Armstrong Strategic Management and Marketing Pty Limited v Expense Reduction Analysts Group Pty Ltd (No 9)

[2016] NSWSC 1005

Supreme Court

New South Wales

Medium Neutral Citation:

Armstrong Strategic Management and Marketing Pty Limited v Expense Reduction Analysts Group Pty Ltd (No 9) [2016] NSWSC 1005

Hearing dates:

2 to 4, 7 to 11, 14 to 18, 21 to 24, 29 to 31 March, 4 to 6, 8 and 14 April 2016, 30 and 31 May 2016

Decision date:

22 July 2016

Before:

Ball J

Decision:

Proceedings dismissed.

Catchwords:

TRADE PRACTICES – misleading and deceptive conduct – whether representations made during the course of negotiations for an agreement concerning terms to be included in the agreement was misleading or deceptive EQUITY – whether fiduciary relationship exists in connection with the negotiation of a commercial agreement CONTRACTS – general contractual principles – construction and interpretation of contracts – prior agreement inconsistent with existence of entire agreement clause EQUITY – estoppel – lack of relevant detriment CONTRACTS – termination of contract – whether party in breach of contract entitled to terminate it for breach or repudiation by the other party – whether terminating party entitled to claim damages TRADE PRACTICES – unconscionability – operation of s 51AC TPA DAMAGES – pre-contractual representations – difference in damages where a transaction occurs as against a ‘no transaction’ case

Legislation Cited:

Corporations Act 2001 (Cth)
Fair Trading Act 1987 (NSW)
Fair Trading Act 1985 (Vic)
Judiciary Act 1903 (Cth)
Trade Practices Act 1974 (Cth)
Trade Practices Amendment (Cartel Conduct and Other Measures) Act 2009 (Cth)

Cases Cited:

ACCC v Allphones Retail Pty Ltd (No 2) [2009] FCA 17; (2009) 253 ALR 324
ACCC v Oceana Commercial Pty Ltd [2004] FCAFC 174
Australian Competition & Consumer Commission v Universal Sports Challenge Ltd [2002] FCA 1276
BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266
Bunge SA v Nidera BV [2015] UKSC 43
Butcher v Lachlan Elder Realty Pty Ltd [2004] HCA 60; (2004) 218 CLR 592
Campbell v Backoffice Investments Pty Ltd [2009] HCA 25; (2009) 238 CLR 304
Civoken Pty Ltd v Madden Grove Developments Pty Ltd [2006] VSC 283
Commissioner of Taxation of Commonwealth of Australia v St Helens Farm (ACT) Pty Limited [1981] HCA4; (1981) 146 CLR 336
Commonwealth v Amann Aviation Pty Ltd [1991] HCA 54; (1992) 174 CLR 64 at [4] per Deane J
Cook Straight Skyferry Ltd v Dennis Thompson International Limited [1993] 2 NZLR 72
Craftsmen Restoration & Renovations Pty Ltd v Boland [2011] NSWCA 147
Dib Group Pty Ltd v Ventouris Enterprises Pty Ltd [2011] NSWCA 300; (2011) 284 ALR 601
Emhill Pty Ltd v Bonsoc Pty Ltd (No 2) [2007] VSCA 108
Fabcot Pty Ltd v Port Macquarie-Hastings Council [2011] NSWCA 167
Fink v Fink [`946] HCA 54; (1946) 74 CLR 127
Geraldton Building Co Pty Ltd v Christmas Island Resort Pty Ltd (1992) 11 WAR 40
Golden Strait Corporation v Nippon Yusen Kubishika Kaisha (The Golden Victory) [2007] 2 AC 353
Highmist Pty Ltd v Tricare Ltd [2005] QCA 357
Hospital Products Limited v United States Surgical Corporation [1984] HCS 64; (1984) 156 CLR 41
Howe v Teefy (1927) 27 SR (NSW) 301
IOOF Australia Trustees (NSW) Ltd v Tantipech [1998] FCA 924; (1998) 156 ALR 470
Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd [2007] HCA 61; (2007) 233 CLR 115
Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd [1989] HCA 23; (1989) 166 CLR 623
LMI Australasia Pty Ltd v Baulderstone Hornibrook Pty Limited [2003] NSWCA 74
McCrohon v Harith [2010] NSWCA 67
Mad Dogs Pty Ltd (in liq) v Gilligan’s Backpackers Hotel & Resort Pty Ltd (No 3) [2015] QSC 319
Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749
Nina’s Bar Bistro Pty Ltd v MBE Corporation (Sydney) Pty Ltd [1984] 3 NSWLR 613
North East Equity Pty Ltd v Proud Nominees Pty Ltd [2010] FCAFC 60; (2010) 269 ALR 262
Ridgeway Maritime Inc v Beulah Wings Limited (The Leon) [1991] 2 Lloyd’s Rep 611
Roadshow Entertainment Pty Ltd v (ACN 053 006 269) Pty Ltd (Rec and Mgr apptd) (1997) 42 NSWLR 462
Shevill v Builders’ Licensing Board [1982] HCA 47; (1982) 149 CLR 620
State Trading Corporation of India Ltd v Golodetz Ltd [1989] 2 Lloyd’s Rep 279
Streetscape Projects (Australia) Pty Ltd v City of Sydney [2013] NSWCA 2; (2013) 295 ALR 760
Sunbird Plaza Pty Ltd v Maloney [1988] HCA 11; (1988) 166 CLR 245
Suttor v Gundowda Pty Ltd [1950] HCA 35; (1950) 81 CLR 418
Sykes v Reserve Bank of Australia (1998) 88 FCR 511; (1998) 158 ALR 710
Tonto Home Loans Australia Pty Ltd v Tavares [2011] NSWCA 389; (2011) 15 BPR 29,699
Tsaprazis v Goldcrest Properties Pty Ltd [2000] NSWSC 206; (2000) 18 ACLC 285
Traderight (NSW) Pty Ltd v Bank of Queensland Ltd [2015] NSWCA 94
United Dominions Corporation Ltd v Brian Pty Ltd [1985] HCA 49; (1985) 157 CLR 1

Texts Cited:

N C Seddon and M P Ellinghaus, Chesire & Fifoot’s Law of Contract (8th ed, 2002)

Category:

Principal judgment

Parties:

Armstrong Strategic Management and Marketing Pty Limited (ACN 005 709 928) (First Plaintiff)
Armstrong Consulting Pty Ltd (ACN 073 762 940) (Second Plaintiff)
Kenneth Alan Armstrong (Third Plaintiff)
Expense Reduction Analysts Group Pty Ltd (ACN 008 852 926) (First Defendant)
ERA Insurance Services Pty Ltd (ACN 109 873 010) (Second Defendant)
Expense Reduction Analysts Australasia Pty Ltd (ACN 095 591 665) (Third Defendant)
Stuart Roy Michael (Fourth Defendant)
Ronald Clucas (Fifth Defendant)
Charles Frederick Marfleet (Sixth Defendant)
ERAGICS Limited (Seventh Defendant)
Expense Reduction Analysts International Limited (Eighth Defendant)
Keith John Chapman (Ninth Defendant)
Anthony Frederick Dormer (Tenth Defendant)

Representation:

Counsel:

 

EW Alstergren QC | D Briggs (Plaintiffs)
DL Williams SC | EAJ Hyde (Defendants)

  Solicitors:
Nick Stretch Legal (Plaintiffs)
Thomson Geer (Defendants)

File Number(s):

2011/76919

Publication restriction:

Nil

TABLE OF CONTENTS

Introduction - paragraph 1

Background - paragraph 3

The ERA group - paragraph 3

Mr Armstrong and his companies - paragraph 6

AC becomes an ERA franchisee - paragraph 7

Establishment of ERAIS - paragraph 12

Expansion of the insurance business and the establishment of ERAGICS - paragraph 21

Commencement of business in the US; Mr Sellwood joins ERAIS - paragraph 31

Agreements continue; breakdown of the relationship - paragraph 35

Termination of the Agreements - paragraph 59

The claims - paragraph 65

Misleading and deceptive conduct inducing Cooperation Deed - paragraph 65

Claim in respect of retained earnings - paragraph 70

Claim in respect of ERAGICS shares - paragraph 71

Claims arising from termination of the Consultancy Agreement and Cooperation Deed - paragraph 72

Claims in relation to the Licence Agreement - paragraph 78

Conduct allegedly inducing Cooperation Deed

Relevant legal principles relating to misleading and deceptive conduct - paragraph 81

Some general observations - paragraph 92

The representation that Mr Armstrong would be a director of the LOCs - paragraph 95

Access to the accounts of the LOCs - paragraph 107

The funding representations - paragraph 116

Damages - paragraph 123

Pre Deed Breach of Fiduciary Duties

Relevant legal principles - paragraph 135

No fiduciary relationship in this case - paragraph 137

The claim for retained earnings - paragraph 142

The claim - paragraph 142

Factual background - paragraph 144

The claim based on an agreement - paragraph 153

The claim based on estoppel - paragraph 157

Claim in respect of ERAGICS shares - paragraph 162

Termination of the Cooperation Deed and Consultancy Agreement - paragraph 170

Relevant legal principles relating to termination - paragraph 170

The plaintiffs’ case on termination - paragraph 179

Termination of the Consultancy Agreement by ERAGICS - paragraph 183

Mr Armstrong’s statements to licensees - paragraph 186

The comments to Mr Newstadt - paragraph 190

Mr Armstrong’s refusal to relocate to the United States - paragraph 192

Mr Armstrong’s involvement with The Lion Partnership - paragraph 197

Tasracing - paragraph 206

Mr Armstrong’s repudiation of the Consultancy Agreement - paragraph 210

Representations made to Clubs NSW - paragraph 215

Did ERAI or ERAGICS repudiate the Cooperation Deed or Consultancy Agreement? - paragraph 220

Unconscionable conduct and breach of fiduciary duties - paragraph 229

Misleading and deceptive conduct - paragraph 235

Accessorial liability - paragraph 237

Damages - paragraph 238

Termination of the Licence Agreement - paragraph 247

Specific grounds of termination - paragraph 248

Other grounds for termination - paragraph 253

Tasracing - paragraph 255

Denial of AC’s licence - paragraph 258

Other grounds - paragraph 263

Other claims - paragraph 266

Damages - paragraph 267

Orders - paragraph 275

Judgment

Introduction

1. In these proceedings the plaintiffs claim damages from the defendants in connection with an agreement by which the second plaintiff, Armstrong Consulting Pty Ltd (AC), became a franchisee of an expense reduction consulting business carried on by the eighth defendant, Expense Reduction Analysts International Limited (ERAI), and its subsidiaries. The plaintiffs also claim damages in connection with agreements by which the first plaintiff, Armstrong Strategic Marketing and Management Pty Ltd (ASMM), agreed with ERAI to establish a business in Australia of providing insurance expense reduction consulting services and later to expand that business into other territories in which ERAI (through subsidiaries or licensees) operated. Under the terms of the later agreements, the third plaintiff, Mr Armstrong, became the Managing Director first of the company established to conduct the insurance expense reduction business in Australia and then of the principal company established for the purpose of conducting the business in the other territories in which ERAI operated.

