Eighty-Second Vocation Pty Ltd v Parere Investments Pty Ltd
[2005] FCA 844
•23 JUNE 2005
FEDERAL COURT OF AUSTRALIA
Eighty-Second Vocation Pty Ltd v Parere Investments Pty Ltd [2005] FCA 844
TRADE PRACTICES – misleading or deceptive conduct – whether claim time barred – when claim became “reasonably ascertainable” – whether representations as pleaded were made – reliance – whether reasonable grounds for future representations – Trade Practices Act 1974 (Cth), ss 51A, 52, 75B and 82
NEGLIGENCE – negligent misstatement – commercial negotiations at arms length – whether parties were “partners” – whether parties were “joint venturers” – whether duty of care owed – whether reasonable grounds for making representations – whether representations caused loss
EQUITY – fiduciary duties – parties’ relationship that of directors and shareholders – whether fiduciary relationship between parties
RESTITUTION – unjust enrichment – whether shareholder can recover property or value of property allegedly misappropriated from company – Corporations Act 2001 (Cth), ss 236 and 237
Trade Practices Act 1974 (Cth) ss 51A, 52, 75B and 82
Trade Practices Amendment Act (No 1) 2001 (Cth) Sch 1
Corporations Act 2001 (Cth) ss 236 and 237Bryan v Maloney (1995) 182 CLR 609 at 617-18 cited
Cole v South Tweed Heads Rugby League Football Club Ltd (2004) 207 ALR 52 discussed
Donoghue v Stevenson [1932] AC 562 at 580 referred to
Hill v Rose [1990] VR 129 distinguished
Hill v Van Erp (1997) 188 CLR 159 cited
Hospital Products Limited v United States Surgical Corporation (1984) 156 CLR 41 at 73 and 147 referred to
Karedis Enterprises Pty Limited v Antoniou (1995) ATPR ¶41-427 at 40,816 referred to Perre v Apand Pty Limited (1999) 198 CLR 180 cited
Sutherland Shire Council v Heyman (1985) 157 CLR 424 at 497-8 referred to
Wardley Australia Limited v The State of Western Australia (1992) 175 CLR 514 at 536-7 referred toEIGHTY-SECOND VOCATION PTY LTD (ACN 007 244 804) and THOMAS FOX v PARERE INVESTMENTS PTY LTD (formerly known as H-W SERVICES PTY LTD) (ACN 003 142 881) and ALAN HALL-WATSON
VID 30 of 2002
WEINBERG J
23 JUNE 2005
MELBOURNE
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
VID 30 OF 2002
BETWEEN:
EIGHTY-SECOND VOCATION PTY LTD (ACN 007 244 804)
FIRST APPLICANTTHOMAS FOX
SECOND APPLICANTAND:
PARERE INVESTMENTS PTY LTD (formerly known as H-W SERVICES PTY LTD) (ACN 003 142 881)
FIRST RESPONDENTALAN HALL-WATSON
SECOND RESPONDENTJUDGE:
WEINBERG J
DATE OF ORDER:
23 JUNE 2005
WHERE MADE:
MELBOURNE
THE COURT ORDERS THAT:
1. The application be dismissed.
2. The applicants pay the respondents’ costs.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
VID 30 OF 2002
BETWEEN:
EIGHTY-SECOND VOCATION PTY LTD (ACN 007 244 804)
FIRST APPLICANTTHOMAS FOX
SECOND APPLICANTAND:
PARERE INVESTMENTS PTY LTD (formerly known as H-W SERVICES PTY LTD) (ACN 003 142 881)
FIRST RESPONDENTALAN HALL-WATSON
SECOND RESPONDENT
JUDGE:
WEINBERG J
DATE:
23 JUNE 2005
PLACE:
MELBOURNE
REASONS FOR JUDGMENT
INTRODUCTION
This is an application by Eighty-Second Vocation Pty Ltd (ACN 007 244 804) and Thomas Fox against Parere Investments Pty Limited (formerly known as H-W Services Pty Limited) (ACN 003 142 881) and Alan Hall-Watson. The applicants claim that they are entitled to damages for misleading or deceptive conduct, contrary to s 52 of the Trade Practices Act 1974 (Cth) (“the Act”) or, alternatively, for negligent misstatement, breach of fiduciary duty, and unjust enrichment. Both in their pleading, and in their written submissions, they also mentioned a claim for “breach of a duty to act in good faith” (assuming that a claim so formulated differs from a claim for breach of fiduciary duty). However, it is fair to say that little attention was given to this particular cause of action, either during the trial, or in closing submissions. Accordingly, it will be dealt with somewhat briefly during the course of these reasons for judgment.
BACKGROUND
The background to this matter can be briefly summarised. Parere Investments Pty Limited, a company associated throughout with Mr Hall-Watson, was incorporated on 18 July 1986 as Hilrand Pty Ltd. On 12 September 1986 it changed its name to H-W Computer Services Pty Ltd. On 26 November 1996 it became H-W Services Pty Limited, and on 11 February 1998, H-W Services International Pty Limited. Finally, on 30 March 1999 it adopted its current name of Parere Investments Pty Limited.
Given that the company was known as H-W Services Pty Limited at the time that the events giving rise to this proceeding occurred, it will be convenient to refer to it by that name throughout these reasons for judgment.
H-W Services Pty Limited carried on the business of computer consulting services, particularly in relation to a financial software product known as Masterpiece. A large United States-based multinational company, Computer Associates International Inc (“Computer Associates”), had marketed that product in Australia since the mid-1980s.
On 16 March 1989, H-W Computer Services (Vic) Pty Ltd (“H-W Vic”), a company related to H-W Services Pty Limited, was incorporated in Victoria. H-W Services Pty Limited was the proprietor of 49 of the 100 issued shares in H-W Vic. Eighty-Second Vocation Pty Ltd (a company owned and managed by Mr Fox) also held 49 shares, and Mr John Rae, a friend of Mr Hall-Watson, held the remaining two shares. There was evidence that Mr Rae held his shares on behalf of Mr Hall-Watson, and would vote with Mr Hall-Watson in the event of any dispute with Mr Fox. Mr Hall-Watson and Mr Fox are, and were at all material times, the directors of H-W Vic.
From the time of its incorporation, H-W Vic operated a computer consulting service business in Victoria. It operated in conjunction with H-W Services Pty Limited in providing consulting services with respect to Masterpiece software as well as certain other products.
In 1994, H-W Services Pty Limited began a three-year project to implement Masterpiece software on behalf of various departments of the South Australian Government. That project was known as the “South Australian Government Implementation Project” or “SAGIP”.
On 30 June 1997, H-W Vic merged its business with H-W Services Pty Limited in order to create a national operation. The idea that the companies in the group, including a New Zealand entity, should operate as one company with various business units aligned to its merger business partners emanated from Mr Hall-Watson. According to a letter sent by Mr Hall-Watson, in his capacity as Managing Director of H-W Services Pty Limited to Mr Fox on 10 June 1997 (“the 10 June letter”) the employees of H-W Vic (some five in number) were to join H-W Services Pty Limited effective from 1 July 1997, with Mr Fox being offered the position of Manager of CA Financials Business Unit. Mr Fox accepted that position in a letter sent by him to Mr Hall-Watson on 15 June 1997 (“the 15 June letter”).
In April 1999, Computer Associates acquired the entire business operations of H-W Services Pty Limited. The business was purchased for a sum in excess of $2 million, pursuant to a Business Acquisition Agreement dated 23 April 1999. The business operations acquired by Computer Associates included those that had been conducted by H-W Vic up to 30 June 1997, but which were transferred to H-W Services Pty Limited from 1 July 1997.
THE APPLICANTS’ CLAIMS
In substance, the applicants claim that H-W Services Pty Limited, the first respondent, engaged in misleading or deceptive conduct in breach of s 52 of the Act when it made certain representations to them regarding the terms upon which the merger of the H-W Vic operations with the H-W Services Pty Limited operations would take place. More specifically they say that prior to 1 July 1997, both H-W Services Pty Limited and H-W Vic operated computer software consultancy service businesses specialising in the implementation of the Masterpiece program for large organisations. They further say that H-W Services Pty Limited serviced customers in Queensland, New South Wales and South Australia, while H-W Vic serviced customers in Victoria, Tasmania, South Australia and the Northern Territory.
