Groeneveld Australia Pty Ltd v Wouter Nolten (No. 3)
[2010] VSC 533
•22 November 2010
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| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
COMMERCIAL COURT
LIST E
No. 07564 of 2009
| GROENEVELD AUSTRALIA PTY LTD (ACN 070 025 795) & Ors (according to the schedule attached) | Plaintiffs |
| v | |
| WOUTER NOLTEN & Ors (according to the schedule attached) | Defendants |
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JUDGE: | Davies J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 20 – 23 September 2010, 27 September 2010 | |
DATE OF JUDGMENT: | 22 November 2010 | |
CASE MAY BE CITED AS: | Groeneveld Australia Pty Ltd & Ors v Wouter Nolten & Ors (No. 3) | |
MEDIUM NEUTRAL CITATION: | [2010] VSC 533 | Revised 2 February 2011 |
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Director – Conflict of interest – Breaches of statutory and fiduciary duties – Remedies – Equitable compensation, account of profits, allowance for fiduciary’s skill, efforts, property or resources.
Shares – Call and put options – Where director obtained right to shares pursuant to contract – Where director failed to disclose breaches of duty – Where disclosure of breaches would have resulted in termination of employment – Where director failed to protect the interest of the company – Where director failed to disclose facts relevant to the board’s decision – Where calls for shares made in breach of duties – Invalid resolution of directors due to failure fully and properly to disclose of breaches of statutory and fiduciary obligations.
Misleading and Deceptive Conduct – Silence constituting misleading and deceptive conduct – Failure to disclose breaches of fiduciary and statutory duties – Obligation to act in good faith and for a proper purpose – Fair Trading Act 1999 (Vic) s 9.
Tort – Deceit – Principles – Proof of fraud – False representations of director – Where director held himself out as discharging functions and responsibilities in accordance with duties – Where board induced by representations.
Contract – Commercial contract – Whether “good faith” an implied term – Director’s breach of fiduciary and statutory obligations – Director knowingly held himself out as properly discharging duties – Breach of implied term of good faith.
Declarations – Whether declaratory relief for breaches of statutory duties available – Corporations Act 2001 (Cth) ss 181, 182, 183 – Whether Utility in general law declarations.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr P.D. Crutchfield SC with Mr A.T. Strahan | DLA Phillips Fox |
| For the Defendants | Mr I.D. Martindale SC with Mr P.L. Ehrlich | Willocks Lawyers |
HER HONOUR:
A. Introduction
The plaintiffs are part of the multinational Groeneveld group of companies. The first plaintiff (“GA”) carries on the Groeneveld business in Australia, providing automated greasing and lubrication systems, lubricants and associated technical support to the trucking and transport industries. The first defendant (“Mr Nolten”) was appointed the managing director of GA from the time of its incorporation in 1996. On 23 July 2009 Mr Nolten’s position as managing director was terminated and he was dismissed from his employment for alleged breaches of his duties as a director and an employee of GA. Those alleged breaches are the subject of this proceeding. The plaintiffs claim entitlement to equitable and common law remedies against Mr Nolten and companies associated with him for the alleged breaches, including declarations that Mr Nolten has contravened statutory, fiduciary and contractual duties. The defendants have consented to judgment on specified claims but Mr Nolten opposes the Court granting the declarations that the plaintiffs seek on the ground that there can be no utility in those declarations, given that his consent to judgment will result in monetary awards to the plaintiffs.[1]
[1]Letter from Willocks Lawyers to DLA Phillips Fox dated 5 July 2010.
The consents to judgment have significantly narrowed the issues for determination by the Court. The issues that remain for determination fall under the following agreed headings.
B. GSI Franchise Fee Claim
This claim arises out of various payments that Groeneveld South Island Limited (“GSI”), a New Zealand based distributor of GA, made to Mr Nolten, directly or indirectly, between 2005 and 2009. It was alleged that Mr Nolten made an arrangement with GSI for GSI to pay a “franchise fee” to the fourth defendant (“C&CT”) or its wholly owned subsidiary (“C&CT NZ”), which are companies associated with him. Pursuant to that arrangement, GSI was alleged to have made payments to C&CT or C&CT NZ totalling:
(a) in the financial year ending 31 March 2005, NZ$10,000;
(b) in the financial year ending 31 March 2006, NZ$30,000;
(c) in the financial year ending 31 March 2007, NZ $30,000;
(d) in the financial year ending 31 March 2008, NZ $30,000;
(e) in the financial year ending 31 March 2009, NZ$30,000;
(f) in the period 31 March 2009 to 30 June 2009, NZ$7,500.
It was further alleged that Mr Nolten breached statutory and fiduciary duties to GA by failing to disclose to the board of GA the arrangement that he had with GSI. GA seeks an account of the profits that Mr Nolten and C&CT and C&CT NZ made out of that arrangement .[2]
[2]Joint list of issues in dispute [3]; Plaintiffs’ written closing submissions [14]; Defendants’ written closing submissions [1(b)].
The defendants admitted that C&CT and C&CT NZ received payments from GSI and admitted that Mr Nolten had not made any disclosure to the board of GA of the arrangement he had with GSI. The claim was defended on the following grounds:
(a) that the payments were not franchise fees but payments for IT services that C&CT or its subsidiary provided to GSI which had no connection with the GSI’s distribution agreement with GA;
(b) that Mr Nolten was under no obligation at law to disclose the IT services arrangement to the GA board.
