Conflicts of interest in employment law

It would seem self-evident to most people that if you are employed, as an employee you owe certain duties to your employer, the most basic of which is not to put yourself in a position of conflict with that of your employer. This idea that as an employee you owe certain duties to your employer is certainly one of the cornerstones of the employment relationship. It is so important that the law implies certain duties into the relationship of employment, including the duty of fidelity and good faith. This duty of fidelity is extremely broad and would encompass most activities associated with the proper performance of the role. It should however, be distinguished from the fiduciary duty owed by senior employees and officers of the employer. The fiduciary relationship imposes duties over and above those required by the duty of fidelity, and has been described as follows:

“An employee owes an obligation of loyalty to the employer but .. will not necessarily owe that exclusive obligation of loyalty, to act in the employer’s interest and not in his own, which is the hallmark of any fiduciary duty owed by an employee to the employer”.[1] 

Essentially, fiduciaries are subject to the “no profit” and “no conflict’ rules. This means that a fiduciary must not profit from their position of trust and not bring their own interests in conflict with their fiduciary obligations.[2] This is what most people understand as the pillar of the no conflict of interest obligation. However, this obligation is not universal to all employment relationships, but only applies to those who hold a fiduciary relationship. It is also not entirely clear to whom the duty applies and the extent of the common law duty. As such, the scope of the duty often turns on the facts and circumstances in question.

Certainly, senior managers and company directors are subject to a fiduciary obligation, however, even in these cases it is not always clear how far this obligation extends. In the decision of Nottingham University v Fishel, Dr Fishel was employed full time as a director of the University’s infertility research and treatment clinic. With the knowledge of the university, he accepted paid consultancies in private overseas clinics. He also provided university staff under his supervision, to work in these private clinics. Dr Fishel received substantial fees for this work from the private clinics, which he retained. The university brought proceedings against Dr Fishel for breach of contract and breach of his fiduciary duties. Although, arguably obtaining outside work was a breach of contract because Dr Fishel did not actively obtain permission to do so, the University suffered no damage from his activities. It sought however to argue that Dr Fishel had breached his fiduciary duties and as such it was entitled to an account of profits, which would mean the University could claim the monies paid by the private clinics directly to Dr Fishel. The court considered whether in this circumstance, Dr Fishel owed the University a fiduciary obligation to act solely in the interests of the employer. The court found that this was not the case in respect of his own work in the overseas clinics, which was common knowledge at the University and in fact encouraged. However, the sending of University staff to overseas clinics for which Dr Fishel received a fee was a breach, because Dr Fishel had used his own position to place his own financial interests above his duty to the University.[3]

It is clear that the common law duty of fidelity and that of a fiduciary overlap. It is also clear that the scope of the fiduciary duty is dependent on the position held by the employee and the particular circumstances. This is not very helpful for most employers. As such, it is common for contracts of employment to include express contractual prohibitions dealing with conflicts of interest. The purpose of these clauses is to make clear to employees that they must not act in conflict with the employer’s interests and the scope of prohibition.

The case of Buitendag v Ravensthorpe Nickel Operations Pty Ltd[4], dealt with a claim by Mr Buitendag for the breach of his employment contract by virtue of his summary termination. Mr Buitendag was the general manager of the employer and was employed subject to a written contract of employment. Mr Buitendag was summarily terminated because the Company claimed he had breached his employment contract in a number of areas, principally: he failed to make full and fair disclosure and made misleading statements to his manager, Mr Wilson in relation to the donation of a transportable house to the Hopetoun Clay Target Club (the Club) of which the Mr Buitendag was a founding member; requested an employee of the respondent to prepare drawings for the Club’s clay target range; requested an employee of the Company to action the donation of materials owned by the Company to the Club; requested Ertech, an independent contractor who provided services to the Company, to voluntarily undertake earthmoving works for the Club.  These matters were held to involve a contravention of the conflict of interest principle.

It was a term of the employment contract that the Mr Buitendag comply with and conduct himself ethically and professionally as detailed in the company’s Code of Conduct .A further term of the employment contract was that Mr Buitendag was required to familiarise himself with, and comply with, all workplace policies and procedures and with the Company’s rules, policies, practices and procedures as introduced or amended from time to time. Those included, relevantly, the Company’s Conflict of Interest Standard (Conflict Standard). Other express terms of the employment contract included obligations to diligently and faithfully serve the Company and protect and further its interest at all times.

The trial judge found that this term reflected the duty of good faith and fidelity that is implied into contracts of employment as a matter of law.  The trial judge also found that the high levels of discretion and trust placed in Mr Buitendag placed him under a fiduciary obligation in the exercise of his powers on behalf of the Company.  The trial judge stated:

“[The appellant] was subject to the ‘no conflict’ fiduciary rule, that is, [the appellant] was under an obligation not to bring his interests or duty to a third party into conflict with the interests of, or his duty to, his employer without the informed consent of his employer.”

The Company was a mining enterprise situated in a small town with a predominantly farming community, with few education, sporting or recreation facilities. Mr Buitendag and a few others wanted to establish a shooting club, and approached the town council to give them a piece of land for this purpose at a reduced rent. The town agreed. Mr Buitendag in his role at work, became aware of two transportable houses on Company property, and their donation to his Club and another club were within his delegated authority. However, given his involvement in the Club, he asked his direct manager for permission to donate the two houses to the respective clubs. The manager approved the donation on the basis that the cost to do so would be borne by the Club.

A conflict of interest will exist if the interest in question is in opposition to, or in tension with, the duty of loyalty. It does not necessarily have to benefit the employee.

