Banks v Galea
[2019] FCA 986
•24 June 2019
FEDERAL COURT OF AUSTRALIA
Banks v Galea [2019] FCA 986
File number: WAD 174 of 2019 Judge: MCKERRACHER J Date of judgment: 24 June 2019 Catchwords: CORPORATIONS – claim of misleading or deceptive conduct – where the claim relating to the corporation is sought to be struck out – whether the Court has jurisdiction to entertain the claim as pleaded – whether ‘loss or damage’ is pleaded – whether any oral agreement has been adequately pleaded – where the contract was pleaded to have been entered into prior to the registration of the company – s 131 of the Corporation Act 2001 (Cth) considered
PRACTICE AND PROCEDURE – application to strike out paragraphs of the pleadings – amended statement of claim struck out – leave given to re-plead
Legislation: Australian Consumer Law, Sch 2 to the Competition and Consumer Act 2010 (Cth) ss 6, 6(3)(a), 18, 131, 131(1), 236
Corporations Act 2001 (Cth) s 131, 131(1)
Fair Trading Act 2010 (WA) s 20(2)
Cases cited: Masters v Cameron (1954) 91 CLR 353 Date of hearing: 10 June 2019 Registry: Western Australia Division: General Division National Practice Area: Commercial and Corporations Sub-area: Commercial Contracts, Banking, Finance and Insurance Category: Catchwords Number of paragraphs: 24 Counsel for the Applicants: Mr MT McKenna Solicitor for the Applicants: Gilbert + Tobin Counsel for the Respondent: Mr CS Williams Solicitor for the Respondent: Solomon Brothers ORDERS
WAD 174 of 2019 BETWEEN: AARON PETER BANKS
First Applicant
AUSTRALIAN SILICA PTY LTD ACN 613 775 287
Second Applicant
AND: MICHAEL GALEA
Respondent
JUDGE:
MCKERRACHER J
DATE OF ORDER:
24 JUNE 2019
THE COURT ORDERS THAT:
1.The further amended statement of claim be disallowed.
2.The amended statement of claim be struck out.
3.The applicants have leave to file a draft further amended statement of claim within 21 days of these orders.
4.The applicants pay the respondent’s costs of and incidental to the application.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
MCKERRACHER J:
OVERVIEW
The first applicant, Mr Aaron Banks is a shareholder and director of the second applicant, Australian Silica Pty Ltd, which operates a business involving the acquisition of mining tenements for exploration and development of silica resources. The respondent is Mr Michael Galea.
It is claimed Mr Galea represented to Mr Banks that he had expertise in managing mining tenements (the expertise representations), including the process of applying for mining tenure grants. Further it is claimed that Mr Banks relied on the expertise representations when entering into an oral agreement with Mr Galea to apply for mining tenements in their personal names and then to transfer their shares in the mining tenements to Australian Silica upon incorporation, on terms to be agreed (the Agreement).
It is claimed Mr Banks applied for an exploration licence for a mining tenement (the Tenement licence) in reliance on advice from Mr Galea that he had the expertise to overcome issues in the application process raised by encumbrances on the land for which the Tenement licence was sought. It is claimed Mr Banks expended time and financial resources in securing the Tenement licence and that the only time Mr Galea assisted in the process was by attending one meeting with a government official.
It is claimed that by making the expertise representations, Mr Galea contravened s 18 of the Australian Consumer Law (ACL), Sch 2 to the Competition and Consumer Act 2010 (Cth) (CCA), in addition to breaching the Agreement, which resulted in Mr Banks expending time and incurring costs to secure the Tenement licence. It is claimed that in July 2017, Mr Banks and Mr Galea sold their shares in the Tenement licence to Australian Silica in return for cash, royalty rights and shares and that Australian Silica subsequently sold the Tenement licence to another company for consideration of shares and options. Mr Banks and Australian Silica claim to have suffered loss from Mr Galea making the misleading expertise representations. The applicants seek damages, that the Agreement be set aside and that Mr Galea transfer his shares in Australian Silica to Mr Banks.
The further amended statement of claim (the FAS), being the form of the pleading under consideration in these reasons, is annexed to these reasons as Annexure A. This was annexed to submissions filed in opposition to Mr Galea’s strike out application discussed below.