The evidence does not support a finding that the payments were in the nature of franchise fees nor was there a specific allegation in the statement of claim that they should be so characterised. The allegation in the statement of claim that GSI agreed to pay a “franchise fee”[3] was based on the description of the payments as they appeared in GSI’s 2005 and 2006 financial accounts. I accept the evidence of Mark Alston, a director of GSI, that the payments were mistakenly entered by GSI’s bookkeeper into the company’s MYOB accounts in the 2005 and 2006 financial years as a “distributor fee”. This error was perpetuated by GSI’s accountant in the preparation of 2005 and 2006 financial accounts by describing the payments as “franchise fees”. Mr Alston’s evidence was that the error was corrected in later years’ financial accounts when the payments were recorded as “communication and service co-location fees” in relation to the IT computer services that GSI paid for.
[3]Third Further Amended Statement of Claim filed 14 September 2010, 13 [93].
I find on the evidence that the arrangement entered into between Mr Nolten and GSI concerned the supply of computer services to GSI and that all of the payments made by GSI under that arrangement were for those computing services. I also find on the evidence that Mr Nolten did not enter this arrangement in a private capacity unconnected with GA. To the contrary, Mr Nolten took advantage of his position as managing director of GA to effect this arrangement and to benefit himself personally. These findings are based on the evidence of Mr Alston as Mr Nolten did not give evidence.
Mr Alston’s evidence was that he and Mr Nolten became “good friends” when Mr Alston was employed as the manager responsible for operations and sales at Groeneveld New Zealand Limited (“GNZ”), a wholly owned subsidiary of GA that operated out of the north island of New Zealand. Some time in 2004, Mr Alston decided to set up GSI to operate an independent distributorship for GA based in the south island of New Zealand. Mr Alston said that when he was at GNZ he had remote computer access to GA’s quotation and technical information and that he “had used the services provided to [GA] by C&CT” and that he “considered it to be an excellent service”. Mr Alston said that when he set up GSI he “wanted to continue to use that service in [his] new distribution business and also in the other businesses then undertaken by [him]”. Mr Alston’s evidence was that he wanted in particular to use the “cloud computing” service, which is a remote desktop protocol. Mr Alston said that he “approached C&CT” to contract for “IT services” for GSI and his other businesses and that he “agreed to pay” $2,500 per month for those services.
GSI entered into a distributorship agreement with GA in October 2004 and commenced operations as GA’s distributor in early 2005. GSI also commenced making payments for IT services in early 2005. Initially GSI deposited NZ$2,500 per month directly into a personal New Zealand account held by Mr Nolten and his then wife. In about July 2006 GSI, at the direction of Mr Nolten, redirected the monthly payments to C&CT or its wholly owned subsidiary (“C&CT NZ”). The evidence was unclear about the actual recipient but C&CT has accepted that it is liable to account for those payments, if this claim is successful.[4]
[4]The Fourth Further Amended Statement of Claim alleged that the payments were received by a wholly owned subsidiary of the Fourth Defendant. The wholly owned subsidiary was not joined as a defendant to the proceeding but no issue was taken about the non-joinder and the case proceeded on the basis that fourth defendant received the payments: letter from Willocks Lawyers to DLA Phillips Fox dated 3 September 2010.
GSI was not invoiced for any payments until March 2006, notwithstanding that Mr Nolten was receiving regular monthly payments from GSI. On 23 May 2006, Mr Nolten directed Gwen Nolten to raise invoices from C&CT NZ as follows:
(a) IT services provided YTD 2006 March, as per your instructions NZ$30.000 +12,5% GST dated 15 March 2006
(b) IT services provided for the month of April 2006 NZ$2.500 +12,5% GST dated 14 April 2006
(c) IT services provided for the month of May 2006 NZ$2.500 +12,5% GST dated 12 May 2006
(d) IT services provided for the month of June 2006 NZ$2.500 +12,5% GST dated 12 June 2006
It appears that these instructions were carried out as C&CT NZ rendered two invoices to GSI bearing the date of 16 March 2006 for:
IT services provided YTD 2005, as per your instructions $11,250
IT services provided YTD 2006 March, as per your instructions $33,750
C&CT NZ also rendered separate invoices to GSI for the months of April, May and June 2006 respectively. It appears that C&CT NZ thereafter rendered invoices to GSI on a monthly basis which GSI paid.
I accept that GSI was paying for IT services from the beginning of 2005 and that the amounts of NZ$2,500 that GSI paid into the New Zealand account of Mr Nolten were referrable to the arrangement that GSI had for the provision of IT services. In my view the evidence plainly shows that the opportunity to profit from an arrangement with GSI for IT services came to Mr Nolten and his corporate alter egos by reason of, and in the course of, Mr Nolten’s position as managing director of GA and not in any private capacity.
The evidence did not explain why Mr Nolten was personally paid NZ$2,500 a month for the IT services provided to GSI. I infer that at all relevant times Mr Alston was dealing with Mr Nolten and that Mr Nolten directed where the payments were to be made. Significantly, it is clear that whatever arrangement Mr Alston initially had for the provision of IT services to GSI, such arrangements could not have been with C&CT or C&CT NZ, as C&CT was not incorporated until 5 May 2005 and C&CT NZ was not incorporated until 1 February 2006.
It appears that Mr Alston thought that the IT services for which GSI was paying were the same services that C&CT provided to GA. In fact, C&CT only started to provide computer services to GA in late 2005, when GA changed to external data storage using “cloud computer” technology which it paid C&CT to install and maintain. Furthermore, there was no evidence that Mr Nolten or his corporate alter egos carried on independent operations for the provision of computing services to GA or anyone else prior to late 2005.
