Coope v LCM Litigation Fund Pty Ltd

[2016] NSWCA 37

Court of Appeal

Supreme Court

New South Wales

• Amendment notes

Medium Neutral Citation:

Coope v LCM Litigation Fund Pty Ltd [2016] NSWCA 37

Hearing dates:

19 April and 20 April 2016

Decision date:

08 June 2016

Before:

Gleeson JA at [1];
Leeming JA at [2];
Payne JA at [7].

Decision:

(1) Appeal dismissed;

 

(2) The appellant is to pay the costs of the respondent of the appeal on a party–party basis as agreed or assessed, save for those costs referable to order 4;

 

(3) The respondent’s Notice of Motion dated 26 February 2016 is dismissed;

 

(4) The respondent to pay the appellant’s costs of the Notice of Motion on a party–party basis as agreed or assessed;

 

(5) In relation to the cross-appeal:

 

(a) the cross-appellant’s written submissions of no more than five pages containing such orders (including costs) it submits should be made on the cross-appeal to be forwarded by email to Gleeson JA’s associate by 5pm, 15 June 2016 and served on the cross-respondent at the same time. Those submissions should address whether the opportunity to make any further oral submissions is sought;

 

(b) the cross-respondent’s written submissions of no more than five pages containing such orders (including costs) it submits should be made on the cross-appeal to be forwarded by email to Gleeson JA’s associate by 5pm, 22 June 2016 and served on the cross-appellant at the same time. Those submissions should address whether the opportunity to make any further oral submissions is sought;

 

(c) the cross-appellant to provide any written submissions in reply of no more than two pages to be forwarded by email to Gleeson JA’s associate by 5pm, 24 June 2016 and served on the cross-respondent at the same time;

 (d) liberty to apply to this Court on three days written notice.

Catchwords:

CORPORATIONS – employment as managing director – whether director engaged in serious misconduct; EQUITY – fiduciary duties – conflict of duty and interest – whether disclosure necessary to avoid conflict; CORPORATIONS – construction of s 200F of the Corporations Act 2001 (Cth)

Legislation Cited:

Corporations Act 2001 (Cth) ss 200AB, 200B, 200C, 200D, 200F
Criminal Code Act 1995 (Cth) ss 6.1, 9.2
Supreme Court Act 1970 (NSW) s 75A

Cases Cited:

Adler v Australian Securities and Investments Commission [2003] NSWCA 131; 46 ACSR 504
Balston Ltd v Headline Filters Ltd [1990] FSR 385
Blackmagic Design Pty Ltd v Overliese [2011] FCAFC 24; 191 FCR 1
Blyth Chemicals Ltd v Bushnell (1933) 49 CLR 66
Boardman v Phipps [1967] 2 AC 46
Breen v Williams (1996) 186 CLR 71
Buitendag v Ravensthorpe Nickel Operations Pty Ltd [2012] WASC 425
Buitendag v Ravensthorpe Nickel Operations Pty Ltd [2014] WASCA 29
Chan v Zacharia (1984) 154 CLR 178
Concut Pty Ltd v Worrell [2000] HCA 64; 176 ALR 693
Fexuto Pty Limited v Bosnjak Holdings Pty Limited [2001] NSWCA 97; 37 ACSR 672
Fox v GIO Australia Limited (2002) 56 NSWLR 512; [2002] NSWIRComm 318
Friend v Brooker [2009] HCA 21; 239 CLR 129
GSK Australia Pty Ltd v Ritchie [2008] VSC 164
Hodgson v Amcor; Amcor v Barnes [2012] VSC 94
Hospital Products v United States Surgical Corporation (1984) 156 CLR 41
Howard v Commissioner of Taxation [2014] HCA 21; 253 CLR 83
LCM Litigation Fund Pty Ltd v Coope; Coope v LCM Litigation Fund Pty Ltd (No 2) [2015] NSWSC 992
LCM Litigation Fund Pty Ltd v Coope; Coope v LCM Litigation Fund Pty Ltd (No 3) [2015] NSWSC 1156
LCM Litigation Fund Pty Ltd v Coope; Coope v LCM Litigation Fund Pty Ltd (No 4) [2015] NSWSC 1158
Maguire v Makaronis (1997) 188 CLR 449
Manildra Laboratories v Campbell [2009] NSWSC 987
Noranda Australia v Lachlan Resources NL (1988) 14 NSWLR 1
Pilmer v Duke Group Ltd (In Liq) [2001] HCA 31; 207 CLR 165
Rankin v Marine Power International Pty Ltd [2001] VSC 150
Robb v Green [1895] 2 QB 1
Shepherd v Felt & Textiles (1931) 45 CLR 359
Tasman Capital Pty Limited v Sinclair [2008] NSWCA 248; 75 NSWLR 1
Woolworths v Kelly (1991) 22 NSWLR 189

Texts Cited:

The Hon JD Heydon AC QC, “The duty to act in good faith in the best interests of the company, in light of Bell Group”, Presentation at the Supreme Court of New South Wales Annual Corporate Law Conference: Directors’ Duties: New Perspectives

Category:

Principal judgment

Parties:

Patrick Mark Coope (Appellant / Cross-Respondent)
LCM Litigation Fund Pty Ltd (Respondent / Cross-Appellant)

Representation:

Counsel:
J Clarke SC / Y Shariff (Appellant)
A Sullivan QC / S Fendekian (Respondent)

  Solicitors:
Esplins Solicitors (Appellant)
Piper Alderman (Respondent)

File Number(s):

2015/00257383

Publication restriction:

Nil

 Decision under appeal 

Court or tribunal:

Supreme Court of New South Wales

Jurisdiction:

Equity

Citation:

[2015] NSWSC 992

Date of Decision:

24 July 2015

Before:

Stevenson J

File Number(s):

SC 2015/60819

headnote

[This Headnote is not to be read as part of the judgment]

These proceedings relate to an employment dispute between Mr Coope, the appellant and cross-respondent, and LCM Litigation Fund Pty Ltd (“LCM”), the respondent and cross-appellant. Mr Coope is a former joint-managing director of LCM. Clause 19.9(b) of Mr Coope’s employment contract gave LCM the right to terminate Mr Coope’s employment if he was “guilty of any serious misconduct”. Clause 4.1(c) required Mr Coope to “bring to the Company’s and the Board’s attention any significant matters of which you become aware that would be of detriment to the Company”.

On 31 March 2015, LCM terminated Mr Coope’s employment under cl 19.9(b), alleging that Mr Coope had engaged in serious misconduct on two occasions. LCM alleged that on each occasion, Mr Coope breached cl 4.1(c) of his employment contract and his fiduciary duties and contravened ss 181 and 182 of the Corporations Act by failing to disclose certain matters to the LCM Board.

LCM commenced proceedings seeking a declaration that Mr Coope had engaged in serious misconduct. Mr Coope cross-claimed damages for wrongful termination. The primary judge found that, on the second occasion, Mr Coope had breached his employment contract and fiduciary duty, amounting to serious misconduct. The primary judge therefore dismissed Mr Coope’s claim for damages.

Factual background

LCM is a litigation funder. The LCM Board comprised Dr King as chairman and Mr Coope and Mr Moloney as joint managing directors.

LCM funded litigation projects from its own cash reserves, capital raisings and a joint venture agreement with Vannin Capital, a significant Jersey-based funder.

The Vannin Joint Venture was due to expire on 31 March 2015. In about April 2014, Mr Coope, on behalf of LCM, entered into negotiations with Vannin Capital, about a number of commercial opportunities for Vannin to work with LCM in the future. However, by July 2014 it became clear that these negotiations had been unsuccessful.