The applicants claim that in June 1997 they entered into an agreement with the respondents to the effect that H-W Services Pty Limited would take over the business of H-W Vic, the staff employed by H-W Vic would be employed after 1 July 1997 by H-W Services Pty Limited, H-W Vic would cease trading, and Mr Fox, “through his company”, Eighty-Second Vocation Pty Ltd, would be employed by H-W Services Pty Limited as a manager “on a salary package of $150,000”. They describe this agreement as “the restructure agreement”. In their amended statement of claim, they say that in so far as the restructure agreement was in writing it was constituted by the 10 June letter, and by “minutes of meetings” of H-W Services Pty Limited and H-W Vic held in June 1997. No such “minutes” were produced. Curiously, no mention was made in the particulars of the 15 June letter.
The applicants next claim that in late 1997, pursuant to the restructure agreement, H-W Services Pty Limited took over the business of H-W Vic, and its staff, and H-W Vic ceased trading. They claim that Mr Fox, “through his company” Eighty-Second Vocation Pty Ltd, was engaged by H-W Services Pty Limited to be a “manager”.
The applicants claim that prior to their entering into the restructure agreement the respondents represented to them that the applicants would be compensated by H-W Services Pty Limited for the loss of value in the H-W Vic shares. They claim this compensation would occur either by the issue of shares in H-W Services Pty Limited to them, or by granting them an entitlement to a share of profits, and that the purpose of the restructure agreement was merely to “centralise administration”. These representations were alleged to have been made both orally and in writing by Mr Hall-Watson to Mr Fox in June 1997. To the extent that they were in writing, they were said to have been made in the 10 June letter, which stated, inter alia:
“I can assure you that equity will be offered to you, however the form, extent and bases have yet to be defined. As soon as I have information on this I will advise you.”
The applicants allege that the respondents had no intention, at the time the representations were made, of offering any equity in H-W Services Pty Limited to them, or of granting them any share of profits. They further allege that the respondents had no intention of compensating them for agreeing to the restructure. That too is a curious feature of the amended statement of claim because there is no allegation, in terms, that the respondents had represented that they intended to compensate the applicants for agreeing to the restructure. In any event, the lack of intention to offer the applicants any equity, share of profits, or compensation is alleged to be inferred from the failure of the respondents to do so at any time after the restructure took place. It is also to be inferred by reason of the fact that the respondents “engaged in similar conduct with respect to the New Zealand business conducted as H-W Computer Solutions (N.Z.) Ltd”.
The applicants plead that acting in reliance upon the representations, they entered into the restructure agreement. They say that this led to H-W Vic being “stripped of its principal asset, being the value of the business based on its customer base”, and that H-W Vic therefore no longer had the capacity to pay Mr Fox various accrued entitlements. Moreover, H-W Vic no longer earned profits in which the applicants could share. They claim that but for the false representations regarding equity or profit share in H-W Services Pty Limited, they would not have consented to the restructure. They further claim that had they known that the purpose of the restructure was not to streamline or centralise administration “but to wrest control of the business” of H-W Vic from them without compensating them for their share of the value of the business, they would not have entered into the restructure agreement.
As previously indicated, the applicants say that the conduct described above was misleading or deceptive, or likely to mislead or deceive, in breach of s 52 of the Act. In so far as the representations related to future events they invoke s 51A. In relation to Mr Hall-Watson, they plead that he was knowingly concerned in the breach by H-W Services Pty Limited of s 52, and is therefore liable pursuant to s 75B of the Act.
The claim in negligence commences by alleging that the respondents owed the applicants a duty of care in making the same representations as were relied upon in support of the claim under s 52. The duty of care was said to have arisen because the applicants and the respondents conducted the business of H-W Vic “as a partnership or alternatively as a joint venture”. The applicants say that the respondents knew, at the time they made the representations, that the applicants would rely upon them, and that they also knew that the applicants would suffer detriment as a result. They then say that they did rely upon the representations, that those representations were made negligently in breach of the respondents’ duty of care, and that they thereby suffered loss and damage. They say that had the representations not been made, they would not have entered into the restructure agreement. Mr Fox would have continued to earn a salary from H-W Vic, and Eighty-Second Vocation Pty Ltd would have been in a position to receive a 49 per cent share in the net proceeds of sale of the business of H-W Vic to Computer Associates.
The next claim is for breach of fiduciary duty. That claim is pleaded both baldly, and alternatively as a breach of duty owed by the respondents to the applicants as business partners or joint venture participants and co-investors to disclose all relevant information to enable the applicants to make an informed decision as to whether or not to enter into a restructure agreement, and a duty to act in good faith. The source of these various duties is said to be a shareholder’s agreement dated 15 July 1990 between Mr Fox and Mr Hall-Watson (as well as various other parties) and the relationship between these two individuals.
The final claim is expressed as a “failure of consideration for the applicants’ consent to the restructure agreement” and a claim of “unjust enrichment” to the extent of the 49 per cent share in the business of H-W Vic which H-W Services Pty Limited took over. It is said that by reason of this unjust enrichment, the applicants are entitled to restitution.
THE RESPONDENTS’ DEFENCES
The various defences to this action may be briefly summarised. The respondents say that they did not engage in misleading or deceptive conduct in making the statements or representations that they did in June 1997. They say that there was never any question of compensating Mr Fox for the loss in the value of his 49 per cent interest in H-W Vic because that had already been resolved in January 1997 when Mr Fox agreed to accept a salary package of $150,000 for joining H-W Services Pty Limited. According to Mr Hall-Watson, that was a significantly higher salary than Mr Fox had been earning at H-W Vic. Indeed, it was approximately $50,000 more than what he had previously been paid. The difference between his salary at H-W Vic, and his salary at H-W Services Pty Limited was that both he and his wife (who was also employed by H-W Vic) were provided with motor vehicles by H-W Vic, but these were subject to loan accounts in favour of that company, whereas the vehicles provided by H-W Services Pty Limited were paid for by that company, as hire/purchase payments.
It followed, so Mr Hall-Watson claimed, that any goodwill that had been generated by Mr Fox, and for which he was entitled to be compensated, had been fully met by the substantially higher salary package paid to him once he left H-W Vic. Thus, a salary package of about $100,000 per annum that had been paid to Mr and Mrs Fox while Mr Fox was employed by H-W Vic, rose to about $150,000 per annum when he joined H-W Services Pty Limited, even though his wife only ever performed notional services for that company. After Mr Fox joined Computer Associates, he received a package of almost $150,000 per annum, though his wife provided no services whatever to that company. Mr Hall-Watson contended that it could hardly be said, in those circumstances, that Mr Fox had not been compensated for any goodwill that had passed from H-W Vic to H-W Services Pty Limited. In addition, it should be noted that when the H-W Services Pty Limited business was sold, Mr Hall-Watson negotiated an additional $50,000, over three years, to be paid by Computer Associates to Mr Fox.
With regard to the alleged representations as to equity or profit share, the respondents’ case is again quite simple. The respondents say that they did contemplate, prior to the restructure agreement, offering some equity to a number of their senior employees, not just those formerly employed by H-W Vic, but also those employed by H-W Services Pty Limited. They say that the equity they had in mind was obviously far less than what Mr Fox must have contemplated, but in any event, in his 15 June letter, he made it absolutely clear that he had changed his mind, and no longer wanted equity in H-W Services Pty Limited. Rather, he was now seeking some kind of profit share arrangement.
The fact is that although Mr Hall-Watson represented to Mr Fox that there would be a profit share of some kind, there was no agreement reached as to how that would be arrived at. Moreover, a profit share necessarily connotes the deriving of a profit. There was no profit in financial year ending 30 June 1997. There was a profit in financial year ending 30 June 1998, but Mr Hall-Watson claims that this was the result of certain extraordinary items being added to the balance sheet. These extraordinary items were only discovered in June 1998. He says that he was still in the process of trying to work out a satisfactory equity or profit share arrangement for all of his senior employees throughout 1998 and early 1999, but events overtook him, and the business was sold.
