Tesco Stores Ltd v Simon Pook & Ors [2003] EWHC 823 (Ch)

Case No HC 2C00931[2003] EWHC 823 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 14 April 2003
Before
THE HONOURABLE MR JUSTICE PETER SMITH
Between
Tesco Stores LimitedClaimant(1) Simon PookDefendants(2) Natasha Kersey PookDefendant(3) Universal Projects (UK) LimitedDefendant
Miss Linden Ife (instructed by Berwin Leighton Paisner) for ClaimantMr Donald Broatch (instructed by L. E. Law) for DefendantsHearing Hearing dates : 1 st and 2 nd April 2003
Approved JudgmentI direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic..............................Mr Justice Peter Smith

INTRODUCTION

[1]This is a trial of part of the claim brought by the Claimant (“Tesco”) against the First and Third Defendants (“Mr Pook”) and (“Universal Projects”) respectively. The claim against the Second Defendant Mr Pook’s wife has been settled by consent on terms that she acknowledges that she has no claim in respect of the property 3 Beldams Gate, Bishop’s Stortford, Hertfordshire CM23 5RN, (“the Property”) which was acquired using partly monies provided by her and Mr Pook in May 2000.[2]The main claim against Mr Pook arose out of the submission of false invoices by Universal Projects to Tesco ostensibly for services rendered. The amount in question was £512,236. Mr Pook who was employed by Tesco’s from 29 December 1983 until 23 April 2002, was from 10 January 1999 the New Grocery Development Manager in Tesco’s e-commerce department, and from 1 November 2001 he was employed in a similar position in South Korea.[3]Part of his duties involved the approval of invoices, and he concocted on behalf of Universal Projects, false invoices in that sum, and approved them for payment. Inevitably, he consented to a Judgment in that sum together with interest of £34,082.85 to 1 August 2002 with a daily rate of £112.27 thereafter, with an order for costs. Such order was made by consent on 7 August 2002.[4]Tesco discovered what was happening in early April 2002 and on 9 April 2002 obtained the Freezing Order and Search Order from Lightman J. The Freezing Order was extended until after Judgment by Laddie J. on 2 May 2002.[5]Subsequent to the commencement of the proceedings Mr Pook was convicted of theft and sentenced to three years eleven months imprisonment, which he is currently serving.

THE RESIDUAL CLAIM

[6]The residual claim is a sum of £323,749.99 which Tesco submits was a bribe paid to Universal Projects by a company which did business with Tesco, Delta Computer Systems (UK) Ltd. (“Delta”).[7]Mr Pook denies he is liable.

COUNTERCLAIM

[8]Mr Pook has brought a Counterclaim arising out of his entitlement to exercise share options granted to him under an Executive Share Option Scheme for employees.[9]Mr Pook was suspended on 10 April 2002 by Tesco (the day after they obtained the Freezing and Search Orders). There was an investigation into his conduct in which he did not participate in the sense that he did not provide any answers, which led to an interview on 23 April 2002 and he was formally dismissed at the end of the interview. The dismissal was confirmed by a letter dated 25 April 2002.[10]On 22 April 2002, before the actual termination of his employment Mr Pook applied to exercise the options but Tesco refused to allow the options to be exercised. Mr Pook contends that he would have made a profit on the exercise of the option (which he intends apparently to utilise to satisfy his liability to Tesco under the Consent Order).[11]The value of the Counterclaim if any has been agreed at £51,156.58.

