The Court of Appeal, composed of Chief Justice Silvio Camilleri, Mr Justice Tonio Mallia and Mr Justice Joseph Azzopardi, on February 28, 2014, in the case ‘Anthony Caruana & Sons Ltd (and continued by Farsons Beverage Imports Company Ltd) v Christopher Caruana’ held, among other things, that equity imposed upon Caruana, as general manager, duties and obligations which went beyond contract obligations. A manager has a duty of loyalty and care towards his principal. It was also acceptable for Farsons, as employer, to oblige him to show continued goodwill in his contract of termination.
The facts in this case were as follows.
On March 12, 2000, Simonds Farsons Cisk Ltd acquired all the shares in the beverage company Anthony Caruana & Sons Ltd. Christopher Caruana was retained as general manager. He was employed under a definite contract of employment for three years, with the duty to report to the Board of Directors of Farsons or its delegates. On expiry of his contract, a new contract was signed for a further three years on October 7, 2003.
Following the reorganisation and restructuring of Farsons Group, Christopher Caruana decided to resign. On September 27, 2004, a contract of termination was entered into, whereby it was agreed, among other things, that he was obliged to show continued goodwill to his ex-employer and in consideration received Lm10, 500. A dispute ensued thereafter.
Farsons complained that Christopher Caruana disclosed certain confidential information made available to him as general manager to cause it damage by trying to take certain products, poaching its employees and approaching suppliers and customers to request them to deal with him and not with Farsons.
Farsons said that Caruana, as general manager, had a duty to act exclusively in the interest of the company, protect its interests and that as general manager, he occupied a post of trust and was deemed to be a fiduciary in terms of article 1124 A of the Civil Code. This section provides:
“(1) Fiduciary obligations arise in virtue of law, contract, quasi-contract, trusts, assumption of office or behaviour whenever a person (the ‘fiduciary’):
(a) owes a duty to protect the interests of another person; or
(b) holds, exercises control or powers of disposition over property for the benefit of other persons, including when he is vested with ownership of such property for such purpose; or
(c) receives information from another person subject to a duty of confidentiality and such person is aware or ought, in the circumstances, reasonably to have been aware that the use of such information is intended to be restricted.
(4) Without prejudice to the duty of a fiduciary to carry out his obligations with utmost good faith and to act honestly in all cases, a fiduciary is bound, subject to express provision of law or express terms of any instrument in writing excluding or modifying such duty, as the case may be:
(a) to exercise the diligence of a bonus pater familias in the performance of his obligations;
(b) to avoid any conflict of interest;
(c) not to receive undisclosed or unauthorised profit from his position or functions;
(d) to act impartially when the fiduciary duties are owed to more than one person;
(e) to keep any property as may be acquired or held as a fiduciary segregated from his personal property and that of other persons towards whom he may have similar obligations;
(f) to maintain suitable records in writing of the interest of the person to whom such fiduciary obligations are owed;
(g) to render account in relation to the property subject to such fiduciary obligations; and
(h) to return on demand any property held under fiduciary obligations to the person lawfully entitled thereto or as instructed by him or as otherwise required by applicable law.”
Farsons claimed that it was not acceptable for him to use certain confidential information for his own personal gain. Faced with this situation, Farsons filed legal proceedings requesting the court:
• To declare that Caruana violated article 34 of the Commercial Code prohibiting unfair competition and to condemn him to pay Lm500 or such other sum as a penalty under article 37 (3) of the Commercial Code.
• To liquidate the damages suffered in breach of his fiduciary obligations, to condemn him to pay compensation and return any gains.
• To declare that Caruana violated the contract of employment dated March 7, 2003, and the contract of termination dated September 27, 2004, and to liquidate the damages which he had to pay.
Caruana in reply contested the legal action against him.
On September 24, 2010, the First Hall of the Civil Court declared that Caruana, as general manager, owed no fiduciary obligations to Farsons under article 1124 A of the Civil Code. It found, however, that he infringed article 34 of the Commercial Code and condemned him to pay Farsons €1,165 as penalty under article 37 (3) of the Commercial Code. It also declared that Caruana did not observe the terms of his contract of employment dated March 7, 2003, and his contract of termination dated September 27, 2004. It liquidated the damages as €10,000 and condemned Caruana to pay Farsons €10,000 and €1,165.
The First Hall of the Civil Court maintained that employees, even senior employees, owed no fiduciary obligations to their employer in contrast to directors and to persons responsible for policymaking.
Unfair competition: Article 34 of the Commercial Code provides:
“(1) Traders shall not, for the purpose of competition, spread news capable of prejudicing the business or trade carried on by other persons.”
Four elements had to be established under article 34 (re: ‘Alfred Gera & Sons Ltd v Mario Casingena et’ dated October 8, 2004):
• The defendant had to be a trader;
• He had to act with a specific intention of unfair competition;
• He had to spread information; and
• What was stated could cause damage to claimant.
The court felt that Caruana acted both in breach of article 34 of the Commercial Code (unfair competition) as well as in breach of his fiduciary obligations under article 1124 A of the Civil Code.
