Forty Two International Pty Ltd v Barnes
[2014] FCA 85
•18 February 2014
FEDERAL COURT OF AUSTRALIA
Forty Two International Pty Limited v Barnes [2014] FCA 85
Citation: Forty Two International Pty Limited v Barnes [2014] FCA 85 Parties: FORTY TWO INTERNATIONAL PTY LIMITED ACN 095 622 889, BLUEFREEWAY LIMITED ACN 112 262 819 and THE GANG OF 4 PTY LTD ACN 095 624 678 v KIM BARNES and LEE HAWKSLEY File number(s): NSD 2018 of 2008 Judge(s): GRIFFITHS J Date of judgment: 18 February 2014 Catchwords: CONTRACT – whether respondents breached implied terms in contract – implied terms attaching to express terms – implied term to disclose matters relevant to express term – loss of opportunity – interpretation and application of release and entire agreement clauses where cause of action concealed by party seeking to rely on them
TRADE PRACTICES – whether respondents engaged in misleading or deceptive conduct through non-disclosure – misleading or deceptive conduct by silence – application of s 42 of the Fair Trading Act 1987 (NSW) – loss of opportunity
DUTY TO DISCLOSE – whether there is a duty under the general law requiring directors to disclose material personal interests relating to the interests of the company – whether there is a duty under the general law requiring directors not to place their own personal interests in actual or potential conflict with interests of company – whether respondents breached these general law duties
CORPORATIONS – whether duties under ss 182 and 191 of Corporations Act 2001 (Cth) were breached by non-disclosure of personal interest in a transaction by directors of company
DAMAGES – assessment of damages for loss of opportunity – quantifying damages
EVIDENCE – discussion of principle in Jones v Dunkel (1959) 101 CLR 298 – application of ss 69, 135, 183 of the Evidence Act 1995 (Cth)
CROSS CLAIM – whether the applicants made misleading or deceptive representations – application of s 52 of the Trade Practices Act 1974 (Cth)
Legislation: Corporations Act 2001 (Cth) ss 182, 191, 1317H
Evidence Act 1995 (Cth) ss 69, 135, 183
Fair Trading Act1987 (NSW) s 42
Trade Practices Act 1974 (Cth) s 52Cases cited: Australian Competition and Consumer Commission v Telstra Corporation Ltd (2007) 244 ALR 470
Australian Securities and Investments Commission v Hellicar (2012) 247 CLR 345
B.P. Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266
Bank of Credit and Commerce International SA v Ali [1999] All ER 1005
Bourke v Beneficial Finance Corporation Ltd (1993) 124 ALR 716
Byrne v AustralianAirlines Ltd (1995) 185 CLR 410
Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304
Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337
Concut Pty Ltd v Worrell (2000) 176 ALR 693
Daniels v Anderson (1995) 37 NSWLR 438
Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31
Fightvision Pty Ltd v Onisforou (1999) 47 NSWLR 473
Fink v Fink (1946) 74 CLR 127
GIO Insurance Ltd v Leighton Contractors Pty Ltd (1995) 9 ANZ Insurance Cases 76,305
Guest v Commissioner of Taxation [2007] FCA 193
Hart vMacDonald (1910) 10 CLR 417
Hawkins v. Clayton (1988) 164 CLR 539
Harvey v Phillips (1956) 95 CLR 235
Hope v R.C.A Photophone of Australia Pty Ltd (1937) 59 CLR 348
Hornsby Building Information Centre Pty Ltd v Sydney Building Information Centre Ltd (1978) 140 CLR 216 Rhone-Poulenc Agrochimie SA v UIM Chemical Services Pty (Ltd) (1986) 12 FCR 477
Hughes Aircraft Systems International v Air Services Australia (1997) 76 FCR 151
Jones v Dunkel (1959) 101 CLR 298
Lithgow City Council v Jackson (2011) 244 CLR 352
Makita (Aust) Pty Ltd v Sprowles (2001) 52 NSWLR 705
Miller & Associates Insurance Broking Pty Ltd v BMW Australia FinanceLtd (2010) 241 CLR 357
NSW Medical Defence Union v Transport Industries Insurance CoLtd (1985) 4 NSWLR 107
Oceania Pty Ltd v Philips Electronics Australia Limited [2008] NSWSC 710
P & V Industries Pty Ltd v Porto (2006) 14 VR 1
Philips Electronics Australia Limited v Insight Oceania Pty Ltd [2009] NSWCA 124
Pilmer v Duke Group Limited (2001) 207 CLR 165
Sellars v Adelaide Petroleum NL (1994) 179 CLR 332
Sensis Pty Ltd v McMaster-Fay [2005] NSWCA 163
Shirlaw vSouthern Foundries (1926) Ltd [1939] 2 KB 206
State of New South Wales v Moss [2000] NSWCA 133
The Moorcock (1889)14 PD 64
United States Surgical Corporation v Hospital Products International Pty Ltd [1982] 2 NSWLR 766Dates of hearing: 3 - 21 December 2012 Place: Sydney Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 637 Counsel for the Applicants: J M Ireland QC and J Burn Solicitor for the Applicants: Argyle Lawyers Pty Ltd Counsel for the Respondents: R E Dubler SC and A Shearer Solicitor for the Respondents: Herbert Geer Lawyers
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 2018 of 2008
BETWEEN: FORTY TWO INTERNATIONAL PTY LIMITED ACN 095 622 889
First ApplicantBLUEFREEWAY LIMITED ACN 112 262 819
Second ApplicantTHE GANG OF 4 PTY LTD ACN 095 624 678
Third ApplicantAND: KIM BARNES
First RespondentLEE HAWKSLEY
Second Respondent
JUDGE:
GRIFFITHS J
DATE OF ORDER:
18 FEBRUARY 2014
WHERE MADE:
SYDNEY
THE COURT ORDERS THAT:
1.The parties are to seek to agree proposed final orders, including as to costs, in the light of the reasons for judgment. If they are unable to reach agreement within fourteen days hereof, within that time they should file and serve written submissions not exceeding five pages in length in support of their respective proposed orders.
2.Subject to any party demonstrating that there is a need for a further oral hearing, final orders will be made on the papers.
Note:Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 2018 of 2008
BETWEEN: FORTY TWO INTERNATIONAL PTY LIMITED ACN 095 622 889
First ApplicantBLUEFREEWAY LIMITED ACN 112 262 819
Second ApplicantTHE GANG OF 4 PTY LTD ACN 095 624 678
Third ApplicantAND: KIM BARNES
First RespondentLEE HAWKSLEY
Second Respondent
JUDGE:
GRIFFITHS J
DATE:
18 FEBRUARY 2014
PLACE:
SYDNEY
TABLE OF CONTENTS
INTRODUCTION........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .... [1] PART A: BACKGROUND........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..... [5] FTI and BlueFreeway........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..... [5] CMUK licence negotiations........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .... [22] The Exit Agreement........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ [35] PART B: BROAD OUTLINE OF THE PARTIES’ CLAIMS........ ........ ........ ........ ........ .... [38] A Outline of applicants’ primary case and respondents’ defence........ ........ ........ ....... [38] (a) Applicants’ claims in contract........ ........ ........ ........ ........ ........ ........ ........ ........ ..... [41] Respondents’ defence to applicants’ claim in contract........ ........ ........ ........ ........ ........ . [47] (b) Applicants’ claims of breach of statutory and general law duties........ ........ ...... [55] (i) Breach of duty to avoid conflicts of interest........ ........ ........ ........ ........ ...... [64] (ii) Breach of duty to disclose........ ........ ........ ........ ........ ........ ........ ........ ........ [68] (c) Applicants’ case concerning misleading or deceptive conduct........ ........ ........ ... [72] (d) Applicants’ case concerning equitable fraud........ ........ ........ ........ ........ ........ ....... [79] B The cross claim outlined........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..... [80] PART C: THE EVIDENCE SUMMARISED........ ........ ........ ........ ........ ........ ........ ........ ....... [85] A Summary of the evidence of the applicants’ witnesses........ ........ ........ ........ ........ ..... [86] (a) Mr Nick Greiner........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .. [86] (b) Mr Gregory Daniel........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....... [101] (c) Mr Ken McDonnell........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..... [123] Mr McDonnell’s credibility........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ... [133] (d) Mr David Eyles........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ... [189] (e) Mr David Simmonds........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ... [195] (f) Mr Ian Puckrin........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..... [199] (g) Mr Mark Petrucco........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ [217] B Summary of the evidence of the respondents’ witnesses........ ........ ........ ........ ........ . [221] (a) Mr Kim Barnes........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..... [221] (b) Mr Lee Hawksley........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ [268] (c) Mr David McKell........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ [320] (d) Ms Catherine Willems........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ . [326] (e) Mr George Tully........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .. [331] (f) Mr Ian Smith........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....... [335] (g) Mr Derek Harris........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ... [338] (h) Mr Andrew Martin........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...... [342] (i) Mr Raaj Govintharajah........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ [347] (j) Mr Stephen Salmon........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..... [353] (k) Mr Roland Wettenhall........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ . [360] PART D: KEY FINDINGS OF FACT........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ... [367] (a) Some core findings of fact........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .. [370] (b) Discovery issues raised by the respondents........ ........ ........ ........ ........ ........ ........ . [399] PART E: CONSIDERATION OF APPLICANTS’ CLAIMS........ ........ ........ ........ ........ .... [404] (a) Contract........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....... [405] (i) Implied term in the SPA........ ........ ........ ........ ........ ........ ........ ........ ........ .... [406] Breach and loss........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .... [426] (ii) Implied terms in the Management Deed and Exit Agreement........ ........ .. [430] (b) Breach of fiduciary and statutory duties........ ........ ........ ........ ........ ........ ........ ..... [435] (c) Misleading or deceptive conduct........ ........ ........ ........ ........ ........ ........ ........ ........ [438] (i) The respondents’ pleading objections........ ........ ........ ........ ........ ........ ........ [438] (ii) Some relevant legal principles........ ........ ........ ........ ........ ........ ........ ........ ..... [444] (iii) The first representation........ ........ ........ ........ ........ ........ ........ ........ ........ ...... [447] (iv) The second representation........ ........ ........ ........ ........ ........ ........ ........ ........ .. [456] (v) Reliance and causation........ ........ ........ ........ ........ ........ ........ ........ ........ ....... [463] PART F: DAMAGES........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....... [492] The applicants’ submissions outlined........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...... [492] The respondents’ submissions outlined........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ... [497] Resolution of BlueFreeway’s claim for damages........ ........ ........ ........ ........ ........ ........ ........ .... [502] (a) The primary claim for damages........ ........ ........ ........ ........ ........ ........ ........ ........ ... [502] (b) Loss of opportunity damages........ ........ ........ ........ ........ ........ ........ ........ ........ ...... [524] (i) Valuing the lost chance or opportunity........ ........ ........ ........ ........ ........ ....... [530] PART G: CONSIDERATION OF CROSS CLAIM........ ........ ........ ........ ........ ........ ........ .... [548] (a) Campaign Master Commitment Representation........ ........ ........ ........ ........ ........ .. [551] (i) Mr Webb’s objective of spending as little as possible on Campaign Master........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .. [555] (ii) Exclude Campaign Master from the portal and support Traction........ ...... [559] (iii) Group no longer to sell Campaign Master........ ........ ........ ........ ........ ........ .. [571] (iv) Mr Hawksley’s future role........ ........ ........ ........ ........ ........ ........ ........ ........ . [573] (v) FTI sales staff to sell products other than Campaign Master........ ........ ..... [574] (vi) Reduced level of support, maintenance and development of Campaign Master........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .. [575] (b) Funding Representation........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...... [577] (c) Entire Agreement Representation........ ........ ........ ........ ........ ........ ........ ........ ....... [579] CONCLUSION........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ . [580] SCHEDULE A: RULINGS ON SOME EVIDENTIARY MATTERS........ ........ ........ ...... [582] A Respondents’ objections to Mr Simmonds’ affidavit dated 17 November 2012.... [582] B Respondents’ objection to all of Mr Puckrin’s affidavit dated 30 November 2012 [589] (a) Discovery Issues........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .. [591] (b) Late service of affidavit and respondents’ prejudice........ ........ ........ ........ ........ .. [605] (c) Section 135 of the Act........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ [621] (d) Records not proved to be business records........ ........ ........ ........ ........ ........ ........ [622] REASONS FOR JUDGMENT
INTRODUCTION
The second applicant (BlueFreeway) seeks damages against each of the respondents (Messrs Barnes and Hawksley) arising primarily from circumstances connected with a share purchase agreement executed on 24 October 2006 (the SPA). BlueFreeway’s claims are based on alleged breaches of various contracts, breaches of statutory and fiduciary duties and misleading or deceptive conduct. Messrs Barnes and Hawksley also bring a cross claim against BlueFreeway, seeking damages for misleading or deceptive conduct.