2. The plaintiffs put their claims in various ways. They allege that the agreements to which they were parties were wrongfully repudiated by ERAI or the relevant subsidiary, that the defendants made misleading and deceptive representations in connection with the agreements in contravention of s 52 of the Trade Practices Act 1974 (Cth) (as it then was) (the TPA) or the equivalent provisions of the Fair Trading Acts in New South Wales and Victoria. They also allege that ERAI and the relevant subsidiaries owed ASMM and Mr Armstrong fiduciary duties in connection with the business they agreed to establish and that they breached those fiduciary duties by preferring their own interests over those of the business to be carried on by them jointly. The plaintiffs also claim that ERAI and its subsidiaries engaged in unconscionable conduct in contravention of s 51AC of the TPA by improperly seeking to bring about circumstances in which Mr Armstrong resigned as Managing Director and in which the agreement under which he was retained as Managing Director would be terminated and by improperly seeking to bring about circumstances in which AC would be deprived of its rights under its franchise agreement. Lastly, a number of the directors of ERAI and its subsidiaries at the time are said to have accessorial liability for the breaches of the corporate defendants.

Background

The ERA group

3. The Expense Reduction Analysts group (ERA) is a group of companies that operates a franchised business of providing consulting services to clients to assist them to reduce the costs of a range of operating overheads such as information technology, telecommunications, energy and stationery supplies. The business was established in 1993 by the sixth defendant, Mr Marfleet. It operates throughout the world either by selling master licences in particular territories or establishing subsidiaries in those territories. The master licensees or subsidiaries in turn may enter into franchise agreements (called Licence Agreements) in respect of franchised areas falling within the relevant territory. In the United States and Continental Europe, there are also entities known as “Area Developers” who are contracted to sell and to develop the ERA business in particular regions falling within the territory. Franchisees charge their clients by reference to the savings achieved in relation to particular categories of expense – usually 50 percent of the amount saved. Most franchisees specialise in particular types of expense and it is not unusual for more than one franchisee to provide services to a client in relation to the types of expense that fall within their areas of expertise, in which case the fees are shared by the franchisees who provide the services.

4. From 2005 until it went into administration on 25 January 2011, ERAI was the global parent company of ERA. ERAI made its income primarily by selling Master Licences and franchises and by charging fees for services it provided to franchisees. Master Licensees made their income by charging a royalty to franchisees, which was normally 15 percent of the income the franchisee earned from the franchise. In Australia and New Zealand, ERAI conducted its business through a subsidiary known as Expense Reduction Analysts Group Pty Ltd (ERAG), which is the first defendant. The ultimate holding company of ERAI’s Australian and New Zealand assets (including its shares in ERAG) was the third defendant, Expense Reduction Analysts Australasia Pty Ltd (ERAA).

5. Following the administration of ERAI, Montgomery Investments Co SA, a company associated with Mr Marfleet, acquired all of the intellectual property of ERA and that company continues to operate a franchised expense reduction advisory business under the name “Expense Reduction Analysts”.

Mr Armstrong and his companies

6. Mr Armstrong has extensive experience in the insurance industry. From 1974 to 1978 he was the Chief Executive Officer and a Director of Sentry Insurances Australasia Limited. Between 1978 and 1994, he was the Managing Director of AFL Insurance, in which he had a 50 percent shareholding. In that position he built up extensive contacts with people in the insurance industry. In 1994, Mr Armstrong sold his shares in AFL Insurance and from then until 2003 he worked outside the industry. ASMM and AC are companies owned by Mr Armstrong’s family. In his affidavit, he described them as the companies “through which I conduct business activities including providing consulting services”.

AC becomes an ERA franchisee

7. On or about 1 March 2004, AC entered into an agreement (the Licence Agreement) with ERAG to acquire an ERA licence and from that time AC began trading under the name “Expense Reduction Analysts”. At that stage, ERAG had approximately 50 licensees in Australia. The initial term of the licence was 10 years. AC was required to pay an initial licence fee of $50,000 and an initial training fee of $29,500 together with a monthly fee equal to 15 percent of Gross Trading Income (as defined) (or a specified minimum, whichever was the lesser). Under cl 10.1(c), AC agreed “not to be involved in any business activity other than the Business which would affect your ability to fulfil your obligations under this Agreement without our prior written consent, where such consent will not unreasonably be withheld”. Under cl 10.3(b), AC was required actively to promote the business in the Territory and use its best effort “to promote the mutual business interests of yourself and us”. Under cl 10.20, AC was required not to be a party “to any act, matter or thing whereby the reputation of ourselves or the ERA System may be prejudicially affected either during the currency of this Agreement or after its termination for whatever reason”. “ERA System” is defined broadly to include the operational, sales and promotional techniques used as part of the expense reduction analysis business conducted by ERA.

8. Under clause 19.3 of the Licence Agreement, ERAG had a right to terminate the agreement immediately in certain circumstances. One circumstance was where AC had breached the agreement, the breach could not be remedied and ERAG had suffered or was likely to suffer substantial loss or damage as a result of the breach. Another was where the licensee acted in a way “that would entitle us to immediate termination at law”. ERAG also had a right under cl 19.3(c) to terminate the agreement if AC breached a term of the agreement and AC failed to remedy the breach within a reasonable time (which was no longer than 30 days) in accordance with a notice given by ERAG.

9. Mr Armstrong was a party to the Licence Agreement, although for what purpose is not clear. The agreement does not purport to impose any obligations on him, although a number of terms (for example, those dealing with the effect of death or permanent disability) seem to assume that the contracting party is an individual rather than a company.

10. AC focussed on insurance cost reduction consulting services and in doing so it developed systems and documents to assist it in providing those services. Mr Armstrong’s son, Mr Mark Armstrong (Mr Armstrong Jnr), also worked in the business and it was Mr Armstrong’s intention that he would eventually take over the franchise.

11. AC, and Mr Armstrong in particular, were well received by other ERA licensees in Australia and quickly became well‑known within the group. His success came to the attention of Mr Marfleet. Mr Marfleet had been interested for some time in expanding ERA’s business to cover insurance and in or about July 2004 he and Mr Armstrong had a number of preliminary conversations about establishing a company to provide specialist insurance costs reduction services to the ERA network in Australia and New Zealand.

Establishment of ERAIS

12. Following those initial conversations, Mr Armstrong and Mr Stan Zets, a director of ERAG, negotiated an agreement by which ERAG and ASMM established a company in Australia that became known as ERA Insurance Services Pty Ltd (ERAIS), the second defendant. On 31 August 2004, ASMM and ERAG signed a Shareholders Agreement regulating their respective interests in ERAIS.

13. Under the terms of the Shareholders Agreement, it was agreed that 50.1 percent of the shares in ERAIS would be owned by ERAG and the balance would be owned by ASMM. It was also agreed that ERAIS would provide specialist insurance consulting services to the ERA network in Australia and New Zealand. Under cl 6.1 of the Shareholder Agreement, Mr Armstrong was appointed ERAIS’s Managing Director, for which he received an initial salary of $120,000. In addition, ASMM was to be paid a management fee in the first year of $240,000 but only out of the gross profits of ERAIS. Mr Armstrong’s salary increased and the management fee decreased in subsequent years so that by the financial year ending 30 June 2007 Mr Armstrong was to receive a salary of $240,000 and ASMM a management fee of $120,000.

14. Clause 7.1 of the Shareholders Agreement provided:

The Company herein established, shall conduct its business in accordance with the terms and conditions of an ERAG license agreement. The Company shall in particular, comply with the financial terms of the said license agreement and pay to ERAG the royalty contemplated therein at the rate of 15% of all revenue received by the Company from the ERA System. In consideration thereof, ERAG shall not itself develop any insurance operation in competition with The Company and use its best efforts at all times to promote and develop the business of the Company.

15. Clause 7.2 provided that ERAG was entitled to all intellectual property rights relating to the development of the ERA System, which was defined as “the distinctive and unique system for assisting businesses to reduce their expenses developed under the trademark “Expense Reduction Analysts””.

16. Each shareholder having 20 percent or more of the shares was entitled to appoint a director for each 20 percent of the shares held by it. However, the directors appointed by a shareholder were together only entitled to exercise one vote. Under cl 8.7, to the extent permitted by law, a director was entitled to make decisions in the interests of the director’s appointor.

15. Clause 10.4 of the Shareholders Agreement provided:

The income of the Company must first be applied towards meeting the operating expenses of the Company and then repaying Shareholder loans in accordance with the Business Plan. Subject to the Company meeting all legal requirements, the balance of the income of the Company must be paid as dividends to the Shareholders.

18. At some stage, ERAIS also employed Mr Armstrong Jnr. At the time ERAIS was established, AC transferred to it an application it had made for an Australian Financial Services Licence (AFSL), which was subsequently granted. San Regis Pty Ltd, the trustee of Mr and Mrs Armstrong’s superannuation fund also agreed to lease suite 1204 in a building in Queens Road, Melbourne to ERAG for the use of ERAG and ERAIS. At about the same time ERAIS entered into a lease of suite 1220 in the same building. The premises in Queens Road were initially also shared with AC.

19. It is common ground that ERAIS provided specialist insurance services to other ERA licensees. In doing so, it entered into separate agreements with clients and entered into a Referral Agreement with the licensee who referred the client. Under the terms of the Referral Agreement, ERAIS generally agreed to pay the licensee 40 percent of the fee paid to it by the client, although in the case of two licensees who attracted a lot of business it paid 50 percent. Most often, ERAIS charged the client 50 percent of the savings made by the client as a result of ERAIS’s services, although in some cases it charged a fixed fee.

20. Despite the arrangements in relation to ERAIS, the Licence Agreement between AC and ERAG remained on foot. According to Mr Armstrong’s affidavit evidence, once ERAIS was established, it and AC worked together on insurance projects. However, the only examples Mr Armstrong gives of ERAIS and AC working together are affinity schemes entered into with industry bodies. The first such scheme was entered into in about April or May 2007 with FCA Insurance Services Pty Ltd (FCAIS), which was a special purpose subsidiary established by the Franchise Council of Australia (FCA) for the purposes of the scheme. Under the terms of the scheme, ERAIS and AC arranged through an insurance broker, Willis Australia Limited (Willis), to provide insurance to FCA members on favourable terms. Willis paid FCAIS a proportion of the commission it earned from placing the insurance and FCAIS paid ERAIS a management fee for managing the scheme. After paying expenses, including a 15 percent royalty payable to ERAG, ERAIS paid 50 percent of the amount it received to AC. AC and ERAIS entered into a similar scheme with Clubs NSW on or about 27 May 2008. Mr Armstrong says that AC also entered into affinity schemes with Australian Hotels Association (NSW) trading as Australian Hospitality Insurance Services, Australian Hotels Association (ACT) trading as Australian Hospitality Insurance Services and Diabetes Australia trading as Diabetes Australia Insurance Services. In addition, he says that in mid-2009, AC and ERAIS were negotiating to enter into affinity schemes with Clubs WA and Clubs Queensland.