The evidence is unclear about the kind of computer services that GSI obtained under the arrangement that Mr Alston made with Mr Nolten. Mr Alston’s evidence was that GSI did get access to quotation and technical information from GA. Significantly, that was the only evidence of the “service” that GSI was provided. Moreover, it is apparent from the evidence that this “service” was something that GSI provided to all distributors through its computer network so that distributors could access quotation and technical information on GA’s database.
It is implausible that the service that Mr Nolten purportedly provided to GSI for a fee was unconnected Mr Nolten’s position as managing director of GA. I find that the benefit of the arrangement with GSI came to Mr Nolten by virtue of his position as managing director. I further find that Mr Nolten exploited that opportunity without disclosing his interest to the board of GA.
Senior counsel for the defendants argued that because of the IT outsourcing to C&CT in late 2005, there was no relevant diversion of business opportunity from GA to C&CT. It was submitted therefore that GA had no interest that could be in conflict with Mr Nolten’s interest in C&CT with respect to the provision of IT services to GSI. These contentions cannot be accepted. The evidence was that it was Mr Nolten who was in charge of the project to change GA’s computer system to “cloud computing”. Mr Nolten engaged C&CT to install and maintain GA’s “cloud computing” network, a company of which he was the directing mind and in which he held an interest. Mr Nolten did so without informing the board of GA of his interest in C&CT or of the extant arrangement that he had with GSI for GSI to access GA’s data for a fee. The argument that there was no diversion of business opportunity is unsustainable. Mr Nolten used his position as managing director of GA for personal gain. Mr Nolten had a clear conflict of interest in securing C&CT to provide computing services to GA, in place of GA’s existing computer system and a clear conflict of interest in relation to his arrangements with GSI. Mr Nolten exploited his position as managing director to profit for himself, which he did not disclose to the board of GA. This was a fundamental breach of his statutory[5] and fiduciary duties as a director of GA.
[5]Corporations Act 2001 (Cth) ss 181, 182 and 183.
In the circumstances, GA is entitled to an order that Mr Nolten and C&CT account for the profits made from the GSI arrangement.
C. Perth Rent Claim
Mr Nolten has admitted that he was a defaulting fiduciary on the claim that the fifth defendant (“TTM”), of which Mr Nolten was the directing mind, leased an office/warehouse to GA without Mr Nolten disclosing his interest in TTM to the board of GA at any relevant time. In issue is the relief to which GA is entitled arising from Mr Nolten’s breach of duties.
The office/warehouse is lot 8 in an industrial estate situated at 8/24 Belmont Avenue, Belmont, Perth, Western Australia. TTM purchased lot 8 on 12 July 2005 for $399,556 (exclusive of GST). TTM immediately leased the premises to GA for a term of five years with two options to renew of five years each. On 13 November 2006 TTM sold lot 8 subject to the lease for $560,000 and made a profit on the sale of $160,000.
Mr Nolten and TTM conceded that GA is entitled to an order for an account of profit on the sale of lot 8. GA has also sought:
(a) equitable compensation on a claim that the rent that it paid under the lease was in excess of market rent; and
(b) an account of the profit made by TTM under the lease based on market rent.
Mr Nolten and TTM dispute the claim for equitable compensation. They also dispute that they should account to GA for the profits under the lease.
(a) Was the rent in excess of market rent?
The commencing rent for the unit was $39,000 (exclusive of GST) with provision in the lease agreement for annual rent increases under a rent review clause.
(a) In 2006/7, the rent increased to $40,638;
(b) In 2007/8, the rent increased to $41,898;
(c) and in 2008/9, the rent increased to $45,000.
Each of these rent increases was a function of the rent review clause in the lease.
The allegation that the rent that GA paid TTM under the lease was in excess of market rent was based on a valuation report from Scott Bellerby, who gave expert evidence for GA in this proceeding. In Mr Bellerby’s expert opinion, a fair commencement market rent for lot 8 (exclusive of GST) was $28,300 pa, representing a rental return of $121 per square metre.
Mr Bellerby’s expert opinion was challenged by “factual evidence as to market rental” given by the developer of the estate, Christiaan Hazebroek. Mr Hazebroek’s evidence was that the lots in the estate were marketed for sale on the basis that purchasers could anticipate a rent return of a minimum of $190 per square metre based on a yield of approximately 9% of list price (including GST) as an appropriate rental. Mr Hazebroek said that lot 8 was purchased for the list price of $399,556 exclusive of GST ($439,511 inclusive of GST) and was the first lot in the estate to be leased. His evidence was that the lease of lot 8 by TTM to GA at a rent of $39,000 plus GST represented a return for TTM of $190 per square metre on a floor area of 232 square metres. He also gave evidence that the business records of the developer showed rental returns on the lease of other lots at the estate in 2006 as follows:
(a) lot 1 office/warehouse: $206 per square metre;
(b) lot 2 office/warehouse: $195 per square metre;
(c) lot 3 office/warehouse: $192 per square metre;
(d) lot 4 office/warehouse: $161 per square metre;
(e) lot 5 office/warehouse: $195 per square metre.