Under the SPA, Messrs Barnes and Hawksley (and some associates) sold their shares in Forty Two International Pty Limited (FTI), to BlueFreeway. In December 2006, Messrs Barnes and Hawksley (and their associates) received initial payments of $10 million under the SPA for their shares. In November 2007, a further sum of approximately $16 million was paid to Messrs Barnes and Hawksley under the SPA following the execution of an Exit Agreement in either late October or early November 2007 (the Exit Agreement), after which Messrs Barnes and Hawksley left the BlueFreeway group. The negotiations and the circumstances leading up to the execution of the Exit Agreement are central to these proceedings. BlueFreeway’s claims for damages largely depend upon it establishing that, but for certain allegedly deceptive prior conduct on the part of Messrs Barnes and Hawksley, the payment of $16 million would not have occurred. The conduct in question relates to the respondents’ role in funding the payment by a UK company of a licence acquired from FTI. The applicants claim that the respondents failed to disclose their funding role in that transaction.
For the reasons which follow I consider that BlueFreeway has established an entitlement to an award of damages in the amount of $2 million in respect of the respondents’ conduct which I find constituted both a breach of an implied term in the SPA as well as being misleading or deceptive. The quantum of damages reflects the loss of BlueFreeway’s opportunity or chance to negotiate a termination payment with the respondents which is less than the $16 million which was actually paid. I also consider that the respondents’ cross claim should be dismissed.
These reasons are structured as follows:
PART A
BACKGROUND
PART B
BROAD OUTLINE OF THE PARTIES’ CLAIMS
PART C
THE EVIDENCE SUMMARISED
PART D
SOME KEY FACTUAL FINDINGS
PART E
CONSIDERATION OF APPLICANTS’ CLAIMS
PART F
DAMAGES
PART G
CONSIDERATION OF CROSS CLAIM
SCHEDULE A
RULINGS ON SOME EVIDENTIARY MATTERS
PART A: BACKGROUND
FTI and BlueFreeway
FTI is a company engaged in developing and selling digital marketing products. Messrs Barnes and Hawksley founded FTI in 2001 and were the original directors and shareholders of the company. Broadly speaking, Mr Barnes, who was the Managing Director, had particular responsibility for product development and financial administration. Mr Hawksley was the Marketing Director with responsibility for sales. Although both had an involvement in all aspects of FTI’s operations, it appears that Mr Barnes had primary responsibility for financial matters. The third applicant (Gang of 4) was created by Messrs Barnes and Hawksley to hold intellectual property. By 2006, Messrs Barnes and Hawksley together owned 92% of the equity in FTI. Two associates held the remaining 8%.
FTI developed and supported several software programs, the most important of which is Campaign Master. Campaign Master is an email marketing software system with certain advanced functionalities which enables commercial organisations to send out marketing material to their clients and monitor the responses. The product was not sold to customers as a one-off item of software. Rather, it was principally sold under a contract involving a recurring monthly usage fee. Campaign Master experienced significant success and by 2005 had been widely accepted in the market.
Initially, FTI operated only in Australia. By early 2006, however, FTI had also established a business connection with a UK registered company called Campaign Master (UK) Limited (CMUK) for the distribution of the Campaign Master product in the UK. CMUK was formed specifically to act as a reseller of Campaign Master in the UK. FTI executed a reseller agreement with CMUK on 1 February 2006. The chief executive officer and major shareholder of CMUK was Mr Gurjeet Dhillon, with whom Mr Barnes had previously had a long business association in the UK.
In late 2005 to early 2006 Messrs Barnes and Hawksley were considering ways to leverage FTI’s success by obtaining finance or selling their shares in FTI to a larger company. They engaged KPMG to assist them and to prepare an Information Memorandum for potential investors. The Information Memorandum was released in about June 2006. Prior to its release, Messrs Barnes and Hawksley were approached by representatives of BlueFreeway, who expressed interest in acquiring FTI.
BlueFreeway was established with the aim of creating a publicly listed company with ten independent “portfolio companies” operating in different areas of digital and interactive marketing and communications. BlueFreeway aimed to create an online “portal” (which came to be referred to as “blu”) through which it would offer the portfolio companies’ products and services, and in this way become a leading “one-stop” digital marketing and interactive communications media company. Mr Richard Webb, who was BlueFreeway’s chief executive officer, was the driving force behind BlueFreeway. Mr Greg Daniel was the executive chairman of BlueFreeway. The other directors were Mr Ken McDonnell (who was the chief financial officer), Mr Nick Greiner and Mr Warwick Smith.
Messrs Webb and Daniel approached Messrs Barnes and Hawksley in May 2006 (prior to the release of the IM) expressing an interest in acquiring both FTI and Gang of 4. Heads of agreement were executed in August 2006 on a conditional basis which restricted Messrs Barnes and Hawksley from dealing with any other potential purchasers. On 24 October 2006, the SPA was executed. It was conditional upon the success of the proposed float of BlueFreeway on the Australian Securities Exchange (ASX).
The sale price under the SPA was calculated by reference to three amounts: the “Initial Payment”, the “Additional Payment” and the “Earn Out Price”. The Initial Payment involved BlueFreeway paying $10 million to Messrs Barnes and Hawksley (and their associates). It was paid in December 2006. The Additional Payment and the Earn Out Price were calculated by reference to earnings before interest and tax (EBIT) targets for FTI for the 2007-2009 financial years.
The Additional Payment was an amount to be paid to Messrs Barnes and Hawksley by the delivery of shares in BlueFreeway as soon as reasonably practicable after 31 October 2007. The number of shares was determined by reference to a formula which embodied various elements as defined in the SPA, in particular the FTI EBIT target for the 2007 year (the FTI EBIT 07). The FTI EBIT 07 threshold target was $2.5 million. Clause 3.1 of the SPA relevantly provided:
3.1 Calculation of Additional Payment
(a)Where the Forty Two EBIT 07 is greater but not less than $2.5 million but equal to or less than $3.0m the Buyer must pay the Additional Payment to the Sellers in Accordance (sic) with this Clause (sic)
(b)The Buyer must pay the Additional Payment to the Sellers by delivering the following number of Buyer Shares to the Sellers (sic)
Number of Shares= (Forty Two EBIT 07 - Forty Two Forecast EBIT 07) x 4.0x Thirty Day VWAP 07.
“Thirty Day VWAP 07” was defined in Schedule 1 (although it was mistakenly referred to as “Thirty Day VWAP 08”) as meaning the weighted average trading price of Buyer Shares sold on the ASX during the 30 consecutive trading days prior to 30 October 2007.
“EBIT” was defined in Schedule 1 of the SPA as meaning, in respect of any financial year, the consolidated earnings of FTI and Gang of 4 before interest income, interest expenses and income tax, but after amortisation and depreciation, as set out in the Earn Out Accounts. The “Earn Out Accounts” were defined as meaning accounts to be prepared by BlueFreeway in accordance with Schedule 4. Under Schedule 4, BlueFreeway was obliged to prepare and deliver to the respondents audited consolidated accounts of FTI and Gang of 4 and a draft certificate stating the EBIT. The Earn Out Accounts were required to be prepared in accordance with accounting principles. It might also be noted that under cl 1.2 of Schedule 4, BlueFreeway was obliged to:
not do or omit to do, and must procure that no member of the Buyer Group does or omits to do, any act or thing whicih (sic) adversely distorting (sic) the results of the Business or the ability of the Buyer to achieve the highest level of EBIT, except as agreed by the Sellers (acting reasonably and if such a thing does occur the EBIT will be adjusted to compensate (sic).
As will emerge below, this provision is important to the respondents’ cross claim.
The Earn Out Price was:
(a)an amount to be paid to Messrs Barnes and Hawksley in either cash or shares in BlueFreeway (at the election of Messrs Barnes and Hawksley) as soon as reasonably practicable after 30 October 2008 (the Earn Out Price 2008); and
(b)an amount to be paid to Messrs Barnes and Hawksley by delivery of shares as soon as reasonably practicable after 30 October 2009 (the Earn Out Price 2009).
The Earn Out Price was subject to certain conditions relating to the 2008 and 2009 EBIT targets for FTI.
The SPA also provided for a “Clawback Amount”. This was an amount to be paid by Messrs Barnes and Hawksley to BlueFreeway on or before 30 December 2009 in the event that the EBIT targets set out in the SPA for the 2008 and 2009 financial years were not achieved.
On 24 October 2006, Messrs Barnes and Hawksley also entered into a Management Deed with each of the applicants (the Management Deed). The Management Deed was for a term to commence on the completion of the SPA (19 December 2006) and to end on completion of the “Earn Out Period” (30 October 2009). The Management Deed set out the terms and conditions of the operation and decision-making of FTI and Gang of 4 at a board level during that term. Under clause 2, BlueFreeway was entitled to nominate three directors to the boards of both those companies, while Messrs Barnes and Hawksley were entitled jointly to nominate two directors to both boards. Under clause 3.3, certain matters could only be determined by a board resolution that was supported by at least one director nominated by BlueFreeway and one director nominated by Messrs Barnes and Hawksley.
Messrs Barnes and Hawksley remained as directors of FTI following its acquisition by BlueFreeway. BlueFreeway appointed three additional directors of FTI, including Mr Webb and Mr McDonnell. The other was Mr Simon Spencer.
Also on 24 October 2006, each of the respondents entered into Executive Service Agreements with both FTI and Gang of 4, under which both were employed to undertake all duties and responsibilities consistent with the role of Joint General Manager and each was to receive fixed remuneration in the amount of $120,000 per annum.
CMUK licence negotiations
A central matter in the proceeding is the role which Messrs Barnes and Hawksley played in the sale in May 2007 of a licence to CMUK to sell Campaign Master. That licence sale set in train a course of events which resulted in the execution of the Exit Agreement and the payment by BlueFreeway under that agreement of approximately $16 million to Messrs Barnes and Hawksley.
