeMet also built up and held a substantial stock. Breitenfeld wanted both the intercompany debt and the stock level reduced as part of its review process. In short, the more the core inter-company debt rose the greater the risk of closure. But neither Breitenfeld nor AG demanded repayment of the debt, ForgeMet was not in jeopardy, and the Company continued to be supported even though its cashflow was negative and it was making no realisable profit.
- ForgeMet's business operations may be summarised thus. ForgeMet obtained from general and specialist steel producers (including Breitenfeld and AG) tool grade steel bars of various specifications, sizes and cross section. Its principal business was to cut these into machineable pieces for engineering customers, using band saws (there were four of them) for smaller pieces and plate saws (there were two of them) for larger pieces. For safety reasons two operatives had to be present when any saw was in use: ForgeMet had three saw men, so Mr Harrison or John Harrison would fulfil the additional role when required. During this cutting process about 3% of the steel would be lost as "swarf", perhaps more if the steel was "crusted" and that crust had to be removed. At the end of the cutting process ForgeMet would be left with a cut piece of the size and shape conforming to the customer's requirements, and the remainder of the bar from which it had been cut. This remaining part might be treated as an "off cut", capable of being re-worked to meet another customer's requirements: or its size or irregular shape might mean that it could only be treated as "scrap". "Offcuts" were returned to the store and should have been recorded as an item so held. "Swarf" and "scrap" were simply stored and periodically sold by weight for reprocessing. In fact there was no clear segregation between "off-cuts" and "scrap", with quantities of ultimately unusable material being held as stock until such time as space was required. To allow for both "swarf" and "scrap" Breitenfeld worked (for the purposes of this action) on an average wastage rate of 7% of the original bar, billet or block. In my judgment that is a fair estimate.
- Mr Harrison focused upon meeting the requirements of his regular customers. He did not focus upon the profitability of the particular job in hand. So some of his revenue was produced from high-volume low margin work. This put pressure on the availability of the saws, particularly from October 2009 onwards. Mr Harrison responded by from time to time implementing a staggered shift system (with two men starting early and two men finishing late), and by himself coming in early to set up work (and sometimes to do cutting work alone). In this way peaks in demand were addressed. But inevitably delivery times became extended: by July 2010 ForgeMet had four weeks' work for the plate saws which had to be completed within two weeks (itself an extension on the seven days which customers had come to expect); and seven days' work for the band saws which had to be completed within four days (at the limit which customers had come to expect). By August 2010 he had introduced a 24-hour shift pattern for one week, and a 12-hour working day for a short period thereafter.
- On 1 July 2010 John Harrison and Gemma Harrison entered into new contracts of employment with ForgeMet. These were in the same terms as their previous contracts save for one feature. Their original contracts had contained a provision in these terms:-
"For a period of one year after the termination of your employment you will not without the prior written consent of the company directly or indirectly solicit, canvas or entice away any person firm or company who is, or may during the subsistence of this contract become, a client or customer of the company".
This was omitted from the new contracts. Mr Harrison explained that John Harrison had told him that he wanted to start his own business in view of the confusion over the future of ForgeMet, that his solicitor had asked that the "non-solicitation" clause be removed from the contract and had also advised that as Managing Director Mr Harrison had the power to do so. It is evident that no thought was given as to what was in the interests of ForgeMet: and with characteristic straightforwardness Mr Harrison acknowledged that with hindsight what he did was not in ForgeMet's best interests. John Harrison acknowledged that he knew at the time that the original clause was there to protect ForgeMet and that its removal was not proper.
- By the 19 July 2010 John Harrison was embarking on the formation of HSS. As John explained to a finance broker:-
"The company would be servicing the tooling industry, which the company I currently work for
He impressed upon him the need for discretion saying:-
"If you require references please contact either myself or Harry first this is very important." (Emphasis in original text ).
When doing the costings for this new company he explained:-
"You will see in the first year that there are no expenditure for wages, car expenses etc. Forge-Met (my current employer) would still be covering these costs for the first year, then I would expect the company to be in a position to cover these additional costs."
So the business plan assumed that for the first year's trading of the new company John Harrison and Gemma Harrison would both continue to be employed by ForgeMet. John Harrison's view was that on that assumption he could easily manage to bear the set-up and initial "maintenance" costs of a new company: but the evidence of Gemma Harrison ("We had no money; only what we earned as a monthly wage. We needed investment otherwise we could not go on
.We had no money to purchase anything ourselves") struck me as nearer to the truth and more consistent with contemporaneous e-mails. As to where the estimates of expenses came from, on another occasion John Harrison explained in a business plan that his costing projections had utilised "figures obtained from my current employers
. Profit and Loss report".
- There is no doubt that Mr Harrison was aware of these plans: indeed he was considering active involvement in it himself (until his wife put a stop to it). He said that the new company was seen as a "safety net" in case ForgeMet closed, and was not intended to trade: but I do not accept that this was the way it was viewed at the time. Mr Harrison has convinced himself that this must have been the justification: and so have John Harrison and Gemma Harrison. In truth, in July 2010 John Harrison set about establishing a fully fledged trading company which would enter significant legal commitments and would not remain a dormant shell.
- I do accept that at the very outset the precise business of the new company was not settled. Mr Harrison said (and I accept) that one possibility under consideration was a focus upon the off-shore market dealing in high end, high value, high grade stainless and nickel alloy steel. But that would have involved Mr Harrison contacting a lot of old customers from his pre-2000 experience in the steel business and also travelling to overseas producers: and once a stop had been put to Mr Harrison's extensive personal involvement in the business (although he was still to be a co-owner) this could not be achieved. Moreover, it was not an area in which Markus Buhl could help. I find that from about mid-July 2010 (a) the business of the new company was seen by all as being in the same market sector as ForgeMet: and (b) Mr Harrison was intended to have a limited personal involvement (to give the new business credibility) and remained a planned investor. As Mr Harrison acknowledged in cross-examination: "Possibly Breitenfeld would have objected in the strongest terms if they knew what was going on". (The "possibly" did him no credit). This new company was being promoted as a direct competitor of ForgeMet. It was not at that stage being suggested to any investor that ForgeMet was "leaving the field" or that the new company would act only as a sub-contract supplier to ForgeMet.
- By late July 2010 John Harrison had found an ideal warehouse with a crane at Riccall Business Park near Selby, and was negotiating to acquire a lease "for as long as possible" and to reduce the initial rent in order to keep start up costs to a minimum. He had bought one second-hand band saw (for £400, which he told one funding intermediary that Mr Harrison had paid for) and was negotiating for another (a much more expensive new automatic band saw costing £12,950). By August 2010 he had identified a further band saw - a reconditioned machine for £6000 plus VAT. Even though these purchases did not proceed (and other cheaper second-hand machines were acquired) the level of ambition is telling.
- In addition to seeking funding for HSS with the assistance of intermediaries, and having discussed the matter with Mr Harrison, he also made a direct approach to Markus Buhl for £10,000 (stressing the need to keep the approach confidential). As part of this approach he emphasised the advantage he had through working for ForgeMet (thereby making clear what the area of business was to be) , saying:-
"The new company would initially be servicing the tool steel industry. We have been servicing this industry for some years now, through Forge-Met, so we have a good knowledge of the customer base, selling prices and have a number of very good contacts."
"In the past year, either Gemma, myself or Harry have talked to the hundreds of companies that have bought material from Forge-Met. Most of these companies we talk to on a regular basis, as a consequence we have built up strong relationships with these people. Those relationships will still exist even when Gemma, myself and Harry are with the new company. I have no doubt the majority of these customers would buy from this company just because of those relationships.
Forge-Met is struggling to cope with the amount of orders received. (This has been so since October 2009). Harry is turning away orders although we had even run nightshifts this month to try and catch up."
John Harrison made plain in his approach that he was intending to establish the new company (not simply as a dormant company but as a trading entity) within a matter of weeks. He was seeking outside funding because Mr Harrison did not want to use his pension and he and Gemma Harrison did not want to use their house. In making his "pitch" John Harrison told Markus Buhl that Mr Harrison had invested £10,000 in stock material "so far": and on another occasion that Mr Harrison had invested £12,000 in office and warehouse equipment, £7000 in stock and was to invest a further £50,000. When Mr Harrison himself took over the negotiations in August 2010 he told Markus Buhl that at that moment in time he had invested approximately £12,000 in the new company, additionally was looking at releasing other investments, and if successful, would propose investing a further £50,000.