Expansion of the insurance business and the establishment of ERAGICS

21. The business conducted by ERAIS was successful and in June 2006 Mr Marfleet and Mr Armstrong had a number of discussions concerning the possibility of expanding the business conducted by ERAIS to other territories in which ERA operated, starting with the United States. Following those initial discussions, Mr Armstrong had detailed negotiations with ERA concerning the expansion. Initially, those negotiations were handled by Mr Zets. Mr Ken Hagerstrom, the CEO of Expense Reduction Analysts Inc (ERA-US), the company through which ERAI conducted business in the United States, was also involved. In June 2007, Mr Stuart Michael, the fourth defendant, took over responsibility for the negotiations with Mr Armstrong from Mr Zets.

22. The discussions were protracted and sometimes fractious. Eventually they resulted in two principal agreements. One, which was entered into on or around 25 February 2008, was known as the Consultancy Agreement. The other, which was entered into on 27 February 2008, was known as the Cooperation Deed. In contemplation of those agreements, ERAI incorporated in the United Kingdom the seventh defendant, ERAGICS Limited (ERAGICS), which was to be the company through which the international insurance business was to be carried on.

23. The parties to the Cooperation Deed were Mr Armstrong, ASMM, ERAI, ERAG and ERAGICS. Under the terms of the Cooperation Deed, Mr Armstrong was to become the initial Managing Director of ERAGICS. ERAI had a right to terminate the agreement at any time within the first 12 months (referred to by the parties as the “wind-back period”). If ERAI did not exercise that right, then it was to cause ERAGICS to issue 25 percent of its shares to Mr Armstrong and to allot conditionally and to place in escrow a further 10 percent of the enlarged share capital of the company to be transferred to Mr Armstrong if the EBITDA (earnings before interest, tax, depreciation and amortisation) of ERAGICS reached $2 million within 3 years of the date of the deed or 5 years if ERAI was not listed within 3 years of the date of the deed. In return, ASMM agreed to transfer its shares in ERAIS to ERAI or its nominee. ERAI also agreed to provide ERAGICS with sufficient funds to carry on the business in accordance with each business plan that was to be prepared by the Managing Director and submitted to the board for approval. Under cl 10.1.3 of the Cooperation Deed, the adoption or variation of a business plan required the prior written consent of ERAI and Mr Armstrong.

24. Clause 11 required the Board to consider and to adopt a Business Plan for each Financial Year (which ran from 1 January to 31 December). Under cl 11.1.1, the Managing Director (Mr Armstrong) was required as soon as reasonably possible after the execution of the Cooperation Deed, and at least two months before the commencement of each subsequent Financial Year, to submit to each director a draft business plan, which, with any agreed modifications, was to be approved by the Board before the beginning of the Financial Year to which it related. Clause 11 set out the information the business plan was to include. It also permitted the Managing Director to submit an amended business plan “at any time he reasonably considers it is in the interest of the Company to do so”. The table of contents of the Cooperation Deed contemplated that an initial business plan would be annexed as schedule 4 to the deed, although no plan was annexed.

25. Although no business plan was annexed, Mr Armstrong had on 16 September 2007, well in advance of the Cooperation Deed being signed, circulated a first draft of the initial business plan for the operations in the United States. That business plan assumed that fees would be split between ERAGICS and the relevant licensee on a 50/50 basis but that ERA US would pay for the US Sales Manager “in lieu of the Fee split being forty sixty (40/60)”. It also assumed in the first year that the US operations would employ a general manager and a sales manager and broker in the second quarter of that year and a clerk in the third quarter of that year. Staff numbers were projected to increase in future years. On those assumptions, the business plan projected that the US operations would require funding of $1,121,250 in the first year of operations but would generate increasing profits in subsequent years. Mr Clucas, who is the fifth defendant, and who had recently been appointed the finance director of ERA, in particular, did considerable work on that business plan. However, it is common ground that the business plan prepared by Mr Armstrong was approved; and that it was the only business plan for the US operations to receive approval from Mr Armstrong and ERAI in accordance with the Cooperation Deed.

26. Clause 13.1.1 of the Cooperation Deed provided that Mr Armstrong and ERAI, and companies in the ERAI group, would not during the term of the deed either directly or indirectly, on their own account or on behalf of any other person “be engaged or involved in any capacity in any business or activity which is the same as, substantially similar to or competitive with the Business”. The clause goes on to state that “engaged or involved in” includes “direct or indirect involvement as a principal, agent, partner, employee, shareholder, director, trustee, beneficiary, financier, consultant or advisor”. “Business” is defined to mean “the ERA System which includes the business of providing corporate insurance advisory services using the skill and expertise provided by [Mr Armstrong]”.

27. The Cooperation Deed contained in cl 14 a mechanism for breaking deadlocks, which involved reference of the deadlock to an independent accountant, who was to determine the matter as an expert and not as an arbitrator.

28. Under the terms of the Consultancy Agreement, Mr Armstrong was appointed a consultant to ERAGICS for an initial period of 36 months and then until terminated by either party on 12 months written notice. ERAGICS agreed to pay Mr Armstrong a consulting fee of $360,000 per annum together with his expenses.

29. Under cl 8 of the Cooperation Deed, the parties agreed that ERAGICS was to enter into service level agreements (which the parties referred to as “SLAs”) with certain companies that were associated with, or were subsidiaries of, ERAI, which the parties referred to as “Local Operating Companies” or “LOCs”. The terms of the SLAs were agreed between the parties. ERAGICS entered into two SLAs. The first, which was between ERAI, ERAGICS, Mr Armstrong and Expense Reduction Analysts Insurance Inc, later known as ERAGICS Inc (ERAGICS USA). That agreement was entered into in the United States on or about 24 or 25 February 2008. Under the terms of the agreement, ERAGICS agreed to provide ERAGICS USA with analytical consulting and marketing services in relation to insurance. In return, ERAGICS USA agreed to pay ERAGICS 90 percent of its EBITDA, the components of which were to be agreed by ERAGICS and ERAGICS USA each year. ERAI agreed to provide ERAGICS USA with sufficient funds to carry on the business in accordance with each Business Plan agreed between ERAI and Mr Armstrong or that was agreed in accordance with the Cooperation Deed. “Business Plan” was defined in the agreement to mean:

… a detailed business plan of the Company for carrying on the Business during a financial year that is adopted by the board of directors of the Company that comprises:

(a)   a detailed description of the Company’s proposed products, marketing activities, financing, expenditure and other activities during that period;

(b)   a budget containing an estimate of the income to be received and the expenses to be incurred in implementing and carrying on the activities described in paragraph (a) and not containing any material expenditure outside the normal course of the Business unless such expenditure has been approved by [Mr Armstrong];

(c)   a program for equity or debt contributions, if any, to be made by [ERAI].

30. An Australian SLA, which was in similar terms, was entered into on 8 April 2008 between ERAI, ERAGICS, Mr Armstrong and ERAIS. At about the same time, ERAG transferred its shares in ERAIS to ERAA, although that transfer was backdated to 31 December 2006.

Commencement of business in the US; Mr Sellwood joins ERAIS

31. The US insurance business commenced operations in March 2008, although considerable preparatory work was done before then. Local licensees had been informed of the proposal to commence an insurance business at an ERA conference held in Dallas between 5 and 7 November 2007. At about the time the business commenced, Mr Armstrong went to the United States for about four or five months and Mr Peter Sellwood, who had previously worked for Willis, and who had become and who remains a close personal friend of Mr Armstrong, became the General Manager of ERAIS. Also at about the same time, Mr Stuart Michael was appointed a director of ERAIS and Mr Clucas became a director of a number of group companies including ERAG, ERAIS and ERAGICS. Subsequently, on 17 November 2008, Mr Dormer, who is the tenth defendant, and who founded Kreston Dormers, a multidisciplinary professional services firm which provided accounting, taxation and other services to the ERA Australian companies, was also appointed a director of ERAIS.

32. There is a question of how well the business in the US performed in the first year to which it will be necessary to return, although reports from Mr Armstrong in the second half of 2008 suggested that the US operations would go close to achieving the business plan.

33. During the first year that ERAGICS operated, the relationship between Mr Armstrong and ERA deteriorated to some extent. Mr Dormer, Mr Clucas and Mr Michael, in particular, began to raise questions concerning the operation of ERAIS’s business in Australia and Mr Armstrong took particular offence to an email Mr Michael sent to Mr Sellwood on 18 August 2008 in which he sought advice “in strict confidence” concerning the employment by ERAIS of Mr Neil Musgrave, Mr Armstrong’s brother-in-law as “State Manager”. Mr Armstrong replied to that email, which he copied to a number of others, including Mr Hagerstrom and Mr Marfleet, by describing Mr Michael as “the most pathetic executive I have ever had to [sic] the displeasure to work with”. In a subsequent email to Mr Marfleet and others, which appears to be undated, Mr Armstrong complained about the fact that he had not been notified of the appointment of Mr Sellwood as CEO of ERAIS, the alleged failure of ERAI to provide appropriate funding for the global insurance operation and Mr Michael’s conduct. Mr Armstrong asserted that these matters involved “substantial breaches of the agreement between ourselves and our companies” and said that as soon as he returned to Australia he would “be referring the matter to my attorneries [sic] in regard to accepting your actions as a repudiation of the agreements”.

34. Following these emails Mr Armstrong and Mr Marfleet met and it was agreed that Mr Armstrong would no longer deal with Mr Michael and that he would report directly to Mr Clucas and Mr Marfleet in relation to financial matters and to Mr Hagerstrom in respect of US insurance operations and to Mr John Goodhardt in respect of the European operations, although ultimately no European LOC was established and initial attempts to set up a European insurance business were abandoned after Mr Labau, who had been engaged in France to establish the business, refused to become the responsible officer. During this time, Mr Armstrong also began to raise concern about the structure of the insurance operations. In his view, the existing structure did not work efficiently and needed to be amended so that the LOCs were owned directly by ERAGICS and he had control over them.

Agreements continue; breakdown of the relationship

35. Despite these developments, ERAI did not exercise its right to terminate the Cooperation Deed during the wind-back period. Following the expiration of the wind-back period, Mr Armstrong caused ASMM to transfer its shares in ERAIS to ERAG as ERAI’s nominee. ERAI took steps to arrange for the issue of shares in ERAGICS to Mr Armstrong. However, the issue of the shares was never registered at Companies House and there is a dispute whether ERAGICS actually issued the shares, although the defendants accept that ERAGICS was under a contractual obligation to do so.

36. The relationship between Mr Armstrong and ERA continued to worsen. ERA became increasingly concerned about the financial performance of the insurance business. Following Mr Sellwood’s appointment, the financial performance of ERAIS deteriorated substantially. It made a loss of $1,866 for the year ending 31 December 2008 compared with a profit of $218,926 in the previous financial year. Its total revenue for the financial year ending 31 December 2009 was $410,517 (compared with $1,218,576 in 2008 and $1,701,273 in 2007) and it made a loss in that year of $626,330. The US business did not perform well. Mr Armstrong blamed the poor performance on the failure of ERAI to provide sufficient capital, the structure of the business and problems with the client engagement letter, which permitted a client to terminate its contract with ERAGICS USA before payment, even if the client achieved savings as a result of ERAGICS’ efforts. Mr Armstrong pressed aggressively for a change in structure and at the same time made it clear that, under the arrangements that had been established, he had limited involvement in the LOCs and consequently limited control over the success of the insurance business. He spent less time in the United States. After travelling there on 5 April 2009, he left on 8 June 2009 and only returned in October for approximately a week. On several occasions, he suggested that he and ERAI agree to part ways.