Thus, at a factual level, it is necessary to focus upon what, if anything, was agreed between Mr Hall-Watson and Mr Fox in January 1997, when Mr Hall-Watson says agreement was reached on a salary package of $150,000 per annum for Mr Fox to come over to H-W Services Pty Limited, as full compensation for the value of the H-W Vic business. It is further necessary to determine what precisely took place in June 1997, shortly before the restructure agreement, in order to ascertain whether the statements made by Mr Hall-Watson were false, or made without any reasonable basis.
There are also several legal questions to be determined. First among these is a limitation point. The respondents have pleaded that the applicants’ claims under the Act are time barred. They point to s 82(2) of the Act. They contend that any cause of action that the applicants may have, had accrued at the time they entered into the restructure agreement. At that time, a period of three years was available within which to bring proceedings. However, the present application was not instituted until January 2002. They say that the six-year period that now applies to claims under s 52 cannot be invoked in favour of the applicants because their claims were barred before the Act was amended in July 2001, when the limitation period was extended from three years to six years.
In addition, in relation to the claim in negligence, the respondents say that the facts pleaded, even if proved, do not give rise to a duty of care. In relation to the claim for breach of fiduciary duty, the respondents deny the applicants’ contention that the relationship between Mr Fox and Mr Hall-Watson was one of partnership, or joint venture. Finally, in relation to the claim for restitution, the respondents say that the goodwill in H-W Vic, which the applicants allege was misappropriated by H-W Services Pty Limited, did not belong to either Eighty-Second Vocation Pty Ltd, or Mr Fox, and that only H-W Vic has standing to bring such a claim. They note that the applicants have not sought to invoke s 236 of the Corporations Act 2001 (Cth) as the basis for a derivative claim on behalf of the company.
THE EVIDENCE
Although a number of witnesses were called in this proceeding, there are really only two whose evidence needs to be carefully considered as regards the issue of liability. These witnesses are Mr Fox, on behalf of the applicants, and Mr Hall-Watson, on behalf of the respondents.
In his evidence-in-chief, Mr Fox first deposed to his background. He was born in 1951 in Scotland. He left school at the age of 16 to become a full-time soccer player. He did not acquire any formal qualifications. He migrated to Australia in 1970. Shortly before doing so he sat for, and passed, an aptitude test for computers. After his arrival in this country he initially worked as a cost clerk at the Commonwealth Aircraft Corporation. In 1976 he transferred from the accounts department to the IT department, and began working as a financial analyst. In 1976, the company purchased Masterpiece.
Mr Fox said that over time he became an expert in the installation, implementation, and upgrading of Masterpiece. He described Masterpiece as a sophisticated financial management suite of applications which monitors and controls debt and credit in an organisation for statutory and management reporting. He said that it is today an important element in modern corporate governance requirements. Its main competitors now are SAP, Oracle and PeopleSoft.
In 1983 Mr Fox joined Computer Associates in Melbourne as a support consultant. It was there that he met Mr Hall-Watson. He was Mr Fox’s immediate superior. In 1986 Mr Hall-Watson left Computer Associates and started his own company, initially called Hilrand Pty Ltd, and then re-named H-W Computer Services Pty Ltd, in New South Wales. Mr Fox continued to work with Computer Associates.
In 1988, the ANZ Bank approached Mr Fox and engaged him to implement, maintain and upgrade the Bank’s Masterpiece suite. Mr Fox remained at the ANZ Bank for 18 months.
As previously indicated, in March 1989, Mr Hall-Watson established H-W Vic. Mr Hall-Watson approached Mr Fox and suggested that he join H-W Vic as an employee, with an equity share. Initially, Mr Fox was offered 20 per cent equity, but in 1990 a new deal was struck. On 15 July 1990, Eighty-Second Vocation Pty Ltd and H-W Services Pty Limited entered into a shareholders agreement, which was subsequently varied so that the shareholding became H-W Computer Services Pty Ltd 50 per cent, and Eighty-Second Vocation Pty Ltd 50 per cent. Subsequently, in 1995, Mr John Rae was brought in as a 2 per cent shareholder, ostensibly to act in an independent manner so as to break any deadlock that might arise. Mr Rae did not participate in the day-to-day business of H-W Vic.
From 1991 to 1997, Mr Fox operated H-W Vic in Melbourne, while Mr Hall-Watson ran the New South Wales operations. H-W Vic employed a secretary and an accounts clerk, who worked at an office in South Melbourne. Mr Fox identified a series of clients that he claimed to have brought in to the business, including the ANZ Bank, and GRE Insurance. He also claimed to have introduced other clients, including the Northern Territory Government, Country Road, Just Jeans, Roger David, Bob Jane T-Marts, Carter Holt Harvey, Esprit, Pacific Dunlop, Telstra and a number of other large business enterprises. He also claimed that he had procured the South Australian Government, a major Masterpiece user, as a client, though Mr Hall-Watson had arranged for the contract with that government to be made with H-W Services Pty Limited. He said that although he had queried this with Mr Hall-Watson, all payments were made to the New South Wales entity.
Mr Fox said that between 1990 and 1995 Mr Hall-Watson had sought to diversify into ventures outside Masterpiece. He insisted that H-W Services Pty Limited and H-W Vic share the costs of these ventures equally. None of them were successful. Masterpiece was the only profitable aspect of the business. During the same period, Mr Hall-Watson established an offshoot of the business in New Zealand. This was done in conjunction with Ms Dianne Bussey. The company was known as H-W Computer Solutions (NZ) (“the New Zealand company”), and Ms Bussey had 48 per cent of the shares.
Mr Fox set out the gross income of H-W Vic for the six financial years preceding 30 June 1997. The figures were as follows:
“01/07/1991 to 30/06/1992 $233,640.00
01/07/1992 to 30/06/1993 $247,073.00
01/07/1993 to 30/06/1994 $247,037.00
01/07/1994 to 30/06/1995 $443,358.00
01/07/1995 to 30/06/1996 $608,720.00
01/07/1996 to 30/06/1997 $538,930.00”He claimed that the figure for the year ending 30 June 1997 was not a reliable indicator of the business generated by the company. That was because there were a number of consultants employed by, and paid for by, H-W Vic who carried out services to clients who were billed by the New South Wales company.
Mr Fox then set out the net profits of H-W Vic, as they appeared in the statutory accounts, in the three financial years leading up to 30 June 1997. The figures were as follows:
“01/07/1994 to 30/06/1995 $52,784.00
01/07/1995 to 30/06/1996 $65,912.00
01/07/1996 to 30/06/1997 ($30,781.00)”Mr Fox referred to a meeting that took place in mid to late 1996 in Sydney at the offices of Mr Hall-Watson’s accountant in Sydney. Mr Hall-Watson, Mr Ian Stone (Mr Hall-Watson’s accountant), Ms Bussey, and Mr Fox, attended the meeting. Mr Hall-Watson said that he wanted to restructure the companies. He said that he wanted to centralise the administration of the companies in Sydney, to operate nationally, as one. He said that under this proposal H-W Vic would cease to operate, as would the New Zealand company, and their businesses would be taken over by H-W Services Pty Limited. Ms Bussey expressed support for the proposal, but indicated that she wanted 20 per cent equity as compensation. Mr Hall-Watson indicated that this was far too much, and suggested a figure of about three to five per cent. Mr Fox said he would go along with the restructure provided he was offered equity in the New South Wales company as “compensation for my interest”. According to Mr Fox, Mr Hall-Watson said that he was not opposed to the idea of equity, but considered 25 per cent, which Mr Fox suggested, as excessive. Mr Hall-Watson suggested that they would “work it out” based on the value of Mr Fox’s interest in H-W Vic.
