If you found BAILII useful today, could you please make a contribution?

Your donation will help us maintain and extend our databases of legal information. No contribution is too small. If every visitor this month donates, it will have a significant impact on BAILII's ability to continue providing free access to the law.

Thank you very much for your support!


BAILII [Home] [Databases] [World Law] [Multidatabase Search] [Help] [Feedback]

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 [2004] EWCA Civ 1244 (30 September 2004)
URL: http://www.bailii.org/ew/cases/EWCA/Civ/2004/1244.html
Cite as: [2005] ICR 450, [2004] IRLR 928, [2005] 2 BCLC 91, [2004] EWCA Civ 1244, [2004] BCC 994, [2007] Lloyd's Rep PN 17

[New search] [View without highlighting] [Printable RTF version] [Buy ICLR report: [2005] ICR 450] [Help]


Neutral Citation Number: [2004] EWCA Civ 1244
Case No: A3/2003/0311

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
(Mr Nicholas Strauss QC)

Royal Courts of Justice
Strand, London, WC2A 2LL
30 September 2004

B e f o r e :

LORD JUSTICE MUMMERY
LADY JUSTICE ARDEN
and
MR JUSTICE HOLMAN

____________________

Between:
Item Software (UK) Ltd
Appellants
- and -

Kouroush Fassihi,
Mandy Liddiard,
Rams International Ltd,
Isograph Ltd
Respondent

____________________

(Transcript of the Handed Down Judgment of
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 Nigel Dougherty ( instructed by the Bar Pro Bono Unit) for the Appellants
Mr Ben Quiney (instructed by Placidi & Co) for the Respondent

____________________

HTML VERSION OF JUDGMENT
____________________

Crown Copyright ©

    Lady Justice Arden:

  1. This is an appeal with the permission of the judge from the judgment (reported at [2003] 2 BCLC 1) of Mr Nicholas Strauss QC (sitting as a Deputy High Court Judge) on two issues:-
  2. 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") ?

  3. Both these questions of law are important, and it is perhaps surprising that the law is unclear.
  4. Background, the judgment of Mr Nicolas Strauss QC and some of the earlier authorities

  5. The trial before the judge was a trial on liability only. It is not necessary to set out the factual background in great detail. At the relevant time a major part of Item's business was the distribution of software products for a company called Isograph Ltd ("Isograph"). The directors of Item included a Mr Dehghani and the appellant, Mr Fassihi. Mr Dehghani was managing director and Mr Fassihi was the sales and marketing director. He was employed under a contract which provided for him to receive a salary of £28,000 per annum, payable monthly in arrears. It was paid by the last working day of each month by an automatic transfer to his bank account. He was employed from 1 May 1995 for an indefinite period, terminable on three months' notice. The contract expressly provided that Mr Fassihi should not use confidential information belonging to Item for his own purposes.
  6. In November 1998 Item decided to negotiate more favourable terms with Isograph. At the same time, Mr Fassihi secretly approached Isograph with his own proposals which involved establishing his own company, RAMS International Ltd (which I will call "RAMS"), to take over the contract. Mr Fassihi encouraged Mr Dehghani to press Isograph for improved terms. In the end, although agreement was nearly reached, the negotiations failed because Item insisted on terms that Isograph was not prepared to accept. Isograph terminated the contract by giving twelve months' notice expiring on 11 May 2000.
  7. Item then discovered Mr Fassihi's misconduct and Mr Fassihi was summarily dismissed on 26 June 2000. Item then brought proceedings against Mr Fassihi alleging (so far as material) that he was in breach of duty as a director and employee in seeking to divert the contract with Isograph to RAMS and for having pressed Mr Dehghani to take a hard line in the negotiations with Isograph so as to improve the prospects of obtaining the business for himself. I will call the issues arising from these allegations the "diversion" and "sabotage" issues respectively. These claims failed before the judge, but Item succeeded on a further allegation, which gives rise to the disclosure issue, that Mr Fassihi was in breach of duty in failing to disclose to Item his own wrongdoing. For his part, Mr Fassihi counterclaimed for wrongful dismissal and for arrears of salary for the period of 26 days prior to his dismissal on 26 June 2000.
  8. Other than finding that Mr Fassihi was the sales and marketing director of Item, there are no findings as to his functions as an employee. It would appear from the facts that he may have had day to day responsibility for the trading relationship with Isograph but not responsibility for strategic business decisions regarding that relationship.
  9. The reason why Item did not succeed on the diversion or sabotage issues was that the judge found that, in the negotiations with Isograph, Item insisted on terms that Isograph was not prepared to accept and that Item's insistence in this regard was the cause of the failure of the negotiations with Isograph. Moreover, there was nothing to suggest that Mr Dehghani would have negotiated any more cautiously if Mr Fassihi had not pressed him to seek better terms. There is no cross-appeal against the judge's findings on these issues, and accordingly I express no view thereon or on the judge's conclusions on these issues. Accordingly, the focus turns to the disclosure issue, which arises from Item's allegation that Mr Fassihi had failed to disclose his own misconduct in seeking to divert the contract to his own new company. There was no doubt about the egregious nature of Mr Fassihi's conduct in this regard. On 24 April 1999 Mr Fassihi had sent a fax to Isograph referring to his proposal to set up a new company and urging Isograph to accept a conditional notice to terminate the existing distribution arrangements which Item had given. In respect of non-disclosure of this breach of duty, the judge was satisfied that loss resulted. He held:-
  10. "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."
  11. There is no appeal from the judge's finding of fact on this point and accordingly I express no view thereon.
  12. The judge then turned to consider what he termed the "crucial"issue of law, namely:
  13. "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."
  14. The judge's approach was to consider first whether Mr Fassihi was in breach of his duty as an employee of Item by failing to disclose his wrongdoing to it. For this purpose he started with the well-known case of Bell v Lever Brothers Ltd [1932] AC 161 (referred to below as Bell v Lever). This is a decision of the House of Lords and I have shall have to consider it in detail below
  15. The judge then considered a number of more recent authorities. In particular, he referred to Horcal Ltd v Gatland [1983] BCLC 60, in which Glidewell J held, obiter, that the failure by a director of a company, as opposed to an employee, to disclose an earlier breach of fiduciary duty would render an agreement terminating his contract of service (on terms advantageous to the director) void on the grounds of mistake. Glidewell J held that Bell v Lever did not apply where there was a fiduciary relationship between the parties. He inferred that Lord Atkin was in agreement with a different passage from that to which he (Lord Atkin) refers in the judgment of Greer LJ in the Court of Appeal in Bell v Lever [1931] 1 KB 557, 600 where Greer LJ said:-
  16. "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."
  17. Lawrence LJ expressed a similar view at page 592. Glidewell J also based his conclusion on the well-known principle of law that a director is liable to account for any secret profit which he makes out of his relationship with his company (see, for example, Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134n). The decision of Glidewell J was affirmed on other grounds by this court at [1984] BCLC 549.
  18. The judge also considered the decision of this court in Sybron Corporation v Rochem Ltd [1984] Ch.112, where the issue which arose was whether an employee was bound to disclose the misconduct of his fellow employees at a time when a decision was being taken as to the payment to be made to him under the terms of a pension scheme. The scheme provided for different payments according to whether or not the member of the scheme was dismissed for fraud or serious misconduct. This court unanimously held that the employee in the circumstances of that case was under a duty to disclose the misconduct of his fellow employees, and that this was so even though it inevitably involved disclosure of his own misconduct. This court further held that Bell v Lever was distinguishable because the only question raised in that case was whether an employee was bound to disclose his own misdeeds.
  19. The judge in this case considered some further authorities, but I do not think that I need to cite them as they take the issue with which this appeal is concerned no further.
  20. On the basis of the authorities, the judge held that Bell v Lever was authority for two separate propositions (judgment para. 51). His first proposition was that an employee's duty to act in good faith and in the interests of his employer would not require him to disclose his own misconduct when it was committed. His second proposition was that an employee still owes no duty to disclose his misconduct if he later enters into a contract with the employer to vary or terminate his contract of employment, even though the misconduct would be a material matter to be taken into account by the employer. He noted that an employee could be required to disclose his own misconduct "where particular aspects of the employee's functions in the business require disclosure of the relevant facts", for example where he was required to disclose that of his fellow employees. He further held that the general propositions in Bell v Lever might be inapplicable if the concealment of the misconduct was fraudulent. He held that it was not clear on the authorities whether the position of a director was the same as that of a employee.
  21. Having first ascertained that the questions before him were largely open, the judge went on to make the following holdings against Mr Fassihi:-
  22. "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 [51](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 [1983] 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 [1942] 1 All ER 378, [1967] 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."
  23. He accordingly held that Mr Fassihi was in breach of his duties both as an employee and as a director for failing to disclose his own misconduct and that accordingly Item was entitled to recover from him damages for breach of that duty suffered as a result of the termination of the Isograph agreement, otherwise than in relation to sales in the United States. He held that the assessment of damages should be on the basis that royalties would have been increased by 75% in respect of any sales above the level of £333,000 per annum. The judge ordered an inquiry as to damages, which has been stayed pending this appeal. It is apparent that the liability of Mr Fassihi may be a substantial sum.
  24. As respects the 1870 Act, Mr Fassihi's claim was for the period 1 to 26 June 2000. I have referred to the form of his service agreement already. The judge held that he was not entitled to recover a proportionate part of the salary, citing Boston Deep Sea Fishing & Ice Co v Ansell (1888) 39 ChD 339 and Goff & Jones, The Law of Restitution, 5th edition, 1998, at page 548 and the 6th edition, 2000, at page 540. The judge held that it would be inconsistent with the Boston case to apply section 2 of the 1870 Act. The judge held that the rationale of the Boston case was that the employee was no longer employed when the salary became due and payable. The application of the 1870 Act to the salary of a director had been considered by the Divisional Court in Moriarty v Regent's Garage & Engineering Co Ltd [1921] 1 KB 423. The Divisional Court considered that the 1870 Act applied but their decision was overruled by the Court of Appeal on procedural grounds. The Court of Appeal left open the question of whether the 1870 Act would apply.
  25. The judge considered an argument by Mr (now Professor) Paul Matthews in an article entitled 'Salaries' in the Apportionment Act 1870 in (1982) Legal Studies 302, in which the author argued that the 1870 Act only applied where there was a change in the person entitled to the payment occurring in the course of the period at the end of which payment was due to be made. The judge did not express a view on the argument though he refers to the article as one of the reasons for not holding that the decision in the Boston case was, as he put it, per incuriam.
  26. The judge considered two further questions, namely the question whether, if the 1870 Act in principle applies, it is prevented from applying in this case because Mr Fassihi's dismissal was a justified dismissal and the question whether, having regard to his breaches of duty, Mr Fassihi would be entitled to his salary in any event. The judge decided both these issues in favour of Mr Fassihi, subject to set off of any damages due to Item. There is no cross-appeal on these issues, and accordingly I express no view thereon.
  27. Submissions

