FEDERAL COURT OF AUSTRALIA
Barnes v Forty Two International Pty Limited [2014] FCAFC 152
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Details
- Case
- [2014] FCAFC 152
- Decision Date
CaseChat Overview and Summary
Barnes and Hawksley, the original directors and shareholders of Forty Two International Pty Ltd, sought to appeal against the decision of the trial judge who dismissed their claims against BlueFreeway, Forty Two’s majority shareholder. The primary issues before the court were whether BlueFreeway had breached an implied term to disclose matters relevant to an express term, engaged in misleading or deceptive conduct, and whether the loss of opportunity to negotiate a different exit agreement was a recoverable loss. Additionally, the court considered the assessment of damages for the loss of opportunity.
The court held that BlueFreeway had breached the implied term to disclose matters relevant to the express term, as it had failed to disclose the concealment of its role in the management of Gang of Four, which was a material fact. Furthermore, BlueFreeway had engaged in misleading or deceptive conduct by omission, as it did not disclose the existence of Gang of Four, thereby concealing the true nature of its involvement in the business. However, the court found that there was no causal link between the misleading or deceptive conduct and the loss of opportunity to negotiate a different exit agreement. The court also held that the loss of opportunity to negotiate a different exit agreement was a recoverable loss, but it could not be quantified with sufficient certainty to award damages.
The court set aside the judgment for damages and dismissed the originating application. The appellants were ordered to pay the respondents' costs of and incidental to the further amended application, while the respondents were ordered to pay the appellants’ costs of and incidental to the respondents’ cross claim. The court also ordered that there be no order as to costs in relation to several other notices and motions. The respondents were to pay the appellants’ costs of and incidental to the appeal.
The court held that BlueFreeway had breached the implied term to disclose matters relevant to the express term, as it had failed to disclose the concealment of its role in the management of Gang of Four, which was a material fact. Furthermore, BlueFreeway had engaged in misleading or deceptive conduct by omission, as it did not disclose the existence of Gang of Four, thereby concealing the true nature of its involvement in the business. However, the court found that there was no causal link between the misleading or deceptive conduct and the loss of opportunity to negotiate a different exit agreement. The court also held that the loss of opportunity to negotiate a different exit agreement was a recoverable loss, but it could not be quantified with sufficient certainty to award damages.
The court set aside the judgment for damages and dismissed the originating application. The appellants were ordered to pay the respondents' costs of and incidental to the further amended application, while the respondents were ordered to pay the appellants’ costs of and incidental to the respondents’ cross claim. The court also ordered that there be no order as to costs in relation to several other notices and motions. The respondents were to pay the appellants’ costs of and incidental to the appeal.
Orders
Orders of the court
1. Paragraphs 1 and 2 of the orders made by Griffiths J on 14 March 2014 be set aside and in lieu thereof it be ordered that:
“The further amended application filed on 5 May 2011 be dismissed.”
2. Paragraph 4 of the orders made by Griffiths J on 14 March 2014 be set aside and in lieu thereof it be ordered:
“4. (a) Subject to paragraph (c), the applicants pay the respondents’ costs of and incidental to the applicants’ further amended application filed on 5 May 2011.
(b) Subject to paragraph (c), the respondents pay the applicants’ costs of and incidental to the respondents’ cross claim filed on 17 February 2012.
(c) There be no order as to costs in relation to:
i) the costs of and in relation to the notice of motion filed by the applicants on 19 November 2009;
ii) the costs of and in relation to the notice of motion filed by the respondents on 4 December 2009;
iii) the costs of and in relation to the notice of motion for security for costs filed by the respondents on 17 November 2009;
iv) the costs of and in relation to the notice of motion filed by the respondents on 16 February 2011;
v) the costs of the notice of motion filed by the respondents on 8 April 2011;
vi) the costs of the interlocutory application filed by the applicants on 17 November 2011 (relating to the confidentiality of certain documents produced on subpoena by the National Australia Bank);
vii) the costs of and incidental to the interlocutory hearing on 28 February 2012; and
viii) the costs of the applicants' interlocutory application filed on 29 February 2012.”