In early 2015, Mr Coope, on behalf of LCM, recommenced negotiations with Vannin about a possible merger, or other commercial arrangement between LCM and Vannin.

The Wind Down Proposal

The LCM Board held a meeting on 9 February, which included as an agenda item, “Vannin Proposals”. Three days prior, on 6 February 2015, Mr Coope sent the other Board members a document containing five potential proposals for a commercial arrangement between LCM and Vannin. The first allegation of serious misconduct related to the way in which Mr Coope communicated the “Wind Down Proposal” to the Board in that document and also at the 9 February meeting. Relevantly, in communicating the Wind Down Proposal, Mr Coope did not disclose that, as part of the deal, he would receive 20 per cent equity in the proposed Vannin vehicle. The primary judge found that Mr Coope had not breached his employment contract or fiduciary duties on this occasion.

The Separation Proposal

By 9 February 2015 the relationship between Mr Coope and Mr Moloney was strained. At the conclusion of the Board meeting on that day, Dr King asked both Mr Coope and Mr Moloney to submit a proposal to the LCM Board on the terms on which each would be prepared to leave LCM. Shortly after the 9 February meeting, Mr Coope spoke to Mr Craddock, the principal of Vannin Capital, to discuss potential employment terms. On 12 February, Mr Coope sent Mr Craddock an “Employment Proposal”. On the same day, he presented to the LCM Board a “Separation Proposal” in which he sought to be released from his non-compete restraints. The second allegation of serious misconduct related to Mr Coope’s failure to disclose to the LCM Board that he had put the Employment Proposal to Mr Craddock and the omission of key features of that Employment Proposal from the Separation Proposal. The primary judge found that Mr Coope had breached his employment contract and fiduciary duties on this occasion. The primary judge did not make a finding regarding breach of ss 181 and 182 of the Corporations Act as the matter “was barely developed” by Senior Counsel then appearing for LCM.

Issues on appeal

1. In relation to the Separation Proposal:

(a) Mr Coope contends that his conduct did not breach his employment contract or fiduciary duties, and even if it did, this did not amount to serious misconduct. Mr Coope submits that he is entitled to damages for wrongful termination.

(b) LCM, by Notice of Contention, submits that the primary judge should have found that, in addition to a breach of his employment contract and breach of his fiduciary duties, Mr Coope also breached ss 181 and 182 of the Corporations Act.

2. In relation to the Wind Down Proposal

(a) LCM, by Notice of Contention, submits that the primary judge erred in failing to find that Mr Coope engaged in serious misconduct by failing to disclose the offer of a 20 per cent interest in Vannin to the LCM Board. LCM argues that this constitutes a breach of Mr Coope’s employment contract and his fiduciary duties.

(b) LCM also contends that if this aspect of its Notice of Contention is upheld, it should be granted leave to cross-appeal and that LCM should in those circumstances be entitled to an order for all of its costs, on a party–party basis, of the trial.

3. In relation to Mr Coope’s claim of wrongful termination:

(a) LCM, by Notice of Contention, submits that if this Court finds that Mr Coope’s employment contract was wrongfully terminated by LCM:

(i) any determination of damages should be limited by s 200F(2) of the Corporations Act; and

(ii) Mr Coope was obliged to mitigate his loss. By Notice of Motion, LCM seeks an order pursuant to s 75A of the Supreme Court Act 1970 (NSW) to lead fresh evidence relating to the mitigation issue.

Issue 1

Held, per Payne JA (Gleeson and Leeming JJA agreeing):

1. Breach of cl 4.1(c): The primary judge was correct to find that Mr Coope’s failure to disclose key features of the Employment Proposal to the LCM Board when making his Separation Proposal did amount to a breach of cl 4.1(c): at [74]–[100]. In particular:

•   A proper construction of clause 4.1(c) reveals that an obligation to disclose a matter arises if, ascertained objectively, there is a real likelihood of LCM suffering detriment in the future; the clause does not require a definite detriment be established: at [74]–[75];

•   LCM was entitled to know the identity of the competitor, Vannin, and Mr Coope’s relationship with that competitor before deciding whether, as Mr Coope asked, he should be released from his non-compete obligation. In the present case, both of these matters, objectively, gave rise to a real likelihood of LCM suffering detriment: at [81];

• Dr King’s request that Mr Coope prepare a proposal to leave did not release Mr Coope from his contractual obligations: at [89].

2. Breach of fiduciary duties: The primary judge was correct to find that Mr Coope had failed to avoid a conflict of interest and duty in breach of his fiduciary duties: at [137]. In particular:

•   As a director, Mr Coope’s actions in proposing the Separation Proposal went beyond mere acts preparatory to leaving a current employer: at [114]–[115];

• By failing to seek the informed consent of LCM to the Employment Proposal, Mr Coope did not exercise utmost candour and honesty in submitting the Separation Proposal. Mr Coope did not disclose the critical facts known to him: at [123].

3. Serious misconduct: Having correctly found the breach of contract and breach of fiduciary duty, the primary judge was correct to conclude that Mr Coope’s conduct warranted the description “serious misconduct”: at [143].

4. Sections 181 and 182 of the Corporations Act: the operation of ss 181 and 182 in the present case is indistinguishable from the way in which the breach of fiduciary obligation case was put. In these circumstances, there is no utility in the Court making a finding in relation to s 181 or s 182 in relation to this ground of contention: at [158]–[159].

Issue 2

Held, per Payne JA (Gleeson and Leeming JJA agreeing):

1. Breach of cl 4.1(c): The primary judge correctly concluded that the Wind Down Proposal would have been material to the Board if the proposal had gone ahead. However, the primary judge should have found that Mr Coope was obliged under cl 4.1(c) to disclose the 20 per cent interest he had been offered to the LCM Board in the Board paper he circulated on 6 February, and certainly no later than the commencement of this agenda item at the Board meeting on 9 February 2015: at [178], [185].

Held, per Payne JA (Gleeson and Leeming JJA agreeing):

3. Fiduciary duty: In making the written Board report on 6 February 2015 and participating in the discussion on 9 February 2015, Mr Coope, was in a position where there was “a real or substantial possibility” of a conflict of interest and duty and accordingly owed “a heavy duty to show the righteousness of the transactions”: at [209].

Pilmer v Duke Group (In Liquidation) [2001] HCA 31; 207 CLR 165; Hospital Products v United States Surgical Corporation (1984) 156 CLR 41; Maguire v Makaronis (1997) 188 CLR 449.

3. Serious misconduct: The conduct engaged in by Mr Coope, in failing to seek fully informed consent for his breach of his fiduciary duty, was antithetical to the mutual trust and confidence between LCM and Mr Coope and warranted the description “serious misconduct”: at [231].

Issue 3

Held, per Payne JA (Gleeson and Leeming JJA agreeing):

1. Unless an exemption or limitation applies, it is a contravention of the Corporations Act for a corporation to give a benefit to a managerial or executive officer who has retired (or a spouse, relative or associate of that person) unless member approval (to the giving of the benefit) has been obtained: s 200B: at [241]

2. Where a payment by way of damages for breach of contract is made pursuant to order of a court the exemption in s 200F(1)(aa) applies: [247].

Judgment

1. GLEESON JA: I agree with Payne JA. I also agree with the additional observations of Leeming JA.

2. LEEMING JA: I have had the considerable advantage of reading the reasons of Payne JA in draft. I agree with the orders his Honour proposes, and with his Honour’s reasons. I provide the following additional observations because I, like Payne JA, have reached a different view from the primary judge on one aspect of the hearing – concerning the “Wind Down Proposal”. What follows presupposes familiarity with the facts.