- Mr Harrison said that all of this (save for the possibility of his investing £50,000 in the future) was pure invention by John Harrison which he adopted, telling lies in order to secure an investment into the new company. John Harrison's evidence was also that these e-mails were bare-faced lies to investors. To tell such lies to secure such a modest investment demonstrates that this is something to which the Harrisons were deeply committed because they saw personal advantage in it. They would not have told lies simply to secure some extra saw capacity for ForgeMet to enable it to cope with peak demand.
- In none of the approaches to investors was there any hint that the new company might have a short "shelf-life" or was in any way contingent upon what might happen at ForgeMet. It was promoted as a free-standing soundly based business with a future.
- On 3 September 2010 HSS was incorporated as a £2 company. John Harrison and Gemma Harrison were its only directors and shareholders.
- In the event Markus Buhl did not fund HSS; nor did other potential investors (of whom there were at least two). Indeed by 18 October 2010 John Harrison and Gemma Harrison had decided not to take up any borrowing because
for the next eight months we will have full support of our current employers- [ForgeMet -] and feel that to take the loan out now would be premature and possibly unnecessary."
This demonstrates both that John Harrison was at that point confident that ForgeMet would not be closing down until at least June 2011; and also that until then he could rely on "full support" from ForgeMet. By this he can only have meant that one way or another all the expenses of running HSS (rent, service charges, business rates, insurance, telephone, broadband, electricity, loan instalments, stock funding costs etc) would be covered by ForgeMet and that he himself could rely for his livelihood upon his continued employment with ForgeMet.
- Within a few days (on 28 October 2010) John Harrison did in fact take a £25,000 business loan from one of the several funders to whom he had made applications. Under it he and Gemma Harrison assumed personal obligations for the debt. At trial he would not really engage with the question: "If you say this is all a "safety net" against the closure of ForgeMet, what would have happened if you had borrowed £25,000 and then ForgeMet had continued?". In my judgment the entry of legal commitments such as loans and leases is a clear indicator of an intention to establish a new business irrespective of the future of ForgeMet. I believe Gemma Harrison when she said that they were trying to get funds in place whilst they each had a job:-
"If ForgeMet let us go there would be a delay whilst we got the money: and we would have to get it as unemployed people."
But I do not accept her evidence that these steps were all simply contingency steps ("ideas" she insisted on calling them) against the possibility of ForgeMet's closure. It was all about building an alternative career to secure a future once Mr Harrison had retired, and to do so in a way which avoided delay. What John Harrison and Gemma Harrison wanted was a ready-made trading company that would mean that there was no gap between their last customer contact as employees of ForgeMet and their first customer contact as proprietors of HSS.
- During October 2010 ForgeMet again experienced a peak in demand. Mr Harrison once more introduced 24-hour working for two weeks (though only one was needed), but informed Breitenfeld that the large plate saws were fully booked until January. Dr Hackl responded on 22 October 2010:-
. [C]ongratulation to the good order intake. You know the general situation of our company. At the timebeing we will not invest in equipment. Maybe it is possible to contract some cutting work, taking into account the overall financial situation" "
- A review meeting to consider the future of ForgeMet had been planned for late October: but it was cancelled. Mr Harrison and John Harrison did not take this as a good omen. Rather, they read into it an indication that Breitenfeld was not interested in the future of ForgeMet. But in my judgment they cannot genuinely have thought that closure was imminent. What did become clear to Mr Harrison and John Harrison in October 2010 was that John Harrison would not succeed Mr Harrison as Managing Director of ForgeMet. I have no doubt that it was this (and not any anticipated closure of ForgeMet) that motivated the entire Harrison family to act as they did.
- In his update of the 1 December 2010 Mr Harrison told Breitenfeld that the order book was higher than it had ever been before, but that he was now turning away business every day of the week. However he gave the good news
"I have found one local company that will do some of our cutting work for us."
This was, of course, HSS: but Mr Harrison did not disclose its name or the family connection. He wished to conceal from Breitenfeld what was going on. In fact HSS was not taking any of the strain at this stage since its saws were still being commissioned (and were not fully commissioned until 16 December).
- On 29 November 2010 HSS signed a 10-year lease for the warehouse at Riccall. The initial rent was £4000 p.a. (rising to £8000p.a from on 29 May 2011) plus £2000 p.a. service charge and a further insurance rent. These sums were payable monthly in advance. HSS had the option to determine the lease on 29 November 2011 (and again on 29 November 2016).
- At that point (with 3 saws bought and ready for commission) John Harrison and Gemma Harrison had a company that was "ready to go": if ForgeMet closed or if they walked out, as Gemma Harrison put it, "we would not be waiting around for six months or longer".
- On 6 December 2010 Mr Harrison tendered his resignation to Dr Kailbauer (not, so far as I can see, to his co-director) effective on 30 June 2011. In the ensuing correspondence Mr Harrison assured Dr Kailbauer that during his notice period "all efforts would be aimed at leaving a very successful company".
- On 13 December 2010 ForgeMet placed two orders with HSS for some 1750 pieces to be cut and supplied (using band saws), with an order value of about £9300. The steel that HSS used for this supply was itself supplied by ForgeMet to HSS.
- That same day ForgeMet placed two orders with HSS for cutting services alone to be provided in relation to steel belonging to and supplied by ForgeMet. Mr Harrison said that he had contacted three local companies about sub-contracting the cutting (though there was no documentary support for this), but that their prices were so high that there was no profit for ForgeMet if the work it placed with HSS had instead been placed with them. I accept that Mr Harrison probably did take indicative quotes (to ensure that the price HSS offered to ForgeMet could be justified). The outcome is not surprising. ForgeMet was paying John Harrison's salary, so he could afford to price HSS's work excluding any labour element and simply with the aim of covering overheads: indeed, that was the object of the exercise. Moreover, John Harrison was prepared to operate the saws at HSS on his own, which an operator following the safety code would not.
- Mr Harrison and John Harrison said that ForgeMet did not have the capacity to do this work. Mr Harrison said that he considered it to be in the best interests of ForgeMet (so as not to lose work and so as to service its customers) to engage HSS in this way.
- At trial ForgeMet did not accept that there were any capacity constraints such as to justify the course taken by Mr Harrison. "Capacity" itself is an unclear concept dependent upon what work the business decides it wants to take on, and with many variables, from the nature of the steel to be cut, through the size of the starting piece to be worked on and the complexity of the cuts that have to be made, to the quality of the work done (and whether any of it has to be redone), to the number of repeat pieces to be cut and the availability of automated processes: and, critically, the type of saw required. So the question of "capacity" within a business is one for judgment not precise computation; and the decision whether to take on or to refuse particular work is one that needs to be taken by reference to a business plan.
- Dr Hackl took the view that the steel stockholding business was a cyclical one, and that there would be times when a company like ForgeMet did not have enough resources to satisfy 100% of the peak business demand. At such times it was necessary (a) to put in place price controls to regulate the volume of incoming work; and (b) to give customers realistic lead times, managing their expectations and, if necessary, losing work. There was only a "capacity" issue if a company tried to do everything: there was no "capacity" issue if it selected the most profitable jobs and managed expectations.
- ForgeMet accepted that "sub-contracting" was one way of managing peak demand: but pointed out (as was the case) that it had not been seen as a necessary tool either before or after Mr Harrison's engagement of HSS. Staggered shifts, 24 hour working and simple overtime are other tools: and they were used. As to staggered shifts, David Stocks, a saw man, said (and I accept) that whilst there were a couple of occasions when he refused to do extra or revised shifts, in general he did so: but that in fact any backlog was always rapidly cleared. Thus when night shifts were proposed for two weeks, only one week was needed: and when there was a backlog in December 2010 it was cleared in days. To the same effect was the evidence of Michael Brookfield, the plate saw operator. As to overtime, between October 2010 and March 2011 no overtime was paid save for £477 in November 2010 and £182 in February 2011. Further, whereas in September 2010 John Harrison had covered 10 shifts of cutting at ForgeMet, in October 5 shifts and in November 3 shifts, for the entirety of the months of December 2010 to April 2011 he covered only one shift. This suggests that the cutting time he could have spent at ForgeMet was actually spent at HSS (provided that there would have been an available saw at ForgeMet, as the cessation of staggered shifts and overtime suggests was the case).