3. The respondents pay the appellants’ costs of and incidental to this appeal.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
Background
Background to the litigation
For completeness, the appellants had filed a cross-claim in the proceeding, but this was dismissed by his Honour. There has been no challenge to that dismissal.A: FACTUAL BACKGROUND His Honour in a meticulous and lengthy judgment set out an analysis of the evidence and his detailed factual findings relevant to the claims. The vast majority of his Honour’s careful evidentiary analysis and factual findings were not in issue on this appeal. Given that such analysis and findings have not been in issue on this appeal, I have gratefully and extensively drawn upon his Honour’s recitation and findings (see [5]-[37] of his Honour’s reasons) in what follows in this section of my reasons. Forty Two developed and sold digital marketing products. In 2001, Barnes and Hawksley founded Forty Two and were its original directors and shareholders. Barnes, who was the managing director, had responsibility for product development and financial administration. Hawksley was the marketing director with responsibility for sales. Although both had an involvement in all aspects of Forty Two’s operations, Barnes had primary responsibility for financial matters. Gang of Four was separately created by Barnes and Hawksley to hold intellectual property; they were also its directors and shareholders. By 2006, Barnes and Hawksley together owned 92% of the equity in Forty Two. Two associates held the remaining 8%. Apparently, a similar position applied concerning the ownership structure of Gang of Four. Forty Two developed and supported several software programs, the most significant of which was Campaign Master. Campaign Master was an email marketing software system with advanced functionalities that enabled commercial organisations to send out marketing material to their clients and to monitor responses. The product was sold to customers under contracts involving recurring monthly usage fees. Initially, Forty Two operated only in Australia. But by early 2006, Forty Two had also established an affiliation with a UK company, Campaign Master (UK) Limited (CMUK) for the distribution of the Campaign Master product in the UK. CMUK was formed to act as a reseller of Campaign Master in the UK. Forty Two executed a reseller agreement with CMUK on 1 February 2006. The chief executive officer and major shareholder of CMUK was Mr Gurjeet Dhillon (Dhillon), with whom Barnes had previously had a business association. Not later than early 2006, Barnes and Hawksley considered ways to leverage Forty Two’s success by, inter alia, selling their shares in Forty Two and Gang of Four to a larger company. Barnes and Hawksley were approached by representatives of BlueFreeway, who expressed interest in acquiring all of the issued capital of Forty Two and Gang of Four. BlueFreeway had been established with the aim of creating a publicly listed company with ten independent “portfolio companies” operating as its subsidiaries in different areas of digital and interactive marketing and communications. Mr Richard Webb (Webb) was BlueFreeway’s chief executive officer. Mr Greg Daniel (Daniel) was its executive chairman. The other directors were Mr Ken McDonnell (McDonnell), the chief financial officer, Mr Nick Greiner (Greiner) and Mr Warwick Smith (Smith).
Evidence
Evidence Before The Court
But even accepting for the sake of argument BlueFreeway’s attempted shift to a structural rewriting of paragraph 15F so that each element is dealt with separately, where does it go? To say, separately, that “the applicants would not have entered into the Exit Agreement” does not imply that they would have entered into a different form of exit agreement. None is referred to. To say, separately, as BlueFreeway does, that “the second applicant would not have made the Additional Payment” does not imply that it would have agreed to make a lower payment. But in any event, I do not agree with BlueFreeway’s rewriting of its pleading. Finally, on this textual aspect of the further amended statement of claim, BlueFreeway sought to get around the cumulative elements of paragraph 15F, which used “and”, by referring to other pleading aspects. First, reference was made to paragraph 15ZB which did not use “and”. But that plea does not relate to the misleading or deceptive conduct claim or the breach of implied term claim. In any event it does not refer at all to the “loss of opportunity” scenario or an alternative form of exit agreement. Further, in the particulars, it refers back to the particulars to paragraph 12F. Paragraph 12F is expressed to be cumulative. Moreover, the evidence referred to in the particulars to paragraph 12F does not refer to this alternative scenario. Further, when one reads paragraph 15ZB it appears to be cumulative rather than disjunctive. There is nothing in BlueFreeway’s point by reference to paragraph 15ZB. Second, reference was made by BlueFreeway to paragraph 12Fcii of the appellants’ defence which referred to an aspect of potential renegotiation that might need to have occurred as a result of the escrow restraint in clause 3.2 of Schedule 2 to the share purchase agreement. There is nothing in that point either. To say that a mechanical provision may have required rethinking on one detail as to the mechanism of payment is to address a different area of discourse to BlueFreeway’s “loss of opportunity” scenario envisaging a different exit agreement with a substantially lower additional payment.II: How the Case was Run – the Course of Evidence Moreover, the case was not opened by BlueFreeway on this alternative basis. So much seems to be accepted. Further, in terms of the course of evidence, such an alternative basis was not directly the subject of any evidence in chief or cross-examination of any witness called by any party. In terms of the evidence in chief led by BlueFreeway, it does not appear that any evidence was directly led on the basis of or to support this alternative scenario. The evidence in chief of its witnesses was in an affidavit form. None of it directly addresses this alternative basis. This was not in contest on the appeal. Further, the appellants also contended that this alternative case had not been put to them in cross-examination. His Honour at [526] rejected that contention in the following terms:526Having regard to these principles and to the circumstances here, I do not accept the respondents’ submission that it was incumbent upon the applicants to put to each of Mr Barnes and Mr Hawksley whether, in the counterfactual, they would agree to a payout figure other than $16 million and, if so, what amount they would accept. The absence of such evidence may well be relevant to the measurement of the value of the loss of the opportunity to negotiate a different figure but it is not fatal to that exercise. I should also add that I do not accept the respondents’ related submission that they were not frightened or concerned about the prospect of their role being revealed. That submission is inconsistent with the findings made above concerning the steps taken by the respondents to keep the other directors of FTI and the BlueFreeway board in the dark on that matter because of the respondents’ keen interest in not jeopardising their earn out payment.
Decision
Reasons for decision
Given that grounds 11-13 are not made out, it is not necessary to deal with ground 14, although it is noted that BlueFreeway’s reply pleaded the same (although there was apparently an unresolved objection thereto made by the appellants – see [57] of the appellants’ outline of submissions dated 7 July 2014).M: CONCLUSION In summary, grounds 1-3 and 7-8 of the notice of appeal are made out. Accordingly, his Honour’s judgment for damages should be set aside and the originating application dismissed. At the outset of these reasons there is set out the form of orders that are proposed to be made. But as we have not heard from the parties as to the appropriate consequential orders including costs, an opportunity to make submissions thereon will be given. The appellants are to file and serve any submissions on the form of such orders and costs within 7 days, with the respondents to file and serve any such submissions 7 days thereafter. If no submissions are received, the orders set out above will be made.
Ratio Decidendi
Legal Principle Established
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