3. I would uphold LCM’s Notice of Contention concerning the Wind Down Proposal. The question turns upon the failure to disclose the proposal that Mr Coope would receive a 20 per cent equity interest in the new Vannin company which would take over the business of LCM. It was common ground that that had been proposed some 10 days earlier in Mr Craddock’s email to Mr Coope. There was no dispute that in the five options raised in Mr Coope’s document sent on the afternoon of Friday 6 February 2015 (which is reproduced at [166]) he expressed the view that each of options 1, 2, 3 and 5 were unavailable or probably not available. Contrary to Mr Coope’s submissions on the appeal, on a fair reading, that document must be read as advocating consideration of option 4, “LCM wind down”, even if that were only the least worst of the options. As much is corroborated by the fact that it was accompanied by a “Wind Down Financial Model”.

4. Clause 4.1(c) only applies to “significant” matters. However, the significance of the possibility that Mr Coope own 20 per cent of the acquiring company is emphasised by the fact that, in respect of option 5, Mr Coope positively disclosed that he would “end up with 5% of Australian business”.

5. Mr Coope also contended that he intended to tell the Board that it was proposed that he have a 20 per cent equity interest in the company acquiring LCM’s interest, but did not have a chance because the discussion only lasted “a couple of minutes” and the proposal was rejected. The primary judge relied on Mr Coope’s unchallenged evidence that it was Mr Coope’s intention to disclose his interest prior to LCM deciding to enter into any agreement: at [35] and [164]. With respect, I do not agree.

6. There were opportunities for Mr Coope to satisfy his obligation of disclosure (a) by supplementary email over the weekend or at any time before 4.30pm on the Monday; (b) at the commencement of the directors’ meeting (irrespective of whether the chairman invited Board members to declare any interests); (c) before or after Mr Coope presented the first matter of business at the meeting; or even (d) at the commencement of this item of the agenda. According to Mr Coope’s evidence, it was he who introduced this topic, and he did so in an open-ended fashion, inviting Board members to make comments. The short point is that it is no answer to breach of an obligation to disclose to the Board to say that the Board’s discussion was short. Nor is it an answer to say that there would be disclosure before the company made a decision. The purpose of an obligation to disclose is to ensure that the Board’s deliberations, long or short, and irrespective of the course ultimately determined, are fully informed. I respectfully disagree that a person in the position of Mr Coope is entitled not to disclose to his fellow directors information material to a proposal he was advocating until such time as it appears that a majority was inclining toward that proposal.

7. PAYNE JA: These proceedings arose out of an employment dispute between the appellant and cross-respondent, Mr Patrick Mark Coope and LCM Litigation Fund Pty Ltd (“LCM”), the respondent and cross-appellant. Mr Coope was a joint managing director of LCM.

8. In the proceedings before the primary judge, the respondent sought a declaration that the appellant had engaged in serious misconduct on two separate occasions, each of which justified the termination of his employment. The appellant cross-claimed against the respondent, seeking damages for the alleged wrongful termination of his employment contract.

9. The primary judge rejected the complaint about serious misconduct on the first occasion but found that the appellant had engaged in serious misconduct on the second occasion and therefore had not been wrongfully terminated: LCM Litigation Fund Pty Ltd v Coope; Coope v LCM Litigation Fund Pty Ltd (No 2) [2015] NSWSC 992.

10. Mr Coope appeals against the finding of serious misconduct and, in the event he is successful, submits that he is entitled to be paid for the remaining period of his contract of employment which, he submits, was wrongfully terminated by LCM.

11. LCM, by Notice of Contention, seeks to support the finding of serious misconduct by relying on the events the subject of the allegation of serious misconduct on the first occasion. In addition, the Notice of Contention contains grounds that:

1. The primary judge erred in failing to find that the appellant also contravened ss 181 and 182 of the Corporations Act 2001 (Cth); and

2. So far as the appellant’s cross-claim was concerned (which the primary judge addressed on the basis that he was incorrect about his serious misconduct finding), the primary judge erred:

1. in his construction of s 200F of the Corporations Act which, it was submitted, provided a statutory cap on the appellant’s damages for breach of contract should any be awarded; and

1. in not permitting the respondent to raise a mitigation of damages submission in reply.

12. By Notice of Motion the respondent also seeks leave to adduce fresh evidence on appeal, relating to mitigation of damages in the event that Mr Coope is successful on appeal and is entitled to damages for wrongful termination.

13. In a separate judgment, the primary judge awarded the respondent two-thirds of the costs claimed by it: LCM Litigation Fund Pty Ltd v Coope; Coope v LCM Litigation Fund Pty Ltd (No 4) [2015] NSWSC 1158. This costs order is the subject of the cross-appeal filed by LCM.

Background facts

14. There was little dispute in this case about matters of primary fact, although there was a residual controversy over the characterisation of some events and the correct inferences to be drawn from documentary material.

15. LCM, a litigation funder, was established in 1997 by Mr Coope and others. At all relevant times Mr Coope was both a director and employee of LCM.

16. The essential business of LCM was to source and obtain clients with causes of action likely to generate a significant return, to enter into funding arrangements with those clients, and to supervise the performance of tasks by legal practitioners who would be retained to conduct the cases on behalf of those clients in court. Upon success (by settlement or verdict) LCM would take a percentage of the return.

17. Following some months of negotiations (conducted by Mr Coope), LCM entered into a Deed of Agreement with Vannin Capital Limited dated 24 April 2013. The term “Vannin Joint Venture” was used by the parties and will be used in this judgment. The contractual terms of the arrangement between the parties involved some complexity.

18. Vannin Capital Limited, incorporated in Malta, was also referred to as “Vannin Malta” by the parties. Vannin Malta is a wholly owned subsidiary of Vannin Capital PCC PLC (“Vannin Capital”). Vannin Capital is a significant Jersey based litigation funder. The primary judge referred to Vannin Malta simply as “Vannin”, unless it was necessary to distinguish between the two companies. It is convenient to continue with this approach to corporate identification in this judgment.

19. Under the Vannin Joint Venture, Vannin Capital and Vannin Malta each agreed not to compete with LCM for two years and LCM afforded Vannin Malta a first right of refusal to fund projects valued over $5 million for a two year period. The Vannin Joint Venture, if not renewed, would come to an end on 31 March 2015, although there would be a considerable run-off period involving completion of cases commenced under the Vannin Joint Venture.

20. LCM’s business required a significant capital commitment. LCM funded litigation projects from its own cash reserves, capital raisings and the Vannin Joint Venture. In May–June 2014, LCM completed a capital raising from new investors, unrelated to the parties the subject of this litigation. By early 2015, LCM was in need of further capital as its internal cashflow forecasts predicted that LCM would run out of cash in the second quarter of 2015.

21. Mr Patrick Moloney was a non-executive director of LCM from mid-2003. Prior to December 2013, he also practised as a solicitor. On 1 December 2013, he and Mr Coope commenced as joint managing directors of LCM under identical employment contracts signed on about 11 February 2014 (the “Employment Contract”).

22. Relevantly, cl 19.9(b) of the Employment Contract gave LCM the right to terminate Mr Coope’s employment if he was “guilty of any serious misconduct”. Clause 4.1(c) required Mr Coope to “bring to the Company’s and the Board’s attention any significant matters of which you become aware that would be of detriment to the Company”.

