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England and Wales Court of Appeal (Civil Division) Decisions
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Item Software (UK) Ltd v Fassihi & Ors  EWCA Civ 1244 (30 September 2004)
Cite as:  ICR 450,  IRLR 928,  2 BCLC 91,  Lloyd's Rep PN 17,  BCC 994,  EWCA Civ 1244
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COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
(Mr Nicholas Strauss QC)
Strand, London, WC2A 2LL
B e f o r e :
LADY JUSTICE ARDEN
MR JUSTICE HOLMAN
| Item Software (UK) Ltd
|- and -
Rams International Ltd,
Smith Bernal Wordwave Limited, 190 Fleet Street
London EC4A 2AG
Tel No: 020 7421 4040, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
Mr Ben Quiney (instructed by Placidi & Co) for the Respondent
Crown Copyright ©
Lady Justice Arden:
i) was the judge correct in law to hold that Mr Fassihi was in breach of his duties as a director and/or an employee of the respondent ("Item") in failing to disclose his own misconduct at the time it occurred (" the disclosure issue")? and
ii) was the judge correct in law in holding that the Apportionment Act 1870 ("the 1870 Act") did not apply to a claim by an employee to be paid down to the date of his dismissal even though the date for payment of that remuneration had not then been reached ("the apportionment issue") ?
Background, the judgment of Mr Nicolas Strauss QC and some of the earlier authorities
"35. … I have to consider (if the non-disclosure was a further breach of duty) what would have happened on the balance of probabilities.
36. In my view it is highly probable that had Mr Fassihi disclosed what he had done, this would indeed have changed Mr Dehghani's attitude to the negotiations with Isograph radically. … I have little doubt that Mr Dehghani would have been severely shocked by Mr Fassihi's conduct and that this would have led him to accept Isograph's proposal instead of indulging in the further brinkmanship which caused Isograph to lose patience and serve notice of termination."
"whether, in addition to Mr Fassihi's breach of duty in seeking to divert Item's main contract to his new company, the failure to disclose that misconduct to Item was a further breach of duty."
"It does not seem to me open to question that the directors of a company occupy a fiduciary position towards the company, with the result that they cannot retain a benefit they have obtained by an agreement with the company unless they have made full disclosure of all material facts known to them."
"52. I hold that in this case Mr Fassihi's misconduct did give rise to a 'superadded' duty of disclosure. I do so principally because, as in Sybron Corp v Rochem Ltd, there was a separate and independent aspect of his duties which required him to disclose the facts. He was involved in the negotiations between Item and Isograph and his contractual obligations of fidelity and care required him to disclose important information known to him which was relevant to those negotiations. If he had learned that a rival distributor had been trying to sabotage the negotiations with Isograph, it would have been his duty to tell Mr Dehghani; the fact that it was himself cannot relieve him of the duty. That it would have been in Item's interest to know of the misconduct in order to deal with Mr Fassihi would not have justified the imposition of a duty; what justifies it is its relevance to the ongoing negotiations with Isograph. This therefore seems to me to be a case in which a duty of disclosure was owed.
53. Further, this seems to me to be a clear case of fraudulent concealment. Mr Fassihi' s failure to tell Mr Dehghani of what he had done while remaining involved in the negotiations with a third party apparently acting as a sales director, was part and parcel of his dishonest scheme to rob his employers of the business. For these reasons too I think that Bell v Lever Bros Ltd is distinguishable, and that the non-disclosure of his misconduct was a breach of duty.
54. If this is correct, it is not necessary to decide whether Bell v Lever Bros Ltd is distinguishable for the additional reason that Mr Fassihi was a director of Item as well as an employee, which is the issue on which different views were expressed by Glidewell J and Robert Goff LJ. However, in case the matter goes further, in my opinion Mr Fassihi did owe a duty of disclosure by virtue of his position as a director, for the following reasons.