According to Mr Fox there were a number of conversations between himself and Mr Hall-Watson throughout the latter part of 1996 and early 1997. Mr Fox claimed that he repeatedly raised the issue of his equity share, and Mr Hall-Watson simply said that he would be looked after. Mr Fox claimed that he also discussed with Mr Hall-Watson the salary that he would receive if he joined the restructured organisation, and was told that he would receive $150,000. According to Mr Fox that sum was broadly comparable to the total package, including the use of cars, which he and his wife jointly received whilst employed by H-W Vic.
Mr Fox then exhibited the 10 June letter. Because of the importance that this letter has assumed in this proceeding, it is convenient to set out its terms in full:
“Dear Tom,
Following our discussions I am pleased to confirm our offer to you to join H-W Services. We have agreed that we should operate nationally as one company with business units aligned with our major business partners. In order to achieve this, staff with H-W Computer Services (Vic) should join H-W Services, in particular we wish to confirm your appointment before we make offers to the other staff.
We recognise the very important role that you play in Victoria, and your association with CA and the Masterpiece clients in Victoria and the Northern Territory. We are offering you the position of Manager of our CA Financials Business Unit. In addition you will be responsible for the day to day administration of the Melbourne office. The gross salary package being offered to you is $150,000. We understand that you wish to arrange this package to suit your circumstances, and provided there are no legal or tax risks to the company, we would be happy to assist with the structure of this package.
With the staff of H-W Vic joining H-W Services, it would be appropriate to close the H-W Computer Services (Vic) company. From our discussions I believe the net book value of the assets of the company would be used as the bases for settling the equity position that you have with the company. In order to minimise the preparation of the financial accounts it would be desirable if we could use the 30th June 1997 accounts as the bases for the settling of the equity position.
We would also like to make July 1st 1997 as the start date for staff to join H-W Services. With your acceptance of this offer, we will write to each of the staff of H-W Computer Services (Vic) and advise them of our proposal, and offer them positions with H-W Services. As you are aware we can not offer Fiona a long term position, as we propose to centralise the administration function in Sydney, and thus her position would become redundant. As the process of moving the administration function to Sydney could take up to three months, we will offer her a position with us at least for that period.
You indicated that you wished to take an equity position with H-W Services. At this time no staff have such an opportunity, however with your request we are looking at being able to offer selected staff equity in the company. I have requested our accountants to prepare a report on the options that would be available to us. I can assure you that equity will be offered to you, however the form, extent and bases have yet to be defined. As soon as I have information on this I will advise you.
Tom we have a real opportunity to develop a major business unit within H-W Services and to capitalise on the market position that we have generated with CA and the Masterpiece users. I hope that you can be a part of that team, as its manager.
Please let me know as soon as you can whether you accept this offer. I’m sorry that it has taken me some time to get this letter to you, but with your acceptance I will immediately write to the staff in Melbourne.
Yours faithfully,
H-W Services Pty Ltd[signed]
Alan Hall-Watson
Managing Director.”Mr Fox said that he met with his accountant, Mr Craig Whyte on 13 June 1997, a Friday. On the following day, he had a telephone conversation with Mr Hall-Watson. Mr Fox said that in the course of that conversation Mr Hall-Watson suggested that Mr Fox might prefer to take a profit share arrangement “as a way of being compensated” instead of taking equity in H-W Services Pty Limited.
Mr Fox said that on the next day he wrote the 15 June letter. Once again, that letter is important, and it is necessary to set it out in full:
“Dear Alan,
Following our conversation yesterday, I am pleased to accept your offer to join H-W Services Pty Ltd.
I accept the position of Manager, CA Financials Business Unit, responsible for all Masterpiece projects undertaken by the Company.
As agreed the remuneration for this position is to be $150,000 for the first 12 months with annual reviews. The breakdown of this amount is to be discussed and agreed between both our Accountants, and then accepted by ourselves.
The issue of my equity buy-in to H-W Services is to be replaced by a profit share arrangement which is to be discussed by our Accountants and a proposal received from each for our acceptance.
It is understood that this arrangement is to commence from the 1st July 1997, with all H-W Computer Services (Vic) staff being offered a similar position within H-W Services Pty Ltd.
All staff are due their annual review from this date and I would like to discuss this matter with yourself. Other administrative issues such as outstanding sick, holiday and LSL provisions need to be discussed and resolved.
As all administration for the Company will be controlled from Sydney, it is understood that Fiona, at present, does not have a long term position, however, I have assured her that she will be dealt with honestly and fairly. She is an excellent employee and I will keep her informed as to the duration of her employment, and, if possible I would prefer her to remain within the Company.
I am enthusiastic about this offer and keen to commence the new position and I am sure we will be able to develop CA Financials as a major Business Unit within H-W Services Pty Ltd.
Yours Sincerely,
Thomas Fox”.
Shortly after sending the 15 June letter Mr Fox left for overseas, and did not return until late June or early July. According to Mr Fox:
“Much later, the precise date of which I can no longer recall, Hall-Watson rang me from Sydney. He said to me words to the effect that he wanted me to sign a copy of the letter dated 10 June, 1997 to confirm my acceptance of the offer that had been made, and said that I would be offered equity or a profit share in H-W Computer Services Pty. Ltd. to compensate me for my equity in H-W Computer Services (Vic.) Pty. Ltd. I signed Hall-Watson’s copy of the letter dated 10 June, 1997 and wrote the following words:
“Offer accepted as per letter dated 15/6/97
Thomas Fox”.”Mr Fox said that notwithstanding the two June letters, and the fact that he accepted Mr Hall-Watson’s offer of employment with H-W Services Pty Limited, no equity in that company had been offered to him, or to Eighty-Second Vocation Pty Ltd. Moreover, he had never been offered a share of profits in that company. After 1 July 1997, H-W Services Pty Limited took over the clients and the business of H-W Vic. Mr Fox gave up certain employee entitlements, including annual leave and sick leave, which he calculated as being worth $40,846.15 and $25,269.23 respectively. He said that had he known that he would not receive any equity or profit share in H-W Services Pty Limited, or equivalent compensation, he would not have agreed to the restructure, or to H-W Vic ceasing to trade. He claimed that he raised the issue of profit share or equity with Mr Hall-Watson on a regular basis, but on each occasion was fobbed off with statements to the effect that they would sort it out.
Mr Fox noted that his accountant Mr Whyte had attempted to resolve the dispute relating to profit share or equity with Mr Hall-Watson’s accountants. He exhibited correspondence from Mr Whyte to Mr Stone dated 29 April 1999, 3 June 1999 and 15 May 2000, and further letters dated 13 October 2000 and 8 November 2000 to Mr Hall-Watson. Mr Whyte received two letters from Mr Hall-Watson dated 10 October 2000 and 25 October 2000. At no stage did Mr Hall-Watson offer any equity or profit share.
Mr Fox said that in early 1999 he became aware of the fact that Parere Investments Pty Limited (as the company was now known) had sold the entire business to Computer Associates. In March 1999, he received two letters offering him employment with that company. Mr Fox said that he understood that the sale price had been between $2.25 million and $2.5 million, which included $500,000 payable under a retirement bonus deed, and NZ$500,000 paid under a non-competition deed to the New Zealand company. Plainly, he felt aggrieved by the sale, and considered that H-W Vic had been improperly deprived of its entitlement to a share of the proceeds of that sale.
Mr Hall-Watson, in his evidence-in-chief, set out the history of what he described as “the H-W Group” of companies. He established the various companies in that group from about 1985 onwards. He described the main features of Masterpiece, noting that as an accountant with ICI New Zealand Limited, he had been responsible for managing a project team implementing that software program within that company. Between 1980 and 1985 he was personally responsible for every installation of Masterpiece in Australia and New Zealand. He claimed that he knew personally most of the principal company executives responsible for the accounting systems in the various companies that used this system.
Mr Hall-Watson set out the history of H-W Vic from the time of its establishment in 1989 until mid-1997 when it ceased to operate. He agreed that he had approached Mr Fox to gauge his interest in joining H-W Vic. He regarded Mr Fox as a technical expert in Masterpiece, believing that he would complement his own skills in strategic planning and development. It is unnecessary for present purposes to recount in any detail Mr Hall-Watson’s summary of their relationship throughout the early 1990’s. It is sufficient simply to note that Mr Hall-Watson disagreed with some aspects of Mr Fox’s account, at least in relation to the source of a number of H-W Vic clients. Mr Fox claimed credit for having secured these clients, but Mr Hall-Watson said that either he, or someone else, had procured their business.