- Following the purchase orders placed by ForgeMet on 13 December 2010, on 15 December 2010 John Harrison gave instructions to Spartan Warehousing (ForgeMet's usual hauliers) for 2200kgs of steel to be collected from ForgeMet and 1600kgs from R Cox Haulage (where some of ForgeMet's stock was kept) and the loads delivered to HSS on 17 December 2010. Tracy Staniland (the depot manager) dealt with the haulage order. John Harrison told her that he was setting up in business on his own and asked her to use a vehicle that did not have the Spartan livery on it because it might alert the ForgeMet staff to what was going on: and he asked that the delivery be kept quiet from the Spartan staff.
- This was the first of a series of orders placed by ForgeMet with HSS lasting through until May 2011. Some orders were placed on a "free issue" basis, where ForgeMet supplied the steel to be cut and should have received back the cut pieces and any "off-cuts", paying only for the cutting service. Other orders were placed on the footing that ForgeMet sold steel to HSS (sometimes at "scrap" value) and then bought back the cut pieces (leaving HSS with any "offcuts").
- The pricing was done in this way. Mr Harrison and John Harrison would agree a price for the steel and would work out a cutting charge that would cover HSS' costs. Mr Harrison would tell John Harrison the selling price for the work to be charged to ForgeMet's customer (if he did not already know it) and the difference would be the profit to be divided between ForgeMet and HSS.
- Moreover, Mr Harrison began to refer ForgeMet customers directly to HSS for cutting services. He referred one of its biggest customers (Slack & Parr) for a high-volume low-margin order because (he said) ForgeMet could not do this work without losing more profitable orders and he did not want to lose Slack & Parr to a competitor. He did the same in respect of ForgeMet's biggest customer (Tyne & Wear) and with at least four other customers. I am not convinced by the explanation proffered. With some of these orders the timescales were very relaxed so that "capacity" cannot itself have been an issue. In none of these cases is it possible to think why direct reference to HSS was more in the interests of ForgeMet than ForgeMet accepting the order on the basis that it would be subcontracted to HSS without the customer knowing (which is the justification given for the whole relationship between ForgeMet and HSS). For his part, John Harrison recognised that these were "bungs" without which he would not have covered the costs of running HSS.
- From December 2010 John Harrison was frequently absent from ForgeMet. He himself said he was absent for a day each week in January and one and a half days in February, doing most of the cutting work for HSS in the evenings and on two out of four weekends. But Mike Brookfield said (and I accept) that from December 2010 John Harrison was hardly ever in the office: and Jessica Durrans confirmed that that was the case in March and April 2011.
- At the end of 2010 Mr Harrison decided to have a stock "clearout". On 10 January 2011 ForgeMet delivered 7 tons of steel to HSS as "scrap". HSS was not a dealer in "scrap" and did no reprocessing. The material supplied was plainly usable as "offcuts" and was so used by HSS to satisfy an order for Tyne & Wear diverted from ForgeMet. Although one of the saw men (David Stocks) did deliveries for ForgeMet, he was always taken off that duty when deliveries had to be made to HSS. So knowledge about movement of steel from ForgeMet to HSS was largely kept away from ForgeMet employees and confined to Mr Harrison and John Harrison (and the hauliers they engaged). Another of the saw men (Mike Brookfield) did at this time come to learn that HSS was sub-contracting for ForgeMet: but Mr Harrison made clear to him that he should not tell anyone.
- On 19 January 2011 there was a meeting between the active director of ForgeMet (Mr Harrison) and Dr Kailbauer and Dr Hackl of Breitenfeld. To the surprise of Dr Hackl, Mr Harrison said the ForgeMet business should close: and John Harrison concurred in that view. Consideration of the future of ForgeMet was deferred until the end of February 2011: and in the meantime Mr Harrison was to investigate funding repayment of part of the inter-company debt through invoice discounting, was to return some stock to Austria and was to propose a three-year business plan for ForgeMet. Mr Harrison was told that if ForgeMet was to be closed John Harrison and Gemma Harrison would be employed throughout 2011.
- Mr Harrison's "Long Term Plan" (on half a page of A4) was that ForgeMet should move upmarket and focus upon forged bars, billets and blocks of high alloy steel. Coincidentally, this would have left the field open for HSS to continue to service ForgeMet's existing customers. Tellingly, Mr Harrison made no recommendations for the acquisition of additional saws or other equipment or for additional staff to cope with any "capacity" issues. But the plan was overtaken by events.
- On 28 February 2011 John Harrison and Gemma Harrison simultaneously gave notice terminating their respective employments with effect from 29 April 2011 "as a result of the continuing uncertainty over the future of ForgeMet". By return e-mail Dr Hackl informed Mr Harrison that this was disappointing news since Breitenfeld had already decided to continue with ForgeMet and that he was authorised to communicate this to Mr Harrison that very day. Despite that news, the resignations were not withdrawn. Nor did John Harrison either sell the saws he had acquired (whose market value was much above what he had paid, and which he told me he had always planned to sell if ForgeMet did not close) or terminate the lease (which had included a "break clause" inserted, according to John Harrison, to cover this very eventuality).
- By March 2011 there was a new form of dealing between ForgeMet and HSS. One of ForgeMet's steel suppliers was Poldi. Instead of ForgeMet itself placing the order for steel, HSS would place the order with Poldi and then sell on to ForgeMet at a "mark-up". This John Harrison acknowledged to be "a device to ensure that HSS covered its bills" implemented (he supposed) because he had moaned to Mr Harrison that HSS was not covering its costs.
- By April 2011 John Harrison had also embarked upon direct trading with customers of ForgeMet without the intermediation of Mr Harrison. The volume of such business was small: perhaps one week's work for HSS.
- Deliveries of steel by ForgeMet to HSS and the placing of subcontract orders continued until 18 May 2011 (Mr Harrison's last working day). These dealings were kept secret. Mr Harrison himself acknowledged that any HSS order placed by ForgeMet and involving "free issue" steel could not be noted on the computer records, and was therefore noted only on a piece of paper kept on his desk. (In fact no records of "free issue" steel coming in from and going back to ForgeMet were kept at HSS either). But it appears that there were no traceable accounting entries relating to HSS in the ordinary accounting documents of ForgeMet, so that in March 2011 the incoming sales and accounts manager (Jessica Durrans) did not know of its existence until she chanced upon a delivery note relating to HSS, did a credit check (which disclosed that it was a company belonging to John Harrison and Gemma Harrison) and was then able to interrogate the Sage accounting system. When she raised the matter with Mr Harrison in April 2011 he told her that Dr Hackl was not aware of HSS and should not be told.
- Breitenfeld discovered in mid-April 2011 that John Harrison had founded HSS. This came as a complete surprise to Dr Hackl because he had been told by John Harrison in March 2011 specifically that he and Gemma Harrison were not going into the steel industry when their employment with ForgeMet terminated. (John Harrison denied this and asserted that he had told Dr Hackl the true position earlier, relying upon a reference to such an earlier conversation in a June 2011 e-mail. But it is common ground that what John Harrison says in e-mails is not always accurate: and Dr Hackl was a more impressive witness on this issue).
- As the time for Mr Harrison's departure approached he and Dr Hackl addressed the question of stock. They agreed a £40,000 write-off, and upon the necessity for a physical stock-take.
- The physical stock-take was scheduled for when Mr Rudkin arrived in June 2011: but the ForgeMet stock records in the Sage system were badly corrupted and it was not possible for detailed reconciliation to take place. (Mr Harrison had reported in December 2010 that the system had been infected with a virus). So he and Mr Harrison and Dr Hackl agreed a provisional stock loss figure of £105,000 as the discrepancy between the recorded stock and the actual stock resulting from a stock-take on 21 June 2011. It appears (from ForgeMet's Sage stock control system) that there may have been a final stock write down of some £200,000 (though part of this may have been attributable to a sale of some stock at "scrap" value by ForgeMet to Breitenfeld rather than because of a discrepancy between physical and recorded stock).
- When he took over Mr Rudkin reduced annual turnover from about £1.6 million to £0.7 million (because he turned away low margin orders that took a long time to cut), but he increased profitability and reduced the intercompany debt by 50%: though he was enabled to do this by investment in ForgeMet by Breitenfeld secured upon the submission of business plans.
