Insights

The Maltese Court of Appeal has pronounced its judgement in the case of Anthony Caruana & Sons Limited vs Christopher Caruana on the 28th February 2014 (AC573/2005/1). This is a very important judgement which addresses the fiduciary duties of employees towards their employers.

The facts were very briefly as follows: a general manager of the plaintiff company left the company and then, through another company belonging to himself, became the agent of product brands formerly represented by the plaintiff company. There existed various agreements between the parties touching on competition with the employer after leaving employment.

The defendant claimed that he could not have assumed fiduciary obligations as his employment was established in 2000 whilst the provisions on fiduciary obligations were introduced into the Civil Code and came into force in 2005. He also denied that he spread false news about his previous employer.

On these two pleas the First Court held :

1. on the fiduciary obligations: the Court referred to University of Nottingham vs Fischel [2000] ICR 1462, 1491 which indicated that a contract of employment relationship is not typically fiduciary. It then referred to Korbond Industries Ltd vs Jenkins [1992] 1 ERNZ 1141 which held that whole directors of companies are fiduciaries, employees are not, notwithstanding how high their position is, and to W.J.Christie & Co vs Greer (1981), 121 D.L.R. (3rd) 472 (Man. C.A.) which held that there is nothing to prevent an employee from terminating his/her employment as competing with his/her former employer but it is different when the employee is a key person or a director who is a fiduciary, though the latter can even accept business from his former clients as long as he does not solicit business. The Court then referred to Maltese cases on the invalidity of agreements in restraint of trade and held that in view of the fact that the defendant was not a fiduciary as the law came into effect after his contract of employment, and because on the facts the employee was not a policy maker or a director, then the demand was denied.
2. there had been false allegations and bad mouthing of the plaintiff’s business on the part of the defendant and combined with a breach of a covenant to maintain a respect for the goodwill of the plaintiff, held the defendant liable for penalties under the Maltese Commercial Code for unfair competition and for damages.

The parties appealed.

The decision of the First Court on unfair competition was confirmed whilst the decisions on the non-applicability of the fiduciary obligations provisions on the basis of timing and on the basis of status of the employee were both overturned. The Court of Appeal held that the general manager was indeed a fiduciary and was to be held responsible for the breach involved in his taking over brands belonging to his previous employer, for his own personal interest. In this judgement the Court of Appeal also outlined the applicability of the law on fiduciary obligations and their effects in a very clear manner. Apart from showing the relationship between fiduciary obligations and agreements restricting competition leaving employment, this is a very important judgement as it is the first one since the introduction of the law of trusts and fiduciary obligations in Maltese law in 2007 where a court analyses the legal and historical underpinnings of the provisions of fiduciary obligations. The Courts also declares unequivocally that the 2007 provisions apply to all existing situations, even those arising before these laws were enacted. This reverses some unfortunate judgements of other Courts which held that these new provisions only apply to events occurring after 2007.

To quote from the judgement on the fiduciary issues :

“This Court recognizes that while it is true that article 1124A of the Civil Code came into force after the occurrence of the facts in this case, this article is nothing more than a reproduction of the principle of applicable law, which was the case in Roman Law where [a fiduciary obligation] was considered as a “parasitic institution” (see Lee, The Elements of Roman Law, page 340) and not as a contract. It was seen as imposing additional obligations to the contractual ones in the case of certain contracts. The concept of fiduciary obligations is also not necessarily tied to the concept of trusts which came into the Maltese legal system in a complete manner on the 1st January 2005 and is of general application in every case where a person acts in the interest of another person, in which case he is expected to act with due attention and care. As the Magistrate’s Court stated in Cordina vs Cordina (26/9/2007) through the introduction of article 1124A into the Civil Code the situation “has been immensely clarified” but no new concept was introduced. As stated by the Court in Messina vs Galea (5/1/1881) Roman Law was and still is the “common law” of Malta and “when there is no provision in Maltese law then we need to refer to Roman law”. The concept of fiducia between a principal and his representative has long existed in our legal history, and when one considers that the defendant held the post of the General Manager, it is evident that equity imposed upon him duties and obligations which go beyond the contractual obligations he had.”

