Quality Assurance Management Asia Pte Ltd v Zhang Qing

• Jurisdiction: Singapore
• Judgment Date: 03 May 2013
• Date: 03 May 2013
• Docket Number: Suit No 715 of 2010 (Registrar's Appeal No 391 of 2012)
• Court: High Court (Singapore)

Quality Assurance Management Asia Pte Ltd

Plaintiff

and

Zhang Qing and others

Defendant

[2013] SGHC 96

Vinodh Coomaraswamy JC

Suit No 715 of 2010 (Registrar's Appeal No 391 of 2012)

High Court

Equity—Remedies—Equitable compensation—Principles in assessing—Employee in fiduciary relationship with employer using employer's business to earn secret profit—How employee's obligation to pay equitable compensation to his employer should be assessed

The first defendant, Zhang Qing (‘Zhang’), was a senior employee of the plaintiff company, Quality Assurance Management Asia Pte Ltd (‘QAM’). Zhang admitted that he owed fiduciary duties to QAM. While Zhang was employed by QAM, he set up the third defendant, Pinnacle Microelectronics Pte Ltd (‘Pinnacle’) and ran it using QAM's business opportunities, time and revenue-generating equipment to earn profits. QAM elected to claim only damages, and not an account of profits, for Zhang's breach of his employment contract, breach of his fiduciary duties and misuse of confidential information.

The assistant registrar hearing the assessment of damages (‘the AR’) held that QAM had failed to show that it suffered losses arising from misuse of QAM's confidential information by any of the defendants. The AR did, however, award loss-based compensation amounting to $72,462.10 comprising loss of profits on diverted business, loss of opportunity to secure a full testing contract with Cypress Semiconductor, Inc (‘Cypress’), repayment of Zhang's bonuses and cash awards from November 2007 to 15 September 2010, loss from Zhang's diversion of a Met One condensation nucleus counter (‘Met One counter’), and professional fees paid to Tecbiz Frisman Pte Ltd (‘Tecbiz’) whom QAM employed to investigate Zhang's clandestine activities. Zhang appealed against all five heads of damages awarded.

Held, allowing the appeal in part:

(1) A breach of a fiduciary duty was an equitable wrong triggering equitable remedies. Equity did not have a general power to award ‘damages’, but had the power to order equitable compensation for breach of fiduciary duties. Common law damages was neither an available nor an appropriate remedy for equitable wrongs: at [31] to [33].

(2) While common law damages and equitable compensation were both compensatory, each was rooted in the differing approach taken by the common law and by equity to wrongdoing. The common law had regard for the wrongdoer's freedom of action and kept the wrongdoer's liability within reasonable limits through qualifiers based on causation, foreseeability and remoteness. Equity's starting point was the trust and confidence the innocent party reposed in the wrongdoer. Equitable compensation vindicated the high duty which a fiduciary owed to the wronged and therefore had a deterrent function. This meant that the common law rules of causation, foreseeability and remoteness did not readily apply when assessing equitable compensation; Brickenden v London Loan & Savings Company of Canada[1934] 3 DLR 465 (‘the Brickenden principle’). But even in equity the test of liability for equitable compensation was whether the loss would have been suffered but for the breach of fiduciary duty: at [35], [37], [38], [41], [42], [45] and [46].

(3) The Brickenden principle produced tensions. The categories of fiduciary relationships were not closed and it was not readily apparent that equity should be as stringent with all fiduciaries or with fiduciaries who breached a duty other than the core duty of loyalty as it was with a trustee fiduciary who breached that core duty. In cases far removed from the traditional trustee/beneficiary relationship in which equitable compensation first became available or in cases of innocent breaches of fiduciary duty, the Brickenden principle, even if it was controlled by ‘but for’ causation, might operate unnecessarily harshly against a non-trustee fiduciary. It was at least clear that the Brickenden principle applied with all its rigour where a fiduciary was in one of the well-established categories and where he commited a culpable breach of an obligation which stood at the core of the fiduciary's duties. Zhang was in a well-established category of fiduciaries, namely employees. Zhang's breach was of the duty of loyalty, a core fiduciary duty. The breach was conscious, deliberate and flagrant. This case lay at the core, not the boundaries, of the Brickenden principle. Accordingly, the Brickenden principle did and should apply with full stringency, with the proviso that the legal burden of proving ‘but for’ causation remained on the plaintiff throughout: at [24], [52], [53], [56], [57] and [60].

(4) Where a case came within the boundaries of the Brickenden principle, equity would readily shift the evidential burden on causation to the breaching fiduciary once the plaintiff adduced some evidence to connect the breach to the loss. Causation would be determined shorn of the common law rules of foreseeability, remoteness and novus actus interveniens: at [61].

(5) Given QAM's election for loss-based compensation, the measure of QAM's compensation was not Pinnacle's gain but the profit which QAM would have earned on the contracts which Zhang diverted to Pinnacle in breach of his fiduciary duties. It was clear that if not for Zhang's diversion, the contracts were destined for QAM. Therefore, the AR did not err in holding that QAM had proved its loss and that it was directly attributable to Zhang's breach of fiduciary duties on the test of ‘but for’ causation: at [68].

(6) The AR did not err in finding that QAM lost an opportunity to profit from a testing contract for Cypress. Zhang kept the information about the potential project to himself. That reduced the lead time for QAM to mobilise its resources to quote for the testing contract. If Zhang had pursued the opportunity to the maximum extent possible for the benefit of QAM - as it was his fiduciary duty to do so - there was a real and substantial chance that QAM would have had sufficient time to put in a competitive quote to Cypress for the testing contract. The evidence showed that Zhang was behind this lost opportunity and this was sufficiently strong to shift the evidential burden of proof to Zhang, who failed to discharge that burden: at [73], [78], [83] and [84].

(7) It was difficult as a matter of logic to say that Zhang's admitted breaches of duty caused - in any sense of the word - QAM to pay bonuses and cash awards to Zhang from November 2007 to 15 September 2010. Establishing the necessary ‘but for’ causation required QAM to show that Zhang owed QAM a duty to disclose his wrongdoing. In equity (although not at common law), an employee who was also a fiduciary and who owed his employer a general fiduciary duty of loyalty was obliged pursuant to that general duty to disclose his own wrongdoing to his employer. QAM would have succeeded in proving liability on this basis. However, QAM proceeded on the basis of causative mistake of fact for monies had and received. This was a restitutionary claim which also entitled QAM to recover the sums paid as QAM's payment was made pursuant to a fundamental mistake of fact and there was no evidence from Zhang that he had changed his position, that QAM was estopped or that he had any other defence to QAM's restitutionary claim: at [95], [97] and [99].

(8) There was no risk of double recovery. Each head of damage which the AR's award compensated QAM for was a distinct and separate loss. QAM did not recover more than it lost. There was no abuse of process in QAM seeking to recover all the money it had lost by reason of Zhang's misconduct as the conceptual basis of recovery was not to strip Zhang of his gain: at [100] and [102].

(9) QAM was precluded from recovering any damages for Zhang's diversion of the Met One counter. Zhang paid for the counter with his own money and QAM did not show that it suffered any loss by not having that Met One counter. Further, although Zhang earned a secret profit from renting that Met One counter back to QAM, that secret profit was not recoverable because of QAM's election to claim damages instead of an account of profits. Zhang's gain was not matched by any loss on QAM's side for which loss-based compensation could be awarded. There was no subtraction of QAM's wealth for Zhang's use of QAM's Met One counter: at [106].

(10) The sum paid by QAM to Tecbiz to carry out forensic inspection of the defendants' hard drive, two thumb drives and laptop was recoverable as this expense would not have been incurred but for Zhang's breach of fiduciary duties: at [111].

ABB Holdings Pte Ltd v Sher Hock Guan Charles [2010] SGHC 267 (refd)

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Alexander Barton v Alexander Ewan Armstrong [1976] AC 104 (refd)

Bell v Lever Bros Ltd [1932] AC 161 (refd)

Boardman v Phipps [1967] 2 AC 46 (refd)

Brickenden v London Loan & Savings Co of Canada [1934] 3 DLR 465 (folld)

Bristol and West Building Society v Mothew [1998] Ch 1 (refd)

Canson Enterprises Ltd v Boughton & Co (1991) 85 DLR (4 th) 129 (refd)

CHS CPO Gmb H v Vikas Goel [2005] 3 SLR (R) 202; [2005] 3 SLR 202 (refd)

Chua Choon Cheng v Allgreen Properties Ltd [2009] 3 SLR (R) 724; [2009] 3 SLR 724 (refd)

Chun Cheng Fishery Enterprise Pte Ltd v Chuang Hern Hsiung [2010] SGHC 298 (refd)

Collie, Re; ex parte Adamson (1878) 8 Ch D 807 (refd)

Creanovate Pte Ltd v Firstlink Energy Pte Ltd [2007] 4 SLR (R) 780; [2007] 4 SLR 780 (refd)

Dawson (deceased) , Re; Union Fidelity Trustee Co Ltd v Perpetual Trustee Co Ltd [1966] 2 NSWR 211 (refd)

Firstlink Energy Pte Ltd v Creanovate Pte Ltd [2007] 1 SLR (R) 1050; [2007] 1 SLR 1050 (refd)

Hallett's Estate, Re (1880) 13 Ch D 696 (refd)

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Henderson v Merrett Syndicates Ltd [1995] 2 AC 145 (refd)

Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41 (refd)

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