- From June 2011 HSS was in full-throated competition with ForgeMet. John Harrison contacted a number of ForgeMet customers (but also advertised heavily and was approached by some ForgeMet customers who had had been "let down" by Mr Rudkin's changed approach at ForgeMet). In the result about 60 of that year's 280 customers were ForgeMet customers. In making these approaches John Harrison and Gemma Harrison said (and I accept) that they did not use a list taken from ForgeMet. Having dealt with such customers for 6 or 7 years they knew the contact names and the details.
- The business of HSS has prospered to such an extent that (4 years on from its foundation) it has outgrown the Selby premises. I have no doubt that this is due to a significant degree to the hard work of John Harrison and the undoubted sales skill of Gemma Harrison. But they were building upon the "head start" that they got through HSS being put together from late July 2010 so that it was "ready to go" in May 2011.
What duties did Mr Harrison owe ForgeMet?
- It was common ground that as a director of ForgeMet Mr Harrison owed the following fiduciary duties to the company:-
a) To act in the way in which he considered, in good faith, would be most likely to promote the Company's success (s.172 of the Companies Act 2006 ("the Act"));
b) To avoid a situation in which he had, or could have had, direct or indirect interest or duty that conflicted, or could possibly have conflicted, with ForgeMet's interests or with his duties to ForgeMet (s.175 of the Act);
c) Not to accept any benefit from third parties conferred by reason of his being a director or his doing (or not doing) anything as director of ForgeMet (s.176 of the Act);
d) To declare to ForgeMet's other director the nature and extent of any interest (direct or indirect) that he had in any proposed transaction or arrangement with ForgeMet (section 177 of the Act).
- I consider that the following further propositions would be regarded as non-controversial (being derived from authoritative textbooks and familiar leading cases):-
a) All relevant duties were owed to ForgeMet (not to Breitenfeld as its holding company):
b) The statutory provisions referred to are not an exhaustive code, and do not supplant (but fall to be applied in the same way as) the common law and equitable principles from which they are derived;
c) A director is under a fiduciary duty to apply the property of the company under his control for the purposes of the company and is answerable for any misapplication of it;
d) A director is under a fiduciary duty not to make a profit for himself through the use of his fiduciary position;
e) A director is under a fiduciary duty not to enter into any engagements in which he has or can have a personal interest which conflicts or may possibly conflict with the interests of the company (which he is bound to protect);
f) Whether such a potential for conflict exists is to be ascertained by asking whether a reasonable man, looking at the relevant facts, would think that there was a real, sensible possibility of conflict.
In what respect (if any) is he in apparent breach of those duties?
- So directed, I hold that Mr Harrison did act in breach of his fiduciary duties to ForgeMet in assisting, and being involved in the operations and trading of, HSS.
- I am not satisfied that he made a personal profit for which he is accountable. Despite what was said to proposed investors I do not consider that, on the balance of probabilities, Mr Harrison made any direct investment into HSS or is (by virtue of any of the events recounted in the evidence) entitled to an interest in HSS, the value of which would be increased by HSS's level of trading. Instead, I accept that (save in regard to a potential investment of £50,000 by Mr Harrison) what John Harrison told investors was lies. I accept that Mr Harrison also told lies. The first saw was bought for £400 cash: and although Gemma Harrison said that she and John Harrison had no money but their monthly earnings, I think this sum small enough to have been paid by them without resort to Mr Harrison. I do not believe that HSS spent thousands of pounds (provided by Mr Harrison) on office furniture and computers. The suggestion that Mr Harrison had bought significant quantities of stock before HSS had been incorporated or had acquired premises is unlikely to be true. With limited initial funding it would make no sense to tie up money in stock which could not be traded. As I have said, the fact that they should tell such large lies for the sake of so little demonstrates just how desperate the Harrisons were to establish HSS and graphically underlines that it was the advancement of their own interests and not those of ForgeMet that underpinned everything that occurred.
- Nor do I consider that Mr Harrison holds some post or office in HSS from which he derives personal benefit.
- Counsel for ForgeMet argued that even if Mr Harrison was not a shareholder in or creditor of HSS or otherwise derived any personal benefit he was nonetheless accountable for any profit made by HSS because HSS is to be regarded (having regard to Mr Harrison's participation in the finding of premises and the attempts to secure funding) as a joint venture between himself and HSS/John Harrison to which the law as explained in National Grid v McKenzie  EWHC 1817 (Ch) at - applied. I do not accept this submission. To my mind a joint venture involves the conduct of some economic activity under joint control and in which there is generally some sharing of benefit not merely a sharing of effort. On the evidence it is not established on the balance of probabilities that Mr Harrison and HSS jointly supervise the conduct of HSS's business or that Mr Harrison shares in the distributable profits of the business or receives a commission or other benefit: and Mr Harrison's pre-incorporation conduct does not otherwise seem material.
- I am satisfied that Mr Harrison permitted the property of ForgeMet to be used otherwise than for the purposes of the Company. I address this below when I consider the tort of conversion and deal with loss. The same facts are susceptible of analysis as a breach of fiduciary duty.
- I am also abundantly satisfied that Mr Harrison entered into engagements in which he had a personal interest that conflicted with the duties he owed to protect the interests of ForgeMet. I am so satisfied notwithstanding that that I find that Mr Harrison has no direct financial interest in HSS.
- Conflicts of interest are identified not by shoe-horning the facts of a given case into various pre-determined categories of relationship, but by the application of the principle identified by Lord Upjohn in Boardman v Phipps  2 AC 46 at 124. Thus, sometimes a sale by a trustee to his wife will constitute "self dealing": sometimes it will not. It all depends upon an analysis of the transaction to see whether objectively there is a real sensible possibility of conflict (not an examination of whether the fiduciary in fact succumbed to temptation). Here there plainly was a real sensible possibility of conflict even though Mr Harrison had no direct financial interest in the counterparty to the engagements which he caused ForgeMet to enter into, because that counter-party was the creature of closely connected persons. The whole course of dealing is riddled with conflicts, amongst them (I do not suggest the list is complete)
a) The decision whether to omit the "non-solicitation" clause from the new contracts (not itself relied on as a breach of duty, but a powerful illustration of the problem);
b) The decision to allow John Harrison and Gemma Harrison to do work for a third party (HSS) whilst still employed by ForgeMet;
c) The decision whether to ask the workforce to run staggered shifts/work overtime at ForgeMet or whether to sub-contract;
d) The decision whether to disclose to the entire ForgeMet board or to Breitenfeld that HSS was a potential sub-contractor or to conceal the truth;
e) The decision whether to sub-contract to HSS or to another supplier;
f) The decision about the terms of any sub-contract;
g) The decision whether to contract for cutting services alone or for the purchase cut pieces;
h) The decision whether to sell steel to HSS (and if so whether as "scrap" or as usable stock) rather than to sell as "scrap" to Breitenfeld;
i) The decision whether to buy steel from HSS or direct from the supplier;
j) The decision whether to divert customers to HSS or to retain customers (with the work being done by HSS as an undisclosed sub-contractor);
k) The decision whether to remedy defective sub-contract work or to require HSS to remedy it.
- Human nature being what it is, there was in each situation a danger of Mr Harrison being swayed by interest rather than driven by duty and so the inflexible rule of equity applied: he was not allowed to put himself in a position where interest and duty conflicted: see Bray v Ford  AC 44 at 51.
Does he have a defence to these apparent breaches?
- Mr Harrison relied on "good faith". The constant theme of his evidence was that he only acted as he did because he considered it to be in the best interests of ForgeMet. He may have so persuaded himself when preparing his written evidence: but I do not consider that even he thought at the time that helping John Harrison and Gemma Harrison to establish a rival business during the time that they were meant to be working for ForgeMet was in the best interests of ForgeMet. My reading of the situation is that Mr Harrison wanted to secure a future for his son and daughter-in-law after he ceased to be managing director of ForgeMet and did what he could to help them whilst in the main avoiding obvious immediate damage to ForgeMet (for he had an uneasy conscience, demonstrated by his desire for secrecy).
- But even if he did hold the belief that everything he did was in the best interests of ForgeMet, that would not avail him. The honesty of the fiduciary is irrelevant to the question whether a breach of this fiduciary duty has occurred, so that a breach may be attended by perfect "good faith" on the part of the fiduciary: see Bray v Ford (supra) at 48.