37. Although there were several meetings and a great deal of correspondence between Mr Armstrong and Mr Marfleet and others on the issues raised by Mr Armstrong, no resolution was reached. In addition, Mr Armstrong claimed that ASMM was entitled to be paid its share of the retained earnings of ERAIS as at the date it was agreed ASMM would transfer its shares in ERAIS to ERAG (which were said to total $226,350.00) and tensions were increased by ERAIS’s failure to make that payment and to repay a loan of $30,000 that ASMM had made to ERAIS to provide it with working capital. Mr Armstrong also claimed that ERAIS owed AC $79,500 in exchange for AC’s agreement to transfer its ERA licence to ERAIS.

38. Matters reached something of a head in June 2009. In that month, Mr Armstrong had two meetings with Mr Marfleet and Mr Howson in an attempt to resolve the issues between them. Mr Howson was the second largest investor in ERAI and one of its four directors. He had had little to do with Mr Armstrong up until that time. It appears that Mr Marfleet thought that a new person from the ERA side might make it easier to resolve what seemed to be an impasse. The first meeting occurred at ERA’s offices in Kent on 8 and 9 June 2009. Mr Clucas was also present at that meeting.

39. Following the meeting in Kent, Mr Armstrong prepared draft heads of agreement setting out the proposals that he had raised at the meeting, which he circulated to Mr Marfleet and Mr Clucas on 17 June 2009. Those heads of agreement proposed that each of the LOCs would become subsidiaries of ERAGICS and that the Board of ERAGICS would consist of Mr Marfleet, Mr Howson, Mr Clucas, Mr Armstrong, Mr Armstrong Jnr and Mr Armstrong’s wife as Mr Armstrong Jnr’s alternate. ERAI would hold 65 percent of the shares in ERAGICS and the balance would be held by ASMM. ERAI would remain responsible for funding the business in accordance with agreed business plans. The business would have its own accounting functions and IT systems and would operate independently of the master franchisee in each country.

40. On 22 June 2009, Mr Clucas sent to Mr Armstrong with a copy to Mr Marfleet revised projections for ERAGICS USA based on information that had been supplied by Mr Armstrong. In his covering email, Mr Clucas described the figures as “disastrous”. According to Mr Clucas, the figures showed that ERAGICS USA was projected to make a loss in 2009 of $416,000 compared to a projected operating profit of $425,000. According to Mr Clucas, the figures also showed that “Peak cash requirement is now $704k compared with a current funding level of $413k”. The figures also showed that there would not be a cumulative operating profit until the last week in December 2010. Mr Clucas was not challenged on these projections in cross-examination.

41. The draft heads of agreement prepared by Mr Armstrong were discussed at a second meeting that occurred on 26 June 2009 in London. It appears that at that meeting, Mr Marfleet put forward an alternative proposal under which Mr Armstrong’s interest in the business would depend on the business achieving both profit and cash flow targets and that, in the meantime, Mr Armstrong would agree to a reduction in his salary. However, no resolution was reached at the meeting. It is Mr Marfleet’s evidence that, following the meeting in London, Mr Howson told Mr Marfleet that he was no longer prepared to deal with Mr Armstrong. Mr Howson does not recall saying that, although he does recall expressing frustration with Mr Armstrong’s attitude. Mr Marfleet says that, following the meeting in London, he reached the conclusion that ERA would be unable to satisfy Mr Armstrong’s demands. As a result, ERA began to investigate how the agreements with Mr Armstrong and his companies might be terminated.

35. The plaintiffs contend that, from that time at least, the defendants were determined to do whatever it took to terminate Mr Armstrong’s relationship with ERA. There can be little doubt that by about this stage a number of people within ERA, including Mr Michael, Mr Hagerstrom and, to a lesser extent, Mr Clucas, had formed that view. However, Mr Marfleet gave evidence that that was not his view and that his attitude at the time was that Mr Armstrong should be given one last chance to turn the insurance business around. I accept that evidence. Mr Marfleet came across as a credible witness who made concessions where it was appropriate to do so. He also came across as a calm and rational person. He accepted that ERA began to investigate how it could terminate its relationship with Mr Armstrong. But the fact that it did so is not inconsistent with a desire by Mr Marfleet still to try to make the relationship work. Mr Marfleet had been a strong supporter of Mr Armstrong in the past, even in the face of sometimes intemperate behaviour on the part of Mr Armstrong. Mr Marfleet was committed to developing the insurance business, which depended heavily on Mr Armstrong. Everyone accepts that Mr Armstrong was good at his job and an exceptional salesman. It is natural in those circumstances that Mr Marfleet would not readily want to terminate ERA’s relationship with him. As will become apparent, that conclusion is supported by subsequent events and, in particular, the decision that was taken at the Board meeting of ERAI on 3 July 2009.

36. On 2 July 2009, Mr Marfleet circulated a paper he had prepared for that Board meeting. The paper pointed out that ERAGICS had lost £152,000 in 2008 and was projected to lose £202,000 in 2009. ERAGICS USA had lost £439,000 in 2008 and was projected to lose £74,000 in 2009, making a total loss for the two years of £867,000 or approximately $1,445,000. ERAGICS was projected to make further losses in 2010. It is not easy to reconcile these figures with the figures produced by Mr Clucas in relation to ERAGICS USA. Again, Mr Marfleet was not cross‑examined on them. However, the figures support the view that the performance of the US business was substantially worse than was projected in the initial agreed business plan.

37. Mr Marfleet’s paper also set out three options to deal with the impasse with Mr Armstrong. The first was not to agree to a revised business plan, with the result that the impasse would be referred to an independent accountant in accordance with the provisions of the Cooperation Deed. The second was to require Mr Armstrong to work 48 weeks a year in the United States, which Mr Marfleet thought would be unattractive to him given that his home and family were in Melbourne. The third was to work with Mr Armstrong constructively. That alternative was described in Mr Marfleet’s paper in these terms:

This would be carry out a restructure of the business which he has continually asked us to do whereby ERAGICS owns 100% of ERAIS & ERAGICS USA. He is made MD of both companies and we agree a new business plan with lower investment and slower growth. We would also require him to spend at least 40 weeks a year in the USA and agree a cap on our investment after which he would be watered down.

45. The Board meeting was attended by the four directors of ERAI – Mr Marfleet, Mr Howson, Mr Michael and Mr Chapman, who was a non-executive Board member and is the ninth defendant. Mr Clucas was also present. At that Board meeting it was agreed that ERAI would write to ERAGICS “to request [Mr Armstrong] to relocate to USA and act as interim CEO while preparing revised business plans for USA and Australia”. It was also agreed that ERAI “would be prepared to consider changing the ownership of the insurance subsidiaries and to invite [Mr Armstrong] to join the boards of those companies if he could demonstrate that the USA subsidiary could achieve an agreed revised business plan for 2009”.

46. Following that meeting, on 9 July 2009, ERAI wrote to the Board of ERAGICS stating that future funding of the insurance operations in the United States and Australasia would be subject to ERAI’s agreement to revised business plans and to Mr Armstrong being based permanently in the United States. The letter also stated that if the revised business plans were achieved “[ERAI] will review the ownership of the USA and Australian insurance subsidiaries and consider Ken Armstrong’s request to be appointed to the board of each insurance subsidiaries”. Mr Clucas forwarded a copy of that letter to Mr Armstrong on 11 July 2009. Mr Chapman gave evidence that, in his view at least, the letter was sent to persuade Mr Armstrong to go to the United States to develop the business. I accept that evidence. That evidence is also consistent with the evidence given by Mr Howson, which I also accept. Mr Howson says that his view was that Mr Armstrong had developed a successful business in Australia, that he was very important to the success of the business in the United States and that in those circumstances it was appropriate that he spend most of his time there developing the business.

47. Mr Armstrong replied on the same day. He maintained that with certain adjustments that needed to be made to the accounts of ERAGICS, the results “are in line with the operating forecasts”. He also maintained that he was not contractually obliged to live in the United States. Lastly, he maintained that ERAIS was insolvent and it would be necessary to advise the Australian Securities and Investment Commission (ASIC) and the Trade Practices Commission of that fact on the following Monday. The following day, Mr Armstrong gave notice to the Board of ERAIS of his resignation as a “key person” appointed by ERAIS under the conditions of its AFSL.

48. On 14 July 2009, Mr Clucas sent an email enclosing a draft agenda for a Board meeting of ERAGICS to be held later that week. Mr Armstrong responded on the same day asking for the Board meeting to be postponed because he was not available in the next three days. In that email, Mr Armstrong asserted that it would be impossible for him to relocate to the United States because “this would require citizenship to be obtained and for a 62 year male worker this would probably be close to impossible in the current economic climate and could not be achieved in the immediate short term to have any effect of [sic] the 2009 business plan”. On that basis, Mr Armstrong asserted that the letter dated 9 July 2009 “evinces [ERAI’s] intent to breach the USA and Australian Service Agreements and the Board can accept that these agreements are as good as terminated and legal advice is currently be [sic] sought”. Mr Armstrong also said that he had “absolutely no interest in being on the insurance subsidiaries boards unless he is the Managing Director and the companies are owned 100% by ERAGICS Limited”.

49. Following further correspondence between the parties that was often characterised by a degree of vitriol, particularly on Mr Armstrong’s part, Mr Marfleet wrote to Mr Armstrong on 21 July 2009 giving notice of a deadlock because of what was said to be a refusal by Mr Armstrong to attend a Board meeting of ERAGICS.

50. On 29 July 2009, ASMM served two statutory demands on ERAIS. One claimed the amount lent by ASMM together with interest on that amount totalling $44,846.36. The other claimed $117,350.00, which was the amount said to be due to ASMM in respect of retained earnings as at the date ASMM transferred it shares in ERAIS to ERAG. On the same day, AC served a third statutory demand on ERAIS claiming $79,500 as the amount due to it in relation to what was said to be an agreement by which AC would transfer its licence to ERAIS. ERAIS paid the amount claimed in the first statutory demand. The other two were ultimately set aside by consent.

51. By this stage, Mr Armstrong formed the view that it was impossible for him to continue to develop the global insurance practice. In cross-examination, he gave the following evidence on that subject:

A. …. I was banned from Australia and shortly thereafter I was banned from the USA and the French business I was told was closed.

Q. So the answer is that you agree that you weren't continuing to develop the global insurance practice?

A. It was impossible.

52. On 3 August 2009, Mr Armstrong sent an email to Mr Marfleet and others alleging the rent in respect of the premises leased by ERAG from Mr Armstrong was overdue and threatening to commence proceedings if it was not paid by the following day. Following further correspondence between Mr Armstrong and Kreston Dormer, Kreston Dormer sought access to the premises to remove what was said to be ERA’s confidential information on the server located there. Mr Armstrong refused that access. It appears that subsequently the rent was paid and, on 12 August 2009, Mr Dormer went to the premises with security guards and an IT specialist for the purpose, Mr Dormer says, of obtaining ERAG’s intellectual property. The police were called and, following negotiations, the representatives of ERAG were able to remove some files and laptops, which Mr Armstrong says belonged to ASMM. At the same time, Mr Dormer arranged for the locks to suite 1220 to be changed. It is apparent that one purpose of the action taken by Mr Dormer was to secure information belonging to ERAIS, including information concerning ERAIS’s clients. But it is equally apparent that another purpose was to obtain material that may have been of assistance to ERAIS in its looming dispute with Mr Armstrong and the companies associated with him.