It was submitted for the defendants that these rental returns were the best evidence of market rent for lot 8. Mr Bellerby disagreed. He was of the opinion that only lot 4 was directly comparable. In his view, lot 4 provided “an excellent comparison”[6] but that the other lots would be expected to achieve a higher rate than lot 8. In his second report Mr Bellerby stated that lots 3 and 5 should properly be described as offices, not as office/warehouses which was the description that Mr Hazebroek had given them. Mr Bellerby opined that the rental evidence that he had analysed indicated that office units in the majority of cases would achieve a higher rental rate than office/warehouse units. Therefore it was essential to distinguish between the two types of units on the estate. Mr Bellerby rejected lots 3 and 5 as comparable rentals because they were offices. In addition, he opined that lot 3 also occupied a superior position to lot 8 which would be expected to achieve a higher rate. With regard to lot 1 he said that it occupied the most prominent position within the estate benefiting from excellent exposure to vehicular traffic and that it would be expected that this unit would achieve a rate above all others in the development. Mr Bellerby gave evidence that lot 2 also benefited from superior exposure to lot 8. He was also of the view that the negotiated rental was above market parameters. He supported his view by reference to the rental return on the office unit at lot 3.
[6]Exhibit 14, Letter from Scott Bellerby to David Leggat dated 17 September 2010.
Mr Hazebroek disagreed with Mr Bellerby’s view that there were differences between the lots for rental purposes. However, I prefer the evidence of Mr Bellerby to Mr Hazebroek on market rent for lot 8. In my view, Mr Hazebroek’s evidence cannot be relied on for establishing market rent for lot 8. There are a number of reasons for my view.
First, it may reasonably be inferred that TTM based the commencing rent of $39,000 on the representation from the developer that an appropriate rent was 9% of listed price. It may also be reasonably inferred that TTM calculated the rent on the GST inclusive price that it paid for lot 8: i.e. 9% of $439,511 which is $39,555. Although Mr Hazebroek said in evidence that projected leasing figures were calculated on the basis of a minimum of $190 per square metre based on a yield of approximately 9% of list price (including GST), in fact the marketing brochure gave indicative lease prices exclusive of GST for each lot based on 9% of the list price exclusive of GST and more particularly, not on a $190 per square metre return. For lot 8, the indicative lease price was shown as $35,960 exclusive of GST, on a sale price of $399,556 exclusive of GST, representing a 9% yield. This represented a rental return of $167 per square metre on a floor area of 232 square metres, not $190 per square metre. Mr Hazebroek was careful in his evidence to state that $190 per square metre rent return to TTM was based on a rental of $39,000 plus GST but the GST component distorts the true return to TTM.
Secondly, the figures presented by Mr Hazebroek about the rental returns for lots 1 to 5 in 2006 were not accompanied by any explanation as to how those returns were calculated. Nor was there any evidence to substantiate that they were arm’s length tenancies or evidence that the rentals were indicative of the range of rental returns within the estate. No finding is justified on these figures about market rent in the estate in 2006.
Thirdly, it is also apparent from the leasing figures for lots 1 to 5 that a minimum of $190 per square metre (inclusive of GST) was not obtained on all leases. This tends to support Mr Bellerby’s view that the lots were not directly comparable for rental purposes.
Fourthly, Mr Hazebroek’s background and experience in the rental market was not the subject of evidence. The basis on which he could reliably make a representation to purchasers of an anticipated return of a minimum of $190 per square metre (GST inclusive) at the estate was not explained. Nor was the basis for the representation to potential purchasers that 9% of listed price could be obtained from arm’s length tenants as an appropriate rental return the subject of evidence. I could not on the strength of Mr Hazebroek’s evidence make a finding either that a 9% yield or a return of $190 per square metre (GST inclusive) was an arm’s length market rent for lots in the estate.
I accept the evidence of Mr Bellerby on fair market rent for lot 8. I find that the commencement rent paid by GA was in excess of market rent by an amount of $10,700, being the difference between the rent paid of $39,000 and the fair market rent of $28,300 (exclusive of GST) determined by Mr Bellerby. I also find that GA continued to pay above market rent in the subsequent years, save in 2009. The excess over market rent in each year should not be taken to be the fair market value as determined by Mr Bellerby. Rather it should be calculated commensurately with the percentage increase each year under the rent review clause in the lease as rent increases in subsequent years were a function of the rent review clause in the lease.
(b) Equitable compensation claim
GA contended that Mr Nolten and TTM are liable to compensate GA for the loss that GA has suffered and that GA is entitled to an order for an award of equitable compensation.[7] It was submitted against GA that this was not a loss in any recognised sense and that an account of profits was the appropriate remedy. I reject that submission. In my view, GA is entitled to be placed in the position that it would have been if it had paid market rent,[8] and accordingly is entitled to an award of equitable compensation in relation to the excess rent that it paid on the lease.
[7]Pilmer v Duke Group Limited (in liq) (2001) 207 CLR 165; Target Holdings Ltd v Redferns (1995) 17 ACSR 582; Boardman v Phipps [1967] 2 AC 46; Hospital Products Limited v United Surgical Corporation (1984) 154 CLR 41; Hill v Rose (1990) VR 129.
[8]Warman International v Dwyer (1995) 182 CLR 544; Maguire v Makaronis (1997) 188 CLR 449.
(c) Account of profits on lease claim
GA also seeks an order that Mr Nolten and TTM make an account of the profits in respect of the lease based on the market rent. This remedy was disputed on two bases.