- Nor (as Counsel conceded) is it anything to the point that ForgeMet might not itself have been able to avail itself of the opportunities seized by HSS (in the event that that could be proved): Regal (Hastings) Ltd v Gulliver  2 AC 134n.
- Nor does it matter that HSS traded with ForgeMet on fair terms (in the event that that could be proved) because "no enquiry on that subject is permitted": Aberdeen Railway v Blaikie (1854) 1 Macq. 461.
- Nor can Mr Harrison argue that there was no secrecy in the formation of HSS and that adequate disclosure had been made. The whole plan was for concealment from, not disclosure to, Mr Harrison's co-director (the board being the relevant organ of ForgeMet) and Breitenfeld (the sole shareholder). Although it was pleaded that there had been disclosure (through Markus Buhl) to Herbert Buhl a member of the management board of AG and a director of a company that owned shares in AG and that this amounted to disclosure to Breitenfeld, no serious attempt was made at arguing that this sufficed: and rightly so. Plainly it did not. It was "disclosure" only of the proposal to form a company (not disclosure of dealings). It was "disclosure" to a party to whom the fiduciary duty was not owed. It was "disclosure" in circumstances where Markus Buhl was forbidden to reveal to anyone relevant what was afoot.
- Nor can Mr Harrison rely on some form of "waiver". Paragraph 11(g) of his Defence asserted that in March 2011 John Harrison told Dr Hackl that he and Gemma Harrison had formed HSS and that Dr Hackl had replied that this was "OK" provided that HSS did not approach ForgeMet's top accounts. As my findings of fact indicate, I do not accept that this occurred, preferring the evidence of Dr Hackl to that of John Harrison. But even if the event occurred, the nature of the "disclosure" pleaded would not suffice to enable Dr Hackl (assuming he had authority) to give fully informed approval to everything that had occurred.
- There is in my judgment no defence to the breach of fiduciary duty.
If he is in breach, what remedy ought to be granted?
- There cannot, in my view, be an account, for Mr Harrison did not derive a personal financial benefit. In my judgment the correct remedy is an award of equitable compensation assessed by reference to any loss which ForgeMet may be taken to have suffered and any benefit which HSS derived from Mr Harrison's breaches of duty.
- I put it in that way because the real damage to ForgeMet arising from the breaches of fiduciary duty was not that it had to pay more to produce the goods its supplied to its customers or that some work was diverted to HSS: it was that for a period of at least 6 months Mr Harrison facilitated the establishment of a competitor company that would be "ready to go" as soon as John Harrison and Gemma Harrison left ForgeMet. He provided HSS with a springboard. Instead of having to start looking for premises, arranging funding, purchasing plant and equipment and beginning direct dealings with customers from scratch once they left ForgeMet John Harrison and Gemma Harrison were able to draw on their wages as employees of ForgeMet to reduce the cost of work undertaken by HSS, were able to use their standing as employees to obtain funding for HSS, were able to secure sufficient contracts with ForgeMet to secure that their running costs were covered (including some contracts that could only be regarded as pure "bungs") and were able to use dealings between ForgeMet and its customers to secure direct work for themselves. It was for this benefit that Mr Harrison would have had to account if he was interested in HSS: and it is for the damage caused by this assistance that he must compensate ForgeMet.
- The total benefits passing to HSS over the period in question (October 2010 until the end of April 2011) were its gross sales (which I assess at £70,000) plus steel that was misappropriated (which I assess at £20,500) a total of £90,500. I award equitable compensation in that sum as the money equivalent of the injury that ForgeMet suffered by the breach of fiduciary duty.
Did John Harrison and/or Gemma Harrison dishonestly assist in any breach of duty?
- In my judgment John Harrison and Gemma Harrison did assist Mr Harrison in his breaches of duty: and they did so dishonestly.
- There was no debate at trial about whether what John Harrison and Gemma Harrison did constituted "assistance". They participated in and, indeed, provided the very opportunity for, Mr Harrison's breaches of fiduciary duty. The focus of the argument was as to the honesty of their conduct.
- Counsel for John Harrison and Gemma Harrison submitted that the question of honesty was a stark one. Given (he said) that Mr Harrison (i) outsourced to HSS sub-contract cutting, selling steel and purchasing steel; (ii) directed business to HSS which ForgeMet could not transact at a commercially sensible price to help customers; and (iii) gave business to HSS to ensure that it was able to cover its costs so as to be able to service ForgeMet's requirements, could it really be said that John Harrison and Gemma Harrison were dishonest if they believed:-
a) That ForgeMet needed to outsource work;
b) That the outsourced work was undertaken at a toughly negotiated and advantageous price;
c) That Mr Harrison was acting in ForgeMet's best interests in outsourcing the work;
d) That ForgeMet profited by the activity?
He submitted that an affirmative answer was not an attractive proposition, and that if those facts were established they demonstrated that John Harrison and Gemma Harrison were acting honestly to assist ForgeMet and not dishonestly to assist Mr Harrison in breaching his fiduciary duty.
- I was invited to enter upon the debate as to the nature of "honesty" for the purposes of this jurisdiction. The starting point was the speech of Lord Hutton in Twinsectra v Yardley  2AC 164 where (at p.172) he said:-
"Before there can be a finding of dishonesty it must be established that the defendant's conduct was dishonest by the ordinary standards of reasonable and honest people and that he himself realised that by those standards his conduct was dishonest."
From there I was taken to the commentary upon this passage by the Privy Council in Barlow Clowes  1 WLR 1476 at , and thence to authorities upon the impact of a commentary by the Privy Council upon the authority of speeches in the House of Lords (Abou-Rahmah v Abacha  EWCA Civ 1492 at  per Arden LJ and Sinclair Investments (UK) Ltd v Versailles Trade Finance  EWCA Civ 347 at -), then to recent applications of the relevant test (Adelaide Partnerships v Danison  EWHC 4090 (Ch) and Al Khudairi v Abbey Brokers  EWHC 1486 (Ch)) and finally to a recent authoritative review of the cases and a reconsideration of the position (Starglade Properties v Nash  EWCA Civ 1314). However, as is so often the case for a judge at first instance, it is not necessary to express a view upon this controversy because the answer lies in the facts.
- I do not accept that John Harrison or Gemma Harrison at the time believed that ForgeMet "needed" to outsource work or that Mr Harrison was acting in ForgeMet's best interests in entering into transactions with HSS. The business decision whether to take on high-volume low-margin work was one for Mr Harrison. How to cope with any "capacity" pressure thereby created was also one for Mr Harrison. But I do not accept that John Harrison or Gemma Harrison believed that that he was taking those decisions primarily in the interests of ForgeMet or that the only way of coping with the pressure was for them to set about creating a separate company from July 2010 and to offer to provide sub-contract cutting services to ForgeMet, or (for example) to acquire steel from HSS as "scrap" and sell it back as cut pieces or to acquire steel and sell it on to ForgeMet at a "mark-up".
- The driving force behind the creation of HSS was not the "need" to provide extra saw capacity to ForgeMet but was the desire of John Harrison and Gemma Harrison to secure their futures once Mr Harrison ceased to be managing director of ForgeMet. They believed that they could exploit the "capacity" issue to their advantage in securing that end, knowing that Breitenfeld would object to what they were doing. From the time when their contracts were first amended they knew that what they were doing was not proper having regard to Mr Harrison's duties to ForgeMet. People who hold honest beliefs about the desirability of a particular course of commercial activity do not cloak that activity in secrecy and conceal it from the owners of the business they are employed to serve. John Harrison and Gemma Harrison did not act as honest people would act: and their consciences told them that they were engaged in transactions in which they could not honestly participate, so they acted secretly.
- I do accept both that ForgeMet and HSS shared the profit on the sub-contract cutting supply and that HSS provided cutting services to ForgeMet at a price below that that would have been charged by an independent contractor. But that does not make the conduct honest. I consider that the reason for those arrangements was that both Mr Harrison (for ForgeMet) and John Harrison (for HSS) had uneasy consciences about the nature of the arrangements and did not exploit them as fully as others might have done (which is to their credit). For the most part what they did was to ensure that the general arrangement secured only its main objective, which was the creation and maintenance of a trading company that was "ready to go" as soon as John Harrison and Gemma Harrison left the employ of ForgeMet i.e the covering of start-up and running costs. Only to a small extent was there direct competitive trading.
