Veitch Penny LLP - Exeter | Crediton, Devon

Case

Item Software (UK) Limited v Fassihi & Others
Court of Appeal (30 September 2004)

Issues

(1) Contracts of Employment
(2) Terms of Employment
(3) Fiduciary Duty

Facts

Kouroush Fassihi was employed by Item Software as a Sales and Marketing Director. Item was a supplier of reliability software. His contract of employment expressly stated that Mr Fassihi should not use confidential information belonging to the company for his own purposes.

A major part of the company’s business was the distribution of products for a company called Isograph. There was an agreement in place so that Item would distribute the product on behalf of Isograph in return for a royalty on sales. In November 1998, Item decided to try and negotiate more favourable terms with Isograph. At this time, Mr Fassihi approached Isograph with the suggestion of establishing a new company to take over the contract, thereby cutting Item out of the picture. Furthermore, Mr Fassihi encouraged his employers to negotiate aggressively with Isograph. Eventually, the negotiations failed between Item and Isograph due to the terms that Item was insisting upon. The Agreement was terminated and Isograph entered into an Agreement with Mr Fassihi’s own company, Rams International Limited. When this came to Item’s attention, Mr Fassihi was summarily dismissed.

Item then brought proceedings against Mr Fassihi alleging that he was in breach of his duty as a Director and as an employee by seeking to divert the Contract with Isograph and for encouraging his fellow Director to take the aggressive stance in negotiations.

Mr Fassihi counterclaimed including a claim for damages for wrongful dismissal and arrears of salary.

At the High Court, it was held that Mr Fassihi was in breach of his duties as a Director and/or employee by failing to disclose his misconduct at the time it occurred. Damages were awarded on the grounds that if the employee’s misconduct had been disclosed, then Item’s stance in the negotiation would have changed radically. The effect would be that the Agreement would not have been terminated but varied.

In addition, Mr Fassihi’s claims for arrears of salary and wrongful dismissal were dismissed.

Mr Fassihi appealed on the issues of disclosure and arrears of salary.

Decision

It was found that the High Court had not erred in finding that Mr Fassihi was under a duty as a director to disclose his own misconduct. It was noted that such a duty was an integral part of a director’s fundamental duty to act in what he in good faith considers to be the best interest of the company. The directors are responsible for the success of the company’s business and this is a central part to the business’ strength. In this case, Mr Fassihi was unable to fulfil that duty of loyalty except by disclosing to Item his plan to acquire the Contract for himself. The Appeal on the disclosure issue was dismissed.

It was further held that the High Court Judge had been mistaken in finding that Mr Fassihi was not entitled to arrears of salary and accordingly the Appeal on this issue would be allowed.

Comments

This case confirms that the duty of a Director to disclose his own misconduct is seen as part of the Director’s general duty of loyalty. This was a fundamental duty to act in good faith in the best interests of the company deriving from a Director’s fiduciary obligations. This is in contrast to the High Court decision which focused on whether there was a duty on an employee to disclose one’s wrongdoing.