Case Comment

Extending the Fiduciary Duty of Loyalty: Item Software (UK) Ltd v Fassihi

Name: Priyam Raj Kumar

Word Count: 3000

In Item Software (UK) Ltd v. Fassihi1, the Court of Appeal considered two issues. Firstly, it
determined whether or not a company director was in breach of his fiduciary duty of loyalty by

1 [2004] EWCA Civ 1244; [2004] BCC 994.

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failing to disclose his own misconduct to the company, and secondly, if an employee was entitled to
claim his remuneration to the date of his dismissal notwithstanding the fact that the date for the
payment of that remuneration had not been reached.2 Lady Justice Arden clarified the law by
utilizing policy doctrine3 and extended the fiduciary duty of loyalty to disclosure of a director’s own
misconduct. In relation to the second issue, the Court ruled that the director could make a time-
apportioned4 claim for his salary under the Apportionment Act, 1870.5 This article primarily focuses
on the first issue.

A. THE FACTS

Item Software Ltd (UK) (Claimant) distributed software products and at the relevant time, a major
part of the Item’s business was the distribution of software products to Isograph Ltd. The directors
of Item included Mr. Fassihi (Defendant) and Mr. Dehghani. The defendant was employed from 1
May 1995 and the contract expressly provided that Mr. Fassihi should not use confidential
information belonging to Item for his own purposes.6

In November 1998, Item attempted to negotiate more favourable terms with Isograph. Mr. Fassihi
encouraged Mr. Dehghani to press Isograph for improved terms. At the same time, Mr. Fassihi
secretly approached Isograph with his own proposals which involved establishing his own
company, RAMS International Ltd. (RAMS), to take over the contract. 7 On 24 April 1999, Mr.
Fassihi had sent a fax to Isograph referring to RAMS and urged Isograph to accept a conditional
notice to terminate the existing distribution arrangements which Item had given. 8 In the end, the
negotiations between Item and Isograph failed because Item insisted on terms that Isograph was not
prepared to accept. Item then discovered the defendant’s misconduct and Mr. Fassihi was
summarily dismissed on 26 June 1999. Item brought proceedings against Mr. Fassihi alleging that
he was in breach of his duty as a director and employee in seeking to divert the contract with
Isograph to RAMS and for having pressed Mr. Dehghani to take a hard line in the negotiations with
Isograph with the intention of improving RAMS’ chances of securing the contract. Both these

2 Ibid at Para 1.
3 M. B. Hemraj: 2006, Duty of loyalty: company directors’ positive obligation to disclose their own
misconduct, Company Lawyer, 183 at 1-2.
4 From June 1 to 26.
5 Apportionment Act 1870 at ss.2 and ss.3.
6 Ibid at Para 3.
7 Ibid at Para 4.
8 Ibid at Para 7.
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claims failed before the judge in the trial. 9 However, Item succeeded on a further allegation that Mr.
Fassihi was in breach of his duty in failing to disclose to Item his own wrongdoing.

B. THE COURTS’ DECISIONS

During the trial, Item couldn’t not succeed in the diversion or sabotage issues as the judge found
that, in the negotiations with Isograph, Item insisted on terms that Isograph was not prepared to
accept. This was deemed to be the cause of failure of the negotiations. 10 Furthermore, Mr. Fassihi
was the sales and marketing director of Item and it appeared from the facts that he may have had
day-to-day responsibility for the trading relationship with Isograph but not the responsibility for
strategic business decisions regarding that relationship. 11 There was nothing to suggest that Mr.
Dehghani would have negotiated more cautiously if Mr. Fassihi had not pressed him to seek better
terms.12 In relation to the crucial issue of law, namely: “whether, in addition to Mr. Fassihi’s breach
of duty in seeking to divert Item’s main contract to his new company, the failure to disclose that
misconduct to Item was a further breach of duty” 13, it was held by the trial judge that Mr. Fassihi’s
misconduct did give rise to a superadded duty of disclosure 14 as in Syborn Corpn v. Rochem Ltd,15
there was a separate and independent aspect of his duties which required him to disclose the facts.
Furthermore, the judge stated that there was a clear case of fraudulent concealment as Mr. Fassihi
had failed to tell Mr. Dehghani of what he had done, while remaining involved in the negotiations
with Isograph and was part and parcel of his dishonest scheme to rob his employers of their
business.16 The judge argued that the director owes fiduciary duties to the company for reasons
given in Horcal Ltd v. Gatland17 and it is difficult to justify how a director who was making profit
by appropriating the company’s contract for his own benefit would not be under duty to disclose
what he had done.18 This scenario is distinguishable from the one in Bell v. Lever Bros Ltd19 due to
the fact that Mr. Fassihi was a director of Item as well as an employee. 20 Therefore, the non-
disclosure of Mr. Fassihi’s conduct was a breach of duty.