- In my judgment John Harrison and Gemma Harrison are (together with HSS itself) jointly and severally liable with Mr Harrison for the equitable compensation that I have assessed. It is true that in their case an account could be ordered. But an account is a discretionary remedy: and I consider that I can do justice without the prolongation of the litigation and an increase in attendant expense. What John Harrison and Gemma Harrison set about was covering the running costs and establishing the HSS business amongst customers. They must "account" for the payments they received in pursuit of that plan. In fairness to Breitenfeld, they have conducted the litigation with moderation and without any evident attempt to use it as a means of crushing a nascent competitor. It was apparent from the evidence of Dr Hackl that what cut most deeply was the secrecy and deceit with which the Harrisons went about establishing HSS, and the fact that they used the connections and business of Breitenfeld to do so. An award at the level I have suggested fairly meets the case.
What contractual duties did John Harrison and Gemma Harrison owe ForgeMet?
- There was a large measure of agreement as to the contractual obligations of the Harrisons namely:-
a) Clause 8.2 of their respective contracts require them to devote to their whole time and attention to the discharge of their duties to ForgeMet during the hours of work;
b) Clause 18.1 of their respective contracts required them not to divulge or otherwise make known any confidential information of ForgeMet or its clients or customers except in the proper course of employment or if expressly authorised in writing so to do;
c) Clause 18.2 required them to act at all times in the best interests of the Company;
d) Clause 23.1 of their respective contracts stipulated that under no circumstances were they allowed to undertake any work to their personal requirements or for any third party unless by the express permission of the managing director.
- ForgeMet also alleged (and I hold) that there was an implied term that each of John Harrison and Gemma Harrison would serve the Company with loyalty and fidelity. This imposed upon them a general duty not to use their position as employees of ForgeMet to further their own interests in such a way as to threaten the interests of ForgeMet.
- John Harrison worked overtime and (on the evidence) was not paid for it but was allowed some time in lieu. The extent of his obligation was not examined. Having regard to his position and role I consider that he was probably obliged to work reasonable overtime beyond his core hours. But this would not require him to work whatever hours the state of the business required.
In what respect (if any) are they in apparent breach?
- I find each of them in breach of contract in failing to act at all times in the best interests of ForgeMet in that whilst they were employees (and in fact, partly in working hours) they established a business capable of competing with ForgeMet and took from ForgeMet work which could have been done by ForgeMet in order to fund the establishment and running costs of HSS. They incorporated, and then operated (or assisted in or were involved in) the operations, trading and business of HSS. In doing so they procured ForgeMet to sell and to give steel to HSS (for it to sell either back to ForgeMet as "cut pieces" or on directly to erstwhile customers of ForgeMet under direct contracts).
- I should expand on the holding that the work so taken by HSS could have been done by ForgeMet. I have previously addressed John Harrison and Gemma Harrison's belief about the capacity issue. I must now address the reality of the capacity issue. I am satisfied that ForgeMet could probably have coped with the bulk of the work that was undertaken by HSS down to May 2011. For all the fuss that was made in e-mails from Mr Harrison to Breitenfeld about having to turn work away the advent of HSS led to no uplift in volumes or increase in turnover, but only a sharing of the work that had previously been done by ForgeMet alone: and I consider ForgeMet alone could have done most of it again.
- First, some of the work that was put HSS's way was to an extended timetable that would not have put any capacity pressure on ForgeMet. The customers were not in a rush for their work. The work still went to HSS event though ForgeMet could have done it.
- Second, much of the work was for pieces to be cut by the band saws (whereas the real pressure point at ForgeMet was on the plate saw). It is true that HSS had a large band saw whose capabilities overlapped to some degree with ForgeMet's plate saw. But this additional capability of HSS seems to have been exploited only to a small degree (and possibly only when one of ForgeMet's plate saws coincidentally broke down in December 2010). The work that went to HSS was not the "pressure" work.
- Third, both Mr Stocks and Mr Brookfield denied that there was any outright refusal by the staff to work overtime or staggered shifts in December 2010 or thereafter, and I accept their evidence. The matter was never put to the test because Mr Harrison decided (in agreement with the younger Harrisons) to send work to HSS. In fact, on analysis the period of 24 hour working was short (perhaps for two separate weeks in August and October) and the number of staggered shifts was in truth small so that the peaks in work were in the past accommodated: and I consider that they would have been largely accommodated in the period December 2010-May 2011.
- Fourth, the combined output of ForgeMet and HSS from December 2010 onwards did not exceed the average output from ForgeMet alone for the preceding period. The cross-examination of Mr Harrison showed that between April and November 2010 ForgeMet cut on average 2249 pieces per month: between December 2010 and May 2011 it cut 1411 (and the aggregate output from ForgeMet and HSS was 2019 pieces). Now these crude figures do not paint an entirely accurate picture because (as Mr Harrison pointed out) (i) estimating work by the number of pieces is less accurate than measuring the amount of cutting involved: and (ii) an average which includes December 2010 might (subject to compensating volumes in January) be slightly depressed because ForgeMet had one saw out of operation (though on the Harrison case HSS should have more than made up for that) and there was a period of bad weather. But making proper allowance for that, the figures do not demonstrate an evident growth in capacity from the availability of HSS' additional saws so that through put increased: rather they suggest a redistribution of the available work. That Mr Harrison accepted.
- Fifth, a rough analysis of the sales figures supports the same conclusion. It was put in cross-examination of Mr Harrison that ForgeMet's average monthly sales figure for the period July to November 2010 was £125,000, and for the period from December 2010 to May 2011 was £110,750 (or £116,500 if the sales by HSS were aggregated). Once again, the measure is not precise. Mr Harrison fairly pointed out that the July to November 2010 figure was inflated by overtime working in August and October, and the December 2010 to May 2011 figure distorted by the effect of the breakdown of the plate saw in December, a couple of days' bad weather and the Christmas closure. But the figures are in my judgment sufficiently robust to demonstrate that bringing HSS "on stream" did not enable ForgeMet to increase its turnover by taking on the extra work which Mr Harrison said he was having to turn away. Once again, what was happening was a redistribution of the available work. As Mr Harrison acknowledged, the effect of HSS coming on-stream was to service the turnover he already had, not to increase it.
- The heart of the Harrison case was that what HSS was doing was the work that would otherwise have had to be covered by overtime which the men refused to do. But some of the work done by HSS did not raise any "capacity" issues and the men would (if asked) have done overtime.
- For these reasons I consider that ForgeMet probably could have coped with the bulk of the demand from December 2010 to May 2011 if HSS had not existed. I say "the bulk" because I recognise that to a degree the "coping mechanisms" depended on Mr Harrison and John Harrison putting in extra hours which they were not necessarily obliged to do to the extent they previously had. The modest extent to which they did so is essentially captured by a running production schedule prepared contemporaneously by Gemma Harrison which, although the entire Harrison family was desperate to tell me it was useless ("null and void" was what John Harrison called it) I found helpful. I think the truth of the matter is that John Harrison decided that it was in his own best interests to spend his extra hours working for himself rather than working for ForgeMet (where his prospects of being successor managing director had vanished): and the Harrison family have now persuaded themselves that this was really in the best interest of ForgeMet. It was not.
- But I am not satisfied that (in breach of contract) either John Harrison or Gemma Harrison took a list of customers with them or a list of prices. The e-mails do show that John Harrison used ForgeMet's financial details in preparing his own costings for HSS: but they do not show that he disclosed ForgeMet's details to any third party. The e-mails also show that he boasted of having customer contact details and a folder of enquiries. In seeking funding from one finance intermediary John Harrison wrote:-
"I have the current list of [ForgeMet's] customers some 450 companies. Many of these customers I have spoken to on a regular basis, and have built strong relationships with. I am very confident that many of these companies would change over to the new company. I also have a folder full of companies that have contacted [ForgeMet] in regards to large projects."
Whilst the e-mails contain much that is bluff and lies I think it probable that this material was available to John Harrison and Gemma Harrison: but I do not think that when the break came they actually used it. First, this would have been such a blatant breach of duty that I think the uneasy consciences of the Harrisons would have disinclined them to do it (whatever they boasted to others). Second, they had no need to do so: both John Harrison and Gemma Harrison knew the customers and could either recall (or easily find) any relevant contact details. It was precisely because of this that ForgeMet needed the "non-solicitation" clause that was removed from their contracts. Third, Gemma Harrison was an accomplished "cold caller" and good at generating business (a skill she deployed to the full at HSS by creating a web presence).