Prior to the sale of FTI to the BlueFreeway group, Messrs Barnes and Hawksley had commenced discussions with Mr Dhillon of CMUK to change FTI’s business model with CMUK from a reseller arrangement to one in which CMUK was to acquire a perpetual licence for the Campaign Master product for the UK, Ireland and (initially) India. From about January 2007, Mr Dhillon showed renewed interest in negotiating for a perpetual licence of the Campaign Master product for the nominated territories.
Between February and May 2007, Messrs Barnes and Hawksley and later, Mr McDonnell, were involved in detailed negotiations with Mr Dhillon regarding the software licence.
It was also during this period that Messrs Barnes and Hawksley became concerned that Mr Webb’s “super salesforce” for BlueFreeway, to which FTI’s sales team had been recruited, marginalised Campaign Master in favour of an alternative (and competitive) product within the group called “Traction”. Traction was developed by a company known as Mass Media, in which BlueFreeway had recently acquired a majority interest. Messrs Barnes and Hawksley were very concerned that the promotion of Traction was affecting their capacity to receive earn out payments under the SPA.
The CMUK software licence was approved by the board of BlueFreeway and signed on 22 May 2007 (the Licence Agreement). It provided for payment by CMUK to FTI of a licence fee of ₤1.7 million (approximately $4.1 million). The licence fee was due to be paid on 30 June 2007.
On 22 May 2007, BlueFreeway made an announcement to the ASX (the ASX Announcement). The ASX Announcement stated that BlueFreeway anticipated forecast earnings for the period ending 30 June 2007 to exceed its prospectus statutory forecast by 25% (from $3.6 million to $4.5 million). The consideration for the Licence Agreement significantly contributed to that excess. BlueFreeway’s share price rose on the back of the ASX Announcement. Because of the amount of time devoted to the ASX Announcement by the respondents in cross examining various witnesses, I will set out its full terms:
BlueFreeway advises forecast second-half
earnings up by 25 per cent versus prospectusEarnings upgraded of 96 per cent versus prior year
Sydney, Australia – Tuesday 22nd May 2007: BlueFreeway Limited, a leading global provider of digital and interactive marketing services, advised today that it anticipates forecast earnings for the period ending June 30th 2007 to exceed its prospectus statutory forecast by 25% from $3.6M to $4.5M.
The revised earnings forecast is subject to May and June trading conditions remaining favourable and no unforeseen adverse circumstances arising during this period. The company’s revised forecast anticipates revenues will increase from $17.1m to $19.4m for the 2007 second-half period.
The earnings upgrade has been driven by organic growth in the initial ten companies which made up BlueFreeway at the time of the IPO in December 2006, reinforcing the many benefits of the model. The four acquisitions made in April 2007 will have minimal impact on the 2007 fiscal year results but are expected to contribute significantly to the 2008 fiscal year results.
Statutory Forecast – Second Half (unaudited statutory and proforma accounts)
A$’M
2007 2H Forecast
2007 2H Prospectus
Variance to Prospectus
2006 2H Actual
Variance to 2006
Revenue
$19.4
$17.1
13.5%
$10.6
83.0%
EBIT (excluding OEI)
$4.5
$3.6
25.0%
$2.3
95.7%
Richard Webb, Chief Executive Officer BlueFreeway, said: “BlueFreeway has been born at a time of an unprecedented shift away from traditional media, and as such has realised growth via its one-stop-shop offering through its corporate sales team:” (sic)
“While the company has made, and will continue to make, accretive acquisitions, this result demonstrates that our foundation companies continue to grow and become more efficient and are well placed to benefit from unprecedented growth in online marketing and advertising spending.”
“We anticipate that further acquisitions will be made in the short to medium term, but only where a clear strategic and financial case can be made. We will continue to apply strict investment criteria to acquisitions to ensure they grow shareholder returns.”
Factors that have contributed to the company’s positive variance to its pre-listing forecast include:
· Restructure of the Forty Two international UK reseller framework based on a license fee rather than a revenue sharing model. The restructure removes a barrier to growth for the existing distributor in the UK and allows BlueFreeway to realise its investment in Forty Two International. Under the pre existing arrangement the distributor shared revenue with Forty Two International. This restricted its ability to grow and at the same time BlueFreeway Limited was unable to sell “Campaign Master” directly into the territory. The restructuring of the United Kingdom has resulted in incremental revenue of $2.4m. It is likely that this transaction model will be replicable in other geographic regions where Forty Two International does not establish a direct presence.
· Accelerated sales from the Australian BlueFreeway corporate sales division which were not projected to contribute to the company’s performance until the 2008 financial year.
· Positive performance against budget by several of the Portfolio Companies within the group as a result of an overall revenue of business operations and better utilisation of resources.
· Strong revenue performance has been offset by the acceleration of initiatives designed to generate returns in the 2008 fiscal year. These initiatives include:
ͦ Expansion of the geographic sales force in the United Kingdom and Australia
ͦ Expansion of the BlueCentral hosting infrastructure in Los Angeles, London, and Singapore
ͦ Establishment of a 24X7 centralised service and support centre in Sydney
ͦ Establishment of back office shared services for the group
Mr Webb said: “I am particularly pleased that the increase to forecast earnings has occurred and has allowed us to bring forward investments to expand our offering and global footprint ahead of the schedule outlined in our prospectus.”
Importantly, on a like-for like (pro forma) basis, the first ten companies that made up BlueFreeway on listing have increased their revenue and EBIT (excluding outside equity interest) by 66.7% and 97.6% respectively, over the same period last year.
A summary of the full year proforma analysis is provided for reference below.
Full Year Pro Forma (unaudited proforma accounts)
A$’000
2007
Forecast
2007 Prospectus
Variance to Prospectus
2006 Actual
Variance to 2006
Revenue
$34.5
$32.6
5.8%
$20.7
66.7%
EBIT (excluding OEI)
$8.1
$7.2
12.5%
$4.1
97.6%
About Blue Freeway (ASX: BLU) is an Australian-based global digital and interactive marketing communications company with stakes in a growing portfolio of digital and interactive marketing specialists, as well as BlueCentral, a leading hosting and business infrastructure company. The company has offices in Australia, the United States, the United Kingdom, France, and India.
BlueFreeway offers a suite of end-to-end, internet and mobile marketing solutions, to major corporate and government advertisers. The Portfolio Companies in the BlueFreeway group include: Agency Fusion, BlueCentral, Cogentis, Communicator Interactive, Deepend Sydney, Digicon, eHound, Forty Two International, IBC, IXION, JSA Interactive, MassMedia Studios, SageMetrics, Spin Communications, and Tentacle.
For BlueFreeway Inquires please contact
Ken McDonnell
Chief Finance Officer
Prior to the licence sale in May 2007, Messrs Barnes and Hawksley believed that CMUK would be able to obtain funding for the licence fee from a Mr Terry Tully, who resided in the UK. When Mr Dhillon was unable to finalise funding with Mr Tully in May 2007, he was reluctant to proceed with the licence sale. But Mr Dhillon then changed his mind on the basis of assurances given to him by Messrs Barnes and Hawksley over the weekend of the 19-20 May 2007 that, if necessary, they would provide the funding to CMUK. By 30 June 2007, which was the deadline for payment of the licence fee to be paid to FTI, the arrangement with Mr Tully for the funding of the licence fee had still not been finalised. Messrs Barnes and Hawksley then stepped in and procured the necessary finance by personally guaranteeing a loan to a company they had incorporated in Australia, which then forwarded the money to its UK parent, CMUK.
The funding of the licence fee is pivotal to the applicants’ case. The licence fee was paid to FTI on 29 June 2007 by the company which had been recently incorporated by Messrs Barnes and Hawksley for that purpose, CMUK (Aust) Pty Limited (CMUK (Aust)), which obtained the necessary finance after Messrs Barnes and Hawksley agreed to be guarantors of a bill facility to CMUK (Aust) with a limit of $4.3 million from the National Australia Bank (NAB). To secure the facility, Messrs Barnes and Hawksley deposited $4.3 million into a term deposit with NAB. In doing so, they used part of the $10 million which they had received from BlueFreeway as the Initial Payment under the SPA.
BlueFreeway claims that it was not aware of Messrs Barnes and Hawksley’s role in funding the licence transaction. It alleges that they deliberately concealed their involvement with a view to increasing the Additional Payment by boosting FTI’s 2007 EBIT. BlueFreeway contends that if it had known of Messrs Barnes and Hawksley’s involvement in the financing, BlueFreeway would not have entered into the Exit Agreement with them in October 2007. It initially claimed that, under that counterfactual, Messrs Barnes and Hawksley would have continued to discharge their functions as directors and managers of FTI until 30 June 2009. And, in light of FTI’s financial performance over the 2008 and 2009 financial years, they say that Messrs Barnes and Hawksley would not have received any further consideration for the sale of their shares in FTI. Rather, they would have been obliged to repay to BlueFreeway part of the initial payment sum of $10 million under the “Clawback” provisions of the SPA.
BlueFreeway subsequently advanced an alternative formulation of the counterfactual. It says that it is entitled to an award of damages in respect of the respondents’ misleading or deceptive conduct for the loss of the opportunity or chance to negotiate a termination agreement with the respondents “with all cards on the table” and, in particular, with full knowledge of their involvement in financing the licence transaction. BlueFreeway says that, in those circumstances, it would have negotiated a payout amount which was substantially less than the $16 million which it paid under the Exit Agreement. As will emerge below, the respondents objected to BlueFreeway being permitted to run this alternative case because they say it was not pleaded.
Messrs Barnes and Hawksley deny BlueFreeway’s allegations. They say that it was “no secret” that they provided finance to guarantee the loan because that was known to both Messrs Webb and McDonnell. They say that they were encouraged by Mr Webb to become involved in the financing in order to finalise the transaction promptly. In particular, they rely on a meeting at the Aurora Place café, evidently on 6 March 2007, during which they claim that, in Mr McDonnell’s presence and in the context of a discussion about whether Mr Dhillon would be able to obtain the necessary funds, Mr Webb urged them to “do whatever it takes” to ensure that the licence transaction was completed by 30 June 2007. The respondents claim that this statement was made in the context of the discussion about the likelihood of CMUK obtaining the necessary finance to fund the transaction and shortly after Mr Hawksley had said at this stage of the meeting that Mr Dhillon knew “two rich blokes in Australia” who had recently received $10 million. Messrs Barnes and Hawksley also say that they expected their financial support to CMUK to be only a short-term arrangement pending completion of a funding agreement between CMUK and Mr Tully.
It might also be noted at this point that Mr Webb was not called by the applicants as a witness in the proceeding, a matter which the respondents emphasise and to which I will return below.
The receipt by FTI of the CMUK licence fee made a substantial difference to the operating results of FTI for the 2007 financial year. As a result, the FTI EBIT 07 reached the target of $2.5 million as set out in the SPA, thereby securing the respondents’ entitlement under the SPA to an Additional Payment to the value of approximately $16 million. The payment was ultimately made in cash, not shares as contemplated by the SPA.