    The disclosure issue

  28. Mr Nigel Dougherty, for Mr Fassihi, submits that the question whether there is a duty on a director to disclose his own misconduct is open on the authorities. He submits that it is invidious for such a duty to be imposed and that it should be left to the employer or company to ask the director questions which would lead to the discovery of misconduct. In the alternative, he submits that if there is any duty it is limited to fraudulent misconduct.
  29. Mr Dougherty submits that in Bell v Lever Lord Atkin in fact made no distinction between directors and employees. He further submits that it was not correct to draw the conclusion from Lord Thankerton's speech that he thought the duty would arise in the event of fraud.
  30. Mr Dougherty submits that the Horcal decision does not support the judge's reasoning. This was a case on secret profits, and there is a liability to disclose such profits as a means of avoiding disgorgement.
  31. Mr Dougherty submits that the fact that a director has no duty to disclose his own misconduct is not affected by the rule of law that information held by an agent in the course of his agency is to be imputed to his principal. This rule of law is subject to an exception ("the fraud exception") where the agent is committing a fraud on his principal (Re Hampshire Land Co [1896] 2 Ch 743). In addition, while section 317 of the Companies Act 1985 would require a director to disclose to the board the nature of any interest he may have in a contract which the company proposes to make, a breach of that section would not give the company any claim for damages. Accordingly, even if Item had sought at trial to place reliance on that section (which it did not), it would not have justified the judge's findings against Mr Fassihi.
  32. For the respondent, Mr Ben Quiney submits that there are good policy reasons for imposing a duty to disclose on directors. He submits that it is not invidious that they should be under such a duty. Nor can it be considered a hardship for them to have to disclose wrongful conduct. Moreover, the imposition of the duty to disclose does not run counter to any policy interest protected by the privilege of self-incrimination.
  33. Mr Quiney further submits that fiduciaries owe a general duty to act in what they consider to be the principal's best interests. This will involve a duty to disclose a breach of duty. This would apply whether the breach of duty was fraudulent or not. He also submits that a director owes a fiduciary duty to report relevant information of concern to the company. He bases this submission on Industrial Development Consultants Ltd v Cooley [1972] 1 WLR 443. The test as to what information falls in this category is objective and there is also a subjective element, namely whether the director was aware of the information.
  34. Alternatively to his main submission, Mr Quiney submits that there is a superadded duty to disclose imposed on an employee by virtue of the duty of fidelity. This duty applies to wrongs occurring in the course of employment. Mr Quiney submits that it was not necessary to consider the position with respect to wrongs committed before the employment started. He submits that the duty arises when the misconduct occurs. In the further alternative, Mr Quiney submits that the liability arises where misconduct is fraudulently concealed. On this, he seeks to uphold the judge's judgment on the basis of Bell v Lever.
  35. Mr Quiney submits that the fraud exception referred to above is not inconsistent with his submission as to the existence of a duty to disclose. In this context, the law does not make the unreal assumption that agents will reveal to their principals the fraud which they are comitting on them (see, for example, J.C Houghton & Co. v Northard, Lowe & Wills [1928] AC 1, 14-15). However, the aim of the rules about the attribution of knowledge generally is to protect the interests of third parties dealing with the company. The purpose of the fraud exception is to protect the company's interests. The fraud exception applies in any area where third parties could not expect to have their interests protected.
  36. Mr Quiney submits that section 317 of the Companies Act 1985 supports his submissions as to the duty to disclose.
  37. Neither counsel was able to refer us to any relevant Commonwealth authorities.
  38. The apportionment issue