Do they have a defence to these apparent breaches?
- In my judgment there is no defence to the breaches of contract I have identified. In particular, clause 23 does not avail. They cannot say that everything they did was in accordance with their contractual obligations because Mr Harrison "authorised" it when they knew (as I am satisfied that they did) that what they were doing and what Mr Harrison was authorising was wrong, so wrong that it had to be kept secret. If a legal (rather than a fact-based) foundation is required then it is to be found in Re Hampshire Land Co  2 Ch 743. Shortly put, employees cannot use time for which they are paid by their employer in furthering their own interests: nor can they in their spare time work for a competitor in any way which threatens to harm their employer's business, or solicit their employer's customers or suppliers.
Are Mr Harrison, John Harrison, Gemma Harrison and HSS liable in tort?
- Two causes of action in tort were advanced. The first was conspiracy to injure by unlawful means. The second was conversion.
- Conspiracy to injure by unlawful means was not argued at any length: indeed Counsel for John Harrison and Gemma Harrison thought it had been abandoned in opening (although formally it was not). I will treat the matter very shortly because I do not think it adds significantly to the picture. I find and hold that Mr Harrison, John Harrison, Gemma Harrison and HSS were together parties to a conspiracy to injure ForgeMet by the unlawful means of committing or dishonestly assisting in breaches of fiduciary duty or committing breaches of contract. The unlawfulness of the acts of the participants I have explained above. The key question is that of intention.
- Counsel for John Harrison, Gemma Harrison and HSS submitted that the human agents all believed they were doing their best for ForgeMet because of the chronic capacity problem. I take the view that they were doing their best for themselves: and in so doing committed breaches of contract and dishonestly assisted Mr Harrison to commit breaches of fiduciary duty.
- This is a case in which the Harrisons sought to advance the business of HSS by pursuing several courses of conduct which they knew would in the very nature of things necessarily be injurious to ForgeMet (so that the injury to ForgeMet was the obverse of the advantage to HSS). These courses of conduct included charging ForgeMet for sub-contracting work the bulk of which ForgeMet could have done, acquiring steel from ForgeMet at "scrap" value for processing and sale back as "cut pieces", splitting the profit on sales with ForgeMet, taking work from ForgeMet customers directly which ForgeMet could probably have serviced itself, selling steel to ForgeMet at a "mark-up" which ForgeMet could have sourced directly and acquiring steel from ForgeMet at no cost. In my judgment this suffices to make good the cause of action.
- The "conversion" claim was argued at considerable length. The elements of the tort were not in issue. The question was whether in fact there had been any misappropriation of the property of ForgeMet. I find that there was. That misappropriation was also a misapplication of ForgeMet's property in breach of fiduciary duty.
- It has been necessary for me to examine a quantity of primary accounting material scattered throughout the trial bundles, together with some non-expert workings founded upon it (which cross-examination showed were in some respects in error). I will not recite this evidence but will express my conclusions upon the question whether conversion has been established.
- First, the hauliers' invoices are largely reliable. Whilst the tonnage is estimated (not weighed) any tendency to over-estimate for charging purposes is counterbalanced by a practical necessity not to over-estimate for loading purposes (and leave haulage trucks under-utilised). There is a measure of cross-checking available by reference to matched purchase orders and the cross-checking shows the invoices to be broadly reliable. Where the haulage invoice shows that a greater tonnage was transported than is referred to on the related purchase order it is more likely that the haulage invoice (where the payment is to a third party) is not over-stated and is accurate than that the purchase order (which documents dealings between Harrison family entities) is accurate, and so probably shows that undocumented steel was transported in addition to that formally documented.
- Second, I cannot attribute the absence of delivery notes at trial to some blameworthy conduct by ForgeMet to some lax approach to proving its case. The evidence as to who received and who kept the delivery notes and where they were filed was not clear: though in some cases it was clear (from the evidence of Mr Brookfield) that there was no paperwork created upon the despatch of steel by ForgeMet to HSS using ForgeMet's own transport, and from the evidence of Mr Harrison and John Harrison that no permanent record was kept of steel returned by HSS to ForgeMet.
- Third, the absence of delivery notes and the necessity to work in large part from invoices and purchase orders does not mean that there is an absence of any reliable material from which tonnages may be assessed. I am not looking for precision or exactitude but (when finding facts) sufficient reliable evidence to enable me to discern what probably happened and (when considering quantum) sufficient to enable me to make grounded assessments.
- Fourth, the workings of Mr Brent Wilkinson (who was called by ForgeMet) do not constitute an expert report and the expressions of opinion in them are not evidence. But the workings provide a convenient collation of material derived from other sources and were capable of being (and were) tested by reference to the primary accounting material. Where they were not so challenged I have accepted relevant statements of fact (but not opinions) as accurate without tracing each appendix entry to the source material.
- Fifth, weighing this material I am satisfied that about 34,000kgs of steel went from ForgeMet to HSS between December 2010 and May 2011.
- It is common ground that of this, 21,704 kgs of steel is accounted for by steel that was sold to HSS by ForgeMet for processing. I shall assume that all of this was "processed" or otherwise properly dealt with. To this must be added "free issue" steel sent for cutting services to be supplied. Mr Rudkin assessed it at 1880 kgs by reference to the "cut pieces" eventually sold to customers. Mr Harrison assessed it at 2760 kgs taking account of "swarf" and a purported computation of returned "free issue" steel. Since no records were kept of returned "free issue" steel and since it is known that HSS sold some "scrap" I adjust principally for "swarf" and estimate 2025kgs.
- This leaves a difference of (say) 10,270 kgs which must represent steel that was apparently misappropriated unless returned.
- Sixth, of this we know that some came back as "cut pieces" and some of the "free issue" steel will have been lost in the cutting process. I have assumed the "sold" steel was properly processed. I have estimated the returned and "lost" steel at 2025kgs (so cancelling out the previous addition). This brings the apparent discrepancy down to 8245 kgs.
- Seventh, that there was a net transfer of steel from ForgeMet to HSS is supported by the extent of the write-offs in ForgeMet's stock records at the time when Mr Rudkin took control. Large write-offs were made to reflect the disparity between what was physically present and what appeared to be recorded as being in stock (though in respect of some stock items there was more present than was recorded). There appeared to be significant "stock loss". Taking an average cost price of steel at £2.50 per kilo (which is an average arrived at by Mr Wilkinson after looking at 32 sales signed off by either Mr Harrison or John Harrison as agents for ForgeMet on sales to HSS) 8245kgs would be worth £20,612. The sums written off were substantially higher.
- Eighth, that there was a net transfer of steel from ForgeMet to HSS is also supported by the stock movement figure in HSS's accounts which seem to show that between November 2010 and March 2011 there was a £13,000 increase in recorded stock at no cost (as John Harrison acknowledged).
- Ninth, this picture painted by the accounts is confirmed by the position on the ground. Mr Brookfield (when making a "hush-hush" delivery to HSS from ForgeMet) noted a significant level of stock at HSS. A nascent company with very limited trade and existing on borrowed money is unlikely to carry significant stock, unless it can acquire it in some advantageous way.
- On this evidence I am satisfied that a significant quantity of ForgeMet's steel was converted by HSS through the human agency of Mr Harrison, John Harrison and Gemma Harrison: and that the same facts establish a misappropriation in breach of fiduciary duty by Mr Harrison dishonestly assisted in by the younger Harrisons.
- I should, whilst dealing with this accounting material record that £2000 of transport costs were incurred by ForgeMet on dealing with steel sent to or collected from HSS.
What loss has been suffered by reason of any breach of contract or the commission of any tort?
- The real question here is: what damage has ForgeMet really suffered from the breaches of contract or tortious breaches? In terms of damages at law one must focus on the loss to ForgeMet (not the gain to HSS). Counsel for ForgeMet in his final reply did suggest that damages might be awarded on the Wrotham Park  1WLR 798 basis, relying on One Step Support v Morris-Gardner  EWHC 2213 (QB): but the case had not been opened on that basis and it would not be fair to the Defendants to approach damages in that way (notwithstanding the existence of a claim for equitable compensation).