STRIKE OUT APPLICATION
Mr Galea seeks the following relief:
1.Paragraphs 1(b), 2-5, 6(b)(i), 8A, 9(b), 10-14, 20, 21, 29 (the words “the Tenement Representation”), 30, 31, 32 (the words “further and in ...(is denied)” and “had a reasonable ... the Tenement Representations be”), 34-43 and 44 (the words “and Australian Silica” and “Mr Galea’s misleading or deceptive conduct”), and prayers for relief A(i), B and C, of the amended statement of claim dated 29 April 2019 be struck out.
2.The proceedings, insofar as they are brought by [Australian Silica], be dismissed.
3.The Applicants pay [Mr Galea’s] costs of and incidental to this application.
There are three questions. The first is fundamental. That is whether there is a valid claim under the ACL. This question raises jurisdictional issues. There are two matters raised by this contention: first, whether there is a claim against a corporation; secondly, whether s 6 of the CCA otherwise permits the claim.
The second question raised is whether there is loss and damage identified in respect of the misleading or deceptive conduct which is asserted. Thirdly, there is a question as to whether any oral agreement has been properly pleaded, let alone a pre-incorporation contract recognised by the statute.
For the reasons which follow, Mr Galea is entitled to succeed on all of these complaints.
Jurisdictional question
The proscription on misleading or deceptive conduct in trade and commerce arises under s 18 of the ACL, which comprises Sch 2 to the CCA. Section 236 of the ACL creates a cause of action for recovery of the amount of loss or damage suffered because of the conduct of a person which contravenes the s 18 prohibition. Section 131(1) of the CCA applies the ACL as a law of the Commonwealth to the conduct of corporations.
There is no basis pleaded in the FAS for the ACL to be applied as a law of the Commonwealth covering the conduct alleged to have been engaged in by Mr Galea. The matters pleaded against Mr Galea could only be actionable as a law of the State of Western Australia pursuant to s 20(2) of the Fair Trading Act 2010 (WA). This has not been pleaded. In any event, it would not give rise in federal jurisdiction. The claim would be in the State’s jurisdiction.
The response by Mr Banks is that he seeks to invoke s 6 of the CCA. Section 6 gives extended operation to the CCA in respect of persons who are not corporations in certain circumstances, including by s 6(3)(a) where the relevant conduct involves telephonic services. To that end, Mr Banks points to para 10 of the FAS, which particularises a text message sent from Mr Galea to Mr Banks on 13 July 2016. The difficulty with this argument is that the content of para 10 on any view of the matter is merely part of the narrative. It does not purport to be the conduct constituting any form of a contravention. This is a fundamental difficulty, which the applicants will have to address. Counsel for the applicants are confident they can address this issue. Plainly it will be central to the question of whether this Court has jurisdiction to entertain the claims.
In these circumstances, I am concerned that the attempt to invoke federal jurisdiction, at least as presently pleaded, is so strained that it is properly described as being artificial or colourable. However, there may be other aspects of the surrounding facts and circumstances which do properly give rise to a claim in federal jurisdiction. I propose, therefore, to permit the applicants to file a draft only of a further amended statement of claim in order that I might examine it to satisfy myself as to the existence of federal jurisdiction. If federal jurisdiction cannot be established, the claim should not be pursued in this Court but, within a State court, if at all. Of course, the preferable avenue is for the parties to attempt to mediate this business dispute.
Loss and damage
As to the loss or damage complaint, it is unclear on the face of the pleading that any loss or damage has been sustained because, while there are complaints about time being spent and modest expense being incurred pursuant to reliance on the representations, the outcome achieved was that valuable property was acquired and sold for millions of dollars. Counsel for the applicants accepted that the benefit exceeds the value of any loss.
In written submissions the applicants put the loss another way, namely, to the effect that had Mr Galea not engaged in the misleading or deceptive conduct, Mr Banks would not have entered into a commercial venture with Mr Galea at all, rather any benefit which Mr Banks derived from sourcing and applying for prospective silica sand tenements and consequently ‘shepherding’ those tenements with a view to sale to Australian Silica would have been for Mr Banks’ sole benefit. Mr Galea would not have received any benefit. If that is the way the loss is to be put, it is certainly not pleaded to that effect. Mr Galea should not have to meet a claim in its present form without that pleading being clarified.
