The First Hall of the Civil Court, presided over by Mr Justice Mark Chetcuti, on November 13, 2014, in the case ‘Vascas Enterprises Ltd v Adrian Ellul’, held, among other things, that making preparatory acts before resigning was not a breach of fiduciary obligations.

Adrian Ellul was employed as a manager under a contract of employment dated June 18, 2008, with Vascas jewellers. His employment was terminated on March 12, 2010.

Vascas claimed that Ellul abused his position of trust and loyalty to the company by allegedly orchestrating a manoeuvre to its detriment.

It stated that Ellul made preparations to leave his job, by reducing orders with one supplier, Re Argento, while establishing personal contact with them so that, on quitting his job, he would make orders in his own name directly from this supplier.

Vascas said that Ellul as manager occupied a position of trust. He had a duty to act exclusively in the interest of his employer and protect the company’s interests. He was obliged to keep certain information confidential for the benefit and interest of Vascas.

The company blamed Ellul for terminating Vascas’s relations with Re Argento, in order to finalise a personal business deal.

This act, it was argued, was abusive and a breach of contract and employment obligations. As a result, they said they suffered damages and loss of sales and earnings.

Faced with this situation, Vascas proceeded to file legal proceedings against Ellul, requesting the court:

• To declare that he violated his contract of employment dated June 18, 2008, and acted dishonestly, deceitfully and illicitly as an employee of the company;

• To declare Ellul to be responsible for damages;

• To liquidate the damages, and condemn him to pay the amount so liquidated.

In reply, Ellul contested the claims against him and denied any wrongdoing.

It resulted that in 2007 Vascas made orders of €74,730 from Re Argento.

The orders were reduced to €14,000 and eventually Vascas stopped purchasing from them.

Decisions were taken by the directors. Ellul as manager only made recommendations to his directors. Ultimately, the directors had to approve any order.

The court made reference to two English cases for guidance: ‘Jeremy Michael Ranson v Customer Systems plc dated June 27, 2012’ and ‘Smile Incorporated Dental Surgeons v PTE Ltd VS Lui Andrew Stewart’, dated July 31, 2012.

In the Ranson case, the court held that “a ‘fiduciary’ duty should not be confused with a duty of ‘fidelity’. The duty of fidelity may be expressly set out in the contract but, if not, it will be implied. All employment contracts contain an implied term that an employee will serve their employer in good faith and with fidelity (duty of fidelity) meaning that, during employment, the employee should act in his employer’s interests and not use the time for which he is paid by the employer in furthering his own interests. However, it also means that, while the employee must have regard to his employer’s interests. It does not in general amount to a ‘promise to give his employer the benefit of every opportunity within the scope of its business’.”

The English court maintained that an employee was not automatically a fiduciary. Certain senior employees could be subject to fiduciary obligations under their contract of employment. However, they were not on the same level as directors and did not have the same fiduciary duties imposed on them.

“An employee owes an obligation of loyalty to his employer but he will not necessarily owe that exclusive obligation of loyalty, to act in his employer’s interest and not in his own, which is the hallmark of any fiduciary duty owed by an employee to his employer. The distinguishing mark of the obligation of fiduciary, in the context of employment, is not merely that the employee owes a duty of loyalty but of single-minded or exclusive loyalty.”

Helmet Integrated Systems Ltd v Tunnard also shows that the obligation of loyalty is no more than an obligation loyally to carry out the job that the employee agreed to do.

In the Ranson case, the court said that, where employees had fiduciary duties, this did not necessarily include the duty to report an infringement of the contract, unless this was imposed by the contract.

Although employees had an obligation to protect the interests of the employer, this did not mean that an employee could not look after his own interests insofar as he did not violate some obligations of confidentiality or some other condition in the contract, and provided he did not compete during his employment.

The court had to consider the facts and the contractual relations between an employer and employee.

In the Smile case, it was held “it is trite law that there is an implied term in the employer’s favour that the employee will serve the employer with good faith and fidelity, and that he or she [the employee] will also use reasonable care and skill in the performance of his or her duties pursuant to the employment contract”.