53. In the meantime, on 10 August 2009, Mr Sellwood and Mr Tobin resigned from ERAIS. Mr Sellwood’s resignation followed intense questioning of him concerning the financial performance of ERAIS at a Board meeting of that company on 29 July 2009 and an email dated 31 July 2009 from Mr Dormer to Mr Sellwood in which Mr Sellwood was instructed not to discuss the business of ERAIS with Mr Armstrong. In his letter of resignation, which Mr Sellwood showed Mr Armstrong before sending it, Mr Sellwood listed various complaints about the way he had been treated by ERAIS that caused him to resign. He sent a copy of his letter of resignation to a large number of licensees.

54. On the day that Mr Dormer arranged for the locks to suite 1220 to be changed, Mr Armstrong Jnr and another ERAIS employee, Ms Vanessa Reinehr, were told to go home. There is a question whether they subsequently abandoned their employment or whether they were constructively dismissed. In any event, ERAIS purported to terminate Mr Armstrong Jnr’s employment on 24 August 2009 and took possession of his laptop at that time.

55. The day after Mr Dormer’s visit to the premises of ERAIS, Mr Tobin and Mr Armstrong Jnr met for lunch and at that time they discussed the possibility of setting up a consulting business that became known as The Lion Partnership. A company with that name was registered on 14 September 2009. There is a question concerning the degree to which Mr Armstrong was involved in the setting up of that business to which it will be necessary to return. In the meantime, in an email sent from the ERA email address of Mr Armstrong Jnr on 11 August 2009, Mr Armstrong proposed to licensees in Australasia that if they wanted insurance analysis work done they could enter into a joint venture arrangement with Mr Tobin directly, “until ERAIS Directors can provide us with an alternative solution”. Mr Armstrong also said that he was willing to assist the licensees personally by providing sales, seminars and client presentations. In response, on 14 August 2009, Truman Hoyle wrote to Mr Armstrong on behalf of ERAIS alleging that Mr Armstrong had wrongfully retained intellectual property belonging to ERAIS and that he had engaged in misleading and deceptive conduct by suggesting in his email dated 11 August 2009 to licensees and other correspondence that ERAIS was unable to continue to provide services to licensees following the resignation of Mr Tobin and Mr Sellwood, that ERAIS had forcibly deprived Mr Tobin of his laptop and that ERAIS had engaged persons who had or were likely to have engaged in violent and illegal behaviour. On 17 August 2009, Truman Hoyle sent a copy of that letter to ERAGICS asking that the Board of ERAGICS “takes immediate steps to ensure that there is no repetition of such conduct by Mr Armstrong”. As a result, Mr Armstrong withdrew the proposal that licensees could engage in a joint venture with Mr Tobin.

56. An ERAGICS Board meeting occurred on 19 August 2009. Nothing of significance was agreed at the meeting. However, it provoked a flurry of correspondence between Mr Armstrong and Mr Clucas. In an email dated 22 August 2009 that Mr Clucas sent to Mr Armstrong in response to an email from Mr Armstrong of 20 August 2009, Mr Clucas said, among other things:

You are aware that your actions in Australasia have been the subject of a formal complaint from ERAIS. I believe from discussion with our Client in Australia that there is now a significant and extremely widespread antipathy towards you both personally and professionally. We, your fellow Directors, feel you will find it very difficult to improve the current trading position there. ERAIS has now made other arrangements and whilst the SLA is of course still in place, your services in Australia are not currently required.

57. On 2 September 2009, Mr Marfleet wrote to the Board of ERAGICS stating that there had been a number of complaints about Mr Armstrong in relation to the US business. The letter concluded:

ERA USA Inc and USA Insurance subsidiary do not therefore require or desire Ken Armstrong to provide any further assistance to, or have any further involvement with, ERA USA Inc, or the US insurance business. Ken Armstrong will not be permitted to attend any ERA event in the US.

58. Despite that, Mr Armstrong presented at a seminar in Houston on 5 October 2009 organised by Mr Stronck, an ERA licensee. While he was in the US, Mr Armstrong also assisted Ms Brandel, another ERA licensee with an insurance background who was the Responsible Manager of ERAGICS USA for insurance regulatory purposes, to establish a business that was operated by a company that Ms Brandel was in the process of setting up known as The Lion Partnership LLC. Mr Stronck gave evidence that Mr Armstrong and Ms Brandel approached him some time in mid-2009, well before the seminar in Houston, about using The Lion Partnership rather than ERA for analytical work in relation to insurance. However, that is denied by Ms Brandel and Mr Armstrong. Mr Stronck has no actual recollection of when he was approached and there is no direct evidence that it was before 5 October 2009. Mr Stronck infers that it was before that date because, shortly after the seminar, he, Ms Brandel and Mr Armstrong approached clients on behalf of The Lion Partnership. According to him, it is likely that those meetings were arranged some time before. However, The Lion Partnership LLC was not registered until 8 October 2009. The meetings with clients could have been arranged in anticipation of the seminar whether or not Mr Armstrong and Ms Brandel were meeting on behalf of The Lion Partnership or on behalf of ERA. In the absence of any direct evidence, I am not prepared to conclude that Mr Armstrong and Ms Brandel approached Mr Stronck about The Lion Partnership before about 5 October 2009. However, there can be no doubt that, following the conference on 5 October 2009, they approached clients of ERA or potential clients with a view to providing them with insurance related services through The Lion Partnership LLC.

Termination of the Agreements

59. On 7 October 2009, Truman Hoyle, ERA’s solicitors, sent Mr Armstrong a notice to remedy breaches of the Licence Agreement. The breaches identified included making representations to licensees that ERAIS would be unable to continue to provide services to them, encouraging licensees to enter into a joint venture with Mr Tobin, making derogatory comments about the management and officers of ERAIS and interfering with the business and confidential proprietary information of ERAIS. The letter proposed that the breaches be remedied by AC advising the licensees that the statements made by Mr Armstrong were without foundation and that Mr Armstrong had been reprimanded for his conduct.

60. AC did not send the letter and on 22 October 2009 Truman Hoyle sent a notice to AC terminating the Licence Agreement.

61. On 18 November 2009, there was a meeting of the ERAGICS Board attended by Mr Chapman, Mr Clucas and Mr Armstrong. At that meeting, Mr Chapman and Mr Clucas voted to terminate the Consultancy Agreement. Following the meeting, Mr Chapman wrote to Mr Armstrong in the following terms:

I refer to the Board Meeting that took place on 18 November 2009 and the resolution that the Consultancy Agreement be terminated which was passed by a vote of the directors.

For the avoidance of doubt, I write to notify you that the Board of ERAGICS has terminated the Consultancy Agreement under Clause 15.1.4.

I also note that as a result of the above, the Co-operation Deed has also terminated under Clause 20.1.

Clause 15.1.4 permitted ERAGICS to terminate the Consultancy Agreement forthwith without compensation “by notice in writing to the Consultant [Mr Armstrong] and or the Intermediary Company [ASMM]” in circumstances where “the Consultant is guilty of gross or persistent misconduct or shall be guilty of conduct likely to bring himself or the Group [defined to mean ERAGICS and its related companies] into disrepute”. Under cl 20.1 of the Cooperation Deed, it terminated automatically on termination of the Consultancy Agreement.

62. On the following day, Mr Armstrong resigned as the Managing Director of ERAGICS and on 11 December 2009, Arnold Bloch Leibler, who at that time were acting for Mr Armstrong, wrote to ERAI and ERAGICS advising that the Consultancy Agreement had been repudiated and that Mr Armstrong accepted the repudiation.

63. Following Mr Armstrong’s departure, ERA was unable to make a success of the insurance business and ERAI got into other financial difficulties. ERAIS was placed into administration on 6 July 2010. ERAGICS and ERAI were placed into administration on 25 January 2011.

64. At some stage, Mr Armstrong became the “Managing Partner” of The Lion Partnership, although more recently he has been described as the “Non-Executive Chairman”. The Lion Partnership has operated successfully since it was established, In the year ended 30 June 2010, it paid ASMM in respect of consulting services provided by Mr Armstrong $179,977. In the year ended 30 June 2011, the amount was $195,492. In the year ended 30 June 2012, it was $247,714. In the year ended 30 June 2013, it was $565,678. In the year ended 30 June 2014, it was $474,804.

The claims

Misleading and deceptive conduct inducing Cooperation Deed

65. The plaintiffs allege that prior to or at about the time of execution of the Cooperation Deed, ERAI, ERAG, Mr Michael, Mr Marfleet and Mr Clucas made the following representations:

1. Mr Armstrong would be a director of the LOCs;

2. Mr Armstrong would have access to the accounts of the LOCs;

3. ERAI would provide all necessary funding to the LOCs;

4. ERAI would provide all necessary funding for ERAGICS;

66. Those representations and the failure to correct them are said to be misleading and deceptive because the representors had determined before the Cooperation Deed was executed that Mr Armstrong would not be a director of the LOCs, that he would not have access to the LOC accounts and that he would not be involved in approving the budgets and business plans of the LOCs. Alternatively, the plaintiffs allege that the representors did not have reasonable grounds for making the representations, with the result that, absent evidence of reasonable grounds from the representors, the representations, which are said to be representations as to the future, are deemed to be misleading and deceptive under s 51A of the TPA and the equivalent provisions of the Fair Trading Act 1987 (NSW) (FTA) and Fair Trading Act 1985 (Vic) (VFTA).

66. In addition, to the extent that ERAI, ERAG, Mr Michael, Mr Marfleet and Mr Clucas did not themselves engage in misleading and deceptive conduct, they are each said to have accessorial liability for the misleading and deceptive conduct of the others.

67. The same claim is framed as a claim for breach of fiduciary duties. The plaintiffs allege that ERAI, ERAG and ERAGICS (from its incorporation) owed Mr Armstrong and ASMM fiduciary obligations not to:

1. Place themselves in a position of conflict between their interests and the interest of Mr Armstrong and ASMM except with the informed consent of Mr Armstrong and ASMM;

2. Withhold knowledge and information from Mr Armstrong and ASMM relating to the way in which the global insurance practice would be established;

3. Act capriciously and unreasonably.

69. It is alleged that ERAI, ERAG and ERAGICS breached those duties by dishonestly and fraudulently making the representations referred to above. Alternatively, it is alleged that Mr Michael, Mr Marfleet, Mr Clucas and Mr Chapman are liable for the breaches of fiduciary duty because they assisted with the breaches or did so dishonestly.

Claim in respect of retained earnings

70. It is alleged that Mr Michael, at or about the time the terms of the Cooperation Deed were agreed, agreed on behalf of ERAIS or ERAG to pay ASMM 49.9 percent of ERAIS’s retained earnings for the year ending 31 December 2007 (totalling $235,070) and that those companies have breached that agreement by refusing to pay the amount agreed in accordance with a payment schedule agreed between Mr Clucas and Mr Armstrong. The same claim is pleaded in terms of an estoppel.