Senior Counsel for the defendants argued that such an account will have a “clear element of double-dipping”. It was argued that the double-dipping will arise because Mr Bellerby opined in his report that the sale price on unit 8 in November 2006 contained a profit rental component of $24,517.37. Senior Counsel submitted that an account of profit on the sale will necessarily result in Mr Nolten and TTM accounting for the full capital component generated by the excess rent. I do not accept this submission. Mr Nolten and TTM will not be required to account for more than what they received from the breach of duty. Rather, the two accountings will compel them to account for the whole of the profit made from the two sources, the market rent profit on leasing as well as the profit on sale. TTM has had the benefit of the market rent in addition to the higher sale price.
Secondly, it was argued that an account of profits in respect of the lease based on market rent would result in a windfall to GA because it has had the occupancy of the unit. Reliance was placed on the passage in Warman International Ltd v Dwyer[9] in which the High Court stated that “the liability of the fiduciary should not be transformed into a vehicle for the unjust enrichment of the plaintiff”.[10] In Harris v Digital Pulse Pty Ltd[11] Heydon JA (as he then was) stated:
On the one hand it is oppressive to impose burdens on a defaulting fiduciary which go beyond any benefit that he or she has received or any detriment suffered by the beneficiary. On the other hand it is not just for a beneficiary to receive a benefit in the nature of a windfall not reflecting any detriment suffered or benefit which the beneficiary ought to have received. The pertinence of the unjust enrichment of a beneficiary as a restraint on equitable remedies was emphasised in the joint judgment in Warman International Ltd v Dwyer.[12]
A defaulting fiduciary may not be required to account for profits that are the product or consequence of the fiduciary’s skill, efforts, property or resources.[13]
[9](1995) 182 CLR 544.
[10]Ibid 561.
[11](2003) 44 ACSR 390.
[12]Ibid [53].
[13]Warman International v Dwyer (1995) 182 CLR 544, 561.
The starting point is that GA is entitled to an account of the entire profit that Mr Nolten and TTM made out of Mr Nolten’s breach of duty so as to prevent their unjust enrichment at the expense of GA.[14] The onus lies on Mr Nolten and TTM to establish that it would be inequitable for GA to receive the entire profit and that some allowance should be made to them in respect of GA’s occupancy of TTM’s property.[15] In my view, they have not discharged the onus. There is no evidence before the Court about what the position would have been had GA not leased lot 8 from TTM. The evidence did not show that GA would have leased some other premises at the time had it not leased lot 8, nor did the evidence reveal whether it would have paid a commensurate rent to the fair market rent of lot 8.
[14]Dart Industries Inc v The Décor Corporation Pty Ltd (1992-1993) 179 CLR 101, 114-115.
[15]Warman International v Dwyer (1995) 182 CLR 544, 561.
Accordingly it has not been shown that GA would receive a windfall if they must account for the market rent to it nor that it would be unjustly enriched if no allowance was made.
D. Barkly Street Flat
Mr Nolten arranged temporary accommodation for visiting staff and guests of GA at a flat in Barkly Street, Sunbury owned by the sixth defendant (“Nolten Investments”), another company connected with Mr Nolten. Nolten Investments charged GA for the use of the flat, without Mr Nolten disclosing his interest in Nolten Investments to the board of GA. GA paid Nolten Investments $37,180 in accommodation fees.
Mr Nolten and Nolten Investments concede that they are required to account for the profits that they made out of this arrangement. However, they contend that there should be an allowance for accommodation fees that GA would have incurred had it used motel accommodation in lieu of the flat. The submission was put on three bases.
First, they relied on the evidence of the financial controller, Mr Tozer, who said he knew from about July 2005 that Mr Nolten had an interest in Nolten Investments. It was argued that GA should not get the profits that it effectively permitted Nolten Investments to make. However, the evidence did not support a finding that GA acquiesced to the arrangement. Mr Tozer’s evidence, which was unchallenged, was that he was “unable to prevent” GA from paying rent to Nolten Investments. Mr Tozer also gave evidence that once it was discovered that Nolten Investments was charging rent to GA, Mr Nolten arranged for another entity, Travel Store Pty Ltd, to render invoices for rent charged to GA. It was Mr Tozer’s view that Mr Nolten interposed Travel Store Pty Ltd to conceal the true arrangements from head office. Mr Tozer was not cross examined on that evidence.
Secondly, it was submitted that Mr Tozer did not allege deliberate non-disclosure by Mr Nolten of the use of the flat. However, the remedy, does not depend on the honesty of the fiduciary. The extent of the remedy depends on the extent to which the fiduciary was unjustly enriched.[16]
[16]Hospital Products Limited v United States Surgical Corporation (1984) 156 CLR 41, 107; Warman International Ltd v Dwyer (1995) 182 CLR 544, 557.
Thirdly, it was argued that it would not be proper for GA to obtain a windfall account of profits when Mr Tozer admitted in cross examination that he had consciously decided not to do a comparison on whether GA was better or worse off by using the flat. However, the onus was on Mr Nolten and Nolten Investments to establish what allowance should be made. That included establishing the quantum. Mr Tozer repeatedly said in cross examination that he did not inquire into what the rates would have been elsewhere because GA had ceased using the flat. I accept his explanation. It was open to the defendants to put forward evidence of likely accommodation costs at an alternate commercial premises just as it was for GA to undertake that exercise. They had the details of the accommodation for which GA was charged yet they put no evidence forward to show that their charges were commensurate with, or less than, motel accommodation in the area.
Accordingly I reject the contention that there should be an allowance for accommodation fees that GA would have incurred had it used accommodation.