THE BRIBE ALLEGATION

[12]The pleaded allegation brought by Tesco is that Mr Pook received the monies totalling £323,749.99 around March or April 2000. The first payment was apparently £293,750.00 and, according to invoices to which I shall make more reference in this Judgment, was received on 28 March 2000. The second payment was a figure of £25,531.91 with VAT making a total of £29,999.99, which was received on 31 May 2000. A third payment was made on 27 June 2000 in the sum of £40,000.00 but that was repaid to Delta.[13]The second and third payments are round sum figures after the application of VAT. This is somewhat unusual and shows that in reality Mr Pook was interested in receiving the gross sums. This is a relevant factor when it comes to the question of the quantum (if any) of the monies, which Mr Pook is obliged to repay.[14]The payments were applied in accordance with the schedule and annexed to the Amended Particulars of Claim. The largest payment (£198,476.19) was made to a firm of solicitors Austin Ryder and Co. solicitors who were acting for Mr and Mrs Pook when they purchased the Property.[15]The Property cost around £500,000.00. Mr Pook funded that by a partial sale of some other shares, a mortgage of £300,000.00 and the balance from the monies received from Delta. At that time his salary was £56,000.00, together with bonuses. It is quite clear that he could not have borrowed £500,000.00 on that level of income. Thus the acquisition of the property would only have been possible with the benefit of the monies received from Delta.[16]In the Amended Particulars of Claim it is alleged in paragraph 15 that the purpose of the payment was made to Mr Pook in an effort to ensure that Delta continued to be engaged by Tesco to carry out services for it and in a further breach of Mr Pook’s duty and fidelity to Tesco.[17]Tesco made an application to amend those Particulars, but Master Bragge on 14 March 2003 refused it permission to amend. Tesco chose not to appeal that decision. The reason was set out in a letter sent to Mr Pook’s solicitors. Having considered the matter, Tesco was of the opinion that the paragraph contained an immaterial averment, in that on the authorities, the motive behind the bribe did not have to be proven.[18]Its stance from that time was therefore that motive was irrelevant. Mr Broatch who appears for Mr Pook and Universal Products submitted that Tesco should be required to prove the case as it is pleaded, and ought not to be allowed to proceed on the basis that proof of motive is irrelevant.[19]He suggested that to allow otherwise would be unfair to the Defendants, as they have come to meet a particularly pleaded case. In fact, they were put on notice by the solicitors’ letter that Tesco intended to change its case. I see no disadvantage to the Defendants in having to deal with a case, where no evidence of motive is gone into. I cannot see that it makes any difference to the presentation of the conduct of the Defence.[20]If on the law (and for the reasons that I set out in this Judgment, I accept that that is the position) the Claimant is not required to prove motive that is a question of law and it should not be disadvantaged because it included a pleading which it is not necessary for it to prove. It would be an incredibly unjust result if Tesco establishes a bribe but fails to recover because it fails to establish something, which in law it is not obliged to establish.[21]In any event, on the facts as I shall set out in this Judgment, I have come to the conclusion that Mr Pook did receive a bribe and he received it for the purposes set out in paragraph 15 of the Amended Particulars of Claim. It is not necessary however, based on the authorities cited to me for Tesco to establish that.

