A manager who uses his position in the company to make a secret profit may be obliged to disgorge it
How wide is the range of a company's officers and employees who owe it a fiduciary duty?
The decision of the Supreme Court of Appeal in Volvo (Southern Africa) (Pty) Ltd v Yssel 2009 (6) SA 531 (SCA) throws useful light on one of the most fundamental concepts in company law, namely, that of a fiduciary duty which is owed to the company by certain individuals within the company structure.
It is trite that directors of a company are in a trustee-like position vis-à-vis the company and consequently owe it a fiduciary duty. Such a duty includes the duty to act bona fide in what the director honestly believes to be the best interests of the company, and the duty not to make a secret profit.
In the Volvo case, the company had briefed a certain labour broker to acquire the services of a person to manage its information technology division.
A labour broker is an agency that is briefed by a client (in this case, Volvo) to secure a person to perform services for the client. The person whose services are secured in this way remains under contract to - and is remunerated by - the labour broker, and usually has no contract with the client.
In accordance with its mandate, the labour broker duly recruited one Yssel to fill the position of IT manager at Volvo. Yssel declined to be employed by the company, and remained in the employ of, and continued to be remunerated by, the labour broker. Volvo would pay the labour broker, monthly, an agreed amount in respect of Yssel's services, and the labour broker in turn would pay Yssel a proportion of that amount.
Later, Yssel told Volvo that six other member of its IT staff who were similarly employed but through a different labour broker, were unhappy with their relationship with their current labour broker, and he said that he could (at no cost to Volvo) arrange for them to transfer their services to the same labour broker as employed him. Volvo agreed, and this plan was duly put into effect by Yssel; Volvo had no contact with the labour broker in question and everything was arranged by Yssel.
Unbeknown to Volvo, Yssel had agreed with his labour broker that, if he arranged for these six IT personnel to transfer their services to its agency in this way, the labour broker would pay him a monthly commission, but that this would not be disclosed to Volvo.
Consequently, a significant part of the monthly payment that Volvo were making to the labour broker for the services of the six IT personnel was finding its way into the pockets of Yssel.
When, much later, all of these facts later came to light, Volvo was so incensed that it sued Yssel and (when it lost in the High Court) took the matter on appeal to the Supreme Court of Appeal.
What was Volvo's complaint, given that it had suffered no loss?
But what precisely was Volvo's complaint? After all, it had suffered no financial detriment. It was paying no more than it would have if no secret commission had been paid to Yssel. .
Volvo's argument was that, as its IT manager, Yssel was in a position of trust vis-à-vis the company; that he had abused that trust by negotiating a secret commission for himself and that - even though Volvo had suffered no financial loss - Yssel was obliged to disgorge the improper profit, that is to say, to pay the profit back into Volvo's coffers.
The Supreme Court of Appeal ruled in favour of Volvo
The Supreme Court of Appeal ruled that Volvo's claim for a disgorgement of profit was well founded in law. As for Yssel's argument that he had no contractual relationship with Volvo and therefore owed the company no fiduciary duty, the court ruled that a position of trust, which gives rise to a fiduciary duty, is not necessarily derived from a contract.
In the circumstances of this particular case, it was the position that Yssel held, rather than any contractual arrangement, that gave rise to the fiduciary relationship. The court held that Yssel, being in a position of trust, could not allow his personal interests (in securing a commission from the company's labour broker) to prevail over Volvo's interests. In the circumstances, the court held that Yssel was obliged to disgorge the secret commission he had been receiving over the years and pay it over to the company.
Giving the judgment of the Supreme Court of Appeal, Nugent JA said -
Yssel occupied the most senior position in Volvo's information technology division. That there was no contractual privity between him and Volvo seems to me to be of little consequence. It was the position to which he was appointed, rather than the nature of the contractual relationship, that defined what Volvo could expect of him. He had not been brought into its offices so as to provide him with an opportunity to hawk his own wares but had been brought there in the interests of Volvo.
The fact that Yssel had pledged the labour broker to secrecy about his commission showed, said the court, that he was well aware that Volvo did not know that he was arranging matters so as to secure a personal benefit for himself. It was only because Yssel was a manager at Volvo that the transaction came about at all.
The lesson to be learned from this judgment.
It is trite that directors owe their company a fiduciary duty, which obliges them to act toward the company with the utmost good faith, and that this precludes them from using their position to make a secret or unauthorized profit. However, as the judgment makes clear, this stringent legal duty is not confined to the company's directors, and extends to all persons who are in a position of trust vis-à-vis the company, irrespective of whether they have a contract with the company.
If any such person makes an unauthorized profit from the exploitation of his position with the company then - even if the company has suffered no financial loss -that person can be compelled to disgorge the profit, that is to say, to pay it back into the coffers of the company.
There are often large underhand profits to be made by unscrupulous company directors and employees who are able to arrange, for example, that their company purchases all its services or supplies from a particular entity, and who then take a secret commission from that entity.
If it is wise, a company will include a clause in all its contracts of employment prohibiting any such secret commissions.
An employee who breaches such a term can then be sued by the company for breach of contract - which will sometimes be a more clear-cut cause of action than a common-law claim based on a breach of fiduciary duty - and the company may then be able to claim (in addition to a disgorgement of the secret profit) an amount in damages to compensate it for any loss it has suffered.
In many such circumstances, a company may well suffer a financial loss, for example through being induced to buy stock too expensively in terms of a secret commission arrangement, or being induced to sell its products too cheaply in terms of such an arrangement. It is significant, however, that a claim for disgorgement of profits can be made irrespective of whether the company has suffered any loss, for it is based, not on financial loss being caused to the company, but on a profit having been improperly made by the individual in question.