E. Put and call options
GA and the third plaintiff (“GBV”) have made claims against Mr Nolten and Mr Nolten has counterclaimed against GA and GBV arising out of put and call options that he exercised over shares in GA.
Mr Nolten had a contractual right to call for shares in GA and to put such shares to GBV. Those contractual rights were in two agreements that he entered into with GA and GBV on 28 October 2003. The first agreement (“the Call Option Agreement”) entitled Mr Nolten to call for the issue of shares in GA in two lots, the first at any time after five years from 1 January 2003 and the second at any time after six years from 1 January 2003. The second agreement (“the Call and Put Option Agreement”) entitled him to put the shares that he obtained through the calls to GBV for a purchase price determined in accordance with the provisions of the agreement.
Mr Nolten exercised the first call option (“the first call”) for the issue of $38,500 shares in GA shares by a notice dated 28 October 2008. GA issued those shares to him for a subscription price of $58,000.
On 17 July 2009, Mr Nolten exercised the second option call for the issue to him of a further 38,500 shares in GA (“the second call”). Mr Nolten made the second call shortly prior to his dismissal from his employment, following notification from GA of its intention to dismiss him for setting up another company in competition with GA. Mr Nolten’s dismissal took effect on 23 July 2009 and he exercised the put option after he was dismissed, on 28 August 2009.
GA has refused to issue shares pursuant to the second call and, since July 2009, to pay dividends to Mr Nolten. GBV has refused to comply with its purchase obligations under the Call and Put Option Agreement. GA and GBV seek a declaration that the purported exercise by Mr Nolten of his rights pursuant to the two agreements is void and of no effect. They also submit that they are entitled to orders requiring Mr Nolten to transfer his GA shares to GA for no consideration, subject to an accounting for the subscription price, and requiring him to return the amounts paid to him as dividends in respect of the shares he held. By counterclaim, Mr Nolten sues on the validity of the exercises and seeks damages comprised of the exercise price of the put and unpaid dividends.
(a) General law claim
The plaintiffs’ general law claim is based on the allegation that Mr Nolten breached statutory and fiduciary duties that he owed to GA and his contractual duty of honesty in exercising the put and call options.
(i) Prescriptive and proscriptive obligations
It was submitted for Mr Nolten that “in truth” the attack on the exercise of the call and put options was based on a failure by Mr Nolten to disclose to GA that he was in breach of his fiduciary duty at the time of exercise of the first call option. It was submitted that Mr Nolten had no positive duty to GA to disclose his breaches of duties before exercising his contractual rights and that the claim must accordingly fail.
The law is well established that fiduciary duties are proscriptive, not prescriptive in nature.[17] Fiduciaries are not under a positive duty to act in the interests of the person/entity to whom they owe duties as fiduciaries. Rather, the obligation on a fiduciary is to avoid a breach of duties. In Fitzwood Pty Ltd v Unique Gold Pty Ltd (in liq),[18] Finkelstein J stated:
[T]hat which is often regarded as a fiduciary obligation of disclosure should not be seen as a positive duty resting on a fiduciary, but a means by which the fiduciary obtains the release or forgiveness of a negative duty; such as the duty to avoid a conflict of interest, or the duty not to make a secret profit.[19]
[17]Breen v Williams (1995-6) 186 CLR 71; Pilmer v Duke Group Ltd (in liq) (2001) 207 CLR 165.
[18](2001) 188 ALR 566.
[19]Ibid 576; see also P & V Industries Pty Ltd v Porto (2006) 14 VR 1; Pilmer v Duke GroupLtd(in liq) (2001) 207 CLR 165; Breen v Williams (1995-6) 186 CLR 71.
Thus, a fiduciary has no positive duty to disclose a conflict or profit out of his or her fiduciary position. However, if a fiduciary wants to enter into a transaction which would amount to a breach of duty, the fiduciary must make full disclosure to the person/entity to whom the duty is owed of all relevant facts known to the fiduciary. That person/entity must consent to the proscribed conduct of the fiduciary, if the fiduciary is to avoid liability.[20] The law does not relieve a fiduciary from breaches of fiduciary duty unless the fiduciary can demonstrate that he or she had the person/entity’s informed consent to the breach.
[20]Meager, R.P, Heydon, J.D and Leeming, M.J Equity Doctrines and Remedies (4th ed, 2002) [5-185].
(ii) The first call
Senior counsel for Mr Nolten relied on the statements of the Court of Appeal in Whitlam v Australian Securities and Investments Commission[21] to the effect that the relevant conduct, to constitute a breach of duties, must be conduct in the exercise of the director’s duties as a director. To put it another way, it must be conduct in the exercise of a director’s powers and not an exercise of power by the director in some other capacity.
[21](2003) 57 NSWLR 559.
The question for determination is whether Mr Nolten breached any duty that he owed to GA in his capacity as managing director of GA in his exercise of the first call. It was submitted for Mr Nolten that no duty was breached as he was simply exercising his private contractual right to call for the shares. I do not agree. At the relevant time, Mr Nolten also exercised his power as a director to approve the issue of shares to him giving effect to the first call. In exercising that power of approval in his capacity as managing director of GA, Mr Nolten was under a duty to GA not to misuse his position as managing director for personal gain, or place himself in a position of conflict of interest between his personal interest and the interests of GA except with GA’s fully informed consent.[22] In my view, Mr Nolten, in approving the share issue, misused his position as managing director of GA for personal gain and, by doing so, placed himself in a position of conflict of interest, which he did not disclose to GA.