(a) It is necessary to distinguish between the two propositions established by Bell v Lever Bros Ltd set out at (1) and (2) above. They relate to two quite different duties.(b) There is no reason why proposition (2), that an employee owes no duty to disclose his own misconduct as a material fact which affects or may affect a contract he is negotiating with his employer to vary or terminate his employment, should not apply equally to a director. The rationale, that the contract is not one of the utmost good faith, is the same, and the additional considerations to which I have referred apply equally.(c) However, the position with regard to proposition (1) is quite different. The director owes fiduciary duties to the company and for the reasons given by Glidewell J in Horcal Ltd v Gatland  BCLC 60 it is difficult to see how a director who was making a profit by appropriating the company's contract for his own benefit would not be under a duty to disclose what he had done, not least as part of his duty to account for the profit. To hold otherwise seems to me, as it did to Glidewell J, inconsistent with the decision of the House of Lords in Regal (Hastings) Ltd v Gulliver  1 All ER 378,  2 AC 134n. Nor in my view does a duty on a company director to disclose his own dishonesty impose an intolerable or unattainable standard of conduct.(d) The objection raised by Robert Goff LJ, that a director might have to make a 'confession' before entering into a contract with his employer, supports the view that proposition (2) applies equally to a director, but is not relevant in relation to proposition (1). No question of a contract with the employer is involved. In Horcal Ltd v Gatland the misconduct and the negotiation of the termination of the contract of employment appear to have been more or less simultaneous, but it is still necessary to consider the two quite different kinds of duty separately."
The disclosure issue
The apportionment issue
The disclosure issue
"(1) … any provision, whether contained in a company's articles or in any contract with the company or otherwise, for exempting any officer of the company or any person (whether an officer or not) employed by the company as auditor from, or indemnifying him against, any liability which by virtue of any rule of law would otherwise attach to him in respect of any negligence, default, breach of duty or breach of trust of which he may be guilty in relation to the company."
"(1) It is the duty of a director of a company who is in any way, whether directly or indirectly, interested in a contract or proposed contract with the company to declare the nature of his interest at a meeting of the directors of the company."
Mr Fassihi's duty as a director
"The most general formulation of corporate law's attempted solution to the problem of managerial accountability is the fiduciary duty of loyalty: the corporation's directors … owe a duty of undivided loyalty to their corporations, and they may not so use corporate assets, or deal with the corporation, as to benefit themselves at the expense of the corporation and its shareholders. The overwhelming majority of particular rules, doctrines, and cases in corporate law are simply an explication of this duty or of the procedural rules and institutional arrangements involved in implementing it. The history of corporate law is largely the history of the development of operational content for the duty of loyalty. Even many cases that appear to be about dull formalities or rules of the road in fact involve disputes arising out of alleged managerial disloyalty … Most importantly, this general fiduciary duty of loyalty is a residual concept that can include factual situations that no one has foreseen and categorized. The general duty permits, and in fact has led to, a continuous evolution in corporate law." (Corporate Law (1986) pages 34 and 141, emphasis in the original).
Bell v Lever and subsequent cases
"The servant owes a duty not to steal, but, having stolen, is there superadded a duty to confess that he has stolen? I am satisfied that to imply such a duty would be a departure from the well established usage of mankind and would be to create obligations entirely outside the normal contemplation of the parties concerned. If a man agrees to raise his butler's wages, must the butler disclose that two years ago he received a secret commission from the wine merchant; and if the master discovers it, can he, without dismissal or after the servant has left, avoid the agreement for the increase in salary and recover back the extra wages paid? If he gives the cook a month's wages in lieu of notice can he, on discovering that the cook has been pilfering the tea and sugar, claim the return of the month's wages? I think not. He takes the risk; if he wishes to protect himself he can question his servant, and will then be protected by the truth or otherwise of the answers.
I agree with the view expressed by Avory J in Healey v Société Anonyme Française Rubastic on this point. It will be noticed that Bell was not a director of Levers, and, with respect, I cannot accept the view of Greer LJ that if he was in fiduciary relationship to the Niger Company he was in a similar fiduciary relationship to the shareholders, or to the particular shareholders (Levers) who held 99 per cent. of the shares. Nor do I think that it is alleged or proved that in making the agreement of March 19, 1929, Levers were acting as agents for the Niger Company. In the matter of the release of the service contract and the payment of £30,000. they were acting quite plainly for themselves as principals." (page 228)
"The learned judges of the Court of Appeal appear to regard the duty to disclose as arising at the time of negotiating the contract, but I am unable to see that any such duty could arise out of the circumstances of these agreements; in my opinion, the first question must be whether the appellants incurred a duty to disclose these transactions at the time that they were completed. The failure to account for the profits to [the subsidiary of Lever Brothers], on which some of the learned judges lay stress, was an integral part of the breach of duty to that company. The appellants had just as much – or just as little – right to continue drawing their salaries without disclosure as they had to negotiate two years later for the commutation of these same salaries. In truth, the negotiations [for the termination agreement] were at arm's length, and not on the footing of the relationship of master and servant, but for the termination of that relationship, and, if there was not an already existing breach of an obligation to disclose, I am unable to see how the circumstances or [these agreements] could be held to create such an obligation.