Claim in respect of ERAGICS shares

71. It is alleged that ERAI or ERAGICS breached the terms of the Cooperation Deed by failing to issue the ERAGICS shares to ASMM. The same conduct is said to amount to a breach of fiduciary duties owed by ERAI and ERAGICS to Mr Armstrong and ASMM in which Mr Michael, Mr Marfleet, Mr Clucas and Mr Chapman participated.

Claims arising from termination of the Consultancy Agreement and Cooperation Deed

72. The claims arising from termination of the Consultancy Agreement and Cooperation Deed are put in various ways.

73. First, it is alleged that ERAGICS breached the Consultancy Agreement and Cooperation Deed by wrongfully purporting to terminate the Consultancy Agreement and that Mr Clucas and Mr Chapman induced that breach by voting in favour of the termination at the Board meeting of ERAGICS held on 18 November 2009. It is also alleged that Mr Michael and Mr Marfleet induced that breach because they knew or ought to have known that the termination was wrongful and they intended to procure ERAGICS to breach the Consultancy Agreement and Cooperation Deed.

74. Second, it is alleged that ERAI and ERAGICS engaged in unconscionable conduct in contravention of s 51AC of the TPA by seeking improperly to bring about circumstances in which Mr Armstrong would resign or the Consultancy Agreement might be terminated, with the intention of depriving him of his rights under that agreement and the Cooperation Deed.

75. Third, for the same reasons, it is alleged that the same conduct was misleading or deceptive in contravention of s 52 of the TPA, because it involved falsely representing that there was a valid basis for terminating the Consultancy Agreement.

76. The same conduct is also said to involve a breach of fiduciary duties.

77. Again, each of Mr Michael, Mr Marfleet, Mr Clucas and Mr Chapman are said to have accessorial liability for the breaches of ss 51AC and 52 and liability in respect of the breaches of fiduciary duty.

Claims in relation to the Licence Agreement

78. The plaintiffs allege that ERAG breached the Licence Agreement by wrongfully purporting to terminate it. Mr Marfleet, Mr Clucas, Mr Dormer and Mr Michael are alleged to have induced that breach. That allegation mirrors the allegation in relation to the other agreements. It is alleged that Mr Marfleet, Mr Clucas and Mr Dormer knew or ought to have known that the purported termination amounted to a repudiation of the Licence Agreement and that they intended to procure that ERAG breach the Licence Agreement.

79. The plaintiffs also allege that the same conduct was unconscionable conduct in contravention of s 51AC of the TPA and misleading and deceptive conduct in contravention of s 52 of the TPA because ERAI and ERAG falsely represented that there was a valid basis for terminating the Licence Agreement when there was not.

80. Again, Mr Michael, Mr Marfleet, Mr Clucas, Mr Chapman and Mr Dormer are said to have accessorial liability for the breaches of ss 51AC and 52.

Conduct allegedly inducing Cooperation Deed

Relevant legal principles relating to misleading and deceptive conduct

81. The plaintiffs rely on the provisions of the TPA and the equivalent provisions of the FTA and VFTA. For the most part, the provisions are substantially the same and it is sufficient to focus on the provisions of the TPA.

82. Section 52 of the TPA provided:

A corporation shall not, in trade or commerce, engage in conduct that is misleading or deceptive.

83. In order to characterise conduct as misleading or deceptive or as conduct which is likely to mislead or deceive the relevant conduct must be viewed as a whole. As French CJ explained in Campbell v Backoffice Investments Pty Ltd [2009] HCA 25; (2009) 238 CLR 304 at [25]:

Characterisation [of conduct that is misleading or deceptive or likely to mislead or deceive] is a task that generally requires consideration of whether the impugned conduct viewed as a whole has a tendency to lead a person into error. It may be undertaken by reference to the public or a relevant section of the public. In cases of misleading or deceptive conduct analogous to passing off and involving reputational issues, the relevant section of the public may be defined, according to the nature of the conduct, by geographical distribution, age or some other common attribute or interest. On the other hand, characterisation may be undertaken in the context of commercial negotiations between individuals. In either case it involves consideration of a notional cause and effect relationship between the conduct and the state of mind of the relevant person or class of persons. The test is necessarily objective. (Footnotes omitted).

84. In the case of silence or a failure to disclose, the person alleged to have been deceived must have had a reasonable expectation of disclosure. The principles were summarised by Sackville AJA in these terms in Fabcot Pty Ltd v Port Macquarie-Hastings Council [2011] NSWCA 167 at [209], which were cited with approval by Barrett JA (with whom Bathurst CJ and Beazley P agreed) in Traderight(NSW) Pty Ltd v Bank of Queensland Ltd [2015] NSWCA 94 at [192] [citations omitted]:

(iii)   The question in a case of alleged misleading or deceptive conduct as a result of non-disclosure is whether in the light of all relevant circumstances, there has been conduct which is misleading or deceptive … While the circumstances in which silence can be characterised as misleading or deceptive cannot be exhaustively defined, unless they give rise to a reasonable expectation that if some relevant fact exists it will be disclosed, mere silence will not support the inference that the fact does exist.

(iv)   In commercial dealings between individual entities, the characterisation of conduct must be undertaken by reference to circumstances and context. The relevant circumstances include the knowledge of the person who claims to have been misled and any common assumptions or practices established between the parties or in the particular activity or business in which they are engaged.

(v)   The language of reasonable expectation is not statutory but is an aid to characterising non-disclosure as misleading or deceptive. The judgment as to whether there is such a reasonable expectation is objective.

(vi) The invocation of a reasonable expectation that if a fact exists it will be disclosed, directs attention to the effect or likely effect of non-disclosure unmediated by antecedent erroneous assumptions or beliefs, or high moral expectations that exceed the requirements of the general law or of the prohibition imposed by [s 42 of the Fair Trading Act].

(vi) In general, [s 42 of the Fair Trading Act] does not require a party to commercial negotiations to volunteer information which will assist the decision-making of the other party. A fortiori, s 42 does not require a party to volunteer information in order to avoid the careless disregard of its own interests of a party of equal bargaining power and competence.

85. Section 51A of the TPA operates where a corporation or person makes a representation with respect to any future matter and the corporation or person does not have reasonable grounds for making that representation. In such a case, the representation will be taken to be misleading.

86. Section 51A and the State equivalents reverse the onus of proof concerning the existence of reasonable grounds. In the case of the FTA, it is clear that it is the persuasive or legal onus which is reversed: Dib Group Pty Ltd v Ventouris Enterprises Pty Ltd [2011] NSWCA 300; (2011) 284 ALR 601 at [33] per Allsop P (with whom Macfarlan JA and Handley AJA agreed). In the case of s 51A and s 10A of the VFTA (which is in the same terms as s 51A of the TPA), the balance of authority is in favour of the view that it is only the evidential onus that is reversed: see Australian Competition & Consumer Commission v Universal Sports Challenge Ltd [2002] FCA 1276 at [44] – [46] per Emmett J; North East Equity Pty Ltd v Proud Nominees Pty Ltd [2010] FCAFC 60; (2010) 269 ALR 262 per Sundberg, Siopis and Greenwood JJ.

87. In order to characterise a representation as one with respect to a future matter it is necessary to take into account the context in which the representation was made. As Wheelan J explained in Civoken Pty Ltd v Madden Grove Developments Pty Ltd [2006] VSC 283 at [508]:

[T]he representations made concerning intention, expectation and anticipation were representations of a state of mind. Such representations can be, and often are, representations with respect to a future matter and thereby attract the operation of s.51A. It is conceivable that a representation could in a sense concern a future matter but, in the particular circumstances, be no more than a representation of a present state of mind, thereby not attracting s.51A. This issue was not raised before me. It has arisen in a number of cases. Where this issue does arise the Court is required to identify the character of the representation so as to determine whether it is with respect to a future matter or with respect to a matter which is present or past. It would be an unusual case where a representation as to state of mind concerning matters in the future would not attract s.51A, but I accept the possibility that it could occur. All of the state of mind type representations which I have found were made here say more than merely what was the representor’s present state of mind. They each involved an element of prediction and were directed towards supporting a conclusion that there were prospects that the matter which was the subject of the state of mind would occur. Accordingly, in this case, s.51A is applicable to the representations couched in terms of intention, expectation and anticipation which I have found were made. (Footnotes omitted)

See also Sykes v Reserve Bank of Australia (1998) 88 FCR 511; (1998) 158 ALR 710 at 535 per Emmett J (in dissent, but not on this point).

88. A disclaimer or exclusion clause in a contract cannot be relied upon to exclude liability for misleading or deceptive conduct. However, the clause is part of the surrounding circumstances which must be considered in order to determine the question whether or not conduct is misleading or deceptive: Butcher v Lachlan Elder Realty Pty Ltd [2004] HCA 60; (2004) 218 CLR 592 at [39] per Gleeson CJ, Hayne and Heydon JJ; Campbell v Backoffice Investments at [29] per French CJ. In addition, an exclusion clause may be relevant to the question of causation. As the Full Federal Court explained in IOOF Australia Trustees (NSW) Ltd v Tantipech [1998] FCA 924; (1998) 156 ALR 470 at 480:

Although an exculpatory clause cannot be relied on to answer a claim based on s 52, the fact that an applicant states that he was not induced to enter into an agreement in reliance on representations may bear upon the question whether he should be believed when he asserts that the representations were an inducement. …

See also Campbell v Backoffice Investments at [31] per French CJ.

89. One of the defences raised by the defendants is that, to the extent that they engaged in misleading or deceptive conduct, that conduct occurred outside of Australia and consequently a claim in respect of it can only be brought with the consent in writing of the relevant Minister as a result of s 5 of the TPA as it then was.

90. Prior to amendments introduced by the Trade Practices Amendment (Cartel Conduct and Other Measures) Act 2009 (Cth), which came into effect on 26 June 2009, s 5 of the TPA relevantly provided:

(1) …Part V [which includes s 52] …extends to the engaging in conduct outside Australia by bodies corporate incorporated or carrying on business within Australia or by Australian citizens or persons ordinarily resident within Australia.

…

(3)   Where a claim under section 82 is made in a proceeding, a person is not entitled to rely at a hearing in respect of that proceeding on conduct to which a provision of this Act extends by virtue of subsection (1) … of this section except with the consent in writing of the Minister.

91. The plaintiffs submit that the requirement of Ministerial consent does not apply to claims under the FTA and VFTA, which both apply extra-territorially: see FTA, s 5; VFTA, s 6. In response, the defendants submit that to the extent that those Acts apply extra-territorially without the Minister’s consent, they are inconsistent with the TPA and are therefore invalid under s 109 of the Constitution. That defence was not pleaded and no notices were served in accordance with s 78B of the Judiciary Act 1903 (Cth). Consequently, I do not think that that defence is available in this proceeding. However, as will become apparent, on the conclusions that I have reached, it is unnecessary to consider this issue further.

Some general observations

92. Before addressing the specific representations on which the plaintiffs rely, it is necessary to make two general comments.