It was also held that fiduciary duties “result from the fact that within a particular contractual relationship there are specific contractual obligation which the employee has undertaken which have placed him in a situation where equity imposes these rigorous duties in addition to the contractual obligations.

“Middle management employees with the authority to negotiate a contract on behalf of the company or to authorise the payment of invoices did not owe fiduciary duties to the employer.”

It was stated that only employees in top management had fiduciary duties.

In ‘Anthony Caruana & Sons Ltd v C. Caruana’, dated February 28, 2014, it was held that a manager had duties of loyalty and care towards his employer.

“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 he 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. He is, therefore, the mandatory of the principal and the main function of his office is to increase the prosperity of the principal. He is, therefore, also the lessor of work and industry.

“These characteristics have been referred to by the Commercial Court – Judge Profs. Parnis presiding, in the case ‘Zammit v Galea et’, decided on March 5, 1907. The manager is therefore in relation to his principal an administrator, namely a mandatory and a lessor of work while in relation to third parties he is the representative that binds the principal and therefore is his agent.’’

Although an employee was obliged to look after the interest of his employer, this did not mean that he was obliged to remain in employment and could not seek to improve his position, provided he did so without causing damage or failing in his duties until he was employed

A manager had to act with the diligence of a bonus pater familias. Under article 1124(A) of Chapter 16, certain contracts imposed additional obligations other than contractual. Under Maltese law, in certain contractual relations and/or assumption of office, there were fiduciary obligations when there was a duty to look after another person’s interests. An employee had to act with loyalty, trust, good faith, towards his principal and act with the diligence of a bonus pater familias. Employees having an executive post should not do any act to prejudice their employer.

These duties were over and above any other contractual obligation.

The court noted that, in the circumstances, the management of Vascas vested in its directors. Ellul could not run his own business in the period when he was in full employment. He had to keep information on the company and its customers as confidential after terminating his employment. The court said that there was only proof that before he resigned from his employment, Ellul planned to work on his own.

Although an employee was obliged to look after the interest of his employer, this did not mean that he was obliged to remain in employment and could not seek to improve his position, provided he did so without causing damage or failing in his duties until he was employed.

After terminating his employment, he could not use confidential information, which he became aware of during his employment, at the expense of his employer. But preparatory acts, in the court’s opinion, were not a breach of a fiduciary obligation. There was no proof that Ellul violated his duty of confidentiality.

The court was not convinced that Vascas suffered any damages by the reduction of order from Re Argento, when it increased its orders from its principal supplier. There was no proof that Ellul made orders from Re Argento when still employed by Vascas.

It was not shown that Ellul failed in his duties. Ellul wished to leave his job with Vascas and requested assistance from one of Vascas’s suppliers. There was no breach of loyalty towards Vascas, pointed out the court.

The court did not feel that Ellul had orchestrated a plan to acquire for himself Re Argento as a supplier of jewellery. It was unrealistic that a supplier would wait for Ellul to resign and to set up his own business in order to provide a consignment.

It was also unrealistic that the directors of Vascas would permit orders to slide without increasing orders elsewhere.

Ellul was allowed to make suggestions but this was always subject to the approval of the directors. It was not proven that the decrease in orders from Re Argento was brought about by any wrongdoing on the part of Ellul during his employment.

Ellul had not purchased products in his own name when still in employment with Vascas.

There was no evidence, concluded the court, that Ellul violated his fiduciary obligations imposed by his contract of employment or that he breached his duty of loyalty, trust, correct behaviour, and good faith arising from his duty as manager. There was only proof that Ellul was not content at his place of work and planned to resign.

At the same time, he made contacts and looked for an alternative in order to start his own business.

It was not proven, said the court, that there was any link between the decline of orders from Re Argento with the alleged lack of loyalty on the part of Ellul. In addition Ellul did not have the authority to take decisions.

For these reasons, on November 13, 2014, the First Hall of the Civil Court gave judgment by dismissing Vascas’s requests.

Dr Karl Grech Orr is a partner at Ganado Advocates.