It transpired that in seeking and obtaining the above approval, Mr Buitendag failed to fully inform Mr Wilson of his involvement in the Club, or that he had applied to the Company to fund the removal of the house. In addition, he failed to inform Mr Wilson of the reason the Company had acquired the land on which the demountable home was situated. The Court found that these misstatements and omissions were made to induce Mr Wilson to approve the donation of the homestead and were, as a result, a conflict of interest and a breach of his fiduciary duties. Mr Buitendag also argued that the breaches were not sufficient to amount to serious misconduct warranting summary termination. At trail the judge disagreed, and on appeal, the appeal court upheld the trial judge’s reasoning as follows:

 “The breaches by [the appellant] may be considered together. They all related to the donation of assets and services to the Club or obtaining such donations. The breaches all arose from [the appellant] placing himself in a position of conflict of interest. [The appellant] did not accept that there was any conflict of interest at the time. When he gave his evidence [the appellant] did not accept that there was any conflict of interest. The breaches did not arise from a single act or omission. They arose from a course of conduct in which [the appellant] was in a position of conflict of interest and failed to act in accordance with his contractual and fiduciary obligations. [The appellant] held a senior position which required him to exercise significant responsibilities and discretion on behalf of his employer. His conduct was conduct which is likely to, and did, destroy his employer’s trust and confidence in him carrying out his responsibilities as general manager of [the respondent] in accordance with his contractual obligations. It justified [the respondent] terminating his employment summarily” [5]

The Buitendag case demonstrates that even if the employee is not obtaining a direct benefit for himself, as in this case, the benefit was for the Club, the acts or omissions may still amount to  a breach of the no conflict rule. In essence, Mr Buitendag improperly and in breach of the Company policies, his contract of employment and his fiduciary duty, placed the interest of the Club ahead of that of his employer. It mattered not that he did not derive any direct benefit from his actions.

The issue of breach of fiduciary duty and more specifically breach of the conflict rule was the central issue in the Federal Court decision of Ultra Management (Sports) Pty Ltd v Zibara [2020] FCA 31.

The salient facts in this case are as follows. Ultra Management is a sports management company, which finds and manages sportsmen, primarily involved in rugby league. Mr Zibara was an employee of Ultra and acted as a sports agent on behalf of Ultra. A number of sportsmen had engaged Ultra as their manager and had entered into management contracts with Ultra. Ultra decided to change the contracts it used, to allow for the portability of the agent. In other words, the amended contracts allowed the sportsman to terminate the management contract with Ultra on 7 days’ notice and allowed the relevant agent to re-engage with the sportsman thereafter. However, although, introducing the change to the contract, the Managing Director of Ultra informed Mr Zibara, that there was no need for new contracts to be entered into with current clients, and that the new contracts should only be used on the expiry of existing contracts. Without the knowledge or consent of the Managing Director, Mr Zibara persuaded a number of sportsmen to terminate their existing contracts and to enter into the new contract with the new portability clause. Mr Zibara then resigned his employment and proceeded to encourage these sportsmen to terminate their new contracts on 7 days’ notice and then sign with him.

Ultra, sued Mr Zibara claiming a breach of his fiduciary duties and in particular a breach of the no conflict rule. It sought an account of profits from Mr Zibara. This is a remedy which effectively seeks an order that any monies made by Mr Zibara as a result of his breach must be paid to Ultra. In its decision the Court found that Mr Zibara had breached his fiduciary duty to Ultra and held that all monies derived from the management contracts entered into between Mr Zibara’s new company and the player must be paid to Ultra. In addition, the Court held that the account of profit also applied to any renewal of the contracts in the future.

Lessons from the Cases

It is not uncommon for us to receive enquiries from employers and employees alike querying whether the actions of the employee in question amounts to a conflict of interest. Employees feel that they should be free to do as they please and especially in their own time. As such, the idea that they cannot work for a third party or pursue private interests unless they disclose this to their employer is an anathema. On the other hand, employers wish to ensure employees act in their best interests and this includes ensuring they do not pursue any interests that may conflict with the interests of the employer.

As we have outlined in this article, the scope of the obligation and to whom it applies depends on the relevant circumstances.

However, if you are a senior employee it is without doubt that you will owe a fiduciary duty to your employer, and this includes the duty not to act in conflict with the interests of the employer. The issue is less clear for lower level employees, as the implied duty of fidelity and good faith does not necessarily extend to ensuring that the employee always act in the best interests of the employer. It is certainly not going to be the case that a low-level shop assistant would be in breach of their duty of fidelity if in their free time, they worked in a different capacity.

We therefore recommend that all employers ensure the scope of the prohibited conduct in conflict with its interests is clearly an unambiguously set out in the contract of employment and company policies. Employers are able to ensure that if they wish to prevent employees from engaging in alternative employment, require them to disclose investment or other interests, and the like this is clearly set out in the contract. Employers will then be able to rely on the contractual clauses, if for any reason employees are found not to be bound by the implied duties or that the implied duties do not stretch as far as the employer would like.

We are Here to Help

Contracts of employment can be very effective in ensuring the legal rights of the employer. We are here to assist in unpacking these complicated yet vital documents. If you require further information in relation to any aspect of this client alert or assistance in dealing with an employment law related issue, please feel free to contact us.

This alert is not intended to constitute, and should not be treated as, legal advice.

[1] Helmet Integrated Systems Ltd v Tunnard [2007] IRLR 126 at [36]; Macken’s Law of Employment, 7^th Edition at 217.

[2] Macken’s Law of Employment, 7^th Edition at 217.

[3] ibid

[4] [2014] WASCA 29

[5] BUITENDAG -v- RAVENSTHORPE NICKEL OPERATIONS PTY LTD [2014] WASCA 29 at 141