93. First, the terms of the agreements which governed the relationship between Mr Armstrong and ERAI were carefully negotiated over an extensive period of time. During the course of the negotiations, the parties sometimes took positions from which they ultimate retreated. Although on occasions Mr Armstrong asserted that agreement had been reached well before the formal agreements were signed and although on occasions he accused representatives of ERAI of resiling from those agreements, it is plain that he understood that that the parties’ agreement would be embodied in the formal documents that they were negotiating and that no binding agreement would be reached until those documents were signed. The principle that what was agreed was to be found in the written documents was reflected in entire agreement clauses contained in the Cooperation Deed and the Consultancy Agreement. The representations on which the plaintiffs rely relate to the structure of the joint venture that they were negotiating. In the normal course of events, it is to be expected that if one or other of the parties had put forward a particular matter that was agreed by the other party and was significant, it would have been dealt with in the formal agreements.

94. Second, the Cooperation Deed contained a clause by which Mr Armstrong “confirms that before entering into this deed, he has taken independent advice regarding the transactions contemplated by this deed”. Although that statement was not true, it is plain that Mr Armstrong is a highly intelligent and sophisticated businessman who was able to look after his own interests. Much of the negotiations of the terms governing the relationship between Mr Armstrong and ASMM on the one hand and ERAI occurred in writing, usually in the form of email exchanges. Where there were oral discussions, Mr Armstrong frequently followed those discussions up with an email setting out what he understood had been agreed. In addition, Mr Armstrong gave evidence that he did not trust the representatives of ERAI during the course of the negotiations. It is to be expected that in those circumstances Mr Armstrong would have reduced to writing anything that was said to him that he considered was important to the proposed joint venture.

The representation that Mr Armstrong would be a director of the LOCs

95. The representation that Mr Armstrong would be a director of the LOCs is said to have been made in writing, orally and is to be implied.

96. Insofar as it was in writing, Mr Armstrong relies on an email dated 30 August 2007, which was copied to Mr Marfleet and Mr Hagerstrom, in which Mr Michael said:

On the commercial side, all our terms are agreed (as we discussed) and it is now a matter of drafting a simple shareholders agreement with buy out options as discussed, and finalising the terms of Management/Directors contract for you, which we do not envisage any problems with.

Mr Armstrong also relies on an email dated 30 October 2007 from Mr Michael, which was copied to Messrs Chapman, Clucas, Hagerstrom, Marfleet and Brent, in which he said:

As I suggested when we met, and following a further meeting with Keith in London, my proposal is that you and Keith … will become the Directors of the local operational companies.

97. Insofar as the representation is alleged to be oral, the plaintiffs submit that the representation was made to Mr Armstrong at a meeting in Sydney on 2 August 2007 attended by Mr Zets and Mr Michael. The plaintiffs contend that that conclusion is supported by the fact that subsequent internal documents of ERA refer to Mr Armstrong becoming a director of the LOCs. The clearest example is an email dated 16 November 2007 from Mr Hagerstrom to Mr Mugel, a lawyer, which was copied to Mr Armstrong and Mr Michael, concerning the establishment of the US LOC, which refers to Mr Armstrong being a “Director or Member”. However, Mr Armstrong did not give evidence in chief that Mr Michael or Mr Zets said to him at the meeting on 2 August 2007 words to the effect that he would be a director of each of the LOCs and Mr Armstrong made no reference to his becoming a director of the LOCs in an email he sent the following day recording what had been discussed at the meeting. When re-examined, Mr Armstrong said that Mr Michael and Mr Zets said that he would be the Managing Director of the LOCs.

98. Insofar as the representation is implied, the representation is said to be implied from the fact that the global business was to be modelled on the Australian business, that Mr Armstrong had the relevant expertise and was the person responsible for driving the insurance expansion. In addition, his ultimate shareholding in ERAGICS depended on the performance of the LOCs. Without a directorship, Mr Armstrong would not have sufficient control to drive the global expansion or achieve the financial results that gave rise to his entitlement to an additional 10 percent of ERAGICS.

99. In my opinion, none of these matters establishes that the representation was made. Apart from Mr Armstrong’s evidence in re-examination, there is no evidence of an oral representation to him. I do not accept the evidence given by Mr Armstrong in re-examination. When giving evidence, Mr Armstrong was inclined to say things which he thought supported his case rather than give an account of matters that he genuinely recalled, and Mr Armstrong’s evidence in re-examination appeared to be an example of that. If he really recalled a statement made to him that he would be a director of the LOCS, it is to be expected that he would have said so in his evidence in chief or in cross-examination.

238. The Consultancy Agreement was for an initial term of 3 years and from that time was terminable on 12 months’ notice. Under cl 2 of the Consultancy Agreement, ERAGICS engaged ASMM and ASMM agreed to make available Mr Armstrong “to act as a consultant to [ERAGICS]”. However, under cl 7, the fee of $360,000 per annum payable under the agreement was payable to Mr Armstrong, not ASMM. Consequently, any claim for the fees is a claim by Mr Armstrong.

239. Mr Temple-Cole calculates the value of the fees payable from the time ERAGICS stopped paying them until the expiration of a four year period after the agreement was entered into – that is, from 1 December 2009 until 25 February 2012. He calculates the loss as at 25 February 2008. He applies a discount rate of 6 percent for income earned after that date. On that basis he concludes that Mr Armstrong’s loss was $477,026 before a gross-up for tax and court interest, or $859,720 after allowing for those amounts. He takes no account of the fact that ERAGICS went into administration on 25 January 2011. Nor does he take any account of income earned by ASMM from The Lion Partnership.

240. Mr Gower, on the other hand, uses a discount rate of 23 percent. He also takes into account the fact that ERAGICS went into administration on 25 January 2011 and concludes that, as a consequence. ERAGICS (which he incorrectly refers to as ERAIS), would not have been able to pay any part of the amount claimed, with the result that Mr Armstrong is not entitled to any damages.

241. I prefer the approach taken by Mr Temple-Cole. In my opinion, a discount rate of 6 percent is appropriate. The amount payable under the Consultancy Agreement was not dependent on the performance of ERAGICS. Consequently, it is not appropriate to discount the amount payable by reference to the risks associated with the business. The Consultancy Agreement did not by its terms terminate in the event that ERAGICS went into administration. The fact that ERAGICS may be unable to pay the damages does not mean that they have not been suffered. It follows that, if I had found that ERAGICS wrongfully repudiated the Consultancy Agreement, I would have concluded that Mr Armstrong was entitled to recover the amount calculated by Mr Temple-Cole.

242. The plaintiffs also claim as damages the value of Mr Armstrong’s interest in ERAGICS on the assumption that ERAI had not breached the terms of the Consultancy Agreement and Cooperation Deed. The underlying basis of the claim is the assertion that, if ERAI had not breached the terms of those agreements, the business of the LOCs in the United States, Europe and Australia would have been successful. As a result, ERAGICS would have had an income stream equal to 90 percent of the EBITDA of those businesses, Mr Armstrong would have been entitled to an additional 10 percent of the capital of the company and the shares to which he would have been entitled would have been valuable.

243. In support of their claim for damages, the plaintiffs rely on evidence given by Mr Temple-Cole who values a 35 percent interest in ERAGICS as at 25 February 2008 using a discounted cash flow methodology at between $1,636,529 and $1,931,567.

244. I do not accept Mr Temple-Cole’s valuation. The difficulty with it is that there is no evidence from which it can be concluded that the cash flows on which he relies were reasonable. Mr Temple-Cole relies on three year cash flow forecasts for the United States business prepared by Mr Armstrong. He assumes that the European business would have earned the same income per licensee as the United States business and consequently calculates the projected cash flows of the European business by dividing the cash flows of the United States business by the number of licensees in the United States and multiplying that amount by the number of licensees in Europe. However, Mr Temple-Cole says that he does not have the expertise to assess whether the cash flows on which his calculations depend were reasonable and there is no other evidence from which it can be concluded that they were. There is no evidence from which it can be concluded that the businesses in the United States, Europe and Australia would have done better than they actually did if the alleged breaches about which the plaintiffs complain had not occurred and, if so, how much better. As a result, the cash flow forecasts on which Mr Temple-Cole rely involve nothing more than speculation.

245. The plaintiffs rely on the principle that the difficulty of assessing damages is not a bar to recovery: see Howe v Teefy (1927) 27 SR (NSW) 301 at 306; Fink v Fink [1946] HCA 54; (1946) 74 CLR 127 at 143. But that principle does not relieve a plaintiff of the burden of proving that it suffered damage: Commonwealth v Amann Aviation Pty Ltd [1991] HCA 54; (1992) 174 CLR 64 at [4] per Deane J. In my opinion, the plaintiffs have not discharged that onus in relation to the losses said to arise from breaches of the Cooperation Deed.

Termination of the Licence Agreement

247. The plaintiffs’ case in relation to the Licence Agreement largely mirrors their case in relation to the Consultancy Agreement and both parties to a substantial extent simply repeat the submissions they make in relation to the Consultancy Agreement in relation to the Licence Agreement. In those circumstances, it is only necessary to focus on the issues raised by the two agreements to the extent that they are different.

Specific grounds of termination

248. In the case of the Licence Agreement, ERAG served a breach notice on 7 October 2009. The breach notice identified the same conduct relied on for termination of the Consultancy Agreement - that is, the emails sent by Mr Armstrong and Mr Armstrong’s remarks to Mr Newstadt. In addition, it is alleged that Mr Armstrong permitted or assisted in the unlawful removal from ERAIS’s offices of a computer server containing confidential and proprietary information of ERAG and ERAIS on or about 11 or 12 August 2009 and the wrongful detention of confidential and proprietary information belonging to ERAG and ERAIS.

249. The defendants contend that the conduct about which complaint is made breached a number of provisions of the Licence Agreement. In particular, they rely on cls 10.15, 10.20 and 19.3(c)(iii)(b). I have already set out the substance of cl 10.20, which prevented AC from doing anything that may prejudicially affect the reputation of ERAG or the ERA System. Clause 10.15 required AC to protect ERAG’s Intellectual Property. Clause 19.3(c)(iii)(b) prevented AC from making any unauthorised use of the Trade Marks and Business Name (as defined) or otherwise in ERAG’s opinion materially impairing its goodwill.

250. I have already dealt with the allegations in relation to Mr Newstadt. I am not satisfied that Mr Armstrong’s conduct in relation to Mr Newstadt amounted to a breach of cl 10.20 of the Licence Agreement.

251. The evidence is that on 7 August 2009 Mr Armstrong did remove a server from ERAIS’s premises that included a file that contained insurance records for ERAIS clients including clients of AC. However, according to Mr Armstrong, he provided that file to ERAIS on or about 21 August 2009. The conduct in removing the server may have amounted to a breach of cl 10.15 of the Licence Agreement. However, it appears to be a breach capable of being remedied, and was in fact remedied. Consequently, I am not satisfied that ERAG was entitled to terminate the Licence Agreement by reason of that breach.