23. Clause 17 provided a restraint of trade, which prohibited Mr Coope from “directly or indirectly” engaging in any of the activities identified in cl 17.2 (extracted below) during his employment or within 12 months from the Termination Date, in Australia, without the express written consent of LCM:

17.2 Activity:

(a) approach, solicit, canvass, induce or encourage (or attempt to do any of the foregoing) any Restricted Person to leave the employment or agency of the Company or of an Affiliate, or otherwise engage or employ a Restricted Person;

(b) solicit, canvass, approach or accept any approach, or perform any work for (or attempt to do any of the foregoing), any Client with whom you (or a Person reporting to you) have had direct dealings, or for whom you (or a Person reporting to you) performed work in connection with your employment during the 2 years immediately prior to the Termination Date;

(c) interfere with or disrupt or attempt to disrupt the relationship (whether contractual or otherwise) between the Company (or an Affiliate) and any Client, Restricted Person or supplier of the Company or of an Affiliate, with whom you (or a Person reporting to you) had dealings or performed work in connection with your employment during the 2 years immediately prior to the Termination Date; or

(d) be engaged in any capacity, including as a director, partner, owner, principal, agent, contractor, consultant, representative, shareholder, financier, trustee or employee by any Client or in any Competing Business or Entity.

24. Clause 19.1 provided for payment on termination, “other than where your employment is terminated for…serious misconduct”. The clause provided that termination would be effected by LCM:

(a) making a payment to you equivalent to your total remuneration and benefits for the unexpired Term where the unexpired Term exceeds twelve (12) months; or

(b) if the unexpired period of the Term is less than twelve (12) months, by giving you twelve (12) months’ written notice or making a payment in lieu of notice.

25. Upon their commencement as joint managing directors, Mr Coope and Mr Moloney each received a 20 per cent share of LCM’s entitlements, via the LCM Trust, from the Vannin Joint Venture.

26. From 15 February 2014, and at all relevant times thereafter, Dr David King, as director and non-executive chairman, Mr Coope and Mr Moloney, as joint managing directors, comprised the Board of LCM.

27. The Vannin Joint Venture was due to expire on 31 March 2015. In about April 2014, Mr Coope, on behalf of LCM, entered into negotiations with Mr Daniel Craddock, the executive chairman and majority shareholder of Vannin Capital, about a number of commercial opportunities for Vannin to work with LCM in the future. However, by July 2014 it became clear that these negotiations had been unsuccessful.

28. In early 2015, Mr Coope, on behalf of LCM, recommenced negotiations with Mr Craddock about a possible merger, or other commercial arrangement between LCM and Vannin. These negotiations, and their immediate aftermath, comprise the principal events the subject of this appeal.

The primary judgment

29. LCM’s allegations of serious misconduct against Mr Coope related to negotiations between Mr Coope and Mr Craddock described in the evidence as:

1. the “Vannin Proposal” or “Wind Down Proposal” which Mr Coope communicated to the LCM Board on 6 and 9 February 2015 (which I will describe in this judgment as the “Wind Down Proposal”); and

2. the “Separation Proposal” which Mr Coope made to the LCM Board on 12 February 2015 (and followed up by Mr Coope with the LCM Board on 17,19 and 24 February 2015) and which had not been determined as at the date of Mr Coope’s suspension from LCM, 26 February 2015.

30. The primary judge found that there was no serious misconduct on the part of Mr Coope established in relation to the Wind Down Proposal, but that serious misconduct had been proven in relation to the Separation Proposal.

Relevant background–The LCM/Vannin negotiations in early to mid-2014

31. The primary judge made the following findings about the 2014 negotiations, which were not challenged on the appeal:

1. Mr Coope was appointed by LCM to negotiate on its behalf with Vannin. He and Mr Craddock met between May and July 2014;

2. The topics for negotiation between Vannin and LCM were:

1. a possible merger between Vannin and LCM; or

2. an LCM “wind down”, where LCM would stop trading, Vannin would acquire all issued capital of LCM and, in return, LCM’s shareholders would acquire shares in Vannin;

3. Mr Coope was not pursuing his personal interests independent of the interests of LCM in the 2014 negotiations. The primary judge found that during this period:

the only discussions that Mr Coope had had with Mr Craddock to this point concerning his personal position were in the context of some negotiated ongoing commercial relationship between Vannin and LCM.

The Wind Down Proposal

32. The Vannin Joint Venture was to come to an end on 31 March 2015. In November 2014, Mr Coope and Mr Craddock exchanged a number of emails for the purpose of organising a meeting between themselves and Dr King in London in January 2015 to re-visit the topic of a possible commercial arrangement between Vannin and LCM after the expiry of the Vannin Joint Venture.

33. On 21 January 2015, Mr Coope, Dr King, Mr Craddock and a Vannin employee attended a lunch meeting in London. That evening Mr Coope and Mr Craddock met and had dinner alone.

34. In correspondence exchanged ahead of these meetings, Mr Craddock asked Mr Coope whether there was anything that should not be discussed at the lunch (i.e. while Dr King was in attendance). Mr Coope’s response was that: “Anything related to LCM can be discussed at lunch. Anything personal is best left for dinner”.

35. The primary judge found that Mr Coope and Mr Craddock did not discuss the possibility of Mr Coope becoming employed by Vannin, independent of a commercial arrangement being reached between LCM and Vannin, ahead of their meeting in London. As to the dinner meeting, the primary judge concluded that Mr Coope and Mr Craddock had discussed commercial arrangements between LCM and Vannin, and what possible benefits Mr Coope could negotiate for himself if a commercial agreement between LCM and Vannin eventuated.

36. On 23 January 2015, Dr King and Mr Coope travelled to Amsterdam together to meet a potential employee. While there they had a conversation about LCM and Vannin wherein Mr Coope told Dr King that he had discussed with Mr Craddock whether he could negotiate for himself an arrangement with Vannin if a commercial agreement between LCM and Vannin eventuated. Mr Coope told Dr King, relevantly:

I had a good discussion with Craddock. It seems like he is going to be more sensible this time. I think he is going to struggle with the cornerstone investor option because of tax. In any event he will want more than fifty percent (50%). The merger isn’t going to fly because he still thinks Vannin is worth far more than LCM. I think he will come back with some variation of last year’s proposed transactions. We had a discussion about my personal arrangements if there is a deal. Both of us are now more flexible and pragmatic. He has told me that he will give me the same deal I have now with LCM and I have told him I can live with that. (emphasis added)

37. The primary judge found that Mr Coope’s position at that time was that any personal commercial arrangement with Vannin was “contingent on there being a deal” with LCM.

38. On 25 January 2015, Mr Craddock and Mr Coope communicated via email about the Wind Down Proposal (the terms of which were outlined in a subsequent email, see [39] below). In particular, Mr Craddock asked Mr Coope if he would be “wasting my time” by working on the proposal. Mr Coope responded that he was in favour, but said that he did not “know whether it will be acceptable to the other shareholders of LCM”. His Honour concluded from this evidence that the proposal was not a private arrangement, rather one to be offered by Vannin to LCM and its shareholders.

39. On 27 January 2015, Mr Craddock sent Mr Coope an email that was marked “FYEO” [for your eyes only], which set out, relevantly, the terms of the Wind Down Proposal:

1. The Vannin Joint Venture would come to an end on 31 March 2015;

2. LCM would “sell” its business to Vannin Malta;

3. LCM would be renamed as “ABC”;

4. All LCM costs and staff would be transferred to Vannin Malta;

5. “ABC” would be left with its ongoing interest in all of the outstanding Vannin Joint Venture litigation projects, and with its existing non-Vannin Joint Venture cases, but these cases would be conducted by Vannin Malta “effectively free of charge” to ABC. There would be no ongoing costs or commitments to Vannin and there would be no further requirements for further capital raising or dilution;

6. Vannin Malta would be owned 80 per cent by a Vannin Group company and 20 per cent by Mr Coope;

7. Vannin Malta would be operated as a “standalone entity”.

40. The 27 January email also contained an alternative to the Wind Down Proposal to create a combined business 75 per cent owned by Vannin Malta and 25 per cent owned by LCM.