[22]Chan v Zacharia (1984) 154 CLR 178.
The issue of shares in response to the call required the approval of the board of GA.[23] That approval was given by way of a circulating written resolution[24] signed by the directors, including Mr Nolten, in February and March 2009. The resolution was in the following terms:
The company, having received a Notice of Exercise of Call Option from Wouter Nolten dated 28th October 2008 in the prescribed form, approves the issue of 38,500 ordinary shares to Wouter Nolten in exchange for payment by Wouter Nolten of the Subscription Price (calculated in accordance with the Call Option Agreement between the Company, Groeneveld Transport Efficiency International Holdings BV and Walter Nolten dated 28 October 2003).[25]
The resolution also recorded that Mr Nolten “declared his interest in the subject matter of this resolution”. He did not, however, disclose to the board that he had engaged in conduct, as a director of GA, which may be a “proscribed circumstance”, as that term was defined in the Call Option Agreement.[26] This may have entitled GA to terminate his employment with GA, in which event, the call options under that agreement would have expired immediately and would not have been exercisable.[27]
[23]Call Option Agreement dated 28 October 2003, cl. 4.2.
[24]Corporations Act 2001 (Cth) s 249A.
[25]Directors Circulating Written Resolutions exhibit MTS-3 of the Supplementary Witness Statement of Matthew Tozur dated 14 September 2010.
[26]Call Option Agreement dated 28 October 2003, cl. 1
[27]Ibid, cl. 3.2
Evidence was led from two other directors, Hendrikus Groeneveld and John Hutchings who also signed the circulating resolution. Mr Groeneveld was a director of GA and GBV and Mr Hutchings a director of GA. Mr Groeneveld stated that he authorised the circulating resolution and also authorised the fourth director, Jan Bruinenberg to sign the circulating resolution on behalf of GA. Mr Groeneveld stated that at the time he authorised that resolution he was unaware that Mr Nolten had engaged in conduct that was in breach of his various duties as a director. He also gave evidence that he considered that such conduct triggered the “proscribed circumstance” provision in the Call Option Agreement. Mr Groeneveld stated that had he been aware of Mr Nolten’s misconduct, he definitely would not have authorised the resolution granting shares to Mr Nolten. Mr Hutchings gave evidence that he was also unaware of Mr Nolten’s conduct at the time that he signed the resolution.
I find on the evidence that Mr Nolten did not make full disclosure to the board of GA of the matters of which the other directors needed to be informed in order to give informed consent to the proscribed conduct. It was not enough for Mr Nolten to declare his interest in the share issue. In Centofanti v Eekimitor Pty Ltd,[28] King CJ said:
Having made proper disclosure to the board, was the plaintiff under any further fiduciary obligation? The nature and extent of any obligation remaining on an interested director after making disclosure, must depend upon the circumstances. If he votes, he must exercise his vote with due regard to his obligation to excise his powers for the benefit of the company. If he does not vote, the circumstances may be such that he can deal at arm's length with the company, consulting his own interests and leaving to the other, apparently competent and fully informed, directors the assessment of any risks and the merits of the proposal from the standpoint of the company. Where, however, the director conducts the day to day operations of the company or is otherwise possessed of knowledge relevant to the decision, which his co-directors do not possess, he may not be free to act in that way but may be obligated to act in a way which protects the interests of the company.[29]
In other words, the duty of Mr Nolten was to protect the interests of the company by disclosing to the board the matters that were relevant to GA’s decision to issue shares to him, not just to declare his personal interest in the share issue. Mr Nolten had a duty to act in good faith in approving the resolution and for a proper purpose, not for the collateral purpose of benefiting himself at the expense of the company[30] and, in failing to do so, breached his duty of loyalty to the company.[31] It was Mr Nolten’s responsibility as managing director of the company to ensure that the other directors appreciated the full nature of his conflict of interest. Mr Nolten should have made a full and frank disclosure of his conduct as a defaulting fiduciary, for the GA board to consider in determining whether it could, or should, issue shares to him.
[28](1995) 15 ACSR 629.
[29]Ibid 631-632.
[30]State of South Australia v Clark (1996) 19 ACSR 606; Permanent Building Society (in liq) v Wheeler (1994) 14 ACSR 109; Hospital Products Limited v United States Surgical Corporation (1984) 156 CLR 41.
[31]Hospital Products Limited v United States Surgical Corporation (1984) 156 CLR 41, Pilmer v Duke Group Limited (in liq) (2001) 207 CLR 165.