252. That leaves the emails sent by Mr Armstrong. The plaintiffs claim that those emails were not sent by AC, and consequently there could be no breach by AC of cl 10.20 of the Licence Agreement. I do not accept that submission. Mr Armstrong was the directing mind and will of AC and performed the role of its Chief Executive Officer. Although Mr Armstrong was not a director or shareholder of AC, AC was, in substance, the entity through which Mr Armstrong carried on business as an ERA licensee. He signed the Licence Agreement on behalf of AC and was a party to it. It is unrealistic in those circumstances to say that conduct engaged in by Mr Armstrong in connection with ERA’s business generally was not conduct engaged in by AC. Or to put the point another way, it is hard to say that AC was not a party to the conduct when the conduct was carried out by the person who conducted the business of an ERA licensee through AC. For reasons I have already given, in my opinion, the effect of the emails was to affect prejudicially the ERA business and therefore the ERA system. AC was given an opportunity to remedy the breach but did not do so. It follows that ERAG was entitled to terminate the Licence Agreement.

Other grounds for termination

253. The defendants rely on a broad range of conduct in support of an allegation that ERAG was otherwise entitled to terminate the Licence Agreement either for breach or repudiation by AC. That conduct includes the following:

1. Mr Armstrong’s involvement with The Lion Partnership;

2. Mr Armstrong’s assertions that the Cooperation Deed was unworkable and that ERAI had terminated or repudiated its obligations under that agreement;

3. Mr Armstrong’s failure to continue to develop the global insurance business;

4. Mr Armstrong making disparaging comments about ERA’s senior management;

5. Mr Armstrong’s statements about the solvency of ERAIS;

6. Mr Armstrong’s conduct in procuring or inducing employees of ERAIS to resign;

7. Mr Armstrong’s threats to terminate the lease of premises to ERAIS.

254. The defendants also rely on two matters that are specific to AC. The first is the conduct in relation to Tasracing. The second is the assertion that ERA had purchased the licence issued to AC, the denial that there was a licence between AC and ERA after 1 July 2009 and the failure to pay licence fees. It is convenient to deal with those two allegations first.

Tasracing

255. So far as Tasracing is concerned, I have found that AC sought to obtain the benefit of a contract that had been entered into between ERAIS and Tasracing. For that purpose, it made misrepresentations to Tasracing concerning the relationship between ERAIS and AC. In particular, in his email dated 18 September 2009, Mr Tobin misrepresented to Tasracing that its contract was with “Armstrong Consulting Pty Ltd, previously trading as Expense Reduction Analysts and ERA Insurance Services”. The email was plainly written on behalf of AC. Subsequently, AC charged Tasracing the fees that were due to ERAIS.

256. Under cl 19.3(b), ERAG was entitled to terminate the Licence Agreement immediately by giving written notice if:

v)   you provide us with false or misleading information or make any misrepresentation in connection with obtaining this Agreement or at any time during the continuance of this Agreement in connection with your Business.

257. In my opinion, ERAG was entitled to terminate the Licence Agreement under this clause as a result of the misrepresentation made by Mr Tobin.

Denial of AC’s licence

258. The possibility of ERAIS acquiring AC’s licence was first discussed at a meeting on or about 24 October 2008 between Messrs Marfleet, Clucas, Michael, Hagerstrom and Armstrong. It appears that at that stage Mr Marfleet was willing to agree to ERAIS buying the licence from AC and to pay for it out of ERAIS’s cash flows, which were expected to be sufficient to make the payment as well as to fund the payment of retained earnings. Subsequently, Mr Armstrong proposed the purchase of the licence for $79,500 as part of the completion requirements of the Cooperation Deed. The $79,500 was the total initial licence fees paid by AC.

259. On 29 June 2009 Mr Armstrong sent an email to Mr Clucas and others enclosing an invoice from AC for $79,500 for the transfer of the licence. However, in an email dated 12 July 2009, Mr Clucas replied that ERAIS did not now wish to acquire the licence.

260. Mr Armstrong replied on 13 July 2009 saying:

The Court can decide this one. There is little doubt as to what was agreed and the written communication will be sufficient for a judge to decide in favour of Armstrong Consulting. This will also give Stuart [Michael] a chance to talk about why it was a conflict for Ken Armstrong to own this licence and how I was using it to rip off the company. Again Fred I will also enjoy your performance under cross examination re this lie.

261. From that time, Mr Armstrong maintained that “Armstrong Consulting Pty Ltd does not hold an ERA Licence any more as it was acquired by ERAIS as at July 1 2009” (to quote from an email dated 3 August 2009 from Mr Armstrong to Ms Sally Lipman). Mr Armstrong maintained that position in subsequent correspondence he sent both before and after the date on which ERAG purported to terminate the licence. AC did not pay any licence fees under the agreement at least after 1 July 2009.

262. In my opinion, this conduct amounts to a repudiation of the Licence Agreement. It was Mr Armstrong’s position that AC was no longer a licensee of ERAG and not bound to comply with any of the obligations the agreement imposed on AC. It is difficult to see how that conduct did not amount to a repudiation of the agreement.

Other grounds

263. In response to the grounds on which the defendants rely, the plaintiffs repeat what they say in relation to similar allegations made in the context of the Consultancy Agreement. They also contend that the Licence Agreement imposed no obligations on Mr Armstrong.

264. It is not necessary to go through each of the matters relied on by the defendants. The question is not whether the Licence Agreement placed obligations on Mr Armstrong. Rather, the question is whether Mr Armstrong’s conduct can be attributed to AC. In my opinion, it would not be appropriate to attribute all of Mr Armstrong’s conduct to AC. Mr Armstrong’s assertions about the Cooperation Deed or his conduct in relation to the termination of the lease are examples. However, on the findings I have made, following ERA’s refusal to restructure the global insurance business and to pay Mr Armstrong amounts that he claimed were due to him, Mr Armstrong was unwilling to continue to develop the global insurance business and instead set about developing an alternative business that was to trade under the name of The Lion Partnership. The question is whether that conduct amounted to a repudiation of the Licence Agreement as well as the Consultancy Agreement and Cooperation Deed. In my opinion, it did. Under the terms of the Licence Agreement, AC was not to be involved in any business that would affect its ability to fulfil its obligations under the Licence Agreement. It was required actively to promote ERA’s business in the Territory. It was required not to be a party to any act which would prejudicially affect ERA’s reputation. The business that Mr Armstrong was involved in establishing was a rival business to the one conducted by AC under the Expense Reduction Analysts name. AC was the entity through which Mr Armstrong conducted that business. Consequently, when Mr Armstrong became involved in establishing a rival business to that carried on by ERA and when he ceased to be involved in promoting ERA’s business, his conduct must be regarded as conduct on the part of AC as well as on his own part and on the part of ASMM. By that conduct, AC repudiated its obligations under the Licence Agreement.

265. I have already rejected the plaintiffs’ alternative contention that ERAI and ERAGICS themselves repudiated the Consultancy Agreement and the Cooperation Deed. For similar reasons, I do not think it could be said that ERAG repudiated the Licence Agreement. Even if I am wrong in that conclusion, I do not think that that repudiation would entitle AC to claim damages, given that AC had itself repudiated the agreement.

Other claims

266. The plaintiffs make alternative claims under s 51AC of the TPA and s 52 of the TPA. Neither the plaintiffs nor the defendants suggest that different issues arise in relation to the claims based on a breach of those provisions. For the reasons I have already given, those claims and the accessorial claims against individual directors must fail.

Damages

267. In the event that my conclusions are wrong, I should say something about AC’s damages claim.

268. AC claims damages on the basis that it would have continued to earn income (from 22 October 2009) under the Licence Agreement if that agreement had not been wrongfully terminated. It claims that that income would have consisted of income earned from the FCAIS Agreement together with income it would have earned from agreements entered into with Clubs WA and Clubs Queensland (it does not rely on income from the other affinity schemes). Relying on reports prepared by Mr Temple-Cole, it submits that the loss it suffered from the loss of the FCAIS Agreement income was in the range of $83,280 and $280,903. In reaching the conclusion that AC’s loss in respect of the ERAIS Agreement fell within that range, Mr Temple-Cole calculates the value of the cash flows that it was expected AC would have earned from the FCAIS Agreement as at 22 October 2009 (the date on which ERAG is said wrongfully to have terminated the Licence Agreement). The high figure is arrived at by discounting the income projected to be earned by Mr Armstrong from the FCAIS Agreement (including income projected to be earned from the agreement following its renewal after the initial five year term) at 45 percent. The low figure is arrived at by using that actual income earned from the agreement and applying a discount rate of 15 percent. Mr Temple-Cole then grosses up those figures to take account of interest and tax to arrive at figures of $137,042 and $462,240.

269. In relation to the other affinity schemes, Mr Temple-Cole relies on projected cash flows from those schemes. He assumes a members service fee of 10 percent and applies a discount rate of 55 percent to arrive at a low figure of $138,144. To arrive at a high figure of $334,763, he assumes a members service fee of 20 percent and a discount rate of 45 percent. Again, those figures are grossed up for tax and court interest to arrive at figures of $227,324 and $550,869 respectively.

270. I do not accept Mr Temple-Cole’s conclusions. Critical to Mr Temple-Cole’s analysis is the income that it was projected AC would earn under the FCAIS Agreement and under other affinity schemes. In my opinion, the figures used by Mr Temple-Cole, which result from assumptions given to him, are exaggerated. There are a number of reasons for that.

271. First, I accept Mr Gower’s evidence that the starting point is the actual amount received by FCAIS under the scheme. There is no reason why that amount would have been affected by the termination of the Licence Agreement. The evidence is that FCAIS received $83,639 in the year ended 30 June 2010, $75,179 in the year ended 30 June 2011 and $37,697 in the year ended 30 June 2012. The amount earned in the year ended 30 June 2010 needs to be apportioned between the pre and post termination periods. ERAIS was entitled to retain 30 percent of the amounts paid to it by the broker. AC was entitled to 50 percent of the balance. However, it was also obliged to pay a minimum royalty to ERAG. After making an allowance for that, Mr Gower concludes that AC would have earned no profits during the remainder of the initial term of the FCAIS Agreement. I accept that conclusion.

272. Second, the FCAIS Agreement was not in fact renewed. It is apparent that the FCAIS affinity scheme was not successful. In my opinion, there was no real prospect that it would have been renewed if the Licence Agreement had not been terminated. Consequently, I do not consider that it is appropriate to allow any amount in respect of the renewal of the agreement. Moreover, even if it had been renewed, there is no reason to think that it would have generated profits for AC after allowance is made for the royalty payable by AC to ERAG under the Licence Agreement.

273. Third, there is no evidence that AC would have been able to enter into affinity schemes with Clubs WA and Clubs Queensland. Moreover, the scheme put in place by Clubs NSW was only attractive to small clubs from which limited revenue could be earned. In 2008, Clubs NSW was projected to earn $20,790 in endorsement fees. In 2009, it earned $10,843 in endorsement fees. In 2010, the amount was $6,548. AC was only entitled to a proportion of those fees. ERAIS’s management of the scheme was terminated on 28 July 2010. The performance of the scheme did not improve after that time. Mr Costello, who was the CEO of Clubs NSW, gave evidence that the scheme was a failure because of the low participation rate. There is no reason to think that schemes with Clubs WA and Clubs Queensland would have been any more successful.

267. It follows that if I had found that ERAG’s termination of the Licence Agreement was wrongful, I would have concluded that AC suffered no loss as a consequence of the termination.

Orders

275. The proceedings must be dismissed. I will hear the parties on costs if costs cannot be agreed.

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Decision last updated: 22 July 2016