41. On 6 February 2015, Mr Coope sent Dr King and Mr Moloney an agenda for a Board meeting scheduled to be held on 9 February 2015, which included as an agenda item: “6. Vannin proposals”. Shortly afterwards he circulated a document to the same recipients headed “[t]ransaction options discussion with Vannin and present position” (the “Transaction Options document”). This document outlined five potential commercial arrangements between LCM and Vannin (including the Wind Down Proposal) and incorporated Mr Coope’s comments on those arrangements. Mr Coope commented on the Wind Down Proposal that its terms were more favourable to LCM than the discussions which had occurred in early to mid-2014.

42. Significantly, the Transaction Options document circulated by Mr Coope to the other members of the LCM Board did not refer to the proposal that Mr Coope would acquire a 20 per cent equity stake in Vannin Malta as part of the Wind Down Proposal (as was offered by Mr Craddock in his email of 27 January 2015).

43. Mr Coope gave evidence that at the 9 February 2015 meeting he suggested that the Wind Down Proposal was the preferable option currently available to LCM from Vannin, but that “LCM shareholders would do better if they proceed with the proposed capital raising…”. Proceeding with a capital raising would not necessarily involve any ongoing commercial relationship between Vannin and LCM, save for the conduct of the “run-off” of cases under the Vannin Joint Venture.

44. The primary judge found that at the Board meeting there was a short and cursory discussion about the Transaction Options document which moved quickly onto other items on the agenda. The LCM Board was not then interested in the Wind Down Proposal and did not consider it in any detail.

45. The primary judge found that if the LCM Board decided to pursue negotiations with Vannin in relation to the Wind Down Proposal it was Mr Coope’s intention to disclose to the Board “any deal I could negotiate with [Mr] Craddock in respect of my future employment arrangements with Vannin”.

46. The primary judge concluded that where the Wind Down Proposal was quickly and unanimously disposed of at the 9 February meeting, Mr Coope was not obliged to inform the Board of his personal interest in the Wind Down Proposal under the Employment Contract, ss 181 or 182 of the Corporations Act or by his fiduciary duties to LCM.

47. His Honour also concluded that the obligation of disclosure in cl 4.1(c) of the Employment Contract was not enlivened by reason of the LCM Board’s lack of interest in the Wind Down Proposal:

Any potential detriment to LCM which might otherwise have arisen by reason of Mr Coope having a 20 per cent shareholding in Vannin Malta upon implementation of the Vannin or Wind Down Proposal ceased to be of any moment in light of the board’s decisive, and unanimous rejection of that proposal.

48. The primary judge accepted Mr Coope’s evidence that he would have disclosed the personal benefits open to him under the Wind Down Proposal if the LCM Board had been interested in pursuing it.

The Separation Proposal of 12 February 2015

49. It is clear on the evidence that by 9 February the relationship between Mr Coope and Mr Moloney was strained. At the 9 February meeting, Mr Coope voiced a concern that there would be problems in LCM conducting the proposed capital raising due to the conflict between himself and Mr Moloney.

50. At the conclusion of the Board meeting Dr King asked both Mr Coope and Mr Moloney to submit a proposal to the LCM Board on the terms on which each would be prepared to leave LCM.

51. The primary judge found that following this invitation to submit a separation proposal by Dr King, Mr Coope considered, for the first time, seeking employment with Vannin outside the context of a continuing commercial arrangement between Vannin and LCM.

52. Shortly after the 9 February meeting, Mr Coope spoke to Mr Craddock to discuss potential employment terms. Mr Coope needed to get LCM’s approval before commencing employment with Vannin. In particular, he needed to be released from the restraint in cl 17 of the Employment Contract (see [23] above).

53. On 12 February 2015, Mr Coope sent Mr Craddock an employment proposal (the “Employment Proposal”), the relevant terms of which were that:

1. Vannin Malta would commence operations in Australia as a litigation funder in competition with LCM on 1 April 2015;

2. Mr Coope would become managing director of Vannin Malta in Australia and Asia commencing 1 April 2015 and bring his team from LCM or be entitled to recruit a new team;

3. Mr Coope would obtain a 20 per cent shareholding in Vannin Malta; and

4. Mr Coope would continue managing all existing Vannin Joint Venture projects, subject to LCM’s agreement.

54. Mr Craddock subsequently (and no later than 17 February 2015) agreed, in principle, to the proposal.

55. On the same day as making the Employment Proposal, Mr Coope sent Dr King and Mr Moloney his Separation Proposal, the terms of which were, in essence that Mr Coope would:

1. be released from all obligations under the Employment Contract (and in particular the non-compete obligations) with effect from 31 March 2015 (the day before his proposed start-up date with Vannin);

2. resign as a director of LCM and related companies;

3. have an unrestricted right to use and retain possession of certain confidential information of LCM described as its “contacts register”, “standard documents”, “completed projects data”, “all notebooks”, “all Vannin JV transaction documents” and “all Fund 2 transaction documents and reports to investors”;

4. be entitled to retain “current and old laptops, all other office equipment, stationery and books”;

5. continue to manage all Vannin Joint Venture run-off projects after 31 March 2015 at no cost to LCM, with LCM retaining all “fee entitlements”; and

6. be free to employ two named prospective employees of LCM.

LCM would:

7. advise all employees “that their probationary periods in their employment contracts are satisfied”; and

8. pay Mr Coope a termination payment of 12 months’ salary, rather than what was “otherwise payable” under the Employment Contract.

56. The Separation Proposal also sought that Mr Coope’s LCM shares be swapped for the equivalent interest in the LCM Trust, LCM should acquire Mr Coope’s shares in a related company “for the amount of loan funds provided by Coope”, and that all of Mr Coope’s statutory entitlements be paid out.

57. Mr Coope considered it “obvious” from the terms of his Separation Proposal that he would be competing with LCM after resigning as a director. Mr Moloney and Dr King agreed that they thought, upon reading Mr Coope’s Separation Proposal, that he would be free to compete with LCM from 1 April 2015.

58. The primary judge found that the other members of the LCM Board did not understand from the Separation Proposal that Mr Coope planned to become the head of a direct competitor in Australia, which competitor would be funded by Vannin Capital and further, that:

In my opinion, what might have been “obvious” from Mr Coope’s Separation Proposal is beside the point. It was not for Mr Coope’s fellow directors to deduce from Mr Coope’s Separation Proposal its full implications, absent simultaneous disclosure by Mr Coope of the Employment Proposal.

59. On 16 and 17 February 2015, Mr Coope exchanged e-mails with Mr Moloney about details of the Separation Proposal. On 17 February 2015, Mr Craddock responded favourably (in writing) to the Employment Proposal.

60. On 19 and 24 February 2015, Mr Coope sought from Dr King a response to the Separation Proposal, and asserted that acceptance of it was beneficial to LCM and its shareholders.

61. The primary judge found that the terms of the Employment Proposal were very likely to cause detriment to LCM and this was a “significant matter” such as to enliven the obligation of disclosure in cl 4.1(c). His Honour found that Mr Coope’s failure to inform the Board about the Employment Proposal constituted a breach of contract.

62. The primary judge also found that, as a fiduciary, Mr Coope had a duty not to put his own interests in conflict with the company’s interests. While accepting that Mr Coope owed no positive fiduciary duty to disclose the Employment Proposal, the primary judge found that in Mr Coope’s circumstances the only way to avoid the conflict of interest was to seek the fully informed consent of the LCM Board to the Employment Proposal.

63. The primary judge did not make a finding regarding breach of ss 181 and 182 of the Corporations Act as the matter “was barely developed” by Senior Counsel then appearing for LCM.

64. His Honour concluded that by not disclosing the terms of the Employment Proposal with his Separation Proposal Mr Coope had engaged in serious misconduct that was “repugnant to the relationship of employee and employer”, citing Rankin v Marine Power International Pty Ltd [2001] VSC 150 at [250] per Gillard J.