- Counsel for John Harrison and Gemma Harrison submitted (and was supported in this by Counsel for Mr Harrison) that this was a case about an account or nothing, and that the damages claims were "hopeless", partly because of the quality of the evidence (which he described as "rubbish") and partly because the impugned transactions were in fact beneficial.
- As to the quality of the evidence I shall be guided by the principles referred to in paragraphs , , and  of Capita Alternative Fund Services v Drivers Jonas  EWCA Civ 1417. The assessment of damages is essentially a jury question. It is not generally a mechanistic arithmetical exercise. The fact that damages cannot be assessed with certainty does not relieve the wrongdoer of paying damages. The Court's task is to make whatever findings it can on the evidence before it, recognising that the evidence is unlikely ever to be perfect. But a claimant who obviously fails to obtain and present available, good quality, precise evidence runs a risk that the Court may be unpersuaded by such evidence as is produced, because the Court will not embark upon guesswork to make good a failure to adduce reliable evidence.
- As to the suggestion that the transactions were "profitable" to ForgeMet and that that is an end of the matter, the question is not whether the transactions were "profitable" (in the sense, for example, that ForgeMet made 1 penny per kilogram "profit" over cost price on steel sold); but whether if John Harrison and Gemma Harrison had abided by their contractual obligations ForgeMet would probably have made a greater "profit" by cutting its own steel and selling the "cut pieces" to its customers than it in fact made either by selling steel to HSS and buying back "cut pieces" for on-sale (or by supplying "free issue" steel for cutting and return and paying for the cutting service). As Mr Harrison acknowledged, although the transactions were profitable the profit was reduced; and it is the Defendants' own evidence that the "margin" on the ultimate sale to the customer was shared, and the complaint of HSS that ForgeMet took the larger share.
- Counsel for John Harrison and Gemma Harrison submitted that any "loss of profit" claim must be based on opinion evidence and that since Mr Wilkinson's report workings did not constitute an expert report the claim was not properly evidenced and must be dismissed or assessed in nominal amounts. I do not agree with the premise. An exchange of expert reports would have been of assistance: it would have saved me a great deal of excavation and analysis. But it is possible (if more laborious) to work from primary accounting documents and witness evidence.
- In closing Counsel for ForgeMet submitted that the loss consisted of
a) Payments by ForgeMet to HSS for work that was not required ("dealing loss"), which he put at £48,450;
b) Payments to HSS made by ForgeMet customers whose needs could have been satisfied by ForgeMet ("direct sales loss"), which he put at £33,000:
c) Losses caused by the use by HSS of ForgeMet steel (which could not be identified with precision but was informed by the haulage records) ("conversion loss").
- The figure for the "dealing loss" is derived from ForgeMet's "Supplier Activity" journal entries on its Sage system created from primary documents. Assuming the accuracy of the record, it represents what ForgeMet paid HSS for "cut pieces", cutting services and stock pieces supplied. This, of course, ignores the fact that ForgeMet would in any event have had to pay the metal element of all supplies to its customers at the carrying value of its stock (if it had done all the work itself). It also ignores the fact that on ForgeMet's case at least some of this work would have been done by its saw men at overtime rates. It also takes no account of the fact that in my view not all of this output could have been produced (either as "cut pieces" or by the application of cutting services) by ForgeMet alone, because the actual work was labour intensive and the production depended to a degree upon Mr Harrison and John Harrison themselves doing overtime, and they were not in my view contractually obliged to do whatever the demand required, but only what was reasonable. I have held that ForgeMet could have done "the bulk" or "most" of the work.
- Counsel for John Harrison and Gemma Harrison submitted that this could not form the basis of a loss calculation and that the only basis for a damages claim was "loss of profit" which (as I have already noted) he said depended on expert evidence and upon proof in relation to each individual sale that if the younger Harrisons had performed their contracts then ForgeMet would probably have carried out the transaction itself.
- I not do accept this submission. I do not see why an employer cannot say:
"I know what I in fact sold to my customers. By reason of your breaches of obligation (or tortious acts) I have been caused to expend costs in respect of those sales that I could and should have avoided if you had done as you ought. If you had behaved properly I would have done the work in-house. You misbehaved and I had to pay a third party to do it".
I hold that "excess costs" is a proper basis for the calculation of loss.
- I have some difficulty in accepting £48,450 as the starting point. About £7200 of this was spent in May 2011 (after the Harrisons had ceased to be employees of ForgeMet. So (in the absence of evidence about payment terms) I would reduce the starting figure to £41,250. But I am unpersuaded that even this is the true loss. The question is whether on the evidence I can reduce that figure (by assessment, not mechanical arithmetic computation). In my judgment halving the level of "excess costs" gives fair (possibly generous) weight to the points the Defendants can make about metal costs, inability to cover all of the work undertaken by HSS (through shortage of manpower, congestion on the plate saw), the amount of cutting required for the work HSS undertook and costs of overtime that would have to have been borne by ForgeMet, given the fact that ForgeMet itself had in fact coped with the aggregate volume produced by ForgeMet and HSS together. (In making that assessment I have taken into account the fact that the "direct sales" claim is also being advanced). The excess costs were £20,500.
- The figure for "direct sales loss" is derived from the records of HSS itself. It is a rounded figure for the amount received by HSS on direct supplies by it to customers whom ForgeMet usually supplied. Having cross-checked the primary records I think it should be £32,000. Although the Harrisons insisted that HSS was not allowed to "poach" customers until Mr Harrison had left ForgeMet, and although they insisted that no customer knew that HSS had provided any cutting services to ForgeMet, the position that emerged in cross examination was very different. The Harrison's recollection was seriously deficient. I therefore do not think it appropriate to subject that starting figure to further scrutiny. The whole of that figure is recoverable unless ForgeMet itself could not have met the demand. For the reasons given above I am unpersuaded that it could have met the whole of the demand and consider that to satisfy most of it would have had to undertake overtime working, and drawn its own metal from stock at carrying prices. So I propose to halve the claim again. The "direct sales" loss is £16,000.
- The "conversion loss" involves finding the amount of steel that was probably converted and the then computing its value (including transport costs). I find that probably 8245 kgs of steel was converted. Taking the average price of £2.50 per kilo (which is favourable to the Defendants) I reach a rounded figure of £20,500 to which I would add £2000 in respect of transport costs (though those transport costs could have been added under the "excess costs" heading) making a total of £22,500.
- I would assess total damages at £59,000.
- Had I been required to assess general damages for conspiracy to injure by unlawful means I would have reached the same figure by the same process.
Is HSS otherwise liable?
- HSS was the creature of John Harrison and Gemma Harrison. They were its only directors and shareholders. What they knew the relevant constitutional organs of the company knew. HSS is not itself in breach of any contractual duty owed to ForgeMet: sensibly there was no tort case run of conspiracy to induce breaches of contract. But this difference is immaterial. HSS dishonestly assisted Mr Harrison to breach his fiduciary duties. It was party to a conspiracy to injure by unlawful means. It was a joint tortfeasor in relation to conversion. This is the reality of the position. I am not sorry to find that John Harrison and Gemma Harrison (and indeed Mr Harrison himself) may share their respective personal liabilities with HSS.
- For these reasons I find and hold
a) Mr Harrison is liable to pay equitable compensation to ForgeMet in the sum of £90,500;
b) John Harrison and Gemma Harrison and HSS are jointly and severally liable to pay that same sum for dishonestly assisting in that breach of fiduciary duty (in lieu of an account);
c) In the alternative to (a) and (b), Mr Harrison, John Harrison, Gemma Harrison and HSS are jointly and severally liable to pay general damages for conspiracy assessed in the sum of £59,000;
d) In the alternative to (a), (b) and (c)
i) John Harrison and Gemma Harrison are liable in damages for breach of contract assessed in the sum of £38,500;
ii) Mr Harrison, John Harrison, Gemma Harrison and HSS are liable in damages for conversion on the sum of £20,500.
e) ForgeMet must elect between its equitable and its common law remedies.
- I will hand down this judgment in Newcastle on Friday 20 February 2015. I do not expect attendance of legal representatives. The parties will please liaise with my clerk as to the possibility of a hearing in the following week to deal with consequential matters: if that is not convenient I will consider dealing with such matters by way of written submission.
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