The Court analysed the role of a general manager and then continued by stating that “Although the manager does not have a policy making role, he is a fiduciary of his principal and must act in good faith and with loyalty. As stated in Hayton et. in the book “The Law of Trusts” page 760, a fiduciary always has “a duty of confidence coupled with a duty of loyalty” and among these duties there is also that of confidentiality as well explained by Lord Millet in Balkiah vs KPMG (1999 1All ER 517).”

The court stated that in this case, the defendant also bound himself to continue to act “with continued goodwill” to the plaintiff company which indicated a high level of loyalty and that meant not using any confidential information for his own benefit to the detriment of the employer. The employee has access to information of a sensitive nature and he acted incorrectly when he appropriated for himself the information to the detriment of the plaintiff company. The court found that this abuse was in violation of the fiduciary obligations of the defendant which are now reflected in article 1124A of the Civil Code and so he is bound to pay compensation for the damage he has caused. The Court of Appeal finally held that the agreement to act with continued goodwill to the employer cannot be considered to be one in restraint of trade as the employee was not hindered from working, even in competition with the plaintiff, as long as he acted in good faith and loyally. This certainty could not be considered to be again public order and is reasonable as has been held in Maltese case law which recognised that the higher the employment level, the more onerous the obligations of loyalty are and the more resonable would be limitations on what the employee is free to do.

For information purposes, this is a reproduction of article 1124A of the Maltese Civil Code:

1124A.

(1) Fiduciary obligations arise in virtue of law, contract, quasi-contract, trusts, assumption of office or behaviour whenever a person (the ”fiduciary”) –

(a) owes a duty to protect the interests of another person; or

(b) holds, exercises control or powers of disposition over property for the benefit of other persons, including when he is vested with ownership of such property for such purpose; or

(c) receives information from another person subject to a duty of confidentiality and such person is aware or ought, in the circumstances, reasonably to have been aware, that the use of such information is intended to be restricted.

(2) A person who is delegated any function by a fiduciary and is aware, or should, from the circumstances, be aware, of the fiduciary obligations shall also be treated to be subject to fiduciary obligations.

(3) Fiduciary obligations arise from behaviour when a person –

(a) without being entitled, appropriates or makes use of property or information belonging to another, whether for his benefit or otherwise; or

(b) being a third party, acts, being aware, or where he reasonably ought to be aware from the circumstances, of the breach of fiduciary obligations by a fiduciary, and receives or otherwise acquires property or makes other gains from or through the acts of the fiduciary.

(4) Without prejudice to the duty of a fiduciary to carry out his obligations with utmost good faith and to act honestly in all cases, a fiduciary is bound, subject to express provision of law or express terms of any instrument in writing excluding or modifying such duty, as the case may be –

(a) to exercise the diligence of a bonus pater familias in the performance of his obligations;

(b) to avoid any conflict of interest;

(c) not to receive undisclosed or unauthorised profit from his position or functions;

(d) to act impartially when the fiduciary duties are owed to more than one person;

(e) to keep any property as may be acquired or held as a fiduciary segregated from his personal property and that of other persons towards whom he may have similar obligations;

(f) to maintain suitable records in writing of the interest of the person to whom such fiduciary obligations are owed;

(g) to render account in relation to the property subject to such fiduciary obligations; and

(h) to return on demand any property held under fiduciary obligations to the person lawfully entitled thereto or as instructed by him or as otherwise required by applicable law.

(5) In addition to any other remedy available under law, a person subject to a fiduciary obligation who acts in breach of such obligation shall be bound to return any property together with all other benefits derived by him, whether directly or indirectly, to the person to whom the duty is owed.

(6) The obligation to return property derived from a breach of a fiduciary duty shall apply also to all property into which the original property has been converted or for which it has been substituted.