65. The primary judge emphasised that even though Mr Coope had been invited to make the Separation Proposal to LCM, he remained a co-managing director of LCM at the time and was still bound by his director’s duties (both under the Corporations Act and his fiduciary duties) and his duties under the Employment Contract:

in order to eschew the conflict of interest in which Mr Coope found himself, it was necessary that he obtain LCM’s consent not only to the terms of his Separation Proposal, but also to the undisclosed circumstance that, the very next day after he proposed to leave LCM, he proposed to head up its current major funder and joint venturer as a competitor. He could only do that by disclosing to the LCM board that, simultaneously with making the Separation Proposal to LCM, he had made the Employment Proposal to Mr Craddock.

66. Subsequent to delivery of his Honour’s first judgment, an error in the transcript of the proceedings was identified. The primary judge addressed this error in LCM Litigation Fund Pty Ltd v Coope; Coope v LCM Litigation Fund Pty Ltd (No 3) [2015] NSWSC 1156. The transcript had recorded Mr Coope as saying “I agree with that” in answer to a question about whether he understood that his employment with Vannin Malta would be disastrous for LCM. When corrected he was found to have said, “I don’t agree with that.” The primary judge had referred to that question and answer in his original judgment, however, upon being informed of the error, concluded that the correction of the error did not cause him to change his finding of serious misconduct. The original judgment was republished with an addendum to this effect: LCM Litigation Fund Pty Ltd v Coope; Coope v LCM Litigation Fund Pty Ltd (No 2) [2015] NSWSC 992.

The issues on this appeal

67. The first group of issues on this appeal relates to the finding of the primary judge that the appellant was engaged in serious misconduct in relation to the Separation Proposal:

1. Mr Coope contends that the trial judge erred in finding that a failure to disclose the Employment Proposal was a breach of cl 4.1(c) and, in the absence of informed consent, a breach of his fiduciary duties. Mr Coope also contends that even if his conduct breached cl 4.1(c) and/or his fiduciary duties, this did not constitute serious misconduct within the meaning of the Employment Contract. Accordingly, Mr Coope submits that his employment was wrongfully terminated and he is entitled to damages for breach of the Employment Contract by LCM;

2. LCM, by Notice of Contention, submits that the primary judge should also have found, in addition to a breach of cl 4.1(c) and breach of his fiduciary duties, that Mr Coope contravened ss 181 and 182 of the Corporations Act in making the Separation Proposal to LCM without also disclosing the Employment Proposal.

68. The second group of issues on this appeal relates to Mr Coope’s failure to disclose the offer by Mr Craddock to him of a 20 per cent equity stake in Vannin Malta as part of the Wind Down Proposal which was otherwise conveyed to LCM in the Transaction Options document on 6 February 2015 or at the LCM Board meeting on 9 February 2015:

1. LCM, by Notice of Contention, submits that the primary judge erred in failing to find that Mr Coope engaged in serious misconduct by the failure to disclose the offer of a 20 per cent equity stake when passing on the Wind Down Proposal in the Transaction Options document on 6 February 2015 or at the LCM Board meeting on 9 February 2015. It is submitted, in the circumstances of the communication of the Wind Down Proposal which was otherwise made, that this constituted a breach of cl 4.1(c) and a breach of Mr Coope’s fiduciary duties;

2. By its draft Notice of Cross-Appeal, LCM submits that if this aspect of its Notice of Contention is upheld, it should be granted leave to cross-appeal and that LCM should in those circumstances be entitled to an order for all of its costs, on a party–party basis, of the trial.

69. The third group of issues on this appeal concerns the remaining grounds in LCM’s Notice of Contention, which arise on the hypothesis that Mr Coope’s appeal succeeds and LCM’s Notice of Contention otherwise fails and this Court is required to assess the damages payable to Mr Coope for breach of the Employment Contract by LCM. If this Court finds that Mr Coope’s Employment Contract was wrongfully terminated LCM contends that:

1. any determination of damages should be limited by s 200F(2) of the Corporations Act; and

2. Mr Coope was obliged to mitigate his loss. By Notice of Motion, LCM seeks an order pursuant to s 75A of the Supreme Court Act 1970 (NSW) to lead fresh evidence relating to the mitigation issue.

The first group of issues –The Separation Proposal

70. Before turning to the arguments advanced on the appeal, it is necessary to set out in a little detail the Employment Proposal Mr Coope made to Vannin on 13 February 2015. That proposal was as follows:

Coope proposal for employment by Vannin Malta (“VM”)

Key issues

20% shareholding in VM

Salary of $450K per annum plus superannuation contributions of $30K per annum

12 month notice period from each party

Free to compete in Australia if employment ceases

Bring existing team with me or, if that isn’t possible, a replacement team to be recruited

Keep managing all existing JV projects (LCM to agree)

What happens on a Vannin IPO?

Issues to discuss

Does VM have any other assets or liabilities

What are the operating costs of VM

What tax is payable by VM on its profits

How will VM be funded by VC and at what costs

What happens if VC doesn’t provide VM with required funding

Will there be any FX risks in VM and if so, how to be dealt with

How will money be paid out of VM as it successfully resolves projects

Internal management of VM

Rights of access to company records

Audit

Drag along and tag along rights

Restrictions on issues of shares or other securities that convert into shares

Pre-emptive rights on transfers

Restrictions on its activities to litigation funding in Australia and Asia

Exit rights if Craddock sells out of VC or is no longer the majority shareholder

What happens to shareholding if employment ends

Will VM meet all legal costs of documenting arrangements

My shareholding in ATE insurance broking business in Australia

Detail

Commencement date of 1 April 2015 (nothing to be read into this!)

Managing Director of Australia and Asia

VM undertakes all Australian and Asian projects of Vannin Capital (“VC”) and VC agrees not to compete in those jurisdictions with VM

6 weeks paid holidays a year (current LCM arrangement)

Same travel policy as for LCM

Pay for mobile phone (LCM does)

(emphasis added)

Breach of clause 4.1(c) of the Employment Contract

71. There was no dispute on the appeal about the correct legal principles which apply in addressing the question of construction of the Employment Contract. The obligation in cl 4.1(c) of the Employment Contract must be construed by reference to the objects of the Employment Contract and in a businesslike way. A construction must be given to the clause so as to avoid commercial nonsense.

72. Clause 4.1(c) of the Employment Contract provided:

During your employment, you must:

(c) bring to the Company’s and the Board’s attention any significant matters of which you become aware that would be of detriment to the Company

73. It was submitted by the appellant that the primary judge erred in concluding that the obligation of disclosure in cl 4.1(c) of the Employment Contract was enlivened in the present circumstances. It was submitted that, for five reasons, the Employment Proposal did not need to be disclosed when making the Separation Proposal to the Board of LCM:

1. First, the primary judge erred in finding that the Employment Proposal was a significant matter that “would be of detriment to the company” within the meaning of cl 4.1(c). Clause 4.1(c), it was submitted, did not apply because the terms “would be of detriment” required that a certain or definite detriment must be established, and there was no evidence of a certain or definite detriment before the primary judge. It was submitted that Mr Coope’s intention to compete with LCM was or should have been obvious from the terms of the Separation Proposal and that no additional detriment, beyond the fact of that competition, had been established;

2. Second, the primary judge erred in finding that cl 4.1(c) was enlivened in circumstances where Dr King had asked Mr Coope to consider the terms on which he would leave; the necessary implication being, it was submitted, that Mr Coope was free to act solely in his own interests in putting forward the Separation Proposal;

3. Third, it was submitted that the primary judge erred in that there could be no detriment to LCM as the Separation Proposal was incomplete and non-binding; it could only go ahead if LCM agreed;

4. Fourth, it was submitted that there could be no detriment occasioned to LCM (and therefore no breach) because LCM had “implicitly rejected” the Separation Proposal;

5. Fifth, it was submitted that the clause was not enlivened “in circumstances where the Board is already aware of the matter”.