9 Ibid at Para 5.
10 Ibid Para 7.
11 Ibid at Para 6.
12 Ibid at Para 7.
13 Ibid at Para 9.
14 Item Software (UK) Ltd v Fassihi [2003] 2 BCLC 1 at Para 52.
15 [1984] Ch. 112; [1983] 3 W.L.R. 713.
16 Ibid (2003) at Para 53.
17 [1983] BCLC 60.
18 Ibid (2003) at Para 54.
19 [1931] 1 L.B. 557; [1930] 11 WLUK 38.
20 Ibid (2003) at Para 54.
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On appeal, L.J. Arden states that in relation to the disclosure issue, she considers the position of Mr.
Fassihi as a director because a director is not simply a senior manager of the company and the
duties of a director are in general higher than those imposed by law on an employee 21 and disagrees
with the trial judge’s superadded duty of disclosure by stating that a fiduciary does not owe a
separate and independent duty to disclose his own misconduct to his principal. 22 However, she
observed that this case is based on the fundamental duty a director is subject to, that is the duty to
act in what he in good faith considers to be in the best interests of the company. 23 Furthermore, the
duty of loyalty is a time-honoured rule24 that focuses on principle rather than the particular words
which have been used previously. This principle is dynamic and it reflects the flexible quality of the
doctrines of equity.25 The fact that the duty of loyalty has never before been applied so as to require
a fiduciary to disclose his own misconduct was not a good objection to the application of the
fiduciary principle.26 Based on this policy doctrine, the Court of Appeal held that there is no basis
on which the defendant could reasonably have come to the conclusion that it was not in the best
interest of Item to know of his breach of duty and Mr. Fassihi could not fulfil his duty of loyalty
except by informing Item about RAMS, and his plan to acquire the Isograph contract for himself.27

In relation to the apportionment issue, the court observed that, if section 2 of the 1870 Act 28 applies,
Mr. Fassihi is free to claim that part of his June salary (1 to 26 June) as his employment contract
contained no provision which expressly excluded the operation of the 1870 Act. 29 Furthermore, the
Court distinguishes this case from the case of Boston Deep Sea Fishing And Ice Company v.
Ansell,30 by observing that in the Boston31 case there was no attempt to rely on the 1870 Act and
therefore it is not an authority as to the effect of the 1870 Act.32 To conclude, L.J. Arden allowed
the appeal and held that none of the authorities cited, detracts from the interpretation to sections 2
and 3 of the 1870 Act and based on that interpretation Mr. Fassihi can make a time-apportioned
claim for his salary for the period 1 to 26 June33.

21 Ibid (2004) at Para 34.

22 Ibid (2004) at Para 41.
23 Ibid (2004) at Para 41.
24 Mutual Life Insurance Co of New York v Rank Organisation Ltd [1985] BCLC 11 at Para 21.
25 Ibid (2004) at Para 41.
26 Court of Appeal: Item Software (UK) Ltd. v Fassihi, Industrial Relations Law Reports, 24, G.B.
3 at 232.
27 Ibid (2004) at Para 44.
28 Ibid.
29 Ibid (2004) at Para 70.
30 [1888] 39 Ch.D 339.
31 Ibid.
32 Ibid (2004) at Para 72.
33 Ibid (2004) at Para 82.
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C. ANALYSIS