  39. Mr Dougherty submits that section 2 of the 1870 Act applies to the claim by Mr Fassihi for the proportion of his salary. He relies on Moriarty v Regent's Garage and Engineering Company Limited and a dictum of Scott J in Sim v Rotherham Metropolitan BC [1987] Ch.216 at 255, where Scott J held that the Act applied where an employee's contract was terminated in the course of a period at the end of which payment would be made. Mr Dougherty submits that in the Boston case the 1870 Act was not considered; in any event the Boston case is distinguishable on the basis that the contract in that case was a five year contract. He further submits that Miles v Wakefield [1987] AC 539 was no assistance to the conclusion which the judge formed.
  40. Mr Dougherty relies also on statements in Treitel, Law of Contract (11 ed.) (1999) pages 823 to 825, and Goff & Jones, The Law of Restitution (6 ed) (2002) paragraphs 20-049 to support the application of the 1870 Act in these circumstances. He submits that this court should not accept the argument made by Professor Matthews in his article entitled 'Salaries' in the Apportionment Act 1870 (1982) Legal Studies 302.
  41. Mr Quiney submits that, while there is no authority to the effect that the 1870 Act does not apply in these circumstances, the effect of the Act is limited to allowing a method of calculation and that it does not create a right to a sum. The question whether there is a right to a sum continues to be governed by the common law and that was established in the Boston case. He further relies on the argument of Professor Matthews in his article, referred to above, that the Act applies to enable apportioned payments to be made to successive holders. Mr Quiney submits that the Act applies only to salaries where there is no repudiatory breach of contract, for example, where a person retires by agreement. He relies on Capron v Capron (1874) 29 LT 826, 827, Bennion on Statutory Interpretation (2002) (4th ed.), sections 327 and 331, and Inman v Ackroyd [1901] 1 QB 613, 616.
  42. Conclusions

    The disclosure issue

  43. As I have explained (above, paragraph 10), the judge approached the question of law under the disclosure issue by considering first the position of Mr Fassihi as an employee as a matter of employment law. This was a course which he felt compelled to take because of the leading case of Bell v Lever. However, as I have pointed out, there are few findings as to the duties of Mr Fassihi as an employee and in any event the case has primarily been argued in this court on the basis that Mr Fassihi's fiduciary duties as a director required him to disclose his misconduct. In these circumstances, and on the assumption at this stage that Bell v Lever does not decide the law on this issue in relation to directors (a point to which I will return when I consider the relevant parts of that decision together below), it seems to me that the logical place to start in relation to the disclosure issue is to consider the position of Mr Fassihi as a director since the duties of a director are in general higher than those imposed by law on an employee. This is because a director is not simply a senior manager of company. He is a fiduciary and with his fellow directors he is responsible for the success of the company's business.
  44. Merely to call a person a fiduciary is only the beginning of the analysis. It is necessary to identify the respects in which he is a fiduciary and the duties which follow. These duties are imposed by law. They are not simply default rules, that is rules of law subject to contrary agreement. They are mandatory rules of law which the company and the director cannot contract out of them: see section 310 of the Companies Act 1985, which (with immaterial exceptions) makes void:-
  45. "(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."
  46. It would be convenient at this point to refer to section 317 of the Companies Act 1985. The immediate significance of this section is that, had a board meeting of Item been called to consider a new contract with Isograph, Mr Fassihi would have been obliged to disclose any interest he had in that contract. The fact that Mr Fassihi stood to benefit if the contract was not approved would be such a benefit (see generally, Buckley on the Companies Acts (last updated 2004) at para. [317.12]). In material part, section 317 provides:-
  47. "(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."
  48. Mr Dougherty submits that the better view is that section 317 does not of itself give rise to any civil remedy (see, for example, Buckley on the Companies Acts at para. [317.21]).
  49. Mr Fassihi's duty as a director

  50. What is it that distinguishes the position of a director from that of an employee? It is, of course, the fact, as the judge said, that a director is subject to fiduciary duties and obligations. One of those obligations is, as the judge points out, the liability to account for secret profits. The judge relied on this duty in support of his conclusion that the holding in Bell v Lever that there was no duty to account did not in any event apply to a director: see his judgment at paragraph 54(c) which I have quoted above. Mr Quiney too relies on this line of authority. These authorities go to show that the fact that a director was acting otherwise than as a director in making a secret profit is no answer to a claim by the company to recover the profits. Thus in Bhullar v Bhullar [2003] 2 BCLC 241, this court held that directors of a company were liable for profits resulting from the acquisition of a property neighbouring that of their company even though they had obtained this information not as directors but as passers-by. Likewise, in Industrial Development Consultants Ltd v Cooley [1972] 1 WLR 44, a director was liable to account for the profits which he made from exploiting a commercial opportunity, offered by a customer of the company, of which he became aware before resigning on the grounds of alleged ill-health.
  51. In the Bhullar case and Cooley case, the consequence of the failure to disclose was that the director came under a liability to account. This case is not concerned with a claim to recover any profit which RAMS has made, but with a claim for compensation for loss resulting from breach of the duty to disclose. Both the Bhullar case and the Cooley case speak of the director owing a duty to disclose. Thus in the Bhullar case, Jonathan Parker LJ, with whom Brooke and Schiemann LJJ agreed, held that "the existence of the opportunity was information which it was relevant for the company to know, and it follows that [the directors] were under a duty to communicate it to the company." (at page 256). This followed the holding of Roskill J in the Cooley case, where Roskill J held that "Information which came to [the director] while he was managing director and which was of concern to [the company] and was relevant for [the company] to know, was information which it was his duty to pass on to [the company] because between himself and [the company] a fiduciary relationship existed …" (at page 451).
  52. However, the Bhullar and Cooley cases do not suggest that the duty to disclose there referred to is some new and separate duty imposed on a fiduciary, breach of which would give rise to a potential liability to pay compensation. It may be that in those cases the courts spoke of a duty to disclose simply to explain why in those cases the information obtained in a private capacity gave rise to a liability to account for secret profits. In addition, it is often said that a fiduciary must disclose a conflict of interest and duty because that is a shorthand way of stating the mechanism by which he can avoid any liability to account for secret profits. It would be odd, however, if there was a separate duty to disclose information and it only arose when the court was considering whether a director had come under a liability to account for secret profits. A duty to disclose can arise in other circumstances (see, for example, El Ajou v Dollar Land Holdings plc [1994] 1 All ER 685 at 703f). We have been referred to two decisions of Peter Smith J in which he has held obiter, distinguishing Bell v Lever that a fiduciary owes a positive duty to disclose breaches of fiduciary duty and that no distinction was to be drawn behind the fiduciary duty to account and any other fiduciary duty (see Tesco Stores v Pook [2003] EWHC 823 (Ch) [10]-[20], [2004] IRLR 618; Crown Dilmun v Sutton [2004] 1 BCLC 468 [181]).
  53. For my part, I do not consider that it is correct to infer from the cases to which I have referred that a fiduciary owes a separate and independent duty to disclose his own misconduct to his principal or more generally information of relevance and concern to it. So to hold would lead to a proliferation of duties and arguments about their breadth. I prefer to base my conclusion in this case on the fundamental duty to which a director is subject, that is the duty to act in what he in good faith considers to be the best interests of his company. This duty of loyalty is the "time-honoured" rule: per Goulding J in Mutual Life Insurance Co of New York v Rank Organisation Ltd [1985] BCLC 11, 21. The duty is expressed in these very general terms, but that is one of its strengths: it focuses on principle not on the particular words which judges or the legislature have used in any particular case or context. It is dynamic and capable of application in cases where it has not previously been applied but the principle or rationale of the rule applies. It reflects the flexible quality of the doctrines of equity. As Lord Templeman once put it "Equity is not a computer. Equity operates on conscience …" (Winkworth v Edward Baron Development Co Ltd [1986] 1 WLR 1512, 1516.)
  54. Professor Robert C Clark has described the fundamental nature of the duty of loyalty in these terms:-
  55. "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).
  56. Although Professor Clark was writing about the duty of loyalty in the United States, his observations seem to me to express qualities of the duty of loyalty applying equally to the law of England and Wales.
  57. The only reason that I can see that it could be said that the duty of loyalty does not require a fiduciary to disclose his own misconduct is that it has never been applied to this situation before. As I have explained, that is not a good objection to the application of the fiduciary principle. "Equity refuses to confine within the bounds of classified transactions its precept of a loyalty that is undivided and unselfish" (per Cardozo J in Meinhard v Salmon 164 N.E. 545, 548 (US)). Furthermore, on the facts of this case, there is no basis on which Mr Fassihi could reasonably have come to the conclusion that it was not in the interests of Item to know of his breach of duty. In my judgment, he could not fulfil his duty of loyalty in this case except by telling Item about his setting up of RAMS, and his plan to acquire the Isograph contract for himself.
  58. Other issues