According to Mr Hall-Watson he became increasingly concerned, in around 1995 or 1996, that the structure of the H-W group of companies was inefficient. He was also conscious of the need to develop a national profile for the group, consistent with its national operations. He began to consider ways to streamline operations, and to take advantage of the group’s national presence. In November 1995 he arranged for a conference of all senior staff to be held in Terrigal, north of Sydney. At that conference Mr Mark Hanson, a representative of the South Australian Government spoke. He recommended the integration of the three companies in the group into a single national enterprise thereby enabling significant savings to be made. In addition, he suggested that there should be a single brand name used throughout Australia and New Zealand, rather than the three separate names that were then in use.
On 14 May 1996, Mr Hall-Watson organised a meeting with Mr Fox and Ms Bussey at the offices of his accountant Ian Stone. He suggested that it would make sense to close H-W Vic and H-W Computer Solutions (NZ) Ltd. According to Mr Hall-Watson, both Mr Fox and Ms Bussey indicated that they were interested in the proposal, but wanted equity in H-W Services Pty Limited. Mr Hall-Watson told them that he proposed to explore with Mr Stone the establishment of an employee benefit scheme. This would be for all senior managers, and not just Mr Fox and Ms Bussey. He said that the arrangement would consist of either an offer to acquire equity in H-W Services Pty Limited, as an incentive for ongoing loyalty (he claimed he had in mind up to 10 per cent to be divided amongst all senior managers), or a performance based profit share arrangement. The meeting concluded with Mr Fox and Ms Bussey indicating that they would consider their respective positions.
Shortly thereafter Ms Bussey elected not to join H-W Services Pty Limited. She decided that she wished to strike out on her own. Mr Hall-Watson indicated that he might wish to use the corporate shell of the New Zealand company at a later stage and offered to buy her shares from her. She asked him what price he was prepared to pay. According to Mr Hall-Watson, he said:
“We’ll do an adjustment based on net tangible assets as at 31 July 1996 and I will pay you for your 48%”
Eventually, Ms Bussey was paid NZ$10,358 for her shareholding in the New Zealand company.
Following the May 1996 meeting, Mr Hall-Watson and Mr Fox decided to continue trading with H-W Vic and H-W Services Pty Limited as separate entities while they discussed a possible restructure.
On 15 January 1997, Mr Hall-Watson was in Adelaide working on the South Australian Government contract. As no progress had been made with H-W Vic, and the restructure, he decided to attempt to resolve the issue by going to see Mr Fox. He flew to Melbourne, and they had a discussion regarding current client work. Mr Hall-Watson’s evidence was that they then exchanged words to the following effect:
“I said:I need to decide what to do about the Victorian business. I have got consultants working around Australia. In effect we are already operating more as a single company. I think we should become a single entity. I was thinking we would change the existing business units. There would be a separate Business Unit for Masterpiece Consulting. You would be the manager of that Unit. We will also need an administration manager to deal with the day to day running of each office in Sydney, Adelaide and Melbourne. You would be the administration manager for the Melbourne office.”
He said: “Who would the consultants in Victoria report to?”
I said:“Agnes [Barros] and Michael [Ellis] are primarily technical consultants so they would probably report to Anthea [Himpoo] as the Technical Business Unit Manager.
He said:“I will need to think about what I want to do. Can I get back to you by, say, the end of January.””
According to Mr Hall-Watson, the meeting ended at approximately 3:30pm. Mr Fox then drove him to the airport. During the drive they had a conversation to the following effect:
“He said:“What is happening with the equity or profit share arrangements you have been thinking about?
I said:I am still looking at that, but haven’t decided anything specific about how much or on what terms.””
Towards the end of the conversation, they exchanged words to the following effect:
“He said: “How would you value the goodwill in H-W Vic?”
I said:“I think it would be difficult to establish what the goodwill was for H-W Vic. In many ways we have been working as one company anyway over the past year. As you know, Agnew [Barros] is mostly looked after by Anthea [Himpoo]. Quite a lot of the work for the H-W Vic consultants has come through Sydney. This is particularly so in relation to Adelaide. We have developed a lot of new work in Adelaide. In addition to the Treasury contract there are other agencies, and also the City of Adelaide, University of Adelaide and Adelaide Brighton Cement. H-W Vic consultants have been involved in a lot of this work. Sydney has also sent down consultants to work in Victoria on other projects – not Masterpiece. That’s why I am saying I have to sort this out. I guess I am saying that to try and work out a figure for any goodwill of the H-W Vic business is going to be difficult. There would have to be some arbitrary assessments which we may never be able to agree upon.
He said: “So what do you propose we do?”
I said:“I would prefer to recognise the goodwill as being the value that you have to H-W Vic. I would prefer to just pay you through a significant increase in your salary. I suggest we increase your salary from $100,000 to $150,000 a year – that’s a 50% increase.””
Mr Hall-Watson said that as they arrived at the airport, and completed their discussion, he did not wish to leave without reaching an agreement on the approach to resolving the value of Mr Fox’s goodwill in H-W Vic. While seated in the car he said to Mr Fox:
“Can we agree that if you come on board, then a salary increase is an adequate compensation for any goodwill?”
According to Mr Hall-Watson, Mr Fox replied “Yes”, and they then shook hands on their agreement. Mr Hall-Watson said that he believed, following this conversation, that Mr Fox and he had an agreement regarding how much he would be paid if he chose to become an employee of H-W Services Pty Limited, and that this amount would cover the value of any goodwill that Mr Fox might have had in the H-W Vic business. He said that he acted on that basis in completing the restructure of the group, in agreeing to pay Mr Fox $150,000 per annum following the transfer of the H-W Vic business, and in negotiating with and agreeing, the terms of the subsequent sale of the Parere business to Computer Associates.
I interpolate that it can be readily appreciated that this version of the January 1997 meeting differs significantly from Mr Fox’s account of what occurred. Mr Hall-Watson insisted that he made it perfectly clear to Mr Fox that the figure of $150,000 per year represented a 50 per cent increase on what Mr Fox and his wife were then earning, and that this increase was to cover the value of Mr Fox’s goodwill in H-W Vic.
Mr Fox, on the other hand, in his affidavit, did not refer to the meeting at all. He simply said that he had “discussions” about the salary that he would receive at H-W Services Pty Limited, and that he agreed “that I would receive $150,000, which sum was comparable to the total package (including the use of cars) which my wife and I received whilst employed” by H-W Vic.
In his oral evidence, which supplemented his affidavit, Mr Fox recalled the meeting in January 1997, and the trip to the airport. He said that they discussed the proposed remuneration of $150,000 per annum, which he described as a “package”, and which included his wife. According to Mr Fox, Mr Hall-Watson offered $150,000, Mr Fox suggested that it be split between him and his wife, and Mr Hall-Watson agreed. Mr Hall-Watson also said that this was the “total” package, with car allowance to be deducted. Any amount that was left would be divided between Mr Fox and his wife.
It is important to note that Mr Fox insisted that it was never suggested to him, by Mr Hall-Watson, that the figure of $150,000 involved any recognition of, or payment for, his goodwill in H-W Vic.
Turning back to Mr Hall-Watson’s evidence, he recounted various conversations between himself and Mr Fox in the months leading up to June 1997. According to Mr Hall-Watson, Mr Fox did raise the question of equity in H-W Services Pty Limited, and even spoke of 20 per cent as an appropriate figure. However, this was in the context of his joining H-W Services Pty Limited, and had nothing whatever to do with compensation for loss of the goodwill in H-W Vic, which Mr Hall-Watson regarded as having already been settled by the January agreement. Mr Fox, of course, claimed to have a different understanding of the position.