EVIDENCE OF PAYMENT

[22]Mr Pook has produced some invoices, which evidence the payments he received. In addition Tesco obtained from Delta what ought to have been the counterparts to those invoices. Somewhat surprisingly they are not identical.[23]Mr Pook’s invoices described the services having been provided as “sales consultancy … initial business set up payment based upon future business returns”. His second invoice is the same except that it is described as the second business set up payment.[24]Delta’s copies of the invoices just refer to sales consultancy.[25]The format of Mr Pook’s relevant invoices appears different from the format of the other invoices which Universal Projects produced for obtaining the false payments from Tesco.[26]Equally, I can see no reason why Delta would wish to doctor the invoices by deleting the initial business set up payment, but I can see compelling reasons why Mr Pook would wish to insert such services.[27]On one basis it does not matter, because the invoices (whichever version) are false and fraudulent. No services of any kind were provided by Universal Projects to Delta. Mr Pook’s case is that the payment was a loan. He admitted in cross examination that the invoices were false. He also admitted (inevitably) that if his evidence was to be believed, namely that it was a loan, there was no basis for claiming VAT on it. There has been therefore an offence in relation to the invoices and false VAT returns submitted. In net terms it may be that Customs and Excise has suffered no loss. Delta will have claimed repayment or off set of the VAT element against its input VAT so Delta’s VAT liability will have been reduced by the false invoices whatever the status of the payments i.e. bribe or loan. Mr Pook caused Universal Projects to pay the VAT out of the monies it received although the figures vary slightly.[28]I should say something about the evidence Tesco relied upon. The difficulty it faced of course was that being a victim it is difficult to obtain live testimony from any alleged wrong doers. Mr Pook clearly would not assist. As regards the other party to the transactions Tesco interviewed Louis O’Connell a director of Delta on 10 May 2002. There was a transcript of the interview, which was accepted, as authentic. In those circumstances I decided that it was not necessary to hear the tape.[29]Tesco initially hoped that Mr O’Connell would give evidence on its behalf. He declined so to do. Tesco could have secured his attendance by serving a witness summons on him. Tesco chose not to do that. Instead it served a notice under the Civil Evidence Act 1995 seeking to adduce the transcript as hearsay evidence. Mr Broatch objected to that procedure at the outset of the trial. I rejected his application for reasons, which I set out in an oral Judgment delivered at the start of the trial.[30]There was initially a doubt about whether Mr Pook would give evidence or not. His witness statement was not included in the bundle for that reason. After the conclusion of Tesco’s evidence Mr Pook elected to give evidence. That decision was his on legal advice. There was no question of an adverse inference of itself being drawn merely from the decision not to give evidence. That said in the absence of an explanation for the invoices and the true effect of the invoices the only inference that could be drawn was that the payments were improper payments and an attempt made to hide them by the creation of fictitious invoices.[31]The balancing exercise I have to make is that of Mr Pook’s live evidence, the invoice documents and the transcript evidence of Mr O’Connell. I bear in mind that Mr O’Connell was not cross examined. I also bear in mind (and disregard for these purposes) the fact that Mr Pook has been found guilty of a different criminal offence. That to my mind has no relevance to the issue of his credibility on these issues.[32]Having seen Mr Pook in evidence I find his explanation for the transactions incredible. I do not see how it could have been said with any credibility that Delta would loan such a large sum of money to him to help him start up in business, not obtain any written signed acknowledgment of that loan, not charge interest, identify the loan transaction not by way of loan documentation but by way of false invoices and create a fraudulent VAT claim, and not seek repayment of the monies when (as rapidly became the case) Universal Projects was not set up and Mr Pook instead of leaving Tesco took a new post with tesco.com and used the monies instead to purchase the Property.[33]Had the matter been open and straightforward there was no reason why a loan could not have been made and the matter revealed to Tesco. It was all concealed.[34]Having considered the transcript I prefer the contents of the transcript to the extremely unlikely explanations put forward by Mr Pook in his evidence. Reading the transcript as a whole it is quite clear that Mr O’Connell’s evidence is that he was approached by Mr Pook for a substantial payment, that he regarded it as a blackmail payment and that he had no option but to pay it because his company was locked into Tesco to such a large extent that he could not afford to lose the business. It is clear that he believed that Mr Pook would be in a position to stop that business.