  59. I have referred above to the principle of the law of agency that information received by the agent in the course of his agency is to be imputed to the principal. Under the fraud exception, which applies where the agent is committing a fraud on his principal, the agent is not treated as under any duty to disclose his wrongdoing to his principal. However, I agree with counsel that this principle does not affect the conclusion in this case. This rule of law in agency is about the attribution of knowledge and not about the liability of a fiduciary to his principal.
  60. Counsel have addressed arguments to this court on the policy reasons for imposing a duty to disclose. I consider the policy reasons below, (paragraphs 63 to 68) but first I must consider in detail Bell v Lever.
  61. Bell v Lever and subsequent cases

  62. I have made the assumption above that Bell v Lever does not decide that a director, as opposed to an employee, owes no duty to disclose his own misconduct. I now turn to the question whether that assumption is correctly made. It will be recalled that in paragraph 51 of his judgment the judge concluded that Bell v Lever was authority for two propositions, summarised above. For the reasons explained below, I consider that the two propositions need some qualification, and that the assumption which I have made above is justified.
  63. Bell v Lever is best known as an authority on the law of mistake but there was a subsidiary argument that even if the contract was not void for mistake nonetheless it should be set aside because of the appellants' failure to make disclosure of their wrongdoing to their employers. There were two appellants but it is sufficient for my purpose to take the case of Mr Bell alone. Mr Bell was appointed a director and the chairman of Niger, a subsidiary of Lever Brothers Ltd ("Lever"), pursuant to his contract with Lever. Lever wished to dispense with Mr Bell's services. Lever offered him compensation of £30,000 for termination of his services. An agreement was made and implemented. Lever then discovered that Mr Bell had made secret profits at the expense of Niger for which he could have been summarily dismissed. Lever brought a claim to obtain the repayment of the sum of £30,000 and it claimed rescission of the compensation agreement on the ground of fraud. The jury specifically found that there was no fraud. The jury found that if Lever had known of the dealings giving rise to the secret profits, it would not have agreed to pay compensation to Mr Bell. Before the trial began, Mr Bell admitted his liability to account to Niger for his secret profits, and made a payment into court. Wright J and the Court of Appeal held that Lever was entitled to succeed on the ground that the agreement for compensation was void as having been made under mutual mistake.
  64. In the House of Lords, however, the majority, Lord Blanesburgh, Lord Atkin and Lord Thankerton, allowed the appeal. They considered that the subject-matter of the agreement was a contract of service and that the only mistake was about a quality of that subject-matter rather than its existence. I need not say more about this aspect of the case because it is the further element in Bell v Lever which is material in this case. It was argued that Mr Bell ought to have disclosed to Lever his own wrongdoing. Lord Atkin and Lord Thankerton, with both of whom Lord Blanesburgh agreed, rejected this duty but they expressed slightly different reasons for doing so.
  65. Lord Atkin said:-
  66. "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)
  67. Lord Atkin's reasons for rejecting the superadded duty of disclosure are contained in the passage from his judgment quoted above. He was principally concerned by the possibility of imposing a duty to disclose in a situation where in practice no disclosure is expected. An employer does not expect to be able to recover the wages of an employee who has committed a breach of duty which he has failed to disclose unless (possibly) he has made enquiries of the employee and the employee has given him false information. This was the general position and Lord Atkin's view was not affected by the fact that the jury found that Lever would not have entered into the agreement with Mr Bell to pay him the compensation for loss of office of £30,000 if it had known about his breach of duty. (Interestingly there was no finding by the special jury in that case as to whether Lever expected Mr Bell to inform them of his wrongdoing). A duty to disclose could not have been imposed in the Bell v Lever situation without upsetting the usual situation, in which in Lord Atkin's view there was no expectation of disclosure.
  68. Lord Thankerton said:-
  69. "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)
  70. The present case concerns what Lord Atkin called "the superadded duty to confess". Both Lord Atkin and Lord Thankerton were of the view that an employee was not under such a duty whether at the time he commits the wrongful act or subsequently when the employer makes a payment to him for his services. Arguably, Lord Atkin was primarily concerned with the question whether a duty of disclosure arose at the time when the parties entered the agreement terminating the contract of employment while Lord Thankerton focused on the question whether there was a duty to disclose the misconduct at the time it was committed, but I need not decide that point. There are two material differences in their approach for present purposes. First, Lord Thankerton equates the position of an employee with that of a director, whereas Lord Atkin leaves that question open. It is, however, clear on the facts of Bell v Lever that, for the reasons which Lord Atkin gives, that the question whether a director was in the same position as an employee was not a question which arose for decision in that case. Second, there is a hint in the examples given by Lord Atkin in the passage I have cited that he considered that the existence of a duty of disclosure would depend to some extent on the circumstances. The examples he gives are both of domestic staff, and, in the latter example (that of the cook) and probably also the former example (that of the butler), the breach of duty was not very serious. Likewise, in the paragraph which follows, Lord Atkin stresses that Mr Bell was not a director of Lever. (In addition, it was known that Mr Bell had accepted liability to account to Niger.) The breach of duty did not, therefore, directly affect Lever. If Lord Atkin's view depended upon the circumstances of the non-disclosure, then this qualification affects both the proposition that an employee is not bound to disclose his misdeeds at the time he commits them as well as the question in issue in Bell v Lever whether he was bound to disclose them before entering into a transaction with his employer about his terms of engagement.
  71. In the passage cited above, Lord Atkin also approves Healey v Société Anonyme Française Rubastic [1917] 1 KB 946. In the Healey case, the issue was whether a director was entitled to his arrears of salary for work done notwithstanding that he had been summarily dismissed for misconduct. Again there was no question of a claim for damages for breach of duty. Lord Atkin's holding that there was no duty to disclose must be read in the context in which the holding was made. The situation where a company seeks to make one of its directors liable for compensation for breach of duty caused by his failure to disclose his breach of duty to his company was not the situation before the House of Lords in Bell v Lever.
  72. Accordingly, the next question which arises is: what is the ratio of Bell v Lever on the non-disclosure point? All that the majority needed to decide was that Mr Bell owed no duty to disclose his misdeeds to Lever before entering into the compensation agreement with it, i.e. that, in circumstances such as those in which Mr Bell found himself, Mr Bell owed no duty to disclose his misdeeds to his employee. In my judgment, the majority did not decide that there could never be such a duty on the part of the employee. I do not read Lord Atkin's judgment as going that far.
  73. Likewise, the majority did not decide that a fiduciary would not owe any such duty. Only Lord Thankerton agreed and expressed a view on that point, and his observation was in any event obiter. In addition, Bell v Lever does not in terms cover the case where there is fraudulent concealment, as the jury had expressly negatived fraud. Accordingly, Bell v Lever does not determine the "crucial" (as the judge put it) issue which arises in this case.
  74. In the course of his judgment in the Horcal case, Robert Goff LJ (with whom the other members of the court agreed, though Lawton LJ also delivered a separate judgment) noted, without deciding the point, that the argument that a director is under a duty to disclose any breach of duty on his part before making an agreement for compensation for loss of office "could lead to the extravagant consequence that a director might have to make what counsel… has called " a confession" as a prerequisite of such an agreement." This observation, like those of Lord Atkin in Bell v Lever, expresses the philosophy that the law should not impose a duty of disclosure where that would be contrary to the expectations of the parties. It would be difficult to disagree with the logic and good sense of this approach.
  75. Horcal is an important decision because this court in that case extended Lord Atkin's reasoning in Bell v Lever to company directors. However it did so only in the context of disclosure before an agreement for the payment of compensation or an increase in remuneration was made. Accordingly Robert Goff LJ's observations do not directly cover to the situation with which we are concerned. They were of course strictly obiter but it is not necessary for this purposes of this case to consider whether they should nonetheless be followed.
  76. In the light of Robert Goff LJ's observations in the Horcal case, it would be open to question whether this court should assume, as did Glidewell J at first instance in the Horcal case, that Lord Atkin gave his unqualified agreement to the passage from the judgment of Greer LJ in Bell v Lever, cited above (paragraph 11). Glidewell J took the view that Lord Atkin must have agreed with Greer LJ's proposition that there would be a liability to account for benefits received under an agreement if the fiduciary does not make full disclosure of all material facts, which in this context would include particulars of any wrongdoing, before the agreement is made. In the light of the conclusions which I reach below it is not necessary to decide that point.
  77. Likewise it is unnecessary to consider to what extent an employee has a duty to disclose his own misconduct. Following the Rochem case, one route by which it might be concluded that Mr Fassihi had a duty to disclose his own wrongdoing is that no logical distinction can be drawn between a rule that an employee should disclose his own wrongdoing and a rule that he should disclose the wrongdoing of his fellow employees even if that involves disclosing his own wrongdoing too. That is not an issue which needs to be resolved in this case. I should add that we have not been taken to any of the developing jurisprudence on the duty of trust and confidence which an employer and employee mutually owe (see, for example, Mahmud v BCCI [1998] AC 20). I have already stated that, in my judgment, Bell v Lever is not authority for the proposition that there are no circumstances in which an employee can have a duty to disclose his wrongdoing. It is in that respect that I would hold that the two propositions which the judge extracted from Bell v Lever (above, paragraph 15) need to be qualified.
  78. Likewise, in view of the conclusions reached above, it is also unnecessary to decide whether Bell v Lever applies where there has been fraudulent concealment by the employee. I note, however, the observations expressed on that point by Kerr LJ in the Rochem case.
  79. In the circumstances, in my judgment, Bell v Lever does not expressly or by implication hold that Mr Fassihi was not under a duty of disclosure in the present case by virtue of his position as a fiduciary. Accordingly, the assumption which I made above (paragraph 34) is well-founded.
  80. Policy reasons for holding that a director's duty of loyalty requires him to disclose his misconduct