The oral agreement
The third complaint is about the oral agreement. It is not sufficient, as contended by Mr Banks and Australian Silica, that because Mr Galea was there at the time the alleged oral agreement was made, he knows what was said and can plead to the events in his defence. Quite clearly, Mr Galea is entitled to know the case against him. The case against him needs to be pleaded with sufficient clarity to achieve this fairness. The FAS does not do so. Paragraph 8 of the FAS pleads that Banks and Mr Galea entered into an oral agreement on the basis of the expertise representations. It appears to be said to have been entered into on or about 4 July 2016, but at least before the incorporation of Australian Silica as para 8(c) pleads that an express term concerned the transfer of ownership of any mining tenements ‘upon incorporation of Australian Silica’. Paragraph 8A then pleads that the oral agreement, alternatively, was entered into by Mr Banks on behalf of Australian Silica. It is then said that the oral agreement was ratified by Australian Silica.
As counsel for Mr Galea contends, the terms pleaded in para 8 make sense when pleaded as terms of a bipartite agreement between Mr Banks and Mr Galea, but they make no sense when pleaded as the terms of a tripartite oral agreement under para 8A. There is difficulty in there being no pleading of any consideration moving from Australian Silica, which would be an essential material ingredient of a contract and of a pleading.
A further difficulty is the pleading in relation to the transfer of the tenements to Australian Silica ‘on terms to be agreed’. This is entirely at large and could never be enforceable. It does not fall into the recognised category in Masters v Cameron (1954) 91 CLR 353 where the parties agree the essential terms and would negotiate the detail. There is no indication as to the basis on which there would be a transfer. The FAS sets up no obligation owed to Australian Silica which is said to be breached. There is no contract adequately pleaded.
As to the pre-incorporation aspect, there are two further difficulties. Although the FAS does suggest that Mr Banks informed Mr Galea that he was in the process of incorporating Australian Silica for the purposes of exploring and mining for high grade silica sands, it does not contain the necessary assertion that Mr Banks communicated to Mr Galea that the contract supposedly pleaded at para 8 and para 8A was a contract entered into for and on behalf of Australian Silica which was yet to be incorporated. The only basis upon which Australian Silica could have become a party to any oral contract prior to its incorporation is by virtue of s 131 of the Corporations Act 2001 (Cth).
The legislation concerning pre-incorporation contracts arose because at common law a company could not be party to a contract purportedly entered into by or for it, prior to its incorporation and any purported ratification by the company in those circumstances would be ineffective. Section 131 relevantly provides:
131 Contracts before registration
(1)If a person enters into, or purports to enter into, a contract on behalf of, or for the benefit of, a company before it is registered, the company becomes bound by the contract and entitled to its benefit if the company, or a company that is reasonably identifiable with it, is registered and ratifies the contract:
(a)within the time agreed to by the parties to the contract; or
(b)if there is no agreed time—within a reasonable time after the contract is entered into.
…
Section 131(1) of the Corporations Act will then create a binding contract in certain circumstances and contingent upon certain requirements being satisfied. The first is that ‘a person enters into, or purports to enter into, a contract on behalf of, or for the benefit of, a company’. The second is that this occurs before that company is registered. The third is that ‘the company, or a company that is reasonably identifiable with it’, must subsequently be registered. Fourthly, the company, or a company that is reasonably identifiable with it, must then ratify the contract within the time agreed to by the parties to the contract or within a reasonable time after entry into the pre-incorporation contract.
Even if it can be inferred, which as I have indicated I do not accept, that it was made clear that the oral contract was for the benefit of Australian Silica rather than the individuals, the pleading that the oral agreement was thereafter ratified is no more than a statement of a conclusion. The form of the ratification should be pleaded by way of identification of the material facts. I do not intend to suggest that the means by which ratification can be made are necessarily strictly limited, but what is clear, in my view, is that Mr Galea is entitled to know the case he has to meet in relation to ratification of the oral agreement by Australian Silica.
CONCLUSION
For all those reasons, Mr Galea is entitled to relief substantially in the terms sought. I consider that as these deficiencies go the heart of the pleading, the better course is that the amended statement of claim as a whole be struck out, the FAS be disallowed and leave be given to re-plead. I would not at this stage dismiss the claim brought by Australian Silica, but on a re-pleading of the further statement of claim, the applicants should take into account whether Australian Silica’s claim can be sustained and whether the Court has jurisdiction.
Mr Galea is clearly entitled to costs following the event.
I certify that the preceding twenty-four (24) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice McKerracher. Associate:
Dated: 24 June 2019
ANNEXURE A
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1
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