Australia: Litigation Update: When can direct claims for loss be brought by shareholders, and when can a plaintiff claim travel beyond the pleaded claim?: Garner v Central Innovation Pty Limited [2022] FCAFC 64

Background

The Full Court of the Federal Court recently handed down its decision in Garner v Central Innovation Pty Limited [2022] FCAFC 64, a case about misuse of confidential information.  In its decision, the Court made numerous important observations concerning how claims should be advanced, and how litigation should be pursued.

This article will focus on what the Court stated in respect of:

• Whether a Plaintiff ought to be confined expressly to the matters it has pleaded, or whether it can advance claims outside of the pleadings where notice is provided to the Defendant; and
• The circumstances under which a claim for loss can be brought by shareholders of a company, and/or whether the company should bring it.

The decision in Garner v Central Innovation Pty Limited [2022] FCAFC 64 also provides informative comment on how an Appeal Court should assess findings of fact and credit of witnesses, applying the decision of Fox v Percy (2003) 214 CLR 118. 

The decision also discusses how principles of causation and loss ought to be brought. Whilst these two points are not addressed in this article, readers are welcome to contact Holman Webb's Workplace Relations Group for further information.

Facts

Garner (The Appellant) was a former employee of the company Intercad. Intercad was a wholly owned subsidiary of parent company Central Innovation. Intercad was the Australian and New Zealand distributor of AutoCAD software.

Central Innovation and Intercad alleged that after Garner was made redundant, he had used confidential information obtained from Intercad to attempt to market to customers of those entities, and to provide AutoCAD software through another company called NCCS.

Both Intercad and Central Innovation brought claims against Garner in the Federal Court, alleging loss brought about by Garner's improper use of the confidential information gained throughout the course of his employment.

There was no real dispute that Intercad was Garner's employer; and that Central Innovation was not. Central Innovation owned all the shares in Intercad. Intercad claimed it had lost sales revenue due to Garner's breach of obligation. Central Innovation claimed that the value of its shareholding in Intercad was diminished accordingly, due to Intercad's lost clients and sales revenue.

At first instance, the trial judge found that Garner was in breach of his obligations of confidence to both Intercad and Central Innovation, and ordered that Garner pay damages to them. The judge did not divide up the damages or how they were calculated.

Garner appealed, stating that the final version of the Statement of Claim relied on by Intercad and Central Innovation in the trial Court did not squarely cover all the issues which were relied on when seeking a claim, and that the judge had made findings outside the terms of what had been pleaded.

Garner also said that the loss could be claimed by Intercad, or Central Innovation, but not both, and so one of the claims must fail.

Principles to be applied on when a party is not confined to matters pleaded

The Full Court found that the pleadings, by implication, although not expressly, did encompass all the facts and matters which Intercad and Central Innovation sought to prove in their cases. The claim therefore did not travel outside the matters pleaded. 

The Court did say that it did not matter if that was wrong, because the way that the trial was run meant that Garner was clearly on notice of what was being argued by Intercad and Central Innovation, and he had an opportunity to meet those allegations. The Full Court did not disturb the decision.

The Full Court of the Federal Court confirmed the prior decisions of the High Court including Banque Commercial S.A., En Liquidation v Akhil Holdings Pty Limited (1990) 169 CLR 279, to say that:

Moreover, proceeding on a different basis may be determined by inference and does not need to be patent.

The Full Court of the Federal Court said that ultimately, what is to be determined is whether the trial proceeded fairly.

Relying on the Full Court's decision in NRM Corporation Pty Ltd v Australian Competition and Consumer Commission [2016] FCAFC 98, the Full Court said that setting aside a decision simply because the findings travelled beyond the pleadings is not of itself a basis to set aside the decision, insofar as the party must be given an opportunity to meet the case. 

The Full Court went on to cite numerous High Court decisions including Water Board v Moustakas  (1988) 180 CLR 491 and Dare v Pulham (1982) 148 CLR 658 - in which the High Court stated that while particulars need to be provided, a failure to amend a pleading will not necessarily preclude a verdict on the facts as they have emerged during trial, insofar as there is fairness.

Ban on Dual Action for Loss by Company and by its shareholder

The second point of interest in this case was the Court's analysis of the entitlement of recovery for reflective loss by numerous companies or shareholders. Intercad was the employer in this case, and it was said that the loss sustained by Central Innovation was a loss by reason of diminution in the value of Central Innovation's shares in Intercad.

Garner argued that to the extent that Intercad had a cause of action against Garner, Central Innovation had no right or entitlement to bring a claim against Garner. Its action was derivative to Intercad's cause of action.

The Full Court proposed several principles in respect of whether a shareholder, or a company, can bring a claim - and in what circumstances a shareholder is prohibited from bringing a claim for diminution of shareholding value in the company.

Firstly, the Court said that if a company suffers loss by reason of a breach of duty, the company must bring the action, and a shareholder of that company has no standing to seek a claim for damages for diminution of value of its shareholding. This is the case even if the company has determined not to pursue any action against the wrongdoer.

Secondly, however, where the company has suffered loss but has no cause of action against the wrongdoer - but where the shareholder  has sustained loss and has a cause of action, the shareholder may bring that cause of action in its own right.

Further, there is no presumption that the diminution in the value of the shareholding is the same as the loss sustained by the company. The onus remains on the shareholder to establish that it has suffered loss or damage by reason of a loss or damage suffered by the company in which it holds shares.

Thus, the position here was that Central Innovation was the shareholder in Intercad and to the extent that Intercad had a cause of action against Garner, then Central Innovation could not sue Garner.

If, however, Intercad did not have a cause of action against Garner, but Central Innovation did, then Central Innovation could proceed directly against Garner - even though it was a loss for diminution of its shareholding.

The trial judge found that both Central Innovation and Intercad had losses, and ordered a joint verdict in their favour against Garner. The Full Court finally said, rather unsatisfactorily, that as one of the plaintiffs would have recovered against Garner, it decided not to disturb the trial judge's findings.

Implications from the case

A rigid application of the principle that a case must be confined to its pleadings will not be upheld by a court, if unpleaded matters come to light during the trial, and the other party is afforded procedural fairness to meet those matters.  The court will permit a party to travel outside its pleaded matters, as far as there is no unfairness to the other party.

Secondly, where there are numerous causes of action, one of which may be a derivative shareholder action, careful consideration must be given to:

• who the appropriate plaintiff should be;
• what causes of action are pursued;
• how the loss should be calculated and put; and
• how a plaintiff should progress its claim.

This is particularly relevant if one or more of the entities are in liquidation. Considerations may need to be given to the assignment of causes of action, and whether a liquidator might also need to be joined as a plaintiff.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.