  81. Both counsel have addressed the court on the policy reasons for holding that Mr Fassihi was in breach of his duty of loyalty in this case. These are relevant questions. If the approach of the law were overly intrusive, legitimate entrepreneurial activity would be discouraged and this would not be a beneficial outcome. But that is not in my judgment the result of holding that a duty of loyalty applies in the present case. This is because, on well-established principles of law, Mr Fassihi's setting up of a new company to which the business of Item would be diverted was not a legitimate enterprenuerial activity. In addition, the effect of my decision in this case (if the majority of the court is of the same opinion) is not to make any substantive extension of the duties of directors, such as would be involved for example if the courts held that a director of one company could not accept a directorship of another company. It is simply a duty which makes the remedy for an existing liability of a director to account for secret profits and for the diversion of corporate opportunities more effective.
  82. In my judgment, the policy arguments support the conclusion of the judge on the disclosure issue. These reasons are quite separate from the moral objections to the appellant's conduct in secretly setting up RAMS and approaching Isograph in his personal capacity. Moral objections would not of course be enough in themselves to justify imposing a duty.
  83. A conclusion that a director owes no obligation to disclose his improper actions would be also inefficient in economic terms. It would mean that the company has to expend resources in investigating his conduct and that the enforcement of a liability to compensate the company for misconduct depends on the happenchance of the company finding out about the impropriety. To this it may be said that the law ought not to hold that the duty of loyalty involves a positive duty to disclose because it is unlikely that the consciously misbehaving director will comply with it: this indeed is the rationale for the fraud exception (in Re Hampshire Land) referred to above.
  84. My answer to that is two wrongs do not make a right: the fact that a director is unlikely to comply with a duty is not a logically sustainable reason for not imposing it if it is otherwise appropriate. As the facts of this case demonstrate, the consequence of non-disclosure may be that the company makes erroneous business decisions because it lacks essential information. A legal rule which condones this, in my judgment, condones inefficient outcomes. Moreover, there is a constant dilemma in company law as to the manner in which the shareholders of a company can monitor those who manage its business on their behalf. The duty upheld above helps to ameliorate these problems (often called agency problems) by encouraging the provision of information on which proper decision-making can take place. In many companies, an agency problem exists not only between shareholders and directors but between the board and executive or managing directors. There is an oversight duty owed by the board in respect of executives by virtue of their duty of care. (The precise extent of the duty depends on the facts of the case: Re Barings plc (No.5) [1999] 1 BCLC 433.) The duty of loyalty as applied by me above supports the board in the performance of this duty and is thus efficient for that reason also.
  85. Accordingly, in so far as my conclusion on this issue involves a new application of the duty of loyalty, it is supported for policy reasons.
  86. For all these reasons, in my judgment, the appeal against the judge's judgment on the disclosure issue must be dismissed.
  87. The apportionment issue