BURDEN AND/OR STANDARD OF PROOF

[35]I have had some debate in front of me as to the burden and/or standard of proof and as to the weight I should attach to the evidence of Mr Pook when measured against the unchallenged Civil Evidence Act interview of Mr O’Connell. It is however not correct in my opinion solely to weigh the evidence on those terms. The documentary evidence put forward by Mr Pook as the apparent explanation for the transactions itself cried out for explanation. In the absence of any explanation (as the invoices were plainly false) I would have concluded that Mr Pook was concealing things by creating false invoices. Having seen him in the witness box however, I remain even more convinced as I found his attempts to justify these invoices in cross examination to be wholly unsatisfactory.[36]I give him credit for having gone in the witness box and submitting to cross examination. I also accept that the mere fact of his conviction of itself does not mean that I have to disbelieve everything he says in his evidence. Nevertheless, I do disbelieve his explanation of this bogus invoice trail. I find the explanations given by Mr O’Connell in his interview compelling and prefer the explanations put forward by him as referred to earlier in this Judgment.[37]Mr Broatch in his skeleton argument addressed the issue as to the standard of proof required in civil proceedings where an allegation amounts to serious criminal conduct. It seems to me that the thrust of the decision of the House of Lords in In re H (Minors) [1996] AC 568 is that the standard is one of a balance of probabilities. I also bear in mind the fact that the more serious the allegation made, the less likely it is to occur and therefore stronger evidence is required before the Court can come to a conclusion that the allegation is established on the balance of probability. As Lord Nicholls said at page 586 fraud is usually less likely than negligence. However, given the inadequate explanation by Mr Pook of the invoices as between Universal Projects and Delta I am satisfied in this case to the standard identified in re H that the allegation is established. Although Lord Lloyd or Berwick (page 577) appears to be reserving his position, Lord Goff agreed with Lord Nicholls as did Lord Mustill leaving Lord Browne-Wilkinson dissenting as did Lord Lloyd of course. Therefore I conclude that the civil standard is the relevant standard although for the reasons Lord Nicholls said a higher degree of proof is required on the evidence for a case like this.[38]That is how the case is pleaded and that is what I find was the circumstance that led to the payment. As I have said it is strictly not necessary for me to make that finding. That is based on analysis of several authorities referred to me. In Hovenden and Sons –v- Millhoff 83 LT 41 at 43 Romer LJ said:- “The courts of law in this country have always strongly condemned and, when they could, punished the bribing of agents, and have taken a strong view as to what constitutes a bribe. I believe the mercantile community as a whole appreciate and approve of the court’s views on the subject. But some persons undoubtedly hold laxer views. Not that these persons like the ugly word “bribe” or would excuse the giving of a bribe if that word be used, but they differ from the courts in their view as to what constitutes a bribe. It may, therefore, be well to point out what is a bribe in the eyes of the law. Without attempting an exhaustive definition I may say that the following is one statement of what constitutes a bribe. If a gift be made to a confidential agent with a view of inducing the agent to act in favour of the donor in relation to transactions between the donor and the agent’s principal and that gift is secret as between the donor and the agent – that is to say , without the knowledge and consent of the principal - then the gift is a bribe in the view of the law. If a bribe be once established to the court’s satisfaction then certain rules apply. Amongst them the following are now established, and, in my opinion, rightly established in the interests of morality with the view of discouraging the practice of bribery. First, the court will not enquire into the donor’s motive in giving the bribe, nor allow evidence to be gone into as to the motive. Secondly, the court will presume in favour of the principal and as against the briber and the agent bribed, that the agent was influenced by the bribe; and this presumption is irrebuttable. Thirdly, if the agent be a confidential buyer of goods for his principal from the briber, the court will assume as against the briber that the true price of the goods as between him and the purchaser must be taken to be less than the price paid to, or charged by the vendor by, at any rate, the amount or value of the bribe. If the purchaser alleges lose or damage beyond this, he must prove it ”.[39]In Industries and General Mortgage Co. Ltd. [1949[ 2 All ER 573 Slade J commented on this part of the Judgment. He said at page 577:- “Counsel for the plaintiffs says:- “Yes, but earlier the learned judge has said that if a gift be made to a confidential agent with a view to inducing him, it is a bribe, and, therefore, in using the later language and referring to the bribes the learned judge is in effect saying:
“I am using these later presumptions in cases where a bribe has been established and I have already defined a bribe as being only something which has been established as being paid with a certain motive.”
That, of course, would tear up the whole of the learned judge’s observation because he says lower down that the courts will not receive evidence as to what is the motive of the person making the payment. The motive will be conclusively inferred against him.” “Yes, but earlier the learned judge has said that if a gift be made to a confidential agent with a view to inducing him, it is a bribe, and, therefore, in using the later language and referring to the bribes the learned judge is in effect saying:
“I am using these later presumptions in cases where a bribe has been established and I have already defined a bribe as being only something which has been established as being paid with a certain motive.”
That, of course, would tear up the whole of the learned judge’s observation because he says lower down that the courts will not receive evidence as to what is the motive of the person making the payment. The motive will be conclusively inferred against him.”[40]Mr Broatch submits that the true ratio of Hovenden is that the Court first determines whether or not there is a bribe and second once so determined it is a bribe contemplates those three conditions. I do not read the Judgment in that way nor did Mr Justice Slade nor in my opinion did Mr Justice Leggatt (as he then was) in Anangel Atlas –v- Ishikawajima-Harima Heavy Industries Co. Ltd. 1990 1 Lloyd’s Reports 167 at page 171.[41]Plainly the payment to Mr Pook of such a large amount would inevitably give rise to a conflict of interest.[42]Finally, in Armagas –v- Mundogas [1985] 1 Lloyd’s Reports 1 Staughton J (as he then was) followed the definition of Slade J acknowledging it applied Hovenden and that proof of corruptness or a corrupt motive was unnecessary.[43]Accordingly, as Miss Ife submitted Tesco needs to show to prove that there was a bribe:-(1) a payment was made to Mr Pook by a third party which was dealing with Tesco; and(2) that payment was secret.[44]The receipt of such payment would plainly put Mr Pook in a position of conflict of interest. How could he ever address a competitive tender for the work in the light of that large payment? It follows that I accept Miss Ife’s submission that the payment was a payment in conflict of interest and was a secret commission in addition.[45]Either way Mr Pook is obliged to account. He holds the payment on trust for Tesco, see:- Attorney General for Hong Kong –v- Reid [1994] 1 AC 324. COUNTERCLAIM LEGAL ANALYSIS[46]Miss Ife submits that in respect of fiduciary duties i.e. duties as an agent in respect of which Mr Pook would be accountable for bribes or secret profits Mr Pook is under a positive duty to disclose those breaches. Such positive duty requires him therefore to disclose the fact that he has in this case received a bribe.[47]She submits also that it is an implied term of the Share Option Arrangement that he should not be entitled to take advantage of his own breach of contract, relying on the well-known House of Lords case of Alghussein –v- Eton College [1988] 1 WLR 587.[48]The implication of a matter as a term is a matter law. As the Alghussein case establishes the implication of such a term as contended for by Tesco is a matter of construction of the Share Option Agreement. There is nothing in the Share Option Agreement to my mind, which provides any clear indication one way or the other. I accept that clause 12 says that the Share Option Agreement shall not form part of the contract of employment but I do not think that assists clearly.[49]There have been two cases that consider in a different way the implications of such an implied term. In the first Thompson –v- Asda MFI Group Plc [1988] Ch 231 at 241 Scott J (as he then was) considered the implication of a term which would prevent an employer selling a subsidiary so that employees of the subsidiary who had rights under the group share option scheme ceased to be employees for the purpose of that agreement. He rejected an argument of such an implied term as it was not necessary to give business efficacy to the option and lacked commercial reality. He also held that there was no general principle of English law that parties to a contract could not take advantage of their own acts to avoid their obligations unless the party was in breach of a duty owed to the other contracting party. This decision was considered in Micklefield –v- SAC Technology Ltd. [1990] IRLR 218 (John Mowbray QC). This too involved a Share Option Scheme which provided that the option could not be exercised if the option holder ceased to be an executive “for any reason”. The employer dismissed Mr Micklefield wrongfully, so that he ceased to be an employee before he was able to exercise his option. The learned judge pointed out that Mr Justice Scott had not had the Alghussein case cited (being decided afterwards) to him and as a matter of construction concluded that there was no implied term which prevented the employers terminating the contract of employment wrongfully so as to prevent the Share Option being exercisable.[50]Neither of these cases of course addresses the situation of an employee, nor the situation where the person seeking to enforce the rights was alleged to be the wrongdoer. I do not see that those factors make any difference as a matter of principle.[51]Finally in this context is the case of Mallone –v- BPB Industries Plc [2002] EWCA Civ 126 C.A. This too involved a Share Option Agreement with a provision that the options lapsed forthwith it the executives ceasing to be employed within the group. The actual decision was on the basis of the employer purporting to cancel the options whilst the employee was still employed. The Court of Appeal’s decision therefore was that the option rights had already accrued and could not be unilaterally taken away in that way. The Court of Appeal did not consider an argument based on Micklefield. The decision of Scott J was not cited to them. This decision therefore provides no assistance on the issue as to implied terms.[52]In my opinion there would be such an implied term. I cannot conceive that the parties would have contemplated that somebody who had committed a serious breach of contract should never the less be entitled to exercise his proprietary rights. I therefore conclude that there was an implied term that the option would not be exercisable as long as the employee was in such breach of contract as would entitle the employer to terminate the contract of employment.