In the absence of fraud, which the jury has negatived, I am of the opinion that neither a servant nor a director of a company is legally bound forthwith to disclose any breach of the obligations arising out of the relationship, so as to give the master or the company the opportunity of dismissal; on subsequent discovery, the master or company will not be entitled to hold the dismissal as operating from the date of the breach, but will be liable for wages or salary earned by the servant during the intervening period. In my opinion Healey v Société Anonyme Française Rubastic, which was the case of the managing director of a company, was rightly decided.…
Accordingly I am of opinion that the appellants had no legal duty to disclose their cocoa transactions either at the time of their commission or in negotiation for the agreements of March 1929." (pages 231 to 232)
Policy reasons for holding that a director's duty of loyalty requires him to disclose his misconduct
The apportionment issue
"2. From and after the passing of this Act all rents, annuities, dividends, and other periodical payments in the nature of income (whether reserved or made payable under an instrument in writing or otherwise) shall, like interest on money lent, be considered as accruing from day to day, and shall be apportionable in respect of time accordingly.
3. The apportioned part of any such rent, annuity, dividend, or other payment shall be payable or recoverable in the case of a continuing rent, annuity, or other such payment when the entire portion of which such apportioned part shall form part shall become due and payable, and not before, and in the case of a rent, annuity, or other such payment determined by re-entry, death, or otherwise when the next entire portion of the same would have been payable if the same had not so determined, and not before.
7. The provisions of this Act shall not extend to any case in which it is or shall be expressly stipulated that no apportionment shall take place."
"An employee, for instance, who is rightly dismissed from his employment can recover salary which has become due and payable at the date of his dismissal but cannot recover sums becoming due and payable at some later date and on the condition that he has performed his contractual duties down to that date: see Boston Deep Sea Fishing and Ice Company v Ansell (1888) 39 ChD 339, 364 per Bowen LJ."
"Mr Goudie submitted that the real question was whether a teacher was entitled to be paid for the period of 35 minutes that he or she had not worked. Pay for that period, he said, had not been earned. In my judgment, this approach is fallacious. It involves regarding the teachers' salaries as accruing minute by minute. There is no legal or factual justification for that view of the salaries. Under the contracts, the salaries are based on a yearly scale but are paid by monthly payments. Each month a contractual right to a salary payment vests in the teacher. By reason of section 2 of the Apportionment Act 1870, the salaries are deemed to accrue day by day. If a teacher's contract were, in the middle of a month, to come to an end, by death, dismissal or some other event, section 2 would entitle the teacher, or his estate, to an apportioned part of the month's salary payment,. So the salaries may be regarded as accruing day by day. But they do not accrue minute by minute ..." (pages 254 to 255)
Mr Justice Holman :
The disclosure issue
The apportionment issue
"…All rents, annuities, dividends, and other periodical payments in the nature of income…shall, like interest on money lent, be considered as accruing from day to day, and shall be apportionable in respect of time accordingly."
"The apportioned part of any such rent, annuity, dividend, or other payment shall be payable or recoverable in the case of a continuing rent, annuity or other such payment when the entire portion of which such apportioned part shall form part shall become due and payable, and not before, and in the case of a rent, annuity, or other such payment determined by re-entry, death or otherwise when the next entire portion of the same would have been payable if the same had not so determined, and not before."
"In the construction of this Act –
The word "annuities" includes salaries and pensions."
"But where the employee declines to work at all for a particular period… I see no ground upon which the employee who declines to perform that condition upon which payment depends can successfully sue for the remuneration which is dependent upon its performance. An employee, for instance, who is rightly dismissed from his employment can recover salary which has become due and payable at the date of his dismissal but cannot recover sums becoming due and payable at some later date and on the condition that he has performed his contractual duties down to that date: see Boston Deep Sea Fishing…. per Bowen LJ"
"If an employee, entitled to a weekly salary for a working week of a defined number of hours refuses to work for the whole or part of a week, is the employer entitled, without terminating the contract of employment and without relying on any right to damage for breach of contract, to withhold the whole or a proportion of part of the week's salary?"