The fiduciary duty of loyalty has been a source of debate among academics. It is argued by some
that the requirement of loyalty is subjective as it requires fiduciaries to exercise their judgement in a
manner, which they subjectively believe to be in the best interests of the beneficiary, 34 while others
have argued that the duty of loyalty is best understood as the summation of the various doctrines
that are applied peculiarly to fiduciaries, rather than as a legal duty that is directly enforceable on its
own right.35 In the case of Item Software Ltd36 where full disclosure was seen as an extension of the
fiduciary duty of loyalty; the Delaware court, in the case of Malone v. Brincat,37 where it was
established that absolute honesty was required from the fiduciaries; the Canadian Court, which
adopted the English approach38 and the Scottish Court, where the question of full disclosure being a
part of the fiduciary duty of loyalty was left open.39 The Australian Courts seem to be an outlier as
they have rejected this proposition.40 They view the fundamental duty of loyalty as proscriptive by
nature and this stance does not easily accommodate a duty of full disclosure as a primary fiduciary
obligation.41 According to the Australian Courts, the fiduciary obligation of loyalty is exhausted by
42
the proscriptive ‘no conflict’ and ‘no profit’ rules. In contrast to the Australian Courts, academics
and legal scholars have observed the importance of this extension of the fiduciary duty of loyalty.
For example: Licht argues that the common law regime of fiduciary loyalty implements a dual-
pronged approach that ensures certain outcomes. 43 The first prong i.e. the prohibition of any pursuit
of self-interest aims to counteract self-interestedness and the second prong, which requires full
disclosure by the fiduciary aims to combat information asymmetries.44

34 P.D. Finn: 1977, Fiduciary Obligations, Law Book Company at 3, 13-15.

35 M. Conaglen: 2010, Fiduciary Loyalty: Protecting the Due Performance of Non-Fiduciary
Duties, Oxford at 269.
36 Ibid.
37 722 A.2d 5 (Del 1998) at paras 13-14 as per Holland J.
38 Procon Mining & Tunneling Ltd v McNeil, 2010 BCSC 487 at paras 132-137 as per Ross J; Ibid
(2018).
39 Commonwealth Oil & Gas Co Ltd v Baxter [2009] CSIH 75 at para 82 as per Lord Nimmo
Smith.
40 Ibid (2018) at 793.
41 Ibid (2018) at 793; Pilmer v Duke Group [2001] HCA 31 at para 128 as per Kirby J; Friend v
Booker [2009] HCA 21 at para 84; P&V Industries Pty Ltd v Porto [2006] VSC 121 at paras 23-25
as per Hollingworth J.
42 Ibid (2018) at 793; Fitzwood Pty Ltd v Unique Goal Pty Ltd [2001] FCA 1628 at paras 31-33 as
per Finkelstein J.
43 Ibid (2018) at 792-793.
44 Ibid (2018) at 792-793.
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Academics like Lee have claimed that there is a directional element in fiduciary obligations that
includes a duty to act solely for the benefit of the principal.45 This directional element was explained
in Item Software,46 when the court described the director’s duty to act in the company’s best
interests. Furthermore, Lee explains that this duty consists of a duty to act in the sole interests of the
company as the fiduciary obligations are not result-oriented and do not specify a particular standard
to be attained by the fiduciary.47 She further argues that this positive, directional element of
fiduciary obligation was seen in the case of Regal (Hastings) Ltd v Gulliver,48 where the House of
Lords found the directors liable to account to the company for their profits due to the fact that the
directors has made use of those fiduciary positions to make those profits. 49 It is argued that it was
enough that the fiduciary used its fiduciary position to make a profit for itself and it did not matter
that it had not been shown that the interests of the principal had been adversely affected. 50 However,
some academics are not convinced by the best interests duty applied in Item Software.51 Edelman
argues that the difficulty with the duty to act in the best interests is that the duty is extremely
vague.52 Furthermore, it is observed that the extreme vagueness has generated much academic
criticism such as being unhistorical, simplistic, true in part only and misleading.53

D. Conclusion

The approach taken by L.J. Arden in the case of Item Software54 started a chain reaction and various
jurisdictions around the world adopted this approach. It is crucial to note that even though the court
stated that the duty of disclosure was not an independent duty, it functioned in the exact way as it
operated as a separate and additional source of liability. 55 Furthermore, I believe that Mr. Fassihi
was in clear breach of his fiduciary duty primarily due to the conflict of interest 56 and his duty to not