DUTY TO DISCLOSE

[53]That makes it unnecessary to consider the alternative argument based on the positive obligation to disclose. The argument runs along the lines that Mr Pook was under a positive obligation to disclose his breaches of fiduciary duty. He failed to do so. Had he done so the contract of employment would have been immediately terminated by Tesco. Miss Ife submits that that is on the basis that the disciplinary procedure only applies when there is a doubt about whether or not the employee has committed a breach. It has no application she submits if an employee comes along and confesses. Mr Broatch on the other hand submits that Tesco’s rights to terminate are entirely subsumed in the disciplinary code. I do not agree. It would be an odd thing if an employee comes along and admits a breach of contract of such a serious nature that justifies Tesco in terminating the contract of employment immediately it they would have to go through the procedure of holding a disciplinary meeting entitling Mr Pook in the intervening period to exercise his option. I cannot see that that is a necessary consequence of it.[54]Finally, in any event it seems to me that it would have been open to Tesco (as in Micklefield) to terminate the contract in breach of contract itself on being told the requisite confession. Whilst there might have been employment law issues (which is not a matter of concern to me) it seems to me that the result would have been the same. Thus Tesco could even if Mr Broatch is right as regards the construction of the disciplinary procedure in the contract have repudiated the contract of employment and I do not accept that any Court would Order Tescos to pay anything more than nominal damages for breach of the contract at common law. If that had happened as a result of the disclosure of breach of fiduciary duty the option would also have terminated at the same time.[55]This involves an acceptance however that Mr Pook was under a positive obligation to disclose his breaches of fiduciary duty.[56]Servants must behave honestly. It is accepted that the contract is not one of a uberrimae fide so as to require positive statements to be made see Bell –v- Lever Bros. Ltd [1932] AC 161 H.L. This decision of course has far more familiarity for students in the law of mistake. Having so decided the case on that basis the judgment also addressed the question as to whether or not there was a positive duty on the part of Bell and Snelling to disclose the breaches of contract they made. Lord Atkin concluded that they had no such duty see page 227-229. However, such a decision was not necessary because Lever Brothers were not the employer. No significance to my mind can be derived from the decision of Avory J in Healey –v- Societé Anonyme Francais Rubastic [1917] 1 KB 946 as that case had no analysis. Significantly Lord Atkin said this however at page 228:- “It will be notice that Bell was not a director of Levers and with respect I cannot accept the view of Greer LJ that if he was in a fiduciary relationship with the Niger Company he was in a similar fiduciary relationship with the share holders…” It seems to me that if there was a fiduciary obligation Lord Atkins decision might not have been the same. Similarly Lord Thankerton prefaced his observations (page 231) upon the fact that Bell and Snelling were not in a relationship as master and servant with Lever Bros. It is in that light that his statement “in the absence of fraud … I am of the opinion that neither a servant nor a director of a company is legally bound forthwith to disclose any breach of the obligations arising out of the relationship so as to give the master or the company the opportunity of dismissal …” however, he also said, “there may well be case where the concealment of the misconduct amounts to a fraud on the master or company …”.[57]In Horcal Ltd. –v- Gatland [1983] BCLC 60 Glidewell J (as he then was) held that directors had a positive duty to disclose breaches of fiduciary duty.