74. As to the first submission, that the terms “would be of detriment” required that a certain or definite detriment be established, it seems to me that on its correct construction the clause did not require proof of a certain or definite detriment to be engaged.

75. In my view, the primary judge was correct to conclude that it was sufficient to engage the obligation of disclosure if, ascertained objectively, there was a real likelihood of LCM suffering detriment in the future by reason of the matters identified in the Employment Proposal.

76. Clause 4.1(c) of the Employment Contract does not require proof of certain or definite detriment before there is an obligation of disclosure. The clause is future looking. The clause obliges an employee to bring to the attention of the LCM Board “significant” matters of which the employee becomes aware which would be, in the sense of would now or in the future be, of detriment to LCM. That future looking aspect of the obligation is important. It requires an employee, in respect of significant matters (that is, matters which are now or are likely in the future to be important to LCM), to bring to the Board’s attention those matters which would be of detriment (that is, would now or would likely in the future result in LCM suffering detriment).

77. It would make no commercial sense of the obligation in the Employment Contract to construe it as limited only to those occasions where a certain or definite detriment, after the event, was proven. So to conclude would mean that an obligation of disclosure would only arise for an employee in respect of significant matters when, after the event, LCM could prove that it had suffered detriment by reason of the non-disclosure. That the parties should be understood as having bargained to oblige an employee to disclose in such limited circumstances, which can only be determined after the event, seems to me a farfetched proposition.

78. A critical element in the appellant’s case about cl 4.1(c) of the Employment Contract was a submission concerning “additional” detriment – that LCM would not suffer any additional detriment by Mr Coope becoming the managing director of Vannin Malta, as opposed to any other competitor.

79. A key step in this argument is that it was obvious and known to the other directors of LCM that, if released from his obligations under cl 17 of the Employment Contract, Mr Coope would compete in some way with LCM. Accordingly, so the argument goes, there was nothing further to disclose to discharge his contractual obligation. I do not accept that this is so.

80. In my view, there is no warrant for importing an obligation to prove additional detriment to engage the obligation of disclosure in cl 4.1(c) of the Employment Contract.

81. Given the significance of the matter, LCM was entitled to know the identity of the competitor, Vannin Malta, and Mr Coope’s relationship with that competitor before deciding whether, as Mr Coope asked, he should be released from his non-compete obligation. In the present case, both of these matters, objectively, gave rise to a real likelihood of LCM suffering detriment.

82. This is because Vannin was no ordinary potential competitor of LCM’s in the Australian and Asian litigation funding markets. Vannin was an important counter-party to contracts with LCM and a major funder of LCM’s existing business. More than any other potential competitor entity, Vannin had an intimate knowledge of LCM’s business and its relative strengths and weaknesses, including its capital constraints. Vannin had engaged in an exercise of valuing LCM for the purposes of a possible takeover or equity investment and had had access, via Mr Coope in the course of the 2014 and 2015 negotiations, to intimate details of LCM’s strategic planning. Whatever happened regarding a possible further Vannin investment in LCM, LCM and Vannin would remain locked in a relationship after the expiry of the Vannin Joint Venture, in dealing with the run-off of the cases managed pursuant to that arrangement.

83. By reason of the Employment Proposal, which Mr Craddock had accepted in principle by telephone on 11 February and in writing no later than 17 February 2015, Mr Coope knew that a Vannin entity was entering the Australian litigation funding market and that, if the Separation Proposal was accepted, he – the current joint managing director of LCM – would commence working the very next day for that Vannin entity.

84. The Separation Proposal and the Employment Proposal, when viewed side by side, reveal that Mr Coope would be able to commence his employment with Vannin Malta with no restraint of trade, no restrictions on client base and no time gap. These matters, in circumstances where Vannin had been LCM’s principal funding source, where Vannin had an intimate knowledge of LCM’s business (including that LCM would likely run out of cash in the second quarter of 2015) and where Vannin and LCM were locked in a relationship concerning the remaining cases in the run-off from the Vannin Joint Venture, were obviously likely to cause LCM detriment.

85. It is one thing for LCM to be asked to permit Mr Coope to take another position with an existing competitor in the litigation funding industry; it is a completely different thing for the Board of LCM to consider whether to release Mr Coope to join an entity which had been a principal funder of LCM, and which they knew had access to a ready source of capital. The thing that was constraining LCM’s business was the lack of capital.

86. These were matters which, in the circumstances observed objectively, would be of detriment to LCM and needed to be disclosed by Mr Coope under cl 4.1(c) when making the Separation Proposal.

87. As to the second submission, that Mr Coope was authorised to act in his own interests by Dr King’s act of asking him to prepare the Separation Proposal and thereby released from his obligation of disclosure in cl 4.1(c) of the Employment Contract, I do not accept that that is so.

88. There was nothing contained in Dr King’s request for Mr Coope to make a Separation Proposal which impliedly or expressly released him from his obligation of disclosure under cl 4.1(c) of the Employment Contract. This is especially so in circumstances where Mr Coope was seeking, by the Separation Proposal, to be released from the non-compete obligations in cl 17 of the Employment Contract.

89. At the time of making the Separation Proposal, Mr Coope remained the joint managing director of LCM. It was not suggested that Dr King’s invitation to submit a proposal was a breach of the Employment Contract, much less that it was a repudiation of the Employment Contract by the employer or amounted to a constructive dismissal. Further, Mr Coope’s evidence was that at the time he made the Separation Proposal he was nonetheless intending to continue to be employed by LCM. This also tends against acceptance of the submission that he was expressly or impliedly released from his contractual obligations in cl 4.1(c) by Dr King’s suggestion that he submit a Separation Proposal.

90. LCM could, of course, decide to accept or reject the Separation Proposal. In making that decision, LCM was entitled to have disclosed to them matters known to Mr Coope which would be of detriment to LCM should they accept (or reject) the Separation Proposal.

91. Approaching the issue by reference to the objects of the Employment Contract and in a businesslike way, an objective observer would conclude that LCM would approach the Separation Proposal in a very different manner if they knew that the day after they had agreed to it, Mr Coope was to commence employment as managing director of a new competitor, funded by LCM’s former joint venture partner with whom it had an ongoing relationship in the conduct of cases under the Vannin Joint Venture. There was no express release of the obligation under cl 4.1(c) by Dr King’s suggestion and in my view, whatever modification of the terms of employment may be required to accommodate that request, such as an implied permission to use work hours to construct the Separation Proposal, there is no reason to imply a release of a fundamental obligation to disclose significant matters known to Mr Coope which would be of detriment to LCM.

92. As to the third submission, that there could be no breach of the obligation in the Employment Contract as the Separation Proposal was incomplete and non-binding, this submission should not be accepted. The submission does not address the real issue of the content of the obligation contained in cl 4.1(c) of the Employment Contract.

93. Any proposal that a company is considering is “non-binding” until a decision is made by the Board to progress that proposal and a legally enforceable agreement made or decision reached. To so conclude says nothing about whether the matters known to Mr Coope and contained in the Employment Proposal (and Mr Craddock’s response) would be of detriment to LCM in the future.

94. The critical question is whether Mr Coope had information (as a result of the Employment Proposal and his written and oral discussions with Mr Craddock) pertaining to matters which was highly material to LCM – in the sense of being likely to cause LCM detriment – in making its decision whether to accept or reject the Separation Proposal.