The Exit Agreement
Throughout 2007 Messrs Barnes and Hawksley became increasingly concerned about the implications for FTI and, in particular the future of Campaign Master, of Mr Webb’s vision or plans for BlueFreeway. Much of their concern related to Mr Webb’s plans to create the “blu portal” and their perception of his lack of support for Campaign Master, in contrast with his seemingly strong support for Traction. In the period from August to October 2007, negotiations took place involving Messrs Barnes and Hawksley on the one hand and primarily Mr Webb on the other hand (although Mr McDonnell also had a lesser involvement), with a view to Messrs Barnes and Hawksley leaving the BlueFreeway group. The Exit Agreement was negotiated and executed so as to bring about an early termination of the relevant contractual arrangements between BlueFreeway and Messrs Barnes and Hawksley (such as the SPA, the Management Deed and the Executive Service Agreements). The Exit Agreement terminated the SPA and required the resignation of both Messrs Barnes and Hawksley as directors of FTI, as well as quantifying the final consideration they would receive from BlueFreeway for their shares in FTI. Although the evidence is not entirely clear, it appears that the Exit Agreement was eventually signed in early November 2007.
The final entitlements included the Additional Payment which was calculated by reference to the FTI EBIT 07. It was agreed that, for the purpose of the payment under the Exit Agreement, the FTI EBIT 07 would include the CMUK licence fee, which meant that the relevant target was reached. Under the Exit Agreement, the Additional Payment was to be made to Messrs Barnes and Hawksley in cash or shares on or before 1 November 2007. The provisions in the SPA relating to the Earn Out Price and the Clawback Amount were removed in the Exit Agreement.
On or about 1 November 2007, BlueFreeway paid $16,436,488 to Messrs Barnes and Hawksley and their associates pursuant to the Exit Agreement. This amount represented the Additional Payment as agreed under the Exit Agreement ($16,463,538) less certain deductions. Messrs Barnes and Hawksley thereafter resigned as directors of FTI and Gang of 4, as noted above, and all other related agreements were terminated.
PART B: BROAD OUTLINE OF THE PARTIES’ CLAIMS
A Outline of applicants’ primary case and respondents’ defence
The applicants’ claims raise the following causes of action: breach of contract, breach of fiduciary and statutory duties, and misleading or deceptive conduct under s 42 of the Fair Trading Act1987 (NSW) (FT Act). The applicants’ case largely centres on the financial involvement of Messrs Barnes and Hawksley in the negotiation of the CMUK licence agreement and the alleged concealment from BlueFreeway of their role in that transaction during negotiations relating to both the Licence Agreement and the Exit Agreement. The applicants say that, but for the involvement of Messrs Barnes and Hawksley in relation to the financing and but for their failure to disclose that involvement:
(a)BlueFreeway would not have entered into the Exit Agreement;
(b)the SPA would have remained enforceable according to its terms; and
(c)the entitlements of Messrs Barnes and Hawksley under the SPA would not have included the Additional Payment and hence the sum of $16,436,488 would not have been paid.
As noted above, the applicants also argued in the alternative that BlueFreeway is entitled to damages for the loss of the opportunity to negotiate a termination arrangement with the respondents with full knowledge of their involvement in procuring finance for CMUK.
It is convenient to set out in broad terms the applicants’ individual causes of action and the essence of the respondents’ defence.
(a) Applicants’ claims in contract
The applicants’ case in contract relies on the implication of various terms in the SPA, Management Deed and the Exit Agreement, which terms Messrs Barnes and Hawksley are said to have breached by failing to disclose to BlueFreeway the role they played in procuring and guaranteeing the payment of the licence fee.
The applicants claim that the terms and conditions below are implied in the SPA, Management Deed and Exit Agreement respectively. The applicants claim there was a breach of some of these implied terms by Messrs Barnes and Hawksley (excluding those discussed at (b) below):
(a)an implied term and condition of the SPA that Messrs Barnes and Hawksley would disclose to BlueFreeway all information known to them which might become relevant to the calculation of the FTI EBIT 07;
(b)a series of implied terms and conditions of the Management Deed. The first of these is a term that Messrs Barnes and Hawksley would disclose to the BlueFreeway Director (as defined) any matter of which they had knowledge which was relevant to the exercise of voting rights pursuant to clause 3.3 of the Management Deed. The other suggested implied terms in that agreement are that the respondents would not in the course of operating the business of FTI and Gang of 4 undertake any transactions that would disadvantage BlueFreeway and that the respondents would disclose to BlueFreeway any matters of which they had knowledge which might become relevant to the calculation of the Earn Out Price provided by the SPA. However, as the respondents point out, only the first of those implied terms is alleged to have been breached; and
(c)an implied term and condition of the Exit Agreement that Messrs Barnes and Hawksley had disclosed to BlueFreeway all information relevant to the calculation of the FTI EBIT 07.
In respect of each of those alleged implied terms, the applicants say that:
(a)the terms are implied in fact;
(b)Messrs Barnes and Hawksley were managing FTI’s business as a subsidiary of BlueFreeway and were responsible for its negotiations with commercial parties;
(c)Messrs Barnes and Hawksley were privy to the commercial negotiations and transactions and the trading results of FTI;
(d)the BlueFreeway Director had to be fully informed by Messrs Barnes and Hawksley of matters upon which voting rights might be exercised from time to time pursuant to the Management Deed;
(e)the calculation of the FTI EBIT 07 required full knowledge and information of the nature of FTI’s commercial negotiations and transactions; and
(f)the directors of BlueFreeway were not in possession of equivalent knowledge and information to that held by Messrs Barnes and Hawksley in relation to the commercial negotiations and transactions.
The terms are said to be implied in fact to give effect to the presumed or hypothetical intention of the parties. The applicants submit that, in determining whether a term ought to be implied in fact, the established test requires the Court to engage in a hypothetical inquiry through the eyes of an officious bystander. They submit that a broadly formulated obligation may be required to give a specific contract business efficacy, citing Hughes Aircraft Systems International v Air Services Australia (1997) 76 FCR 151 at 190-191.
The applicants also say that the terms ought to be implied because, as at 24 October 2006 (i.e. the date of execution of the SPA, the Management Deed and the Executive Service Agreements), it would have been clear to the officious bystander that the EBIT performance of FTI for the ensuing three years was a matter of central importance to the SPA, namely the consideration payable by BlueFreeway to Messrs Barnes and Hawksley and their associates.
The applicants also submit that the terms should be implied having regard to the following matters:
(a)under the Management Deed, Messrs Barnes and Hawksley had a large degree of independence in running FTI’s business;
(b)when the CMUK licence deal arose it was the respondents, particularly Mr Barnes, who had the historical business association with Mr Dhillon;
(c)when Messrs Barnes and Hawksley identified the potential deal in February 2007, they began to negotiate directly with Mr Dhillon;
(d)it was only in late April 2007 that Mr McDonnell assumed a superintending role during the negotiations after he was directed to do so by the BlueFreeway board;
(e)Mr McDonnell warned Mr Hawksley in early May 2007 about the need for transparency in the negotiations;
(f)Messrs Barnes and Hawksley themselves recognised that considerations referable to earn out calculations were vital to the ongoing relationship between the parties during the three financial years following the acquisition of FTI; and
(g)Mr Hawksley conceded in cross examination that honesty between the parties as to matters affecting the EBIT was fundamental to the commercial relations between them.
Respondents’ defence to applicants’ claim in contract
Messrs Barnes and Hawksley deny that the relevant terms should be implied. Their submissions in respect of the implication of such terms may be summarised as follows:
(a)courts are generally slow to imply a term into a contract (citing Mason J in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 346 (Codelfa));
(b)the implication of a term in fact should satisfy the following five conditions which were identified by the Privy Council (on appeal from the Supreme Court of Victoria) in B.P. Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 at 283 (BP Refinery) and these requirements should be treated strictly:
…[F]or a term to be implied, the following conditions (which may overlap) must be satisfied: (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that “it goes without saying”; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract.
(c)whether or not a term is to be implied is dependent on the objective intention of the parties at the time of the contract and does not depend on what their subsequent acts might show was their subjective understanding; and
(d)the SPA, Management Deed and Exit Agreement were prepared by the applicants’ solicitors as a “complex suite of documents” and hence there is a heavy onus on the applicants to establish that the pleaded terms are implied.
Messrs Barnes and Hawksley also made the following submissions with respect to the alleged implied terms individually.
First, with respect to the term allegedly implied in the SPA regarding disclosure of all information known to Messrs Barnes and Hawksley which might become relevant to the calculation of the FTI EBIT 07, Messrs Barnes and Hawksley submit that such a term generally conflicts with the “orthodox principle that outside of any recognised relationship uberrimae fidei, no duty of disclosure is imposed upon contracting parties”. In oral submissions, Mr Dubler SC (who appeared with Mr Shearer for the respondents) submitted that a duty of disclosure is ordinarily only implied in relationships of utmost good faith, such as insurance contracts or partnership contracts.
Secondly, Messrs Barnes and Hawksley also draw attention to some express terms of the SPA concerning the calculation of the EBIT (such as cll 4.3(c) (obligation to prepare and provide full past accounts and forecasts for 2007 and 2008); 4.3(e) (obligation to provide explanations and information requested by the purchasers); and 5.2(d) (obligation to deliver ledgers, journals and books of account)). They also draw attention to various provisions relating to the preparation of “Earn Out Accounts” which, together with monthly financial reporting obligations (which are set out in both Sch 4 and cl 1.1 of Sch 5), enable the relevant EBIT to be calculated. They also point to the general “catch all” obligation in clause 1.1 of Schedule 5 of the SPA to provide BlueFreeway with other financial and operational reports and as it reasonably requests. They say that having regard to these provisions, the broad obligation of disclosure is not necessary for the business efficacy or sensible operation of the SPA.
Messrs Barnes and Hawksley also contend that the term does not meet the requirements that it be “clearly expressed”, “reasonably and equitable” and “so obvious it goes without saying”, submitting that a term requiring disclosure of information that “might become relevant” is “vague and creates an obligation of uncertain breadth” and would be “one-sided and onerous”. They say further that the implied term is inconsistent with the “detailed express reporting terms”.
Thirdly, their defence to the further amended statement of claim also points to the following additional clauses of the SPA which are said to be inconsistent with the alleged implied term:
·cl 15.11(a) of the SPA which provided that the SPA embodied the entire agreement between the parties; and
·cl 15.11(c) of the SPA which provided that any statement, representation, term, warranty, condition, promise or undertaking made, given, or agreed to in any prior negotiation, arrangement, understanding, or agreement, has no effect except to the extent expressly set out or incorporated by reference in the SPA.
Fourthly, with respect to the Management Deed, Messrs Barnes and Hawksley submit that the subject matter of the Management Deed is a “power-sharing arrangement in respect of decision-making at the board level of FTI during the Earn Out Period”. They say that the pleaded implied term is not necessary and is largely irrelevant to the terms of the Management Deed. They submit that the alleged term is not reasonable and equitable as it creates a positive duty of disclosure in circumstances where the respondents are not fiduciaries of BlueFreeway, and further that there is no reciprocity in the suggested obligation. They also say that the suggested term is not capable of clear expression and not “so obvious it goes without saying”. The respondents highlight that, having regard to cl 2 of the Management Deed (which provides that the respondents may appoint two directors of FTI), the Management Deed did not require for its operation that the respondents personally be directors of FTI and that the alleged implied term is inconsistent with this position.
In their closing submissions, Messrs Barnes and Hawksley also argue that the alleged implied term in the Exit Agreement is in the form of a warranty as to the disclosure of matters concerning the FTI EBIT 07 and that such a term is “wholly anomalous” in circumstances where the Exit Agreement sought to resolve a dispute about the very subject matter in respect of which the term is sought to be implied (namely by the parties confirming and agreeing on the FTI EBIT 2007). They also say that the term is inconsistent with the entire agreement provision (cl 12.11 of the Exit Agreement) and the releases given in cl 10.1. Otherwise, they rely on their submissions regarding the similar term which the applicants’ claim should be implied in the SPA.
(b) Applicants’ claims of breach of statutory and general law duties
The applicants claim that the following duties were owed by Messrs Barnes and Hawksley to FTI and were breached:
(a)a duty under s 182 of the Corporations Act 2001 (Cth) (Corporations Act) not to improperly use their position to gain an advantage for themselves or someone else;
(b)a duty under s 191 of the Corporations Act to give notice to the other directors of FTI of any material personal interest held by either Messrs Barnes or Hawksley in a matter relating to the affairs of FTI;
(c)a duty under the general law not to place their own personal interests in actual or potential conflict with the interests of FTI; and
(d)a duty under the general law to disclose to the other directors of FTI any material personal interest either Messrs Barnes or Hawksley had in a matter relating to the affairs of FTI.
The applicants divided the alleged duties into two groups and it is convenient to follow the same structure. I will refer to the duties at [55](a) and (c)] as the alleged “duties to avoid conflicts of interest” and the duties at [55](b) and (d)] as the “duties to disclose”. The statutory and general law duties will be referred to separately where appropriate.
Messrs Barnes and Hawksley admit that they owed FTI the duties specified at [55](a) - (c)] above, however, they do not admit that they owed any general law duty to disclose any material personal interests. They say that such a duty is positive in character and that no such duty is recognised in Australian law, citing Hollingsworth J’s decision in P & V Industries Pty Ltd v Porto (2006) 14 VR 1 at 9, as well as the High Court’s decision in Pilmer v Duke Group Limited (2001) 207 CLR 165 at [74].
Messrs Barnes and Hawksley otherwise defend the above allegations and they also bring a cross claim against BlueFreeway. Principally, they say that BlueFreeway knew or ought to have known that they were providing financial assistance to CMUK. Further they say that Mr Webb and Mr McDonnell encouraged them to “do whatever it takes” to ensure the transaction was completed in the 2007 financial year, including providing finance for the transaction. They say that Mr Webb wanted to ensure that the Licence Agreement was signed by May 2007 so that an earnings upgrade could be announced in the ASX Announcement on 22 May 2007. They dispute the applicants’ allegation that in providing finance they acted in their own interests (to secure the Additional Payment). They say that they simply acted on Mr Webb’s directive to “do whatever it takes”.
Alternatively, Messrs Barnes and Hawksley say that there was no duty to disclose their role in providing financial support for the licence sale transaction. They say that BlueFreeway had full knowledge that they would benefit from the Licence Agreement in accordance with the terms of the SPA. In these circumstances, they say that the applicants nevertheless ensured that the licence sale went ahead to the commercial advantage of the applicants on receipt of the licence fee (namely additional funds, achieving budget forecast, maintenance of share price etc). They say that their actions in procuring and entering into the transactions were of no material relevance to the applicants or to their decision to execute the Exit Agreement. Accordingly, they say that they had no duty to disclose their role in the transaction before or after the Licence Agreement had been executed. Messrs Barnes and Hawksley say that their conduct in procuring and guaranteeing the licence payment was immaterial to the applicants because the provision of financial assistance or a guarantee to CMUK was not capable of adversely affecting or otherwise interfering with the interests of either FTI or BlueFreeway.
Further, in defending the applicants’ claims, Messrs Barnes and Hawksley allege that during 2007 BlueFreeway had breached the SPA by adopting business priorities which had an adverse effect on the expansion of FTI’s business and FTI’s financial results – namely promoting Traction instead of Campaign Master.
Messrs Barnes and Hawksley say that any loss suffered by the alleged inducement to enter into the Exit Agreement must be reduced by BlueFreeway’s obligation to pay the 2008 Earn Out Price and the 2009 Earn Out Price. They also say that they made no profit under the Exit Agreement, but rather gave up valuable rights to future benefits under the SPA. Messrs Barnes and Hawksley also rely on an express term in the Exit Agreement which they say fully releases them from any claims brought by the applicants.
Messrs Barnes and Hawksley say further that, even if the applicants can establish the existence of the alleged duties, they should not succeed because of the difficulties presented on the issues of both breach and loss. Messrs Barnes and Hawksley highlight that the alleged duties are said to be owed by them to FTI, whereas the pleaded loss is suffered by BlueFreeway. Messrs Barnes and Hawksley say that FTI alone received the benefit of the licence fee and suffered no loss from any of the alleged breaches of duty.
In contrast, the applicants contend that the alleged duties extend to circumstances where, although FTI gained a benefit by receiving the licence fee, that benefit was at the expense of an increased obligation on the part of its parent (BlueFreeway) to pay additional monies by way of consideration under the SPA. The applicants submit that the receipt of the licence fee was not merely for FTI’s benefit because FTI’s sole shareholder, BlueFreeway, had to make substantial payments to Messrs Barnes and Hawksley as a consequence of the licence fee being received by FTI.
(i) Breach of duty to avoid conflicts of interest
The applicants say that the duties to avoid conflicts of interest (see [55](a) and (c) above) were breached by the actions of Messrs Barnes and Hawksley in providing security which enabled CMUK (Aust) to fund the licence fee where CMUK did not otherwise have the capacity to pay. They contend that Messrs Barnes and Hawksley’s aim and purpose in providing the security which enabled CMUK (Aust) to fund the licence fee was to increase the FTI EBIT 07 calculation for the purposes of the SPA and thus increase their claims against BlueFreeway under the SPA. The applicants also claim that Messrs Barnes and Hawksley acted with the purpose of advancing their own positions, preferring their own interests and gaining an advantage for themselves in negotiating with BlueFreeway to amend the SPA and negotiating further financial terms to their own advantage.
With respect to the alleged duty under s 182 of the Corporations Act, Messrs Barnes and Hawksley submit that the following five elements need to be established:
(a)the person must have been an officer or employee of the corporation at the relevant time;
(b)the person must have used their position;
(c)that use must have been improper;
(d)that improper use must have been for the purpose of gaining (relevantly) an advantage; and
(e)that advantage must have been for the person or some other person.
Messrs Barnes and Hawksley say that s 182 is concerned with the direct use of the employee or officer’s position to gain an advantage. They submit that their conduct here in guaranteeing the licence fee did not involve a use of their positions as directors of FTI and further that there was no improper use. They say that their conduct in providing security was not done for the purpose of gaining an advantage for themselves. They also contend that the security arrangements were personal guarantees provided by them to a third party and did not involve direct use of their positions as directors of FTI. They say that their actions ensured that CMUK did not default in its financial obligations to FTI and that FTI received the benefit of the licence payment and did not incur any financial obligations to any person, hence that there was no related party transaction.
In response to the pleaded general law duty, Messrs Barnes and Hawksley submit that the applicants have not particularised any conflict of interest, and they rely on the matters referred to above in relation to the alleged duty under s 182 to deny the existence of any such conflict of interest. They say that the provision of finance in all the circumstances was “consistent with FTI’s interests in obtaining the licence fee rather than having a defaulting counterparty to chase for payment”.
(ii) Breach of duty to disclose
The alleged duties of disclosure ([55](b) and (d) above) are said to have been breached by the failure of Messrs Barnes and Hawksley to disclose to FTI that they themselves had procured and guaranteed payment of the licence fee. As noted in [57] above, Messrs Barnes and Hawksley do not accept that any such general law duty of disclosure exists. Furthermore, they say that if such a duty does exist, they did in fact make adequate disclosure to the applicants.
As to the applicants’ reliance on s 191 of the Corporations Act, Messrs Barnes and Hawksley submit that no claim for damages can arise under this provision as it is not a corporation/scheme civil penalty provision for the purposes of s 1317H of the Corporations Act.
Messrs Barnes and Hawksley contend that, in any event, even if the applicants had no actual or constructive notice of their role in the transaction, there was no breach of s 191 of the Corporations Act. They submit that their conduct did not involve a material personal interest which they were obliged to disclose under s 191. That submission has the following elements. First, Messrs Barnes and Hawksley contend that the steps taken to procure the licence fee did not result in either of them having a material personal interest in a matter that relates to the affairs of FTI. They did not have a material personal interest in the licence or the fees received. They had an interest in obtaining their entitlements under the SPA but they say that that related to the affairs of BlueFreeway, not FTI. They highlight that there was no duty of disclosure alleged to be owed to BlueFreeway as neither Mr Barnes nor Mr Hawksley were officers of BlueFreeway.
Secondly, Messrs Barnes and Hawksley point to the requirements under s 191(3) of the Corporations Act that the notice which has to be given under s 191 must be given at a directors’ meeting and the details are to be recorded in the minutes of that meeting. They add that no board meeting took place during the relevant period. They emphasise that they asked for a board meeting to be arranged, but Mr McDonnell refused to do so..
(c) Applicants’ case concerning misleading or deceptive conduct
The applicants’ case regarding misleading or deceptive conduct involves allegations that Messrs Barnes and Hawksley falsely represented to the applicants that CMUK itself had the capacity to pay the licence fee to FTI (the first representation). It is also alleged that the conduct that Messrs Barnes and Hawksley engaged in to procure and guarantee payment of the licence fee themselves was misleading or deceptive or likely to mislead or deceive because it represented to the applicants that the licence fee had been paid to FTI by CMUK (the second representation). The applicants say that the above representations were made in trade and commerce, are false and are in breach of s 42 of the FT Act. They also claim that they suffered loss or damage because, but for that conduct, they would not have entered into the Exit Agreement, no Additional Payment would have been made pursuant to the Exit Agreement and BlueFreeway would not have refrained from enforcing the clawback provisions of the SPA.
Messrs Barnes and Hawksley deny that:
(a)either representation was ever made; and
(b)that their conduct was misleading or deceptive or likely to mislead or deceive because the applicants were either aware or ought to have been aware of their involvement in financing the transaction.
In any event, they say that BlueFreeway did not rely upon either representation so as to give rise to any loss or damage and that it would have approved the transaction regardless of its knowledge of how it was funded because of its strong desire to have the transaction included in the group accounts for 2007.
The respondents also claim that the applicants’ misleading or deceptive conduct case as presented was outside the pleadings.
The primary claim for relief is for damages, which are sought only by BlueFreeway. That claim is made on alternative bases. The first basis is that, if the respondents had revealed the truth of their role as financiers before the Exit Agreement was executed, they would not have received the Additional Payment of approximately $16 million and, on one hypothesis, they would have remained with FTI for another two years, but they would not have achieved any earn out entitlement for 2008 or 2009. The alternative basis involves a different hypothesis, which the applicants describe as “the more likely one”. It is that there would have been an exit agreement, but that BlueFreeway would have negotiated a substantially lower amount than $16 million if it had known of the nature and extent of the respondents’ role in financing the licence transaction. BlueFreeway claims an amount for the loss of the chance or opportunity to negotiate such lower amount.
In their pleadings, the applicants also sought, in the alternative, an account of profits. No submission was made in support of that claim, nor was it addressed by the respondents. I will assume that it was not pressed.
The respondents deny that the applicants are entitled to any damages. They contend that the applicants have not established reliance or causation so as to entitle them to any damages, and they also say that the “loss of a chance” was not pleaded. I will deal with these and other matters relating to relief below.
(d) Applicants’ case concerning equitable fraud
No submissions were made by the applicants in support of this claim and the respondents made clear that they regarded the claim as having been abandoned. They also made no submissions in respect of it. I propose to proceed on the basis that this claim was not pressed by the applicants.
B The cross claim outlined
The respondents bring a cross claim, alleging misleading or deceptive conduct under s 52 of the Trade Practices Act 1974 (Cth) (TP Act) (which is applicable because of the relevant dates). Their case relates to two matters. The first matter concerns representations allegedly made by BlueFreeway to support Campaign Master as well as representations which the respondents say Mr Webb made to them to the effect that, if necessary, they themselves should fund the Licence Agreement to ensure that the transaction was finalised before the end of the 2007 financial year. The second matter concerns representations arising out of the entire agreement clause in the Exit Agreement.
Expanding on the first of those matters, the respondents allege that, in the context of the past support which FTI had offered to CMUK (which they say was known to BlueFreeway), BlueFreeway made various statements to the respondents and CMUK confirming their continued commitment to Campaign Master and the business of FTI and, in particular, that no decision had been made by BlueFreeway to alter the level of support for Campaign Master (the Campaign Master Commitment Representation). The respondents say that, contrary to these statements, BlueFreeway had already decided to curtail support for Campaign Master and to marginalise both it and the respondents in various ways. In support of that claim the respondents place heavy emphasis on an email dated 3 May 2007 which Mr Webb sent to both Mr MacDonald and Mr Spencer in which Mr Webb stated that his “objective is to spend as little as possible to support this product [i.e. Campaign Master] over the next few years” and that Traction will be the product which would be put into the portal. It should also be noted that, in the email, Mr Webb also made reference to Mr MacDonald “reviewing our obligations” with Mr Spencer before executing the CMUK Licence Agreement, the significance of which I will consider below.
The respondents also allege that BlueFreeway represented to them that the licence fee sale had to be executed by 22 May 2007 and be paid for by 30 June 2007 to avoid BlueFreeway suffering severe financial difficulties. They claim that Mr Webb told them that if CMUK could not arrange the necessary financing in time, they should “do whatever it takes” in order to ensure completion of the transaction in the 2007 financial year (the Funding Representation).
The respondents say that, in reliance upon those representations, they provided short-term finance to allow the licence fee to be paid pending finalisation of long-term financial arrangements between CMUK and its intended financier, Mr Tully. They allege that Mr Tully withdrew his support when he became aware of BlueFreeway’s decisions to marginalise Campaign Master. They say that if they also had known of those decisions, they would have taken steps to prevent their implementation and ensured BlueFreeway’s continued support of Campaign Master in accordance with its contractual obligations. They say that they suffered loss or damage, which includes the amount of the financial support which they say they would not otherwise have provided to secure the licence fee transaction (and which they ultimately forfeited when CMUK (Aust) defaulted).
Expanding upon the second aspect of the cross claim which, as noted above, arises from the entire agreement clause in the Exit Agreement, the respondents say that, by that clause, BlueFreeway represented that it would not rely upon any representations relating to the subject matter of the Exit Agreement and that that agreement constituted the entire agreement of the parties (the Entire Agreement Representations). They say further that the applicants have engaged in misleading or deceptive conduct in bringing these proceedings because:
(a)the proceedings include an allegation that the respondents made certain representations which are alleged to be false;
(b)cl 12.11 of the Exit Agreement specified that there were no representations relating to the subject matter of the Agreement which were not fully specified therein;
(c)the representations the subject of the applicants’ misleading or deceptive conduct case were not specified in the Exit Agreement but they should have been; and
(d)if those representations had been specified, the respondents would not have executed the Exit Agreement unless and until they were released from any possible claim arising from the funding support they provided to CMUK.
PART C: THE EVIDENCE SUMMARISED
It is convenient to summarise the relevant witness evidence, commencing with the applicants’ witnesses.
A Summary of the evidence of the applicants’ witnesses
(a) Mr Nick Greiner
Mr Greiner swore three affidavits. He was a non-executive director of BlueFreeway from 24 November 2006 (i.e. after the SPA was executed) until 3 July 2009. He described Mr Webb as playing “a principal part” in BlueFreeway acquiring a group of portfolio companies to form one of Australia’s first listed digital and interactive marketing communications services group. He described the board’s discussion in early 2007 of the proposal for FTI to sell a software licence to CMUK. He described how Messrs Webb and McDonnell, as executive directors of BlueFreeway, reported to the board about matters affecting those negotiations with a view to the board ultimately considering whether or not to approve the execution of the Licence Agreement.
Mr Greiner also gave evidence that he assumed that CMUK would be paying the licence fee from its own resources and that at no stage during 2007 was he aware or did he suspect that Messrs Barnes and Hawksley would use their own money or security to facilitate the payment of the licence fee. Mr Greiner said that if he was aware of the true facts relating to the source of the financing, he would have requested that the matter be discussed by the board and that the board take legal advice. He said that he would have approached the matter on the basis that, whilst it was generally beneficial for the group for FTI to receive a licence fee in excess of $4 million, it was not advantageous for the group as a whole if the consequence of receiving that fee was to entitle Messrs Barnes and Hawksley to receive more than $16 million under the SPA. He said that he would have conveyed to the BlueFreeway board that the licence agreement should not be approved on that basis. He acknowledged that the prospect of receipt of the licence fee represented a significant improvement in the operating results of FTI and the BlueFreeway group, but if the licence fee amount had not been received in the 2007 financial year and the forecasts in the November 2006 prospectus were not achieved, he said that he believed that the board would have considered the matter and made any appropriate responses, including discussing with management how the operating results could be improved. He said that at no stage did he regard the conclusion of the licence transaction with CMUK as vital. Mr Greiner also gave evidence of board discussions regarding how the licence fee would be accounted for in the group’s accounts.
In cross examination, Mr Greiner was taken to the February 2007 board minutes where it is reported that there was a 26% EBIT shortfall regarding FTI. He said that the problems BlueFreeway was experiencing with FTI at that time were that it did not have an adequate sales force and there was also an issue about granting a software licence in the UK. He agreed that Mr Webb had a vision of there being a central sales team for the group but he added that that did not mean that such a goal was to be achieved immediately. Mr Greiner said he regarded FTI as the “strugglers” in the BlueFreeway group.
Mr Greiner was taken to the minutes of the 26 March 2007 board meeting, at which the details of the proposal to sell the licence to CMUK were discussed. He agreed that there was an implication in the minutes that the board was implicitly adopting Mr Webb’s vision of not having Campaign Master sold through the portal. He said that Mr Webb seemed to regard the portal as a factor differentiating BlueFreeway from other companies. Despite this Mr Greiner said that in practice the individual companies continued to sell their products individually and that the central sales force was very limited at this time.
Mr Greiner also said that there was some board discussion as to how to treat the proceeds of the licence and whether it should be regarded as a one-off or recurring fee. He said the board was keen to treat the transaction a certain way because it had the potential to be a precedent for licence sales in other markets. Mr Greiner also said it was very likely that he raised the accounting treatment of the licence fee proceeds at the board meeting in May 2007 because he viewed that as the sort of matter that he could make a useful contribution on, relating as it did to governance of the company. He said he had no detailed recollection of what he said about the topic.
Mr Greiner agreed that it was part of the board’s vision to provide an option for Campaign Master to be sold through the portal. He accepted, however, that there were tensions and all sorts of possibilities and he emphasised that, in his view, the board should not become too prescriptive about these matters and that nothing was “set in stone”.
Mr Greiner was taken to the board papers for 4 May 2007 and to the reference to FTI’s performance. Its revenue had now slipped from 26% below forecast at the previous meeting to 55%. He agreed that the increasing gap was a matter of some concern to the board and that if BlueFreeway had to report a decrease in revenue of that magnitude it would have a big impact on share price.
Mr Greiner was also asked a series of questions in cross examination regarding changes in the terms of the proposed licence sale, particularly the drop in the licence fee from £2.5 million paid in three instalments to £1.5m paid as a lump sum. He said he did not make any enquiries as to why the terms changed and he simply relied on Messrs Webb and McDonnell, who were involved in the negotiations. He said he was not too fussed about the differences in price because whatever they obtained was all an upside for BlueFreeway.
As to the first question he was asked to address, Mr Simmonds agreed that AUS 804 was applicable in assessing FTI’s forecasts, but he concluded in paragraph 55 of his report that it had not been appropriately applied by Mr Wettenhall. Mr Simmonds explained that this was because Mr Wettenhall had qualified his report by saying that it had not been prepared in the context of an audit and that he had not audited the information provided to him. In the light of those statements, Mr Simmonds said that it was unclear to him as to why the accounting standard had been referred to at all by Mr Wettenhall because it relates to providing an audit opinion in relation to prospective financial information when in fact Mr Wettenhall had expressed no such audit opinion.
As to the second question which he was asked to address, Mr Simmonds answered the first part of the question affirmatively on the basis that, on that hypothesis, new information had been introduced which would have triggered the need to follow additional procedures in conducting an audit. He said that the first of those procedures would arise from the need to gain, to the extent possible, a thorough understanding of the respondents’ role in funding the licence fee. He said that there would also be a need to assess the need for additional audit procedures to be performed in relation to accounting for the transaction. Finally, he said that in his view there would be two key additional areas of audit focus arising from that new information. He discussed those two additional relevant accounting standards in Section F of his report.
The respondents objected to Mr Simmonds’ evidence relating to the issue whether Mr Wettenhall had appropriately applied AUS 804. They submitted that his evidence on this issue effectively amounted to the expression of an opinion on the proper construction of the relevant accounting standard and did not involve any specialist expertise. In particular, they objected to paragraphs 49-55 of Mr Simmonds’ report. They contended that the Court can read the accounting standard for itself and determine whether or not it has been appropriately applied. I agree and uphold the objection to those paragraphs.
The respondents also objected to large parts of Section F of Mr Simmonds’ report, which addressed the second question described above. The primary objection to this material was on the ground of relevance, but they also challenged some parts on the basis of what has become known as a Makita objection (see Makita (Aust) Pty Ltd v Sprowles (2001) 52 NSWLR 705 concerning the requirement that an expert witness provide a sufficient statement of his or her reasoning which underpins a particular opinion).
Mr Ireland QC submitted that this material was relevant to the counterfactual and the likely impact on an audit of the relevant accounts if the auditors were aware of the involvement of the respondents in funding the licence sale. He said that, on the hypothetical, the auditors would have made a report to the board and that the nature of their involvement would therefore have come to the board’s attention via that path and as an alternative to being informed by management. Mr Dubler SC responded by saying that the applicants have not pleaded that there was any duty of disclosure affecting an auditor. That may be so, but I view this part of Mr Simmonds’ report as potentially relevant to the respondents’ cross claim, which necessarily involves a counterfactual regarding the forecast revenues for 2008 and 2009, and I admit it on that basis. I also consider that Mr Simmonds has adequately explained in paragraph 60 of his report the basis upon which he arrived at his answer to question two and, therefore, the respondents’ Makita objection is rejected.
B Respondents’ objection to all of Mr Puckrin’s affidavit dated 30 November 2012
The respondents objected to the entirety of this affidavit on the following grounds:
(a) three annexures to the affidavit which contained financial information were discoverable documents which were not discovered and, accordingly, the applicants should not be able to rely upon those documents;
(b) leave should not be granted for the applicants to rely upon the material because the affidavit had been filed so late i.e. the last working day before the trial commenced. They said they would suffer serious prejudice if leave was granted;
(c) the material should be excluded under s 135 of the Evidence Act 1995 (Cth) (the Act), on the basis that its probative value was substantially outweighed by the danger that the evidence might be unfairly prejudicial to them or cause undue waste of time; and
(d) finally, the respondents contended that the applicants had not established that the relevant annexures were “business records” for the purposes of s 69 of the Act, so as to avoid the hearsay rule.
I rejected these objections and indicated that I would provide reasons in my final reasons for judgement, which I now do, dealing with each of the four grounds of objection in turn.
(a) Discovery Issues
The three annexures contain financial information and figures drawn from data stored in two software accounting systems used by BlueFreeway called “MYOB” and “Quick Books”. For the purposes of Mr Puckrin’s affidavit, the annexures were presented in the form of documents containing financial information. It was evident that the documents were created relatively recently and for the purpose of Mr Puckrin giving evidence in the proceeding. The documents were created by Mr Puckrin using raw financial data stored in either of the two electronic accounting systems.
Mr Puckrin gave evidence that, when he joined the BlueFreeway group in March 2008 as chief financial controller, he obtained full access to the financial records of the group and its portfolio companies. He said that, prior to the acquisition of FTI by BlueFreeway in December 2006, BlueFreeway’s accounts had been kept by a firm of accountants called Carboni & Co using the computer accounting system called MYOB. Annexure IMP-3 comprised a series of emails involving Ms Carboni from Carboni & Co dealing with year- end accounts and statutory reporting for the financial year 2007. In an email dated 24 July 2007 addressed to both a Mr Bryan O’Loughlin and copied to Mr Barnes, Ms Carboni attached a draft financial statement for FTI, including a detailed balance sheet as at June 2007. The respondents’ objection was directed to that draft financial statement and detailed balance sheet on the basis that they had not been discovered.
Mr Puckrin gave evidence that IMP-4 (which was replaced during the course of the hearing by IMP-7 and was tendered as Exhibit A) comprised print-outs of various profit and loss statements relating to FTI, which he said were derived from the electronic MYOB data held by BlueFreeway. He further stated that the data accorded with the audited accounts of the BlueFreeway Group for the financial years ended 30 June 2007, 2008 and 2009. Although objection was taken to the three relevant annexures to Mr Puckrin’s affidavit, the respondents’ challenge was primarily directed to Exhibit A.
Mr Puckrin also gave evidence that IMP-5 was made up of print-outs of financial reports relating to Mass Media derived from the electronic data stored in Quick Books, another accounting system used by BlueFreeway. He also said that that data accorded with the audited accounts of the BlueFreeway group for the financial years end 30 June 2007, 2008 and 2009.
For the applicants, Mr Ireland QC denied that any of the relevant annexures were discoverable. He pointed out that the underlying data was stored in electronic form in either MYOB or Quick Books and, in effect the data, comprised a “vat of material”. He said that none of the categories of discovery relied upon by the respondents required the applicants to discover the entire vat of data within either the MYOB or Quick Books accounting systems. He submitted that, where the discovery categories identified specific documents, such as financial statements, they had been produced. He said that the data used to generate the controversial annexures to Mr Puckrin’s affidavit did not fit within any of the relevant categories of discovery. In particular, he submitted that there was no obligation on the applicants to create an otherwise non-existing document for the purposes of discovery.
For the following reasons, I agree with the applicants’ submission that the information or material contained in the three relevant annexures was not discoverable.
First, it is relevant to note the terms of the following categories of discovery in the notice and further notice for discovery which the respondents say applied to the three annexures:
21.Copies of all documents with respect to the monthly sales activity of Forty-Two International’s products between the period of 1 July 2007 to 30 June 2009.
39.Copies of the financial and audited account reports for each of BlueFreeway and Forty-Two International for the 2006-2007 and 2007-2008 financial years…
40.Copy of BlueFreeway’s consolidated statements for the Portfolio Companies for the 2006-2007 and 2007-2008 financial years…
Secondly, it is relevant to note that the notices for discovery contained the following definition of “document” (a definition which incidentally adopts some, but not all, of the definition of “document” in the dictionary to the Act):
For the purposes of this notice:
(a)“documents” means any record of information and includes without limitation:
(i)anything on which there is writing;
(ii)anything on which there are marks, figures, symbols or perforations having a meaning for persons qualified to interpret them;
(iii)anything from which sounds, images or writings can be reproduced with or without the aid of anything else;
(iv)a map, plan, drawing or photograph;
(v)notes, audio tapes, video tapes, correspondence, files, minutes, memoranda, email, computer record and any other document in electronic form.
In my view, none of the categories of discovery relied upon by the respondents required the applicants to generate or create a document drawing on raw data stored in either of the two electronic accounting systems. No such document was brought into existence until Mr Puckrin prepared his affidavit dated 30 November 2012. At that point he plainly created a document or record of information, but that was not the case at the times when discovery was being conducted. At those times the raw data was simply embedded in the relevant accounting systems.
The position may have been different if the data in those electronic accounting systems was stored in a form which reflected the documents created by Mr Puckrin. But that was not the case. As I understand matters, the raw data was only brought into the form which is reflected in the three relevant annexures when Mr Puckrin created those annexures for the purposes of his affidavit.
I might add that, in any event, even if the material contained in the relevant annexures was discoverable and had not been discovered, I do not accept that that would mean that the applicants could not rely upon the relevant material. In particular, I do not accept the respondents’ submission that such material would have to be rejected having regard to what the following statement by the Full Court in Bourke v Beneficial Finance Corporation Ltd (1993) 124 ALR 716 at 731-2:
Generally the sanction for the failure of a party to discover documents is that the party is unable to tender those documents in evidence (emphasis added).
The first point to note about that statement is the fact that the Full Court was plainly not purporting to enunciate an absolute rule. The use of the word “generally” necessarily recognises that no such absolute rule was intended. In my view, the Court retains a discretion as to whether or not to permit a party to rely upon a document where discovery obligations have not been met. Naturally, a party’s failure to comply with its discovery obligations will weigh heavily in the exercise of that discretion. But I consider that other relevant considerations may also arise in any particular case, including such matters as the significance of the material to the issues in the proceedings, the prejudice to the other parties if the material is allowed to be relied upon and whether any such prejudice can be adequately accommodated (such as by granting an adjournment or by other steps taken within the framework of the proceedings which do not require the hearing schedule to be disturbed, such as adjusting the order of witnesses or “fast-tracking” the issue and return of relevant subpoenas).
Secondly, it is also important to note that the Full Court’s statement was obiter dictum. The statement was made in the context of the Full Court dealing with the question whether a new trial should be ordered in circumstances where documents had not been properly discovered. The Full Court was not addressing the question whether a party should be permitted to rely upon a document which ought to have been discovered and was not.
Thirdly, I respectfully agree with the following comments of D L Bailey and E K Evans, Discovery and Interrogatories Australia, at (loose leaf service) [37,335]:
The better view is that in the absence of express or general powers such as those referred to above, the court should not refuse to admit in evidence documents not discovered but allow reliance on them on such terms as to adjournment, recall of witnesses, reopening of the surprised party’s case and payment of costs as will prevent any unfairness to that party.
(b) Late service of affidavit and respondents’ prejudice
Mr Puckrin’s affidavit was served on 30 November 2012, shortly before the trial was due to commence. It was not disputed that leave was required to rely upon the affidavit because it was filed well outside the relevant directions for the filing of evidence.
The respondents oppose leave on the ground that they would suffer significant prejudice if leave was granted. That was said to be particularly so because they had a fundamental concern about the accuracy of the data underpinning the controversial annexures. The respondents submit that they have real concerns whether the figures concerning the financial years 2008-2009 accurately reflect sales of Campaign Master during those periods and correctly allocate appropriate expenses in connection with those sales to FTI. They argue that they believe that BlueFreeway may not have maintained accurate separate accounts for FTI which correctly reflected the expenses and sales relevant to the various products sold by FTI during those periods, particularly Campaign Master. The respondents further complain that, had the material been provided earlier, they would have had an opportunity to investigate the accuracy of the information by pursuing various steps. Those steps included the possibility of issuing a subpoena to Carboni & Co, seeking discovery of other records from the applicants’ computer systems and having subpoenas issued to particular customers for invoices from BlueFreeway/FTI in order to check if proper accounts had been kept capturing all relevant sales of Campaign Master.
The respondents further complain about their prejudice relating to Mr Puckrin’s statements that the data from which IMP-3 and Exhibit A were drawn accorded with the audited accounts of the BlueFreeway Group. They say that no audited accounts had been discovered for either FTI or Mass Media. I should record at this point that I attach no weight to the respondents’ claims concerning the absence of audited accounts for FTI. As a member of a consolidated group of companies, there was no legal requirement to produce audited accounts in respect of individual portfolio companies.
Mr Ireland QC responded to these claims by emphasising that Mr Puckrin’s affidavit had been prepared in response to various objections to evidence by the respondents and served only on 22 November 2012. Some of those objections related to various passages in Mr Puckrin’s earlier affidavits dated 4 and 11 March 2011 in which he set out calculations of EBIT for the financial years 2008 and 2009. Mr Ireland QC submitted that the respondents had had ample opportunity to raise any concerns well before 22 November 2012 relating to those passages. He added that the respondents were aware as far back as March 2011 that the parties were in dispute as to the relevant EBIT figures and it should be assumed that they simply took a forensic decision to raise no objection or seek further material until they filed their list of objections to evidence on 22 November 2012. I understood Mr Ireland QC’s submission to be along the lines that any prejudice to the respondents is essentially of their own making.
In my view, there is force in the contention that the respondents could have raised much earlier their concerns regarding the absence of substantiating material in respect of the financial matters set out in Mr Puckrin’s two affidavits dated March 2011. Although their listed objections to evidence were filed and served in accordance with the Court directed timetable, it should have come as no surprise that the applicants might take steps to address the relevant objections, in circumstances where the evidence addressed a significant issue in the proceedings. That issue is whether FTI’s performance in the financial years 2008 and 2009 produced profitability figures or consequential EBIT calculations which even approach the $2.5 million threshold specified in the SPA for the respondents to be eligible for earn out in those years.
The applicants must bear some responsibility for the evidentiary deficiencies in Mr Puckrin’s earlier affidavits, but I accept their contention that it was not until 22 November 2012 (when they were first notified of the respondents’ objection to Mr Puckrin’s summary of the relevant EBIT calculations) that those summaries became controversial.
Secondly, and in any event, I ruled that Exhibit A should be provisionally admitted on the basis that any prejudice to the respondents might be able to be overcome by the applicants responding quickly to any request made by the respondents to have access to additional relevant source material. Mr Ireland QC offered to make promptly available to the respondents any material in the applicants’ possession required by the respondents in order to deal with the three controversial annexures.
As matters transpired, the respondents subsequently renewed their challenge to the admissibility of Exhibit A on the basis of their prejudice, which they said they were now able to particularise. They relied on an affidavit by Mr Barnes sworn 17 December 2012 and two affidavits by Mr Davis both dated 10 December 2012. In response, the applicants relied upon an affidavit of Mr Petrucco sworn 17 December 2012.
The thrust of that evidence may be summarised as follows.
First, the applicants said that it would take some time for them to produce from their archives hard copies of FTI sales invoices and other materials sought by the respondents arising from Mr Puckrin’s affidavit dated 30 November 2012. However, they did make available for inspection around 10,000 FTI sales invoices which they had printed from the MYOB electronic accounting system.