[58]The case went to appeal [1984] BCLC 549. There Robert Goff LJ delivered the major judgment and analysed the competing arguments at page 554:- “Counsel for the defendant (Mr Powles) submitted, as a general proposition, that, putting fraud on one side, there is no general duty on directors or employees to disclose a breach of duty on their part. As I understood his argument he recognised in the case of fiduciaries, such as directors, if they have failed to account for secret profits which they had made, then their failure to account must necessarily involve in consequence a failure to reveal a breach of duty which had given rise to that duty to account. Counsel for the defendant (Mr Powles) in his argument put in the forefront of the authorities on which he relied a dictum of Lord Thankerton in Bell and Lever Bros Ltd. [1932] AC at 231, a dictum with which Lord Blanesburgh appears to have agreed at page 199. There is, in my judgment, much force in counsel for the defendant’s (Mr Powles) submission. Indeed counsel for the plaintiff’s (Mr Thoresby) argument, that a director is under a duty to disclose any breach of duty on his part before an agreement of the kind in the present case was entered into, could lead to the extravagant consequence that the director might have to make what counsel for the defendant (Mr Powles) has called a ‘confession’ as a prerequisite of such an agreement. But, in my judgment, it is not necessary to decide in this case whether counsel for the defendant’s (Mr Powles) submission is correct, because, as I have read the judgment of the judge, having regard to the facts found by him, no breach of duty was committed by the defendant in this case, before the termination agreement was made … ”.[59]In my Judgment the conclusion to be drawn from the case is that Robert Goff LJ does not deal with the differing arguments but if it was necessary he would have accepted that a director had a positive duty to disclose breaches of fiduciary duty.[60]The case of Sybron Corp. –v- Rochem [1983] 2 AER 706 a previous decision of the Court of Appeal was cited to the Court of Appeal in Horcal (as indeed was Healey) but not referred to.[61]In Sybron the Court of Appeal held that an employee had not been under a duty to disclose to his employers his own misconduct but he had been under a duty to disclose a fraudulent misconduct of the subordinate employees with whom he had acted, even though that disclosure would have revealed his own misconduct to his employers. The case concerned an allegation that the employee owed a duty to disclose breaches of contract of fellow employees. The relevant passage is to be found at page 717 (F), namely that there is no general duty to report a fellow servant’s misconduct or breach of contract but that whether there is such a duty depends on the contract or the terms of employment of the particular servant. It is therefore a question of the status of the relevant employee.[62]Fox LJ (page 718) acknowledged that the Sybron case involved disclosure of other employees’ misconduct. Nevertheless he did hold that some employees have a duty to disclose information about breaches of duty of fellow employees. Kerr LJ agreed.[63]None of these cases addresses an analysis of the differing kinds of duties. I accept that there is no duty on an employee to disclose breaches of contract, which do not involve a fiduciary element. However, if an employee receives a profit in breach of his duty, he is liable to account. If he receives a bribe he is liable to account for the bribe. It seems to me that this fiduciary obligation to account is different from the authorities in relation to breaches of contract of employment with no such fiduciary element.[64]These conflicting decisions were considered in the Court of Appeal decision of Van Gestel –v- Can – The Times 7 August 1987 (1987 CL 454). The Court of Appeal there accepted (obiter) the submissions of counsel for the employers that directors have a positive duty to disclose their pre-existing breaches of fiduciary duty. The acceptance of that proposition was not necessary for the Courts finding based on the facts.[65]Having considered all of the authorities I am of the opinion that directors have a positive duty to disclose breaches of their fiduciary duty. I am of the opinion also that senior employees (of the kind identified in Sybron) have a similar duty. I do not believe that the finding of such duties is in conflict with the authorities starting with Bell and following. There is nothing in any of those authorities which suggests that fiduciary duty to account should be treated differently to any other fiduciary duty.[66]Mr Pook to my mind was just below the board level in Tesco and he was of such seniority that he would have been obliged for example to disclose other breaches of duty of fellow employees (Sybron). It would be an odd thing if he was under an obligation to disclose such breaches as regards other employees but not under an obligation to disclose his own breaches. In Sybron the employee concerned had to disclose others breaches even though it led to his own being discovered. The absurdity would be further exposed if he was under a duty to disclose wrong doings of fellow employees (which he did), but failed to disclose his own wrong doings (and they were not found out until afterwards). That would lead to a very bizarre result in my opinion.