250. To understand the respondent’s construction argument it is sufficient to hypothesise a case in which a court makes an order that a former officer of a corporation be paid an amount in excess of his or her notional entitlement under s 200F(2), in circumstances that also meet the description of “a genuine payment by way of damages for breach of contract”. The receipt by the former officer of that court ordered payment (made in contravention of s 200B) would be a strict liability offence: s 200D. There would be no relevant defence as the “error” made by the recipient (being that s 200F(1)(aa) applied as an exemption to the prohibition in s 200B) would be one of law and not fact: s 9.2 of the Criminal Code.

251. In my view, the construction advanced by the respondent should be rejected. It is not supported by the text or the relevant extrinsic materials. The evident purpose of the legislation is also expressed too broadly by the respondent. The statutory purpose of the provisions is, broadly speaking, to ensure shareholder approval is sought for benefits paid to former officers, but that prohibition is subject to the exemptions and limitations for which the legislation specifically provides.

252. If correct, the respondent’s construction would provide that a person who had been ordered by a court to make a payment (which was also capable of falling within the relevant definitions of benefit to a retired officer or employee) and the person who received such a payment would be faced with a criminal sanction. It would not be a defence to those proceedings that there was any relevant mistake of fact, which would provide the only defence available to a person charged.

253. Failing to make a payment ordered by a court could also have potentially drastic consequences for the corporation involved.

254. Accordingly, on the construction advanced by the respondent, parties who were doing no more than complying with an order validly made by a court would be open nonetheless to criminal prosecution, without the availability of a defence under the Criminal Code.

255. This consequence of the construction of the section advanced by the respondent also makes it clear in my view that it cannot be correct. The sections are capable of operating in harmony without the construction advanced by the respondent and each has work to do as I have indicated above.

256. Finally, before leaving this issue, I should record that I do not accept that a court faced with a contrivance of the kind suggested by the respondent is without power to bring that matter to the attention of relevant regulatory authorities who may seek to intervene and make submissions on the topic. If necessary, the court could appoint counsel to address the court on the issue.

257. Given the highly removed circumstances of the example given by the respondent to the facts of this case I would prefer to express no concluded view on this issue beyond what is necessary for the construction argument addressed above.

258. For the above reasons I would dismiss Ground 3 of the Notice of Contention.

Mitigation of damage and the application to lead new evidence

261. LCM submits in the final ground of its Notice of Contention that the primary judge was in error in failing to entertain submissions concerning mitigation of damage.

262. In closing address in reply before the primary judge, LCM made a submission regarding mitigation of damage. This was the first occasion upon which LCM had made such a submission. Failure to mitigate had not been pleaded in the defence or been the subject of submissions prior to that point. Mitigation of loss was not the subject of any specific evidence nor, critically, any cross-examination of Mr Coope.

263. The primary judge, after noting that mitigation was not pleaded, found that Mr Coope had no opportunity to deal with the submission and that Mr Coope may well have sought to adduce evidence to answer a plea of mitigation. His Honour concluded, in those circumstances, that he would not be prepared to entertain that submission: [J[197]].

264. There was, on that occasion, no application to amend the pleading, and no such application was made to this Court.

265. LCM’s submissions in this Court focused upon the distinction in mitigation of loss between avoidable loss and avoided loss, referring to Tasman Capital Pty Limited v Sinclair [2008] NSWCA 248; 75 NSWLR 1. It submitted that in this Court LCM is now solely seeking to address avoided loss and that, at the time of the trial, avoided loss could not have properly been pleaded or proved.

266. The further evidence which was proposed to be tendered established that Mr Coope is now employed by a Vannin entity, however, that evidence is silent as to the terms of that employment. Senior Counsel now appearing for LCM invites this Court to infer on the basis of evidence which was tendered at the trial that the terms are likely to be the same or similar namely a salary of $450,000 and 20 per cent profit share of some part of the business conducted by Vannin (in an amount which, could not at this point be calculated).

267. Whilst I accept the distinction made by the respondent that avoidable loss and avoided loss are different aspects of the plea of failing to mitigate, the problem with the submission made on behalf of LCM is that it seeks to take advantage of what it submits was established at the trial, namely that it was probable Mr Coope would obtain alternative employment in the near future on certain terms, whilst at the same time accepting that this was not an issue before the primary judge. If mitigation had been raised as an issue no doubt Mr Coope could have addressed this subject by evidence. He was not given this opportunity by reason of the conduct of the case by LCM. If, contrary to the way the trial was conducted below, there had been a plea of failing to mitigate based on avoidable loss and cross-examination of Mr Coope directed to that subject (and an opportunity given to him to address that topic) I may have been more sympathetic to the submission that evidence on appeal of subsequent matters going to avoided loss should be permitted.

268. What is determinative here is that this Court would not be in a position, even if the fresh evidence were admitted, to make any sensible calculation of the amount Mr Coope would have earned under the LCM contract compared to that he is alleged now to be earning under his contract with Vannin Malta (including distributions by reason of any shareholding in Vannin Malta). There is no evidence of Mr Coope’s current salary (even if the fresh evidence were to be admitted). In addition, Mr Craddock gave evidence that he estimated prior to Mr Coope’s dismissal that Mr Coope’s interest in LCM was worth approximately $10 million over 3 years. Of course, this is not valuation evidence but provides a basis for caution in this Court making any comparison of Mr Coope’s financial position before and after his summary dismissal. Mr Coope’s financial position was not explored at the trial, including what impact Mr Coope’s summary dismissal had on that position, given that he remained a shareholder in LCM after that time.

269. I do not accept the respondent’s submission that there was any flaw, let alone a fundamental flaw, in the primary judge’s reasoning that it was unreasonable for LCM to seek to rely on a mitigation submission made orally the first time in reply in circumstances where that issue had not been pleaded and no evidence had been led and no cross-examination conducted of Mr Coope on the topic. Further, I do not accept that, absent any attempt to amend its pleading to now rely on a mitigation defence, LCM is entitled to rely on “avoided” loss.

270. In my view, Ground 4 of the Notice of Contention should be dismissed and the Notice of Motion dated 26 February 2016 containing an application to lead fresh evidence contained in the two affidavits of Mr Grieve sworn 26 February 2016 should be rejected.

Conclusion

271. For the reasons above, I propose the following orders:

1. appeal dismissed;

2. the appellant is to pay the costs of the respondent of the appeal on a party–party basis as agreed or assessed, save for those costs referable to order 4;

3. the respondent’s Notice of Motion dated 26 February 2016 is dismissed;

4. the respondent to pay the appellant’s costs of the Notice of Motion on a party–party basis as agreed or assessed;

5. In relation to the cross-appeal:

1. the cross-appellant’s written submissions of no more than five pages containing such orders (including costs) it submits should be made on the cross-appeal to be forwarded by email to Gleeson JA’s associate by 5pm, 15 June 2016 and served on the cross-respondent at the same time. Those submissions should address whether the opportunity to make any further oral submissions is sought;

2. the cross-respondent’s written submissions of no more than five pages containing such orders (including costs) it submits should be made on the cross-appeal to be forwarded by email to Gleeson JA’s associate by 5pm, 22 June 2016 and served on the cross-appellant at the same time. Those submissions should address whether the opportunity to make any further oral submissions is sought;

3. the cross-appellant to provide any written submissions in reply of no more than two pages to be forwarded by email to Gleeson JA’s associate by 5pm, 24 June 2016 and served on the cross-respondent at the same time;

4. liberty to apply to this Court on three days written notice.

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Amendments

08 June 2016 - "prescriptive" changed in "proscriptive" in the quote at [104]

"loyalty of the beneficiary" changed to "loyalty of the fiduciary" at [105]

Decision last updated: 08 June 2016