The recent Victorian Supreme Court decision of Strategic Management Australia AFL Pty Ltd & Anor v Precision Sports & Entertainment Group Pty Ltd & Ors [2016] VSC 303 provides insight into the scope and extent of duties owed by employees.

Background
In 2012, Liam Pickering (Pickering), James Pitcher (Pitcher) and Jason Sourasis (Sourasis) formed a new sports management business, which they named Strategic Management Australia AFL Pty Ltd (Strategic).
The venture commenced on the basis that Pickering, as Managing Director, would own 40% of the company, while Sourasis would acquire equity by way of capital contributions to fund the start-up and initial operating expenses. Sourasis was not an accredited AFL agent and therefore relied upon Pickering and Pitcher to provide the sports management services.

It was agreed that Pickering would receive a $200,000 signing bonus, an annual salary of $200,000 and his shareholding in Strategic would be held in the name of his own company Chillimia Pty Ltd.
Though the parties never signed a formal contract of employment, the signing bonus and distribution of shares was eventually, but not immediately, transferred to Pickering.

When the relationship between Pickering and Sourasis deteriorated in 2013 and 2014, Pickering and Pitcher began planning a departure from Strategic that would ultimately lead to the establishment of a new sports management company (later to be incorporated as Precision Sports & Entertainment Group Pty Ltd (Precision)).

In the remainder of Pickering’s term as Managing Director of Strategic, Representation Agreements between Strategic and its players began to expire before the end of the term of the players’ contract with their respective club. Pickering and Pitcher had also been negotiating and executing contracts with clubs for players during periods where the players’ Representation Agreements with Strategic had expired.

Pickering and Pitcher resigned from Strategic in May 2014 and immediately commenced business operations with Precision. Strategic’s existing clients also left the company and signed new Representation Agreements with Precision. Among the claims brought by Strategic and Sourasis were breach of contractual obligations, breach of director’s duties and breach of fiduciary duties.

Duties owed by employees
At common law employees must, during the course of their employment, act honestly, in good faith, and with the care and skill and competence of a reasonable person in their position. For executive directors specifically, there is an obligation to use reasonable care and skill that is implied in the employment contract.

Statutory duties are also imposed on company directors under the Corporations Act 2001 (Cth) to act with due care and diligence, in the best interests of the company, and not to promote their own interests or the private interests of others.

The decision on breach
Justice Sifris held that Pickering and Pitcher were in breach of an implied term of the employment agreement. Although no formal contract of employment was signed by the parties, there was a term implied in the agreement requiring employees to act with due care and skill. The court found it open on the facts to make the inference that, if requested by either Pickering or Pitcher, players would have extended, renewed or signed Representation Agreements with Strategic. The breach of the implied term was therefore framed as a failure to endeavour to execute the renewal of Representation Agreements with players in circumstances where the existence of a current, valid and enforceable Representation Agreement was relied upon by Strategic to make income.

Breach of the implied term in the employment agreement necessitated the decision that Pickering and Pitcher also breached their duty to act with due care and diligence under the Corporations Act 2001 (Cth). The Court’s rationale in this regard was that a reasonable person in their position would have made sure that Strategic’s income was protected.

Once breach of the first two duties was established, the court found that it was not strictly necessary to consider whether other fiduciary and statutory duties had been breached. Justice Sifris stated at [90] ‘Of course in many, if not most, cases a breach of the first of the two duties will axiomatically involve a breach of the second and indeed usually other statutory duties.’ Nevertheless, the Court had to consider the veracity of Strategic’s claims, which stated that Pickering and Pitcher had breached their fiduciary duty (and other duties) by:

a. making plans and taking steps to set up a competing sports management business before resigning from Strategic; and
b. Commencing employment with a competing business immediately following resignation from Strategic.

These circumstances may ordinarily give rise to a breach of fiduciary duty because of the use of confidential information, however here it was said that Pickering and Pitcher were entitled to:

a. Use their substantial knowledge, experience and contacts for the purposes of conducting business at Precision; and
b. Approach players following their resignation to engage them as clients.

Any information that Pickering and Pitcher had acquired as employees of Strategic, whether confidential or not, could be acquired from players upon request once they had been signed up as clients of Precision.

Key points
This case highlights the fundamental duties owed by employees/directors to their employers. Strategic was successful in establishing that Pickering and Pitcher had breached both their general contractual law and statutory duties. Employees and directors alike are required to fulfil their responsibilities with due care and diligence. Strategic needed its employees and directors to ensure that Representation Agreements were in place to secure the revenue from player contracts. This was at the heart of Strategic’s business model, it was not ancillary to its general operations, and that is why breach in each instance was “obvious”.

Duties owed by employees/directors are underpinned by loyalty. The court touched on the general law and statutory duties that require employees/directors to act in good faith in the best interests of the business/company. Pickering and Pitcher narrowly avoided any liability in this respect because the player information they had used to commence business with Precision was not confidential; and Strategic conceded that they were entitled to compete.

Nevertheless, where an employee/director takes steps against the interest of their business/company, without full disclosure, with a view to resign and subsequently involve themselves with a competing business, the profits flowing from that breach of loyalty may be recoverable.

If you have any queries relating to employment law, please do not hesitate to contact Michael Bishop or Lachlan Chisholm on 03 9614 7707.

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