He therefore had to pay compensation for damages
The intention of defendant to spread harmful information had to be for the purpose of unfair competition. The law did not require the intention to cause damage. It was enough to show that defendant acted for the purpose of unfair competition. Actual damage need not be proven, and it was also possible for the information to be truthful.
The First Court noted that it was not necessary to produce accounts. There was no doubt that if Farsons lost a brand, it would have negative implications. By spreading certain information, Farsons suffered damages. It said that Caruana used the information to the prejudice of Farsons for his personal gain. He could not make use of confidential information as he was paid for the continued goodwill.
Aggrieved, Caruana entered an appeal, requesting the court to vary that part of the decision of the First Court, which found him liable for unfair competition under article 34 of the Commercial Code and revoke that part where he was condemned to pay €10,000 in damages.
Farsons also appealed, reiterating its claim that Caruana violated his fiduciary obligations under article1124A of the Civil Code; made illicit profit and to order him to return the gains which he made. It said the damages should be increased to €24,458.
Unfair competition: It was possible, the court said, to have unfair competition, even if there was no denigration of another trader’s products and criticism was made generally. The court agreed with the First Court that Caruana violated article 34 of the Commercial Code by spreading information that was harmful to Farsons.
Caruana did more than just parallel trading. He disclosed confidential information with the intention to cause damage and confuse traders who bought from Farsons as to who was the agent of certain products and with whom they had to deal. The court felt that the four elements of unfair competition had been proven.
Fiduciary obligations: The court said that although article 1124 A of the Civil Code came into effect, after the facts in question took place, it was nothing but a restatement of Roman Law principles. The concept of fiduciary obligations was not limited to trust but applied generally whenever a person acted in the interest of another.
A fiduciary was expected to show certain attention and care re: ‘Cordina v Cordina’ dated September 26, 2007 (Gozo Courts). In ‘Messina v Galea’ dated January 5, 1881, the court held that Roman Law was still the common law of Malta. The concept of ‘fiducia’ between principal and representative had long existed in Malta and in view of the fact that Caruana was the general manager, equity imposed upon his duties and obligations which went beyond contract obligations.
A manager has a duty of loyalty and care towards his principal re Prof. J. A. Micallef: “The office of manager from the legal point of view embraces both the concept of agency and the contract of trust which arises between the manager and his principal and he must personally perform the duties which go with this office... The manager is an agent of the principal. He acts on his behalf and in his name. But also administers the affairs of the principal and is in charge of the business or a branch of business of the principal in one or more fixed places...”
Although a manager does not have the responsibility of policymaking he acts as a fiduciary and he must always act in good faith and loyally. A fiduciary always has a duty of confidence, as well as a duty of loyalty and a duty of confidentiality: In The Law of Trusts by David J. Hayton, p.760, Lord Millet explained in the English case ‘Balkiah v KPMG (1999 1ALLER 517)’ : “… the duty to preserve confidentiality is unqualified. It is a duty to keep the information confidential, not merely to take all reasonable steps to do so. Moreover, it is not to misuse it, that is to say, without the consent of the former client to make any use of it or to cause any use to be made of it by others otherwise than for his benefit.”
In this case Caruana was obliged to act with continued goodwill towards Farsons. The concept of continued goodwill meant that Caruana had to act loyally to his former employer and not reveal sensitive information nor use such information for his own personal benefit at the expense of his employer. Caruana had access to information of a sensitive nature and acted incorrectly when he used the information to the prejudice of Farsons.
The court felt that Caruana acted both in breach of article 34 of the Commercial Code (unfair competition) as well as in breach of his fiduciary obligations under article 1124 A of the Civil Code.
He therefore had to pay compensation for damages. This court said that it would not consider whether Caruana violated his contract of employment dated March 9, 2003, as, in the September 2004 contract, no mention was made of any breach of contract or any reservation of damages. This court agreed that the sum to be liquidated in damages was the amount
Caruana himself had accepted as representing the value of his obligation – €24,458.
This was not a condition in restraint of trade as Caruana was not prevented from working even in competition with Farsons, provided he acted in good faith and loyally. The condition to show continued goodwill was surely not against public order and should be considered as reasonable in the context of case-law and doctrine.
Reference was made to ‘Vassallo Cesario et v Cilia Pisani’ dated March 3, 2006. In this case, the court accepted the right of employers to safeguard their interests and trade secrets and prohibit ‘the misuse by the employee of his acquaintance with the employer’s clients or customers. More protection could be had against employees occupying a higher post such as managing director.
The court said that the principles enunciated in the Vassallo Cesario case applied to this case ‘mutatis mutandis’.
For these reasons, on February 28, 2014, the Court of Appeal gave judgment by accepting that Caruana had violated his fiduciary obligations. It liquidated the damages to the sum of €24, 458 for his breach of fiduciary obligations and for infringing the contract of termination dated September 27, 2004. In total, it condemned Caruana to pay Farsons €25,623 with legal interests up to the date of payment.
Dr Karl Grech Orr is a partner at Ganado Advocates.