"… it seems to me that there is no decision binding on the Court of Appeal as to whether directors' fees are salary within the Apportionment Act in the case where the agreement… is simply for payment of so much per year. I do not express any opinion one way or another. It seems to me a very arguable point, and there does not seem to me at present anything to prevent that question being considered in the Court of Appeal when it arises."
"…the attitude in the minds of the tribunals was to regard the Apportionment Act as a wrongful encroachment upon common law proprieties. I take exactly the opposite view. The Act remedied a grave injustice; it is a remedial Act, and the inclination of every tribunal should be to extend rather than to restrict its operation."
"…I should hesitate to agree with the suggestion that he can claim in such circumstances. It is quite true that the salary is to be considered as accruing from day to day, and it is quite true that a dismissed servant is entitled to salary that has already accrued at all events up to the date of the act of dishonesty, but the Act does not say that in such a case, or for all purposes, the salary shall be deemed to have accrued from day to day; it only says that it shall be considered as accruing from day to day. That provision was merely inserted to facilitate or to extend the apportionment which the legislature was saying should be made. The sum cannot logically be apportioned unless it is treated as accruing from day to day; it is only for that purpose that it is deemed to accrue from day to day. If something has happened during the service which forfeits the right to the salary it may well be that the servant cannot take advantage of the Act…"
"I do not fail to see the wide stretch of the results which follow from the decision we are now giving, and one of the questions that must arise in the future is whether or not the Apportionment Act will destroy the operation of the rule under which a servant who is dismissed for misconduct loses the whole of the money accruing to him, although he is entitled to get the money that has actually accrued… I express no opinion on this very serious question, which does not arise for direct decision. It may well be said that no servant dismissed for misconduct can rely on that misconduct as a basis for invoking a remedial Act… On the other hand I am not altogether satisfied as to the justice of denying the benefit of the Apportionment Act to a man who has been guilty of misconduct. Suppose a salary is payable half yearly to a man, and suppose he has fulfilled his duties with absolute propriety up to the last week; that he then commits an act which justifies his master in dismissing him. Upon the law as it stands the man gets nothing for his five and a half months' work. Is it right that he should be deprived of remuneration for five and a half months' work because during the last fortnight he has done something for which he has been dismissed? I express no opinion upon that point. Ere long it must arise for decision."
"Each month a contractual right to a salary payment vests in the teacher. By reason of section 2 of the Apportionment Act 1870, the salaries are deemed to accrue day by day. If a teacher's contract were, in the middle of a month, to come to an end, by death, dismissal or some other event, section 2 would entitle the teacher, or his estate, to an apportioned part of the month's salary payment."
"Now, if this means anything, it means that, subject to any agreement to the contrary, a person who earns a salary acquires a claim to it from day to day and the person who has to pay it acquires an obligation to pay it from day to day as earned. There are existing rights and obligations to be discharged in the future so that if a person on salary dies or is prevented from continuing to earn during a part of a payment period, he or his estate becomes entitled to the portion of the salary that he has earned which will, however, be payable only at the end of the pay period. This reasoning would surely be applied in favour of the salary earner and it should also be applied in favour of his creditor…."
1) There is no English authority which decides whether or not section 2 of the Apportionment Act 1870 applies to payment of salary when the employment has ceased in the middle of a pay period. Boston Deep Sea Fishing and the cases mentioned in paragraphs 96 and 97 above are not authorities on the Act at all.
2) Such dicta or observations as there are, are all to the effect that the Act does apply. These include the observations of both judges in the Divisional court in Moriarty, the reference by Simonds J in Re William Porter and, much more weightily, the dictum of Scott J in Sim v Rotherham MBC.
3) There is a body of views of very eminent academic writers to the effect that the Act applies: Glanville Williams, Treitel, and Goff and Jones. The contrary view of Matthews is, in my view, less convincing.
4) Treacy v Corcoran is good, though foreign, authority that the Act applies to salaries; and the words of the Canadian county court judge in Lee v McDonald, quoted in paragraph 110 above, are robust, clear and convincing.
5) I agree with the view of McCardie J in Moriarty that the Act should be treated as a remedial Act and there is no justification for striving to restrict its operation.
6) The common law rule is obviously unjust, and ordinarily a person should receive an apportioned part of the salary for a period actually worked. If the parties wish and intend otherwise they can exclude the Act by an express stipulation under section 7.
7) For the reasons already given in paragraph 90 above, I consider that the language of the Act does indeed extend to apportionment of salaries when the employment ceased during a pay period.
Lord Justice Mummery: