The Court of Session has ruled that, where an employee kept secret a 50% share-holding in a company which he persuaded his employer to do business with, he owed a fiduciary duty to his employer and had to account for the secret profits he had made as a result of his interest (Samsung Semi-Conductor Europe Limited v Docherty and another).
Mr Docherty was a quality assurance manager at Samsung, which provided components to Dell computers. His contract of employment contained confidentiality and non-solicitation clauses and the staff handbook contained a contractual provision that employees had to disclose any business activities or employment being undertaken outwith Samsung. Mr Docherty did not disclose that he had a 50% shareholding in a company called DK Verification Ltd (DKV), which was engaged to provide checking and quality control services in relation to the products that Samsung supplied to Dell, one of its most important customers.
In his role at Samsung, Mr Docherty had to manage and supervise the services provided by DKV. During his employment he also ensured that Samsung did not move its business away from DKV, by providing misleading information about DKV's competitors. He continued to do this when Dell moved its plant from Ireland to Poland, and DKV set up a Polish subsidiary so that it could continue to provide the same services to Samsung in relation to its contract with Dell. Samsung uncovered Mr Docherty's interest in DKV and issued proceedings against him claiming an account of profits made by him from his interest in DKV.
The Court of Session held that, because of his duties and the level of responsibility and influence he enjoyed, Mr Docherty owed a fiduciary duty to Samsung. It did not matter that Samsung had never expressly told Mr Docherty that he owed them a fiduciary duty. He knew that he held an influential role and that he was conflicted in his dealings with DKV – in fact, he influenced decisions on how much to pay DKV and so personally gained from these decisions. He had breached the fiduciary duty by putting himself in a position where there was a conflict of interest between his involvement in DKV and his duties to Samsung. He therefore had to account to Samsung for the profits (just over £300,000) he had made from his interest in DKV.
Impact on employers
- In reaching its decision, the Court of Session reviewed the key legal principles concerning fiduciary duties, in particular the principles set down in Nottingham University v Fishel. It noted that an employee may owe a fiduciary duty without being a director of the company and that a fiduciary relationship may arise because of the particular circumstances of the employment relationship.
- The question to be asked is whether the duties carried out by the employee are such that he has put himself in the position where he must act solely in the interests of the employer. Such circumstances will arise where, as in this case, the influence of the employee is such that the employer is vulnerable to the employee misusing his position.
- An employee in breach of his fiduciary duty can be required to account for profits made, even where the employer has not suffered a loss. This is therefore a particularly useful remedy where the employee has used his position of influence to gain a personal advantage or further his own interests, but the employer cannot establish what, if any, loss it has suffered as a result.
- For the avoidance of doubt, employers should ensure that the contracts of employment of senior staff that will have key decision-making roles within the organisation require them to disclose any outside interests.
- Although decisions of the Court of Session are only legally binding on Scottish courts and tribunals, they will usually be taken into account by the English courts and this decision is likely to be of high persuasive value in similar cases arising in England and Wales.