Mr Hall-Watson then gave his account of the circumstances leading up to the 10 June and 15 June letters, including the telephone conversation that he had with Mr Fox on 14 June 1997. According to Mr Hall-Watson the substance of that conversation was as follows:
“He said:“I would like to have a go at the restructure in the position of Manager for Masterpiece Projects. I have discussed with my accountant taking up equity in H-W. I don’t mind if there is no equity share if there is a profit sharing arrangement in place. This would allow me to make my own decisions about where I invest my money. We will need to have a breakdown of the $150,000 salary package. I would like a service arrangement between Eighty-Second Vocation Pty Limited and H-W Services. The staff coming over will be Michael and Fiona”
I said:“I will speak with the Melbourne Staff next week while you are away. Could I get you to confirm this in writing, please. I won’t be able to consider a service arrangement with ESV as I am employing you.”
He said:“I will be back from the UK on 27 June but only for a few hours, and then in Darwin until 23rd July.”
Mr Hall-Watson strenuously denied Mr Fox’s assertion that he had arranged for Mr Fox to sign the 10 June letter in late 1998 or early 1999, signifying his agreement to its terms, only when it became apparent that he needed Mr Fox’s written acceptance of his offer in order to effect the sale of the business to Computer Associates. He maintained that Mr Fox had signed the 10 June letter within a short time of its having been written, and accepted.
Mr Hall-Watson also rejected the suggestion that he had planned all along to sell the business to Computer Associates, and had effectively swindled Mr Fox out of the value of his shareholding by making a series of promises that he had no intention of keeping. According to Mr Hall-Watson, his proposals for equity or profit share for senior employees were of a general nature, intended for all senior managers, and had nothing whatever to do with reimbursing or compensating Mr Fox for having agreed to the restructure. It was the salary of $150,000 per annum, which was significantly greater than that previously paid, and much higher than the figure offered to other senior employees, that reflected the value of Mr Fox’s interest in the goodwill of H-W Vic.
There were several other witnesses who gave evidence on behalf of the respondents on the issue of liability. Mr Ian Stone said that Mr Hall-Watson had been considering employee share schemes and employee rewards for “a number of years” before the business was sold to Computer Associates. He said that Mr Hall-Watson had always been keen to have an equity scheme in place to reward employees based on performance. Mr Stone had counselled Mr Hall-Watson against such a scheme, and suggested instead profit share arrangements. However, Mr Hall-Watson had continued to raise with him various ways in which an employee share scheme could be established. At no time had he ever suggested a figure of more than 10 per cent for all employees who were to participate.
Mr Mark Hanson supported Mr Hall-Watson’s account of how the South Australian Government contract had been secured, and was critical of Mr Fox’s skill, and performance. On the other hand, he was plainly not a dispassionate observer, having joined the H-W group after his departure from the South Australian Government in December 1997.
Mr Christian Catteau, who was involved on behalf of Computer Associates in the initial negotiations between that company and Mr Hall-Watson for the sale of the H-W Services Pty Limited business made it clear that there were no discussions regarding that matter until mid to late 1998. In effect, his evidence negated the suggestion in Mr Fox’s case that the June 1997 restructure was brought about by subterfuge on Mr Hall-Watson’s part, seeking to “wrest control” of H-W Vic from Mr Fox so that the business could be on sold at a vast profit.
It is against the background of the evidence given by these witnesses, but particularly Mr Fox and Mr Hall-Watson, that it is necessary to consider whether the applicants have established any, or all, of the various causes of action pleaded.
FINDINGS OF FACT
It is necessary to set out in some detail my findings as to fact in relation to those areas where the evidence of Mr Fox and Mr Hall-Watson diverged significantly.
Neither Mr Fox nor Mr Hall-Watson struck me as having given deliberately false testimony. Mr Fox was vague on some matters, but that was hardly surprising. The events of 1996 and 1997 go back a long way, and he had no contemporaneous notes of any conversation to which he deposed. It is significant that, in his affidavit, he failed to make any mention of the January 1997 conversation in the car, given its obvious importance, and the fact that he plainly recalled it when he gave oral evidence-in-chief. Of course, it is possible that reading Mr Hall-Watson’s affidavit prompted his memory.
Mr Hall-Watson had a diary note of the events of 15 January 1997. The note was brief, referring simply to Mr Fox having to “think about his role, plans etc by end of Jan”. It was submitted on behalf of Mr Fox that had there been an agreement reached in the car on the way to the airport between Mr Fox and Mr Hall-Watson, along the lines claimed by Mr Hall-Watson, Mr Hall-Watson would have recorded that fact in his diary. Mr Hall-Watson, on the other hand, maintained that his diary simply recorded general movements, and did not condescend to specific agreements or conversations.
It is impossible, at this time, to determine what precisely was said during the course of this pivotal conversation. My impression is that Mr Hall-Watson has a clearer recollection of events than Mr Fox. In addition, his account of the conversation accords with known facts, and is generally supported by the evidence given by Mr Stone. In any event, it is unnecessary for me to reach a final conclusion regarding this matter. Mr Fox bears the burden of proof as regards what representations were made. His evidence does not persuade me, on the balance of probabilities, or indeed on any lesser standard, that his account of what took place on route to the airport should be accepted.
I am prepared to accept that Mr Fox did not regard the package of $150,000 as any different, in substance, to the package that he and his wife had been receiving whilst employed by H-W Vic. In fact, however, there was a significant difference. Monies paid for the two vehicles that were being purchased under hire/ purchase agreements on their behalf were recorded in the H-W Vic loan accounts. Mr Fox said, in effect, that he did not regard these as genuine loans because he believed that they would never be called in. The reality was that they were genuine loans. They were recorded in H-W Vic’s financial records. Had H-W Vic gone into liquidation, the liquidator would almost certainly have moved to recover the monies owing under these loans. Even Mr Whyte, who gave evidence on behalf of Mr Fox, accepted that this was so, though he considered that the loans would be repaid over time by book entries crediting dividends and/or bonuses.
Mr Hall-Watson is himself an accountant. His explanation of why he regarded the $150,000 package offered to Mr Fox to join H-W Services Pty Limited as an increase of 50 per cent was, in my view, cogent and rational. There is a very real difference between having the costs of a vehicle paid for by the company, and having to meet those costs through a loan from the company. Moreover, Mr Fox acknowledged, in cross-examination, that he had never told Mr Hall-Watson that he did not regard the $150,000 package as a significant increase.
I should add that neither Mr Fox, nor Mr Hall-Watson, covered himself in glory in relation to the arrangements that were made regarding the “package” paid after Mr Fox joined H-W Services Pty Limited. Whatever may have been the position in relation to H-W Vic, the evidence was clear that Mrs Fox performed little or no work for H-W Services Pty Limited after 1 July 1997. The arrangement, whereby the salary paid was divided between Mr and Mrs Fox was, as Mr Hall-Watson finally acknowledged, a “sham”.
This takes me to the events of June 1997. Here again, there is a conflict between Mr Fox and Mr Hall-Watson. In my view, Mr Hall-Watson’s evidence as to what occurred, and in particular, as to why it took place, should be preferred to that of Mr Fox. There is nothing improbable about Mr Hall-Watson having sought to promote an equity sharing arrangement with senior employees, and Mr Stone’s evidence confirms that this was continually brought up in discussions with him. Mr Fox may have thought that there were unresolved issues regarding the goodwill of H-W Vic, but Mr Hall-Watson regarded that matter as having been concluded in January 1997. There is nothing in either the 10 June or 15 June letters that supports Mr Fox’s version of events. The “promise” of equity or a profit share contained in the 10 June letter was perfectly consistent with the broad concept of rewarding senior management that Mr Hall-Watson had long been contemplating. The 15 June letter makes it clear beyond doubt that Mr Fox was not interested any longer in equity, but desired instead to participate in some form of profit sharing arrangement. However, it is important to note that the letter at no point links any such arrangement to compensation for loss of goodwill. Had that been the true position, one might have expected Mr Fox to stress the point.