  88. Sections 2, 3 and 7 of the 1870 Act provide:-
  89. "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."
  90. There is no doubt but that on the face of it the 1870 Act provides that a proportional part of salary can be claimed. Section 5 provides that the word "annuities" includes salaries and pensions. Section 2 provides that 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". Mr Fassihi's salary for June 2000 fell due on 30 June 2000. He was dismissed on 26 June 2000, but on the judge's findings was entitled to arrears of salary at the date of his dismissal. If section 2 applies, Mr Fassihi can claim that part of his June salary which is referable to 1 to 26 June. His employment contract contained no provision expressly excluding the operation of the 1870 Act.
  91. On the plain wording of section 2, there seems to be no reason why the 1870 Act should not apply. Mr Quiney submits that section 2 cannot apply because at the date of Mr Fassihi's dismissal, his June salary had not fallen due. But that of itself cannot be a good objection because it is provided in section 3 of the 1870 Act that any apportioned part of (say) salary shall become due when the entire portion would have become due. Mr Quney seeks to meet that point by submitting that by 30 June the contract had terminated and accordingly there was no longer a date when the entire part would "become due and payable". However, the final clause of section 2 addresses this problem. The contract of employment has determined "otherwise" than by re-entry or death, and accordingly the date when the apportioned part becomes payable is the date on which, but for that termination, arrears of salary would have become due, i.e. 30 June 2000. Section 2 therefore clearly contemplates that the right to payment may have been lost before the contractual date for payment arrives.
  92. In Boston Deep Sea Fishing and Ice Company v Ansell (1888) 39 ChD 339, this court held that a managing director, who was employed for a period of five years at a yearly salary, and who had been dismissed for misconduct, could not recover his salary for the part of the year which he had completed before his dismissal. His right to his salary was conditional on his fulfilling his duties for the year and that condition had not been fulfilled. The contract was indivisible, and no payment under it could be claimed. But in that case there was no attempt to rely on the 1870 Act and therefore it is not an authority as to the effect of the 1870 Act. The 1870 Act now in effect raises a presumption against indivisibility (see section 7, above).
  93. In Miles v Wakefield [1987] AC 539, 570, Lord Oliver treated the Boston case as authority for the narrow proposition that:-
  94. "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."
  95. The Miles case, however, is not an authority on the 1870 Act as it is not referred to in the speeches. Moreover, there is no suggestion in this case that Mr Fassihi's right to recover salary for the whole of June 2000 was dependent on his working throughout the month, or that he failed to provide services in the period up to his dismissal. Thus, if sections 2 and 3 of the 1870 Act apply, then salary was due at the date of his dismissal but not payable until 30 June 2000.
  96. In Moriarty v Regent's Garage and Engineering Company Ltd [1921] 1 KB 423, the Divisional Court applied section 2 of the 1870 Act to a claim for directors' fees on a time-apportioned basis. The company's articles provided that the directors should be entitled to fees of a certain amount per annum. The need for apportionment arose from the fact that the director in question had retired by agreement in the course of the year. The principal issue considered by the Divisional Court was whether directors' fees constituted "salaries" for the purposes of the 1870 Act. The Divisional Court decided that they were within the term "salaries". The decision of the Divisional Court was reversed by this court on appeal on another ground ([1921] 2 KB 766), but this court did not decide the point under the 1870 Act.
  97. In Sim v Rotherham Metropolitan Borough Council [1987] 1 Ch. 216, Scott J held-:
  98. "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)
  99. This case also supports Mr Dougherty's submissions.
  100. Mr Dougherty additionally relies on Powdrill v Watson [1995] 2 AC 394, in which the House of Lords accepted the submission of counsel for employees of a company, which had gone into administration, that the 1870 Act could be used to determine arrears of salary attributable to the period prior to the administrators' appointment. This appointment occurred in the course of the period in which the salary was being earned, the salary in question being payable in arrears. However, the Boston case was not cited. Since the contracts of employment in question had been adopted by the administrators, the issue in the Boston case did not arise. Mr Quiney also seeks to derive assistance from this case: he submits that it shows that the 1870 Act applies to the situation where there is a continuing obligation to pay a sum, whereas here the right to payment terminated in a payment period. That is the argument which I have already dealt with in paragraph 71 above. There is nothing in the Powdrill case to limit the 1870 Act in the way for which Mr Quiney contends. In sum, while I am grateful to counsel for drawing the Powdrill case to our attention, but I do not consider that it assists either party on the crucial issues on this appeal, which are whether the judge was right to conclude that he was bound not to apply the 1870 Act because of the Boston case and, if not, what is the true interpretation of the 1870 Act.
  101. For the reasons given by Holman J, whose judgment I have had the advantage of reading in draft, the Irish case of Treacy v Corcoran (1874) IR 8 CL 40 also supports the argument of Mr Dougherty. We have been referred to other authorities from the Commonwealth. I am grateful to counsel for their researches, but, in my judgment, these cases take the question in this case no further than the judgments of the Divisional Court in the Moriarty case and of Scott J in the Sim case. The application of the 1870 Act is supported by the leading text books to which we have been referred. I am indebted to Holman J for setting out these authorities in detail.
  102. In his article, "Salaries" in the Apportionment Act 1870 (1982) Legal Studies 302, Professor Matthews argues (among other points) that the 1870 Act is only available where the entitlement to a periodical payment belongs to two or more persons in respect of different parts of the period. The claim of an employee to a broken period, terminating with his ceasing to hold office, does not fall within that description. He takes the view that the Divisional Court in the Moriarty case fell into error. The difficulty with this argument is that the 1870 Act treats salaries on the same footing as other periodical payments. There is no reason why, for example, an annuity should not come to an end in the course of a period in respect of which it is paid, as where the annuitant dies during that period. I find it impossible to read any limitation into the Act of the kind Professor Matthews advocates.
  103. We are not concerned with the question whether Mr Fassihi lost the right to claim arrears for the period 1 to 26 June through his misconduct. The judge decided that point in Mr Fassihi's favour and there is no cross-appeal on that point.
  104. None of the authorities cited, in my judgment, detracts from the interpretation which I have given to sections 2 and 3 of the 1870 Act. On that interpretation, Mr Fassihi can make a time-apportioned claim for his salary for the period 1 to 26 June 2000. Accordingly, the appeal on this issue should, in my judgment, be allowed.
  105. Disposition

  106. I would dismiss the appeal on the disclosure issue and allow the appeal on the apportionment issue.
  107. Mr Justice Holman :

    The disclosure issue

  108. I have read in draft the judgment of my Lady, Arden LJ. I agree with her conclusion and her reasoning on the disclosure issue and would dismiss the appeal on this issue.
  109. The apportionment issue

  110. I also agree with Arden LJ's conclusion on the apportionment issue. But as I had already prepared a judgment of my own on this issue I now venture to give it.
  111. So far as is material, Mr Fassihi's contract of employment provided that: "Your starting salary is £28,000 per annum, payable monthly in arrears …. Your salary will be paid by the last working day of each month by automatic transfer to your bank account." He was dismissed on 26th June 2000 and claimed arrears of salary for the period 1st to 26th June. There is no doubt that at common law he is not entitled. The question is whether that uncompromising outcome is altered and mitigated by the Apportionment Act 1870. Sitting at first instance, the judge considered that he was bound by the authority of Boston Deep Sea Fishing and Ice Company v Ansell (1888) 39 Ch D 339 to hold that it is not.
  112. Section 2 of the Apportionment Act 1870 provides that:-
  113. "…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."

  114. Section 3 provides that:-
  115. "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."

  116. Section 5, the interpretation section, provides that:-
  117. "In the construction of this Act –
    The word "annuities" includes salaries and pensions."