45 R. Lee: 2009, Rethinking the Content of the Fiduciary Obligation, Conveyancer and Property
Lawyer at 245, 251, 263.
46 Ibid.
47 Ibid (2009) at 251; Ibid (2010) at 335.
48 [1967] 2 AC 134.
49 Ibid (1967) at paras 144-145 as per Lord Russell, para 153 as per Lord Macmillan, para 153 as
per Lord Wrights, para 158 as per Lord Porter.
50 Ibid (2010) at 336.
51 Ibid.
52 J. Edelman: 2010, When do fiduciary duties arise? Law Quarterly Review, 302 at 9-11.
53 S. Hulme: 2000, The Basic Duty of Trustees of Superannuation Trusts — Fair to One, Fair to
All? Tru. L. I. at 130.
54 Ibid.
55 A. Berg: 2005, Fiduciary Duties: a director’s duty to disclose his own misconduct, Law
Quarterly Review 213 at 5.
56 Diversion Issue at page 1.
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make (potential) secret profits.57 The court arguably erred by placing too much emphasis on the full
disclosure aspect of the fiduciary duty of loyalty and should have adopted the Australian courts’
approach instead.58

57 Ibid (1967) at paras 144-145 as per Lord Russell, para 153 as per Lord Macmillan, para 153 as
per Lord Wrights, para 158 as per Lord Porter.
58 Refer to page 6.
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Bibliography

Case Laws:

Item Software (UK) Ltd v Fassihi [2004] EWCA Civ 1244; [2004] BCC 994.
Item Software (UK) Ltd v Fassihi [2003] 2 BCLC 1.
Syborn Corpn v Rochem Ltd [1984] Ch. 112; [1983] 3 W.L.R. 713.
Horcal Ltd v Gatland [1983] BCLC 60.
Bell v Lever Bros Ltd [1931] 1 L.B. 557; [1930] 11 WLUK 38.
Boston Deep Sea Fishing And Ice Company v Ansell [1888] 39 Ch.D 339.
Malone v Brincat 722 A.2d 5 (Del 1998)
Procon Mining & Tunneling Ltd v McNeil [2010] BCSC 487
Commonwealth Oil & Gas Co Ltd v Baxter [2009] CSIH 75
Pilmer v Duke Group [2001] HCA 31
Friend v Booker [2009] HCA 21
P&V Industries Pty Ltd v Porto [2006] VSC 121
Fitzwood Pty Ltd v Unique Goal Pty Ltd [2001] FCA 1628
Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134.
Mutual Life Insurance Co of New York v Rank Organisation Ltd [1985] BCLC 11

Other Publications:

M. B. Hemraj: 2006, Duty of loyalty: company directors’ positive obligation to disclose their own
misconduct, Company Lawyer, 183.

Court of Appeal: Item Software (UK) Ltd. v Fassihi, Industrial Relations Law Reports, 24, G.B. 3

P.D. Finn: 1977, Fiduciary Obligations, Law Book Company.

M. Conaglen: 2010, Fiduciary Loyalty: Protecting the Due Performance of Non-Fiduciary Duties,
Oxford.

N. Licht: 2018, Lord Eldon Redux: Information Asymmetry, Accountability and Fiduciary Loyalty,
Oxford Journal of Legal Studies, Vol. 37, No. 4.

D. Jensen: 2010, Prescription and Proscription in Fiduciary Obligations, King’s Law Journal 21.

L. Fioris: 2012, Precluding Prescriptive Duties in Fiduciary Relationships: The Problems with the
Proscriptive Delimitation, 40 ABLR.

R. Lee: 2009, Rethinking the Content of the Fiduciary Obligation, Conveyancer and Property
Lawyer.
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J. Edelman: 2010, When do fiduciary duties arise? Law Quarterly Review, 302.

S. Hulme: 2000, The Basic Duty of Trustees of Superannuation Trusts — Fair to One, Fair to All?
Tru. L. I.

A. Berg: 2005, Fiduciary Duties: a director’s duty to disclose his own misconduct, Law Quarterly
Review 213.

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