I note that although Mr Fox implies, in his amended statement of claim, that the restructure that took place in June 1997 was simply a device by which he could be deprived of his interest in H-W Vic when H-W Services Pty Limited was sold to Computer Associates, that allegation is no longer maintained. That is scarcely surprising given the evidence of Mr Catteau.
It follows that were this case to be determined solely upon the facts, Mr Fox would fail. However, his case has more obstacles to overcome, some of which seem to me to be insuperable.
THE SECTION 52 CLAIM
In the first place, the s 52 claim is, in my view, time barred. This proceeding was instituted on 16 January 2002. Section 82 of the Act relevantly provides:
“(1) A person who suffers loss or damage by conduct of another person that was done in contravention of a provision of Part IV, IVA, IVB or V or section 51AC may recover the amount of the loss or damage by action against that other person or against any person involved in the contravention.
…
(2) An action under subsection (1) may be commenced at any time within 6 years after the day on which the cause of action that relates to the conduct accrued.”
Section 82(2) was amended by the Trade Practices Amendment Act (No 1) 2001 (Cth) (Act No 63 of 2001) (“the amending Act”). That Act came into force on 26 July 2001, 28 days after the amending Act received Royal Assent. Prior to the amending Act, the limitation period provided for under s 82(2) was three years. Item 20 of Sch 1 of the amending Act replaced that three-year period with a period of six years.
Item 21 contains transitional provisions. It provides:
“(1) The amendment made by item 20 applies in relation to conduct engaged in on or after the commencement of that item.
(2)The amendment made by item 20 also applies in relation to conduct engaged in before the commencement of that item, but only if the period that:
(a)relates to the conduct; and
(b)applied under subsection 82(2) of the Trade Practices Act 1974 before the commencement of that item;
had not ended when that item commenced.”
Though poorly drafted, the import of these transitional provisions can be discerned. The fact that the “conduct engaged in” occurred before 26 July 2001 is of itself no obstacle to a six-year limitation period being applicable. However, the six-year period will only be applicable if the limitation period that applied prior to that date had not ended when the amendment Act came into force. In other words, the applicants can take advantage of the longer limitation period now in place, if, but only if, the three-year limitation originally in place had not expired as at 26 July 2001.
This interpretation is supported by the Explanatory Memorandum to the amending Act. It states at [39]:
“The extended limitation period will also apply to conduct engaged in before the commencement of the amendment where the limitation period in relation to the conduct that applied before the commencement of the amendment has not ended when the amendment commences.”
This means that the applicants must show that the cause of action that relates to the conduct in question accrued at some point on or after 26 July 1998. They submit that they can do so because their cause of action only accrued when it became “reasonably ascertainable” that by bearing the burden of the restructure agreement they were worse off than if they had not entered into the transaction because the promised benefit of equity, or a share in profits, was not going to eventuate.
I am not persuaded by this submission. The amended statement of claim pleads that the misleading or deceptive conduct, which forms the basis of the s 52 claim, occurred in June 1997. There is uncontradicted evidence before me, given by Mr Alan Weeks, the accountant appointed to value H-W Vic on behalf of the respondents, that it would normally have taken about three months to develop a profit sharing arrangement of the type contemplated by Mr Hall-Watson in his discussions with Mr Fox. Mr Hall-Watson himself estimated that it would have taken no more than six months from mid-1997 to develop such an arrangement had he actively pursued it. At least from the beginning of 1998, if not sooner, it was “reasonably ascertainable”, to use the language of Brennan J in Wardley Australia Limitedv The State of Western Australia (1992) 175 CLR 514 at 536-7, that the profit sharing arrangement foreshadowed by Mr Hall-Watson was going nowhere. Accordingly, time ran from that point. See also Karedis Enterprises Pty Limited v Antoniou (1995) ATPR ¶41-427 at 40,816. The s 52 claims were time barred as from the beginning of January 2001, some 12 months before this proceeding was commenced.
There are other legal difficulties associated with the s 52 claims. The representations, as pleaded in par 11 of the amended statement of claim were never made in the terms described. There was nothing said by Mr Hall-Watson in June 1997 to the effect that the applicants would be “compensated” either by the issue of shares, or a profit share. Nor was it ever said that the purpose of the restructure agreement was merely to centralise administration. The only representation made relating to a share of profit that was operative on 30 June 1997 was that described in Mr Fox’s 15 June letter, namely that a profit share arrangement was to be discussed by their respective accountants, and a proposal received from each for their acceptance. That proposal was not linked to any “compensation”. It was said that one purpose or object of the merging of the businesses was to centralise administration, but it was not said that this was the only purpose.
There is also room for doubt as to whether the evidence supports a finding of reliance on the part of Mr Fox, even if the representations as pleaded were made. Mr Fox’s failure to do anything about the promise to have the profit share arrangement discussed by their respective accountants until 1999, when the Computer Associates sale became known, speaks tellingly of his view of the importance of the promises that were made, such as they were. Indeed, even throughout 1999 and 2000, when Mr Fox’s accountant, Mr Whyte, wrote to Mr Stone, there was not a mention of any link between the profit share arrangement, and any reliance that Mr Fox may have placed upon it in agreeing to the restructure. The claim of detrimental reliance first emerged at about the time that this proceeding was commenced, almost two years after Mr Fox learned of the sale of the business to Computer Associates.
If I am wrong about all of these matters, I would still hold that there were reasonable grounds for believing that a profit sharing arrangement would be arrived at when Mr Hall-Watson made the representations that he did. I accept his explanation that this did not occur, essentially because he focussed upon other matters, including as from 1998 the sale of the business to Computer Associates. In addition, it would have been difficult to come up with any sensible profit sharing arrangement without knowing whether there were going to be profits, and if so, what the extent of those profits was likely to be. That would not be known until well into 1998.
THE NEGLIGENCE CLAIM
The cause of action in negligence does not warrant any extensive discussion. It was barely touched upon in oral argument, and was totally ignored in the applicants’ written submissions. It bears all the hallmarks of an afterthought, thrown in to this case in the hope that any limitation problems associated with the s 52 claims could be overcome.
It is by no means clear that the respondents owed the applicants a duty of care. At the relevant time, the months preceding June 1997, Mr Fox and Mr Hall-Watson, both experienced businessmen, were negotiating at arms length, each seeking advance his own commercial interests. Mr Fox had access to professional advice. In these circumstances, there is little reason to impose upon a party a duty of care.
More importantly, no such duty arises from any alleged relationship between Mr Fox and Mr Hall-Watson as “partners” or “joint venturers”. They were neither partners nor joint venturers. Their relationship was simply that of shareholders and directors of a company, H-W Vic. Their rights and obligations were governed by that company’s memorandum and articles of association. They were also governed by the Corporations Law, which was then in force.
The applicants’ contention that they were owed a duty of care because the respondents “knew” that the applicants would rely upon the representations as to profit share, and that they would suffer detriment in reliance upon those representations, cannot be accepted. This is hardly the occasion to set out, in any detail, the law relating to the existence of a duty of care in cases involving negligent misstatement. In recent years, the High Court has developed various touchstones for the existence of such a duty, in all cases of negligence. Thus, there has been a movement away from “reasonable foreseeability” as discussed by Lord Atkin in Donoghue v Stevenson [1932] AC 562 at 580, to “proximity”: Sutherland Shire Council v Heyman (1985) 157 CLR 424 at 497-8 per Deane J. See also Bryan v Maloney (1995) 182 CLR 609 at 617-18. More recently, Deane J’s attempt to promote proximity as the central underlying concept behind the existence of a duty of care has been heavily qualified. See Hill v Van Erp (1997) 188 CLR 159, and Perre v Apand Pty Limited (1999) 198 CLR 180.
A leading text, RP Balkin and JLR Davis, Law of Torts (3rd ed, 2004), describes the current position as follows at 208:
“Perhaps the most that might be said is that proximity nowadays might be used in conjunction with a variety of other factors to identify the existence of a new duty of care. It has certainly not been abandoned by courts in the United Kingdom where … it still forms an important part (albeit not the sole factor) in the inquiry as to whether a duty of care exists in novel situations.”