Secondly, Mr Barnes gave evidence to the effect that he had spent many hours over the weekend reviewing those sales invoices but that they were inadequate to enable him to form a view as to whether EBIT figures for 2008 and 2009 advanced by the applicant in Exhibit A were correct. In particular, he said that the electronic sales invoices did not address the respondents’ concern that during the relevant periods some FTI clients were not properly invoiced in respect of their Campaign Master transactions and that there may also have been a misallocation of both expenses and the financial records concerning subscriptions to both Campaign Master and Traction.
Mr Dubler SC contended that, in the light of the respondents’ prejudice, Exhibit A should not be admitted or, if it was, the proceedings should be adjourned until sometime in 2013 in order to enable the respondents to have access to and consider all the source material sought by them.
The applicants opposed any adjournment in the proceeding or exclusion of Exhibit A. They placed particular reliance upon the following matters:
(a)the applicants had been engaged in a very lengthy process of discovery in the proceedings, providing three separate lists of documents, the most recent of which was in April 2012 when copies of all discovered documents were furnished to the respondents. They included many financial documents, including management accounts which were provided to the respondents in April 2012;
(b)the EBIT calculations now appearing in Exhibit A contained the same total figures as were first provided to the applicants in Mr Puckrin’s affidavit of 11 March 2011;
(c)in those circumstances, both the EBIT calculations and the figures lying behind Exhibit A were in the possession of the respondents for months before the hearing began; and
(d)although Mr Barnes makes several “theoretical” complaints as to whether other income or expenses had not been properly accounted for in 2008 and 2009 thereby reducing profit and EBIT for those years, such assertions had not been substantiated. In particular, Mr Barnes was unable to identify any suggested anomaly arising from his weekend review of the electronic sales invoices extracted from MYOB.
In my view, the respondents failed to establish a basis upon which Exhibit A should be rejected or the proceedings adjourned. My reasons for this conclusion substantially reflect the applicants’ contentions summarised above. In particular, it seems to me that the respondents made a forensic decision after reviewing Mr Puckrin’s affidavit of 11 March 2011 not to pursue with the applicants at that time the source materials upon which Mr Puckrin’s EBIT figures were based and instead proceed on the basis of their view that the relevant material was inadmissible. It was not until 22 November 2012 that the respondents advised the applicants of their objections to that material.
I consider that it is also significant, independently of Mr Puckrin’s affidavit dated 11 March 2011, that the respondents were provided with Excel spreadsheets on a disc in April 2012, which spreadsheets included EBIT figures for 2008 and 2009 which are identical to the figures relied on by Mr Puckrin. Accordingly, it was open to the respondents at that time to require access to source documents underlying those figures. They did not do so. They complain that, although Mr Petrucco now describes those Excel spreadsheets as “management accounts”, they were not so described in the relevant lists of discovered documents. I attach little or no weight to that fact. The critical point is that the respondents had the material in their possession and failed to take any further relevant steps in respect of it.
Finally, in my view it was undesirable and inappropriate for the hearing to be adjourned until sometime in 2013. The proceedings had been commenced as long ago as December 2008 and had been set down for a three week hearing in December 2012. As the parties were aware, if the hearing was not completed during the scheduled time, Court commitments meant that they would not be able to resume until well into 2013. Moreover, I also took into account the fact that the respondents themselves must bear some responsibility for finding themselves in the position that they did [of having to deal with Exhibit A] in circumstances where it was open to them from at least April 2012 (if not earlier) to take appropriate steps to deal with the matter.
(c) Section 135 of the Act
The Court has a discretion to exclude evidence under s 135 of the Act if its probative value is substantially outweighed by the danger that the evidence might relevantly be unfairly prejudicial to a party or cause or result in undue waste of time. In my view, this is not an appropriate case to exercise that discretion. First, for reasons I have given above, I do not accept that the probative value of the relevant evidence is substantially outweighed by the respondents’ claimed prejudice. I repeat what I have said above on the topic of prejudice. Secondly, I do not accept that admitting the evidence will result in an undue waste of time. That is because I consider that, for reasons given above, appropriate steps can be taken to enable the respondents to deal with the evidence within the framework of the scheduled hearing.
(d) Records not proved to be business records
The respondents submitted that the relevant annexures are admissible as business records under s 69 of the Act only if the applicants satisfy the relevant requirements of that provision, including in particular what was described as the “personal knowledge requirement” in respect of each representation contained in the relevant documents.
In the respondents’ submission (citing Lithgow City Council v Jackson (2011) 244 CLR 352 at [17] per French CJ, Heydon and Bell JJ), the applicants carried the onus of establishing for the purposes of subsection 69(2) that:
(a)each representation in the relevant documents was made by a person who had or might reasonably be supposed to have had personal knowledge of the asserted fact; or
(b)on the basis of information directly or indirectly supplied by a person who had or might reasonably be supposed to have had personal knowledge of the asserted fact.
In accordance with subsection 69(5) of the Act, the respondents accept that a person is taken to have had personal knowledge of a fact if the person’s knowledge of the fact was or might reasonably be supposed to have been based on what the person saw, heard or otherwise perceived.
The respondents contended that the personal knowledge requirement is not satisfied here because the evidence as to the provenance of the relevant documents and their compilation is hearsay in circumstances where:
(a)Mr Puckrin only became involved with BlueFreeway from March 2008, yet he purports to give hearsay evidence to the effect that:
(i)in 2006, FTI’s accounts were kept by Carboni & Co using an accounting system known as MYOB;
(ii)when he joined BlueFreeway, there were MYOB data files containing accounting information prepared by Carboni & Co for FTI and in about December 2007 the data from those files was delivered in electronic form by Carboni & Co to BlueFreeway and integrated into the BlueFreeway’s Group financial accounting records using MYOB;
(iii)from about January 2008, the accounting functioning in respect of the 2008 financial year in respect of FTI was carried out at BlueFreeway’s central office; and
(b)all these matters occurred prior to Mr Puckrin joining BlueFreeway in March 2008. Accordingly, his evidence was hearsay.
The respondents contended that there is no direct evidence establishing the system in place at the relevant times by which the representations concerning the financial details in the documents were collated and recorded, with the consequence that there was no evidentiary foundation upon which the applicants could establish that each representation was recorded by someone with the requisite personal knowledge.
The essence of the respondents’ submission on this matter is captured in the following passage from Mr Dubler SC’s oral argument:
The seminal issue is, your Honour, by looking at what has been printed, is your Honour able to draw the inference that the figures that emerge here have been derived from persons who can be reasonably presumed to have personal knowledge. Does your Honour need more if we object, and we do, to explain that there was a system in place that in particular allowed for the ’06 and ’07 material that had been prepared by others to have been correctly integrated, and to be based on proper source material and documents or people who had the personal knowledge of the underlying source of material that became this. And hence our submission where plainly there is simply an accounting type material printed, is that enough in a legal case, or must, on objection, there be some admissible evidence about the manner of its creation.
For the following reasons, I reject the respondents’ objection to the effect that the business record exemption from the hearsay rule does not apply to the relevant material.
First, while it is true that Mr Puckrin did not join the BlueFreeway Group until March 2008, it is not disputed that, at that time, he gained access to all the past and current financial records of the Group, including the financial records of FTI. Nor is it contested that the 2006 financial statements of FTI were prepared by Carboni & Co. The respondents’ complaint is the absence of any non-hearsay evidence establishing that Carboni & Co used the MYOB accounting system in preparing those financial statements. But it is clear from Mr Puckrin’s evidence that, as at March 2008, the records of BlueFreeway and FTI included MYOB data files containing accounting information prepared by Carboni & Co in respect of the financial years ending 30 June 2006 and 2007. Section 183 of the Act has the effect that, if a question arises about the application of a provision of the Act in relation to a document, the Court may draw any reasonable inferences from the document as well as from other matters from which inferences may properly be drawn. Having regard to the matters described above, I infer the MYOB accounting system was used in the course of preparing FTI’s financial statements for both 2006 and 2007.
Secondly, the relevant annexures constitute hardcopy documents of data from the MYOB files prepared and maintained up until December 2007 by Carboni & Co in respect of FTI and thereafter by the BlueFreeway Group. Mr Puckrin gave evidence that in about December 2007, the data from those MYOB files in Carboni & Co’s possession were delivered by that accounting firm in electronic form to BlueFreeway and integrated into the Group’s financial accounting records, which were also in electronic form and used the MYOB accounting system. Mr Puckrin further deposed that, from about January 2008, the accounting function in respect of the 2008 financial year for FTI was carried out at BlueFreeway’s offices in Macquarie Street Sydney. It can be inferred that the matters were apparent to Mr Puckrin who had full access as chief financial controller to all of the financial records of both the Group and FTI.
I infer that the information contained in the MYOB data files for FTI for the financial year ended 30 June 2006 and part of the following financial year were prepared by accounting staff at Carboni & Co, persons who might reasonably be supposed to have had personal knowledge of the matters reflected in that data. The respondents did not contest the proposition that, as a matter of law, there is no requirement under s 69(2) of the Act to identify by name the “person” who had or might reasonably be supposed to have had the requisite personal knowledge (see, for example, Guest v Commissioner of Taxation [2007] FCA 193 at [29] per Heerey J) (Guest).
Furthermore, in circumstances where BlueFreeway took over responsibility for preparing accounting information in respect of FTI from December 2007, again using the MYOB accounting system, I infer that the relevant data in respect of the financial years ending 2008 and 2009 was prepared by one or more persons in BlueFreeway’s finance department who had or might reasonably be supposed to have had personal knowledge of the matters reflected in that data.
Thirdly, I do not accept the respondents’ core proposition that the relevant documents are not business records for the purposes of s 69 unless the applicants adduce direct and admissible evidence of the systems in place at the relevant times under which financial details were collated and recorded. In my opinion, that proposition sits uncomfortably with both the policy underlying s 69, and the Court’s power to draw appropriate inferences in accordance with s 183 of the Act.
As to the policy underlying s 69, I respectfully agree with the following observations of Heerey J in Guest at [25]:
The policy behind the provisions clear enough. Routine business records, made before any legal proceeding arises or is contemplated (cf the exception in s 69(3)), have an inherent likelihood of reliability which outweighs the common laws aversion to hearsay evidence where the maker of a statement cannot be tested by cross-examination. The utility of s 69 would be greatly diminished if it were necessary to locate among large organisations, perhaps over a long period of time, persons who made representations, often in circumstances where the practical needs of the organisation did not require any identification at the time the representations were made (emphasis added).
Although Heerey J’s remarks were specifically directed to the question of whether there is a need specifically to identify the “person” in order for subsection 69(2) to operate, I consider that they are also apposite to the respondents’ contention here concerning the need for non-hearsay evidence establishing the system under which relevant financial details were collated and recorded.
As to s 183 of the Act, I consider that it authorises the drawing of the inferences I have made above, which are sufficient to satisfy the requirements of subsection 69(2). I do not accept the respondents’ contention that, in the circumstances here, the applicants also had the onus of establishing by direct evidence the systems in place by which the data in the relevant accounting software was compiled and collated. In my view, the respondents’ concerns regarding the accuracy of the raw data goes to the weight of Mr Puckrin’s evidence and not to its admissibility.
For all these reasons, therefore, I rejected the respondents’ overall objection to Mr Puckrin’s affidavit.
I certify that the preceding six hundred and thirty-seven (637) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Griffiths. Associate:
Dated: 18 February 2014
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