  118. The judge commented that "A straightforward reading of [section 2] suggests to modern eyes that a proportionate part of the salary can be recovered by an employee." I agree with that comment. However, on behalf of Item Software, Mr Quiney submitted that the Act seeks "merely to facilitate the calculation of sums due under contracts", and is not intended to create new rights or interfere with existing rights.
  119. Section 2 has two limbs: "shall … be considered as accruing from day to day" and "shall be apportionable in respect of time accordingly." I agree that the second limb, which employs the word "accordingly", is consequential on the first and is essentially to do with calculation and arithmetic. But in my view the first limb does, on the face of it, impact upon and alter what would otherwise be the position in the absence of the provision. To my mind the words "shall… be considered as" mean the same thing as "shall be treated as" and operate as a deeming provision. In this regard I respectfully disagree with the observation of Lush J in Moriarty v Regent's Garage and Engineering Company Limited [1921] 1 KB 423 at page 434 which I quote in paragraph 102 below. Further, in my view the second limb or "case" of section 3 decisively indicates that the effect of the Act is not merely arithmetical but does alter common law rights. Section 3 addresses two quite different "cases" or situations. The first case is that of continuing rent etc. which shall be payable or recoverable "when the entire portion of which such apportioned part shall form part shall become due and payable, and not before…" But the second case is that "The apportioned part of any such rent [etc] shall be payable or recoverable….in the case of a rent [etc] 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." Although this postpones payment or recovery until the entire portion would have been payable, it clearly contemplates payment or recovery, in the case of a period which has not been completed, of the apportioned part of an entire portion which, by hypothesis, has not been fully earned. This reverses the common law rule.
  120. However, the construction, scope and effect of the Act has been the subject of both judicial and academic authority which it is necessary to analyse.
  121. In my view Boston Deep Sea Fishing, being a decision of this court, remains the most formidable obstacle in the way of the above construction. In that case the Court of Appeal held that although as a matter of fact the defendant, Ansell, had been paid quarterly, his contract provided for a yearly payment and that he was not entitled to receive a proportionate part of the annual salary. The fact that he was dismissed for misconduct clearly weighed with all three Lords Justices. Cotton LJ at page 360 referred to him as "having been properly dismissed." Bowen LJ at page 364 said that "…the servant who is dismissed for wrongful behaviour cannot recover his current salary, that is to say, he cannot recover salary which is not due and payable at the time of his dismissal, but which is only to accrue due and become payable at some later date, and on condition that he had fulfilled his duty as a faithful servant down to that later date." Fry LJ at page 370 said that the quarter's payment was "really a portion of the current salary, and as such cannot be recovered by a servant who has been dismissed for fraud."
  122. In my view there is no material distinction between the position of the defendant, Ansell, in Boston Deep Sea Fishing and the appellant, Mr Fassihi, in the present case. So if Mr Fassihi is entitled to recover for the proportionate part of the month in the present case, Mr Ansell should have been entitled to recover for the proportionate part of the year in that case. In short, it is impossible on this issue to distinguish the cases. What is puzzling is that there is simply no mention of the Apportionment Act 1870 anywhere in the only report of Boston Deep Sea Fishing, whether in any of the judgments or in the reported arguments of counsel. There seem to be two possibilities. Either it was overlooked, or counsel considered it but considered that it did not apply. It is idle to speculate which. It is hard to imagine that throughout all the litigation it can have been completely overlooked. Yet over 30 years later, in Moriarty v Regent's Garage and Engineering Company Limited [1921] 1 KB 423 and [1921] 2 KB 766, it seems that the simple explanation why the Act was not originally pleaded and relied upon before the county court judge, was that the plaintiff's counsel overlooked that section 5 included "salaries" (see Scrutton LJ at page 778). If that occurred in 1920, it conceivably might also have occurred in 1888. Whatever the explanation, it is not possible in my view to deduce from the fact that the Act was not mentioned, a judicial determination that it did not apply, still less any particular reason why it did not apply. In my view Boston Deep Sea Fishing is simply not an authority at all on the construction, scope or effect of the Apportionment Act 1870.
  123. In the much more recent case of Miles v Wakefield Metropolitan District Council [1987] AC 539 Lord Oliver of Aylmerton referred at page 570 to Boston Deep Sea Fishing with obvious approval. He said:
  124. "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"
  125. However in this part of his speech Lord Oliver is clearly addressing the common law rule. Although the Apportionment Act 1870 had been referred to in argument, neither in this nor any part of his speech did he refer to it. It was simply not in point to the issue in that case, which was (in the words of Lord Bridge of Harwich at page 55):
  126. "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?"
  127. In my view Miles v Wakefield Metropolitan District Council is simply not in point to the construction and effect of the Apportionment Act 1870.
  128. There were several English cases after Boston Deep Sea Fishing in which, again, the Act was not expressly considered: In Re Central De Kaap Gold Mines (1900) 69 189; In Re London and Northern Bank, McConnell's claim [1901] 1 Ch 728; and Healey v Societe Anonyme Francaise Rubastic [1917] 1 KB 946. They do not, in my view, develop or advance the issues from Boston Deep Sea Fishing itself.
  129. In my view the observations of the Divisional Court in Moriarty v Regent's Garage and Engineering Company Limited, while of obvious interest and importance, are of no weight as an authority. The thrust of all three judgments in the Court of Appeal is that, as the Act had not been pleaded or referred to in the county court, the Divisional Court had no right or business to have considered it at all. All three Lords Justices were at pains to say that they were expressing no opinion at all on the point, although it is of interest that Scrutton LJ said at page 779:
  130. "… 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."
  131. The observations of Lush and McCardie JJ in the Divisional Court are, however, of interest. Lush J at page 434 considered that the "Act, which was passed to remedy a grievance, undoubtedly affected common law rights and obligations." Referring to earlier cases, McCardie J said at page 447:
  132. "…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."
  133. In that case, the plaintiff's fees as a director were agreed to be "£150 per annum". During the course of a year he ceased to be a director but there was no impropriety on his part. Both judges of the Divisional Court considered that he would have been entitled under the Act to an apportioned part of his salary; but that he had issued his claim too soon, having regard to the provisions and effect of section 3 of the Act.
  134. They differed, however, in their observations (which on any view were entirely obiter) as to whether a salaried person would be entitled to apportionment if he had been dismissed for misconduct.
  135. Lush J said at page 434:
  136. "…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…"
  137. However McCardie J at pages 448-449 was perhaps more inclined to extend the Act to such a case. He said:
  138. "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."
  139. There is a passing reference of approval of the view of the Divisional Court in Moriarty by Simonds J in the later case of Re William Porter & Co Ltd [1937] 2 All ER 361 at 363 B. However the comment is entirely obiter (it begins "If this was material…") and the relevant sentence must have been misreported for, as printed, it does not make grammatical sense and the precise meaning of Simonds J is not clear. I regard the comment of Simonds J, as reported, as of minimal significance, despite the fact that Glanville Williams at (1941) 57 LQR 373 at 382 regarded the view of Simonds J as "encouraging to note".
  140. Much more weighty, though again obiter, is the observation of Scott J in Sim v Rotherham MBC [1987] 1 Ch. 216. The issue in that case was whether, when a teacher had refused to carry out certain work, the employer was entitled to make a deduction, by way of set off, from that teacher's monthly salary payment. But in rejecting as fallacious a submission on behalf of one of the education authorities, Scott J said at page 255:
  141. "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."

