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New South Wales appellate court rules that neither judicial "merger" of law and equity proceedings nor sound policy empower it to change domestic law that bars equity award of punitive damages for breaches of fiduciary duties.

Beginning in 1996, Digital Pulse Pty. Ltd. (Digital or plaintiff) ran a small information technology business in Australia, apparently headquartered in New South Wales. It specialized in supplying computer-based multimedia services to its clients. In April 1998, a Mr. Harris began working for the plaintiff, and, in October 1999, a Mr. Eden became one of plaintiff's employees. Each was under a contractual duty not to compete with plaintiff during the course of their employment.

Nevertheless, while working for Digital in November 1999, Harris and Eden secretly decided to leave plaintiff and found their own business, Juice-D Media Pty. Ltd. (Juice). They went about obtaining contracts for Juice with plaintiff's potential clients and carried out projects for plaintiff's clients. Juice even charged fees to some of those clients fees invoiced by Juice. On February 4, 2000, the plaintiff fired Mr. Harris and the next day Mr. Eden resigned.

In the courts of New South Wales, Digital sued Harris, Eden and Juice (defendants), inter alia, for breach of fiduciary duty, the existence of which is undisputed. The trial judge found that Harris and Eden had breached their contractual and fiduciary duties of loyalty and that Harris had also misused confidential information. These actions brought about losses to Digital and generated unwarranted profits to defendants.

The court ordered defendants to render an accounting for these profits. It also ordered Harris to pay equitable compensation of $11,000 for misusing plaintiff's confidential information. Finally, the court ordered Harris and Eden to pay Digital exemplary damages of $ 10,000 each. Harris and Eden asked for leave to appeal against the award of exemplary damages. With two concurring opinions and one dissent, the Supreme Court of New South Wales -- Court of Appeal allows the appeal in part.

The majority decides overall that no power now exists in the law of New South Wales to award exemplary damages for equitable wrongs such as those alleged in this case nor should this Court recognize such a power. The holdings in the main Australian authorities cited clearly support this proposition. Nor can the majority find any persuasive reasoning in the authorities in Canada or New Zealand or the United States.

Noting that the U.S. state law is conflictual on this issue, the present Court refers to some key U.S. authorities. "Convenient collections of cases permitting or refusing the award of exemplary damages in equity up to 1956 may be found in 'Power of Equity Court to Award Exemplary or Punitive Damages' 48 ALR (2d) 947. Later cases may be found in ... Zitter, 'Punitive Damages: Power of Equity Court to Award' 58 ALR (4) 844; ... Leavell, Love, Nelson and Kovacic-Fleischer, Cases and Materials on Equitable Remedies, Restitution and Damages, 2000, p 1218."

"The traditional view was that 'a court of equity is not an instrument for the punishment of an individual or for the exacting of vengeance': Orkin Exterminating Co. of South Florida Inc. v. Truly Nolan Inc., 117 So.2d 419 (1960) at 422. That view apparently commended itself to all nine justices of the Supreme Court in Tull v United States, 481 US 412 (1987) at 422: 'Remedies intended to punish culpable individuals, as opposed to those intended simply to extract compensation or restore the status quo, were issued by courts of law, not courts of equity.'"

"However, neither the traditional reluctance of United States courts to award exemplary damages for equitable wrongs, nor the more recent trend in favour of this course, are intrinsically significant for present purposes. What may be significant is the principle on which the various cases rest." [N/A]

A review of the history of English and Australian parliamentary action significantly tends to reduce the scope of punitives in the common law sphere. Where it has created new statutory rights, it has seldom granted plaintiffs a right to exemplary damages. The fact that parliament has often limited or declined to broaden the power to award such damages indicates that it remains a matter more effectively dealt with by the legislature.

Nor is the traditional equity power to order an accounting of profits penal in nature, although it does possess a deterrent aspect. The scope of this remedy turns on the extent to which the fiduciary has enriched himself, not on his probity. Moreover, equity limits the account itself to actual misbegotten profits.

Furthermore, the fact that equity can and often does set a higher interest rate on errant trustees who take part in the gross misuse of funds does not show that equity has the power to grant punitives. The equity court merely estops the trustee from denying the receipt of interest at a rate that should have been received and fashions an award that precludes the erring fiduciary from keeping any ill-gotten gains. This doctrine is not, at bottom, punitive in character.

On the other hand, equity principles do allow the granting of relief against penalties and forfeitures and rarely enjoins the commission of crimes. These doctrines tend to bolster the defendants' contentions that equity does not award punitive damages.

Plaintiff then points to the traditional rule that courts can grant punitives in tort actions. In the Court's view, however, this should astonish no one in light of the intertwined roots of the common law of tort and crime. No similar entanglement between equity and crime or between contract and crime. As distinct from common law crimes, moreover, equitable duties do not depend on the actor's mental states.

The Court rejects plaintiff's reliance on judicial use of the terms "penal," "punitive," "punishment" and "prophylactic" in litigation dealing with remedies for breach of fiduciary duty as missing the exemplary damages target. Judges often refer to these terms in a loose sense. Both bench and bar should not lose sight of this type of usage.

"All the plaintiff sought to [show] was that labels should be avoided and that to grant exemplary damages in equity was only a small change in the law if it was a change at all. On the contrary, it is a radical change having no justification in traditional thinking, properly understood. Whether it is a desirable change is a question outside the proper province of an intermediate appellate court." [N/A]

"... [T]here are some cases in which an ultimate court of appeal can and should vary or modify what has been thought to be a settled rule or principle of the common law on the ground that it is ill-adapted to modern circumstances. If it should emerge that a specific common law rule was based on the existence of particular conditions or circumstances, whether social or economic, and that they have undergone a radical change, then in a simple or clear case the court may be justified in moulding the rule to meet the new conditions and circumstances.'"

"But there are very powerful reasons why the court should be reluctant to engage in such an exercise. The court is neither a legislature nor a law reform agency. Its responsibility is to decide cases by applying the law to the facts as found. ... The court does not, and cannot, carry out investigations or enquiries with a view to ascertaining whether particular common law rules are working well, whether they are adjusted to the needs of the community and whether they command popular assent. ... In short, the court cannot, and does not, engage in the wide-ranging inquiries and assessments which are made by governments and law reform agencies as a desirable, if not essential, preliminary to the enactment of legislation by an elected legislature." [N/A]

The concurring Justice makes these further points. "Equity is concerned with the conscience of both parties, from which can be deduced the general principle that equity does not punish. A punitive monetary award does not involve the balancing of rights and interests between two parties, but the imposition of a burden upon one party for purposes unrelated to the relationship between them."

"It is oppressive to impose a burden on a defaulting fiduciary going beyond the benefit received by him or her, and unjust for the beneficiary to receive a windfall benefit. On occasion, such an effect may result from the operation of an equitable doctrine such as laches or lack of clean hands. There is, however, no example of equity providing a remedy on a solely punitive basis." [N/A]

"But to reason that, while in the past, while the common law was administered in common law courts and equity in its own courts, common law courts awarded exemplary damages and equity courts did not, the fact that the two systems are now administered in the one court entails the conclusion that the common law remedy of exemplary damages is available for equitable wrongs is to fall into a crude 'fusion fallacy.' The conclusion arrived at could only be justified if there was some particular provision in the legislation effecting the administration of the two systems in a single court compelling it. There is none in the New South Wales legislation." [N/A]

Citation: Harris v. Digital Pulse Pty. Ltd.,197 A.L.R. 626, 44 A.C.S.R. 390 (Sup. Ct. N. S. W., Ct. App. 2003).
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Publication:International Law Update
Date:Oct 1, 2003
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