An interesting example of the current approach of the High Court to questions of duty of care is Cole v South Tweed Heads Rugby League Football Club Ltd (2004) 207 ALR 52. In that case, the appellant was seriously injured when run down by a motor vehicle while drunk. A short time earlier, she had left the premises of the respondent club where she had been drinking for most of the day. At about 3.00 pm she had been refused further alcohol by club staff, and at 6.15 pm had been asked to leave the premises by the club manager who offered to provide transport to her home, which she refused. The appellant claimed that the club owed her a duty of care to monitor and moderate her drinking during the day, and should not have allowed her to leave without proper assistance. A majority of the Court dismissed her appeal. Gleeson CJ observed that except in extreme cases, the law makes intoxicated people legally responsible for their actions. They should not, as a general rule, be able to avoid responsibility for the risks that accompany a personal choice to consume alcohol. Moreover, it was impractical to impose on a supplier of alcohol a general duty to protect consumers against risks of injury attributable to alcohol consumption.
Mr Fox was in a position to negotiate freely his future relationship with Mr Hall-Watson. He had access to legal and accounting advice. Absent fraud, there comes a point at which an individual, negotiating at arms length with a prospective business partner, must take responsibility for his or her own decisions. The fact that it may have been reasonably foreseeable that Mr Fox would suffer damage if Mr Hall-Watson made negligent statements regarding the prospects of a profit share arrangement is not, of itself, sufficient to give rise to a duty of care. Nor was their relationship of a kind that has traditionally been held by the courts to contain special features that give rise to a positive duty to prevent harm.
In any event, there is not a scintilla of evidence to support the conclusion that Mr Hall-Watson acted negligently in making the representations that he did. I have already indicated that I accept the evidence that he gave on this point. He said that at the time he discussed an equity or profit sharing arrangement with Mr Fox, he had in mind something more general, which would apply to all senior staff. He genuinely believed that such an arrangement would ultimately come into existence. I have said that, in my view, he had reasonable grounds for that belief. In the light of that finding, it is difficult to see how Mr Hall-Watson can be said to have acted in breach of any duty of care, even assuming, contrary to my finding, that such a duty of care existed.
I should add for the sake of completeness, that there are other difficulties with Mr Fox’s claim in negligence. The evidence regarding causation is tenuous, at best. In substance, there is only Mr Fox’s account to support that claim, and it may truly be said that this is a case in which actions speak louder than words. There is nothing by way of objective evidence to suggest that Mr Fox would not have entered into the same, or a similar, arrangement with Mr Hall-Watson even if no promise relating to future profit sharing had been made. After all, Mr Fox was prepared to embark upon the new structural agreement without securing any firm commitment on the part of Mr Hall-Watson. Indeed, it was conceded that the nature of the promise made, in the period leading up to that restructure, was too vague to enable Mr Fox to sue upon it for breach of contract. All of this suggests that the promise did not loom large in his considerations in June 1997, and that it only assumed real significance in 1999 when Mr Fox learned that the business was to be sold to Computer Associates for a sizeable sum.
THE FIDUCIARY DUTY CLAIM
The claim of breach of fiduciary duty can also be dealt with briefly. The relationship between Mr Fox and Mr Hall-Watson was not of a fiduciary character. They were simply shareholders in, and directors of, H-W Vic. As directors, they owed fiduciary duties to that company. However, they did not owe each other fiduciary duties when it came to negotiating the restructure of the business as a whole. Though fiduciary obligations apply in some commercial relationships, usually where one party is the representative of the other, or as between partners and joint venturers, where an arrangement between parties is of a purely commercial kind, and they deal at arms length and on an equal footing, generally no such obligations arise.
It is well established that commercial parties are presumed to be responsible for protecting their own interests. As Gibbs CJ and Dawson J each indicated in Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 72 and 147 respectively, it is not the function of fiduciary law to rewrite a bad bargain. The law requires a measure of self-protection. A party who merely trusts another will not be rescued by proclaiming the existence of a fiduciary relationship. People must read the agreements presented to them, and not merely sign them: see generally G Bean, Fiduciary Obligations and Joint Ventures – The Collaborative Fiduciary Relationship (1995) at 59.
In arriving at this conclusion, I am conscious of the applicants’ submission that this case falls somehow within the principles laid down in Hill v Rose [1990] VR 129. There, Tadgell J, dealt with a defendant who, acting on its own behalf, and on behalf of others, induced the plaintiff to purchase a one-third stake in a business for $250,000 and 50 per cent control. At the time of the payment, the defendant company was insolvent, and its true financial position had not been disclosed to the plaintiff. Moreover, it had not been disclosed that the company conducted the business for a family trust, and therefore the plaintiff would not be getting a one-third stake. It was hardly surprising that, in those circumstances, Tadgell J found that a fiduciary relationship existed, and that the defendants owed a duty to the plaintiff to make full and frank disclosure. The information withheld from the plaintiff was material because it was essential to the decision that the plaintiff had to make, namely whether to acquire a stake in the business. Accordingly, the plaintiff was entitled to equitable damages.
Hill v Rose is plainly distinguishable from the present case. Tadgell J based his decision upon the fact that the relationship between the plaintiff and the defendants was not simply a commercial one, in which the parties were at arms length, and on an equal footing. As I have repeatedly indicated, the parties in the present case were in a position where they were negotiating at arms length, and on an equal footing. In particular, there was no “secret plan” in June 1997 on the part of Mr Hall-Watson to “wrest control” of H-W Vic from Mr Fox, and sell the business at a high price to Computer Associates. The proposal to sell the business did not emerge until a year or so after the restructure. In any event, Mr Hall-Watson did not need to “wrest control” of H-W Vic. He had control throughout, through Mr Rae who would vote his two per cent shareholding with Mr Hall-Watson in the event of any dispute between Mr Fox and himself.
To the extent that Hill v Rose forms the basis of the applicants’ claim that there was a breach of a duty to act in good faith, separate from a breach of fiduciary duty, I reject that contention. There was no such duty. If there was, it was not breached.
THE RESTITUTION CLAIM
The final cause of action pleaded is unjust enrichment. It is said that the applicants are entitled to restitution because there was “a failure of consideration” for their consent to the restructure agreement, and because it would be “unconscionable” to permit the respondents to retain the benefit of the goodwill “misappropriated” from H-W Vic.
The short answer to this claim is that it is essentially misconceived, at least in a procedural sense. Any goodwill that existed through Mr Fox’s endeavours on behalf of H-W Vic, belonged to that company, and to that company alone. It did not belong to the shareholders. If Mr Hall-Watson and H-W Services Pty Limited did “misappropriate” the goodwill of H-W Vic, the only party that has standing to recover damages arising from that conduct in a claim for restitution is H-W Vic. However, that company is not a party to this proceeding.
Section 236(1) of the Corporations Act 2001 (Cth) makes provision for a shareholder to bring proceedings on behalf of a company, but only if the shareholder is acting with leave granted under s 237. Section 236(2) provides that proceedings brought on behalf of a company must be brought in the company’s name. Section 236(3) provides that the right of a person at general law to bring proceedings on behalf of a company is abolished. Section 237(2) provides that the Court must grant the application for leave to bring proceedings in the company’s name if satisfied that it is probable that the company will not itself bring the proceedings, and the applicant is acting in good faith and it is in the best interests of the company that the applicant be granted leave. Mr Fox made no application to bring proceedings in the name of H-W Vic, and neither he, nor Eighty-Second Vocation Pty Ltd, can sue, in their own names, to recover property, or the value of goodwill, that was never theirs.
ORDERS
It follows that this application must be dismissed. The applicants must pay the respondents’ costs.
I certify that the preceding one-hundred and eight seven (108) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Weinberg. Associate:
Dated: 23 June 2005
Counsel for the Applicants: Mr A.W. Sandbach Solicitor for the Applicants: Lennon Settle Mazzeo Counsel for the Respondents: Mr V.R.W. Gray Solicitor for the Respondents: Argyle Partnership Dates of Hearing: 31 May 2005, 1-3 June 2005 Date of Judgment: 23 June 2005
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