  142. I note that in that passage Scott J uses the language "deemed to accrue"; and that he contemplates entitlement to the salary even after dismissal during the month.
  143. Our attention has been drawn to certain overseas authorities. First, the Irish case of Treacy v Corcoran (1874) I.R. Vol VIII page 40. In that case the holder of a public office as Clerk of the Crown was entitled to be paid half yearly. During the course of a half year the plaintiff, Treacy, had resigned from that office. At the end of the half year the salary for the whole half year was paid to his successor, Corcoran. In an action by Treacy against Corcoran (not against the Treasurer of the County as payer) the Irish Court of Common Pleas held that Corcoran must pay to Treacy his apportioned share. In part the decision turned on the construction and application of section 110 of the Grand Jury Act pursuant to which a salary was payable to the Clerk of the Crown. But in my view application of the Apportionment Act 1870, which Monahan C J quoted at length on page 43, was a necessary step in the reasoning of the court. After quoting from the Act, Monahan C J said "That being so, it is clear that the salary of the Clerk of the Crown became due to Mr Treacy from day to day up to the 13th of April 1782, being the period during which he filled that office, and became recoverable by him on or after the 24th of July 1872, the proper time for payment having then arrived." In an article in (1982) 2 Legal Studies 302, 'Salaries' in the Apportionment Act 1870, an academic writer, Paul Matthews, treats Treacy v Corcoran as a "perfect example" of the special case of holders of public offices and suggests it is no authority at all for apportionment under the Act of salaries generally. But I do not agree. There is nothing in that part of the judgment which considers the Apportionment Act to limit it in this way, and I agree with the view of Treitel, The Law of Contract, (11th Edition) at page 824 and n. 87, that Treacy v Corcoran does "support the view that the Act does apply" so as to entitle a person whose salary is payable at the end of a stipulated period to recover a proportionate part of the salary if he works for only part of the period.
  144. The New Zealand case of Wallace v Ross (1915) Gazette Law Reports Vol XVII page 518 concerned commission or bonus. Section 108 of the Property Law Act 1908 was, so far as material, in identical term to the Imperial Apportionment Act 1870. But Hosking J doubted whether it applied to the bonus in that case, to which he held the plaintiff entitled on other grounds; and in my view such comments as Hosking J made about the scope of the Act are of no significance.
  145. The Australian case of Harris v Foote's Bus Service Limited (1963) 30 SAIR 259 turned entirely on the construction of the relevant contract or award. The brief comments of Pellew P at page 264 on an alternative argument based on the local equivalent (in identical terms) of the Apportionment Act 1870, are entirely obiter and were not intended to be of any weight.
  146. However the Canadian case of Lee v McDonald 12 DLR (3d) 404 is, in my view, directly in point although of limited authority being a decision of a county court judge in the county court of Halifax. A teacher was paid monthly. On an application for the attachment of a ganishee order to his salary, it was argued that during the course of the month there was nothing to garnish. Applying the local Apportionment Act 1967 (which he described as being in substantially the same words, with some modernization of the format, as the Apportionment Act 1870) O'Hearn Co Ct J said:
  147. "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…."
  148. I turn from judicial to academic authority. Writing on Partial Performance of Entire Contracts in (1941) 57 LQR 373 at 382-383, Professor Glanville Williams clearly considered the Apportionment Act 1870 to have reformed the common law rule. Further, he disagreed with the view of Lush J in Moriarty, quoted at paragraph 102 above, that a servant dismissed for misconduct might not be entitled to an apportioned part of his salary on the ground that the right to the salary had been forfeit. Glanville Williams argues that such a view not only perpetuates the harshness of the common law but is unsound in principle, since the common law rule is not based on the idea of forfeiture but on non-completion of the period (the common law rule being exactly the same where the contract is terminated by death and not misconduct).
  149. Sir Guenter Treitel in The Law of contract, 11th Edition at page 825 quotes the rhetorical question of McCardie J in Moriarty at page 449: "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?" McCardie J deliberately "express[ed] no opinion upon that point." But Sir Guenter is clear that "…a negative answer should be given to this question, and that there is nothing in the 1870 Act which makes it inapplicable to such a situation."
  150. Goff and Jones on The Law of Restitution (2002) 6th Edition at 20-049 take a similar view. They describe it as an "open question" whether the properly dismissed servant is within the section, but, echoing Glanville Williams, express the hope that the view of Lush J based on forfeiture will not prevail. They say "For at common law a servant was debarred from claiming his wages not because of any conception of forfeiture but because he had not fully performed his contract."
  151. Our attention has been drawn to one academic article to contrary effect, namely "Salaries" in the Apportionment Act 1870, by Paul Matthews at (1982) 2 Legal Studies 302. His argument is that the idea of earlier statutory apportionment provisions, which belonged to the law of landlord and tenant "is clearly to cover cases where a periodical payment [typically, rent] is made on one occasion to A and on the next to B, A's successor, A having died or otherwise ceased to be entitled." He argues therefore, that the scope of the word salaries, added by section 5 of the 1870 Act, is limited to salaries payable to holders of a public office which are automatically payable to the successor in office. Despite the ingenuity of the argument, there is absolutely nothing in the Act to limit salaries in this way and the argument has not impressed either Treitel or Goff and Jones, who cite, but do not agree with, Matthews.
  152. From this review of authority I conclude as follows:-
  153. 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.

  154. I would accordingly hold that the effect of section 2 of the Apportionment Act 1870 is that, unless the parties otherwise expressly stipulated, the salary of an employee whose employment terminates during a pay period shall be apportioned and paid in respect of the period actually worked (with payment only becoming due and payable at the end of the relevant pay period).
  155. In the present case the judge had posed three discrete questions, namely "(i) whether arrears of salary are payable by virtue of sections 2 and 5 of the Act where the director or employee works for part of a period; (ii) if so, whether this applies in a case of justified dismissal; and (iii) whether having regard to his breaches of duty Mr Fassihi would be entitled to his salary in any event."
  156. The judge answered the first question negatively but gave permission to appeal from that answer on that issue. I consider he should have answered it affirmatively.
  157. The judge went on to hold that if, contrary to his answer to the first question, the Act does apply, then it applies also to an employee who has been justifiably dismissed for misconduct (as Mr Fassihi had been); and in answer to his third question, that Mr Fassihi could claim arrears of salary despite his misconduct. There was no appeal from these answers to the second and third questions. Mr Fassihi did not seek to appeal them since they were answered favourably to him. Item Software did not seek to appeal them, apparently nailing their colours to the single proposition that the Act simply did not apply at all. Thus the very important issue which, perhaps, divided Lush and McCardie JJ in Moriarty is not squarely before us. But it demands an answer, for Mr Fassihi is only entitled to his apportioned salary if indeed the judge was right in his answer to the second and third questions.
  158. In my view he was. The Act is quite general. There is nothing at all in section 2 to exclude its application in the case of dismissal.
  159. The second case in section 3 (which, by hypothesis, is the one which would apply in the case of dismissal) refers to a payment determined by "death, or otherwise". I see no warrant to exclude the case of dismissal from the generality of "otherwise". Although McCardie J expressed no opinion in answer to his rhetorical question at page 449, it has now arisen for decision (not 'ere long, but 80 year later). In my view, even in the case of dismissal for misconduct, it is not right that the employee should be deprived of remuneration for work actually done; although he may be liable to his employer for damages flowing from his misconduct. I agree with the views of Glanville Williams, Treitel and Goff and Jones on this point; and I gratefully adopt the principled analysis of Glanville William that the common law rule is not based on the idea of forfeiture. In short, an employee whose employment terminated during a pay period is entitled under the Act to apportioned salary irrespective of the cause of termination. This includes Mr Fassihi.
  160. I would accordingly allow the appeal on the apportionment issue.
  161. Lord Justice Mummery:

  162. I agree with the judgment of Lady Justice Arden.


BAILII: Copyright Policy | Disclaimers | Privacy Policy | Feedback | Donate to BAILII
URL: http://www.bailii.org/ew/cases/EWCA/Civ/2004/1244.html