At the same time Mr Fassihi secretly approached Isograph with his own proposals which involved establishing his own company to take over the contract. Negotiations failed because Item insisted on terms that Isograph was not prepared to meet.
Item brought proceedings against Mr Fassihi alleging that he was in breach of duty as a director and employee in seeking to divert the contract with Isograph and for pressing his fellow director to take a hard line in negotiations. Mr Fassihi counterclaimed for wrongful dismissal and for arrears of salary for the period of 26 days prior to his dismissal on June 26, Mr Fassihi appealed on the issues of disclosure and arrears of salary.
Lady Justice Arden dismissing the appeal in relation to the disclosure issue, said that a director was subject to fiduciary duties and obligations. One of those obligations was the liability to account for secret profits. That had not been previously considered by the court. While it could not be inferred from the cases that a fiduciary owed a separate and independent duty to disclose his own misconduct, there was a fundamental duty to which a director was subject, namely, the duty to act in what he considered in good faith to be generally in the best interests of the company.
He was also an employee with a contract that paid him monthly in arrears. A major part of Item's business was the distribution of software products for Isograph Ltd. In November , Item decided to negotiate more favourable terms with the company but, when these failed, Isograph gave notice to terminate the contract, expiring in May During the course of the negotiations, Mr Fassihi who had set up his own company secretly approached Isograph and entered into a distribution agreement with them.
When Item discovered what he was doing, it dismissed him summarily on 26 June Item then claimed that Mr Fassihi was in breach of duty for failing to disclose his approach to Isograph. Mr Fassihi counterclaimed for wrongful dismissal and for arrears of salary for the 26 days prior to his dismissal. The High Court judge decided that Mr Fassihi was in breach of his duty as a director and an employee for failing to disclose his own misconduct and that Item was entitled to recover damages from him.
He rejected Mr Fassihi's counter claim for wrongful dismissal and arrears of salary. Fassihi was the sales and marketing director of Item and it appeared from the facts that he may have had day-to-day responsibility for the trading relationship with Isograph but not the responsibility for strategic business decisions regarding that relationship. There was nothing to suggest that Mr. Dehghani would have negotiated more cautiously if Mr. Fassihi had not pressed him to seek better terms.
Rochem Ltd, there was a separate and independent aspect of his duties which required him to disclose the facts. Furthermore, the judge stated that there was a clear case of fraudulent concealment as Mr. Fassihi had failed to tell Mr. Dehghani of what he had done, while remaining involved in the negotiations with Isograph and was part and parcel of his dishonest scheme to rob his employers of their business. The judge argued that the director owes fiduciary duties to the company for reasons given in Horcal Ltd v.
This scenario is distinguishable from the one in Bell v. Lever Bros Ltd due to the fact that Mr. Fassihi was a director of Item as well as an employee.
Therefore, the non-disclosure of Mr. On appeal, L. Arden states that in relation to the disclosure issue, she considers the position of Mr. However, she observed that this case is based on the fundamental duty a director is subject to, that is the duty to act in what he in good faith considers to be in the best interests of the company. Furthermore, the duty of loyalty is a time-honoured rule that focuses on principle rather than the particular words which have been used previously.
This principle is dynamic and it reflects the flexible quality of the doctrines of equity. The fact that the duty of loyalty has never before been applied so as to require a fiduciary to disclose his own misconduct was not a good objection to the application of the fiduciary principle.
Based on this policy doctrine, the Court of Appeal held that there is no basis on which the defendant could reasonably have come to the conclusion that it was not in the best interest of Item to know of his breach of duty and Mr. Fassihi could not fulfil his duty of loyalty except by informing Item about RAMS, and his plan to acquire the Isograph contract for himself. In relation to the apportionment issue, the court observed that, if section 2 of the Act applies, Mr.
Fassihi is free to claim that part of his June salary 1 to 26 June as his employment contract contained no provision which expressly excluded the operation of the Act. Ansell , by observing that in the Boston case there was no attempt to rely on the Act and therefore it is not an authority as to the effect of the Act. To conclude, L. Arden allowed the appeal and held that none of the authorities cited, detracts from the interpretation to sections 2 and 3 of the Act and based on that interpretation Mr.
Fassihi can make a time-apportioned claim for his salary for the period 1 to 26 June. The fiduciary duty of loyalty has been a source of debate among academics. It is argued by some that the requirement of loyalty is subjective as it requires fiduciaries to exercise their judgement in a manner, which they subjectively believe to be in the best interests of the beneficiary, while others have argued that the duty of loyalty is best understood as the summation of the various doctrines that are applied peculiarly to fiduciaries, rather than as a legal duty that is directly enforceable on its own right.
In the case of Item Software Ltd where full disclosure was seen as an extension of the fiduciary duty of loyalty; the Delaware court, in the case of Malone v. Brincat, where it was established that absolute honesty was required from the fiduciaries; the Canadian Court, which adopted the English approach and the Scottish Court, where the question of full disclosure being a part of the fiduciary duty of loyalty was left open.
The Australian Courts seem to be an outlier as they have rejected this proposition. They view the fundamental duty of loyalty as proscriptive by nature and this stance does not easily accommodate a duty of full disclosure as a primary fiduciary obligation.
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