QUANTUM

[67]There are two issues as to quantum. The first is to whether or not Tesco can claim the amount including the VAT or whether they can only claim the net sum.[68]There is no direct authority on this point. I observe earlier in this Judgment that certainly the second payment was a round sum payment whereby the VAT was absorbed within the gross figure. The same cannot be said of the first payment, which was plainly £250,000.00 plus VAT for some reason.[69]The Reid case establishes that the agent holds the bribe upon trust for the principal. It also establishes that if the agent acquires property, which increases in value those increases accrue for the benefit of the principal. Conversely if properties are acquired which go down in value the agent is required to make up the difference.[70]How much has Delta paid in a bribe? The answer to that question is plainly the invoice value plus VAT. What happens to it in the hands of the recipient to my mind is irrelevant. The gross value of the payment received is the bribe and that is the amount, which he holds upon trust for Tesco.[71]Objection is taken by Mr Broatch because Mr Pook caused Universal Projects to pay the VAT so that the net amount should be paid. I do not see any force in that. The VAT payment was made not because it was a legitimate payment but as part of the charade to clothe an illegitimate transaction with an air of legitimacy. If Mr Pook chooses to do that I do not see why he should be able to reduce his liability. Nor in reality can Universal Projects claim that money back because that would involve asserting that the invoice upon which the VAT was charged was bogus and the claim illegal, and the VAT return was based on an illegality and those are such integral parts to the claim for the return of the VAT, that such a claim would be bound to fail on the grounds of illegality. I do not see why the VAT payment should be treated differently to any other disbursement of the gross funds, which are held upon trust for the principal.[72]It follows that I reject the submission of Mr Broatch that the liability does not extend to the VAT.[73]The other way in which it is sought to reduce it involves the Counterclaim.[74]This involves a consideration of Mr Pook’s terms of employment and the rules of the Executive Share Option Scheme (1994).[75]As regards his employment terms, the relevant provisions appear from the handbook issued with the statement of terms of employment. At page 39, reference is made to summary dismissal for gross misconduct. Instances of gross misconduct are defined as being some breaches of company rules or standards of conduct such as theft or physical assault that are so serious as to make it impossible to continue the contract of employment.[76]There is no doubt that both the fraudulent invoices (which Mr Pook admitted) and the bribes (which I have found were obtained) would be instances of gross misconduct.[77]Under the grievance and disciplinary procedures (page 17 – 18) where such breaches are alleged an employee is suspended on full pay pending an investigation. At the disciplinary meeting if gross misconduct is confirmed the relevant employee can be dismissed without notice.[78]Under the rules of the Share Option Scheme the relevant clause is clause 6, which deals with the exercise of the options. As I have already said, Mr Pook sought to exercise the option after he was suspended pending investigation on 10 April, but before the summary dismissal taking effect on 23 April. The circumstances of exercise and in particular clause 6 provide when the option is not exercisable. I accept Mr Broatch’s analysis that by the time of April 2002 Mr Pook had accrued rights by obtaining the options, which he could exercise, provided he was in a position so to do in accordance with the scheme. Clause 6.9 is the relevant one, which provides:- “subject to the provision of rules 7.1 and 7.2(a) participants rights to exercise an option shall terminate on his ceasing to be employed within the group for any reason. A participant ceases to be employed within the group on the date that he is no longer employed a company within the group or a director employed under a contract of employment of any such company…”.[79]Thus Mr Broatch submits he did not cease to be an employee until 23 April 2002 so that his exercise on 22 April 2002 was valid and Tesco’s refusal to acknowledge it a breach of the Share Option Agreement.[80]I should also refer to clause 12, which provides that the scheme shall not form part of the contract of employment.[81]Tesco puts the case somewhat differently. In Tesco’s Reply and Defence to Counterclaim it pleads that it was an implied term of the Executive Share Option Agreement that Mr Pook could only participate in an agreement so long as he was not acting in a manner so as to defraud the claimant, in breach of his duty of fidelity, nor acting in such a way as to undermine the relationship of trust and confidence between himself and the claimant, nor acting in bad faith towards the claimant, nor withholding facts from the claimant that would entitle the claimant to summarily dismiss him.[82]Thus Miss Ife submitted that Mr Pook was in breach of those obligations. In particular the last obligation cast on him an obligation to confess his actions. She then submits that upon such confession Tesco would be entitled summarily to dismiss him. It would not need to go through a disciplinary procedure as set out in the disciplinary code because that involved an investigation with a view to establishing guilt and has no application when the employee in question admits his liability.[83]Further, it is not inconceivable that the stance could be taken that even if the grievance procedure did require Tesco to go through that exercise had; Mr Pook told it of his gross misconduct Tesco could have committed a breach of contract by summarily dismissing him any way. That would still have the effect of terminating the contract of employment albeit leaving Tesco open to a claim for damages. Contracts of employment are an exception to the rule that ordinarily contacts are not terminated by repudiatory breach as opposed to acceptance of repudiatory breach. If Tesco had acted in breach of contract the contract would nevertheless have terminated subject to its liability (if any) to pay damages. On that analysis Miss Ife would submit that Tesco would not be liable on the option because howsoeverthe contract terminated it would have been terminated before 22 April when Mr Pook attempted to exercise his options. CONCLUSION ON

COUNTERCLAIM

[84]Therefore I conclude that Mr Pook owed a duty to disclose the bribes that he had taken. He was in breach of that duty. If Tesco had been informed of the breach in my opinion they would have summarily dismissed Mr Pook without holding a disciplinary proceeding. That would be an entitlement for the reasons that I have set out above. Even if it was not an entitlement Tesco could have done it anyway even if that was a technical breach of contract.[85]For all of the above reasons Mr Pook’s Counterclaim fails and will be dismissed.

Cited in 13 later judgments

and 4 more of the most senior