In Fitzsimmons v R,[32] the Full Court of the Western Australian Supreme Court stated:
Each case will depend on its own facts. A director who is confronted with a possible conflict must assess his or her position. The minimum requirement will be disclosure of the interest. This is simply part of, or an extension of, the statutory obligation that a director who is in any way “interested” in a contract or proposed contract with the company must declare the nature of the interest at a meeting of the directors: code s 232(1)(now s 231 of the Corporations Law). What action, above and beyond mere disclosure, the director must take will vary from case to case depending on the subject matter, the state of knowledge of the adverse information, the degree to which the director has been involved in the transaction, whether the director has been promoting the cause, the gravity of the possible outcome, the exigencies and commercial reality of the situation and so on. It may not be enough for the director simply to refrain from voting or even to absent himself or herself from the meeting during discussion of the impugned business. The circumstances may require the director to take some positive action to identify clearly the perceived conflict and to suggest a course of action to limit the possible damage. As Ipp J said in Permanent Building Society (in liq) v Wheeler (1994) 11 WAR 187 at 241; 14 ACSR 109:
[The director’s duty] was not affected by the fact that Hamilton believed that he had a conflict of interest and accordingly did not vote when the resolutions in question were taken. It was manifest that the transaction was capable of causing [the company] serious harm. In those circumstances, in my opinion, Hamilton could not avoid his duties … by asserting his perceived conflict of interest. It may be that, because of the conflict, he should not have spoken or voted in favour of the resolution. But as [a director] there was a responsibility on him to ensure that the other directors appreciated the potential harm inherent in the transaction, and to point out steps that could be taken to reduce the possibility of harm. Hamilton could not avoid that duty by, metaphorically speaking, burying his head in the sand while his co-directors discussed whether [the company] should enter into such a potentially detrimental transaction: see Joint Stock Discount Co v Brown (1869) LR 8 Eq 381 at 402-4 cf Re Southern Resources Ltd; Residues Treatment & Trading Co Ltd (1989) 15 ACLR 770 at 784-5; Darval v North Sydney Brick & Tile Co Ltd at 270, 284.[33]
In the present case, Mr Nolten did not avoid his duties merely by declaring his interest in the subject matter of the resolution. The nature of the conflict was such that there was the responsibility on him to ensure that the other directors appreciated that the conditions necessary for termination in “proscribed circumstances” may have been satisfied, entitling GA to terminate his employment, which would cause the options to expire immediately.
[32](1997) 23 ACSR 355.
[33]Ibid 358.
Articles 88 and 109 of the Articles of Association of GA do not help Mr Nolten. Article 88 made provision for a director to vote on and implement a transaction in which he or she had a personal interest, subject to disclosure of that personal interest. Article 109 provided for the circular resolution to be valid and effectual, as if passed at a meeting of directors. Mr Nolten was not disqualified from voting because of his personal interest in the share issue, subject to making disclosure of that interest to the board of GA which he purported to do. However that disclosure could not, and did not, affect his duties to GA to act in good faith and for a proper purpose in exercising his vote.[34] I have held that he breached both duties when he voted on the share issue.
[34]Centofanti v Eekimitor Pty Ltd (1995) 15 ACSR 629; Australian Growth Resources Corp Pty Ltd v Van Reesema (1988) 13 ACLR 261.
Moreover I am not satisfied on the evidence that Mr Nolten did, in any event, declare the nature and extent of his personal interest in the share issue. The resolution merely recorded that he “declared his interest in the subject matter of this resolution”. The evidence showed that the other directors were not made fully aware of the circumstances in which they were asked to approve the share issue.[35]
[35]Cf Woolworths Ltd v Kelly (1992) 22 NSWLR 189.
I therefore conclude that the resolution was not validly passed by the board of GA because Mr Nolten did not fully and properly disclose his interest as required by article 88. I also conclude that the resolution of the board did not absolve Mr Nolten from any breach of duty as Mr Nolten failed to make full disclosure. The resolution was procured by Mr Nolten’s conduct in breach of his duty to exercise his vote with a view to the benefit of the company as a whole and not for the collateral purpose of benefiting himself.
(iii) The second call
The same analysis applies in relation to the second call. The second call occurred before his employment was terminated but after GA had become aware that he was seeking to set up a company in competition. Even then, the other directors of GA remained ignorant of the extent to which Mr Nolten was a defaulting fiduciary. Mr Nolten did not make disclosure of the extent to which he was a defaulting fiduciary which he was obliged to do, as he was still a director of GA and therefore subject to the duty to avoid a conflict of interest.
(iv) Put option
Accordingly it follows that the exercise of the put option was invalid. The exercise of the put option depended upon Mr Nolten validly exercising the call options.
(v) Conclusion
I find that Mr Nolten breached statutory and fiduciary duties that he owed to GA in exercising the call and put options and in authorising the issue of shares to him pursuant to the exercise of the first call. I also find that the resolution approving the share issue on the first call was invalidly made. Accordingly the plaintiffs are entitled to relief under the general law claim.
(b) Misleading and deceptive conduct: Fair Trading Act claim
It is alleged that between approximately early 2005 and mid July 2009 Mr Nolten represented to GA and GBV that he was performing his duties as managing director of GA consistently with his statutory and fiduciary obligations. It was also alleged that Mr Nolten knew that those representations were false, misleading and deceptive and that GA and GBV were unaware of his defaults. I have already held that Mr Nolten was in breach of his duty to GA, as its managing director, to act in good faith in relation to the share issue authorisation resolution and to act for a proper and not collateral purpose. In my opinion, the failure of Mr Nolten to bring to the attention of GA the nature of the activities in which he was engaged in breach of his fiduciary and statutory duties to GA also constituted misleading or deceptive conduct for the purposes of s 9 of the Fair Trading Act1999 (Vic) (“Fair Trading Act”).
The authorities establish that silence may constitute misleading or deceptive conduct. In Demagogue Pty Ltd v Ramensky[36] Black CJ stated:
Silence is to be assessed as a circumstance like any other. To say this is certainly not to impose any general duty of disclosure; the question is simply whether, having regard to all the relevant circumstances, there has been conduct that is misleading or deceptive or that is likely to mislead or deceive. To speak of "mere silence" or of a duty of disclosure can divert attention from that primary question. Although "mere silence" is a convenient way of describing some fact situations, there is in truth no such thing as "mere silence" because the significance of silence always falls to be considered in the context in which it occurs. That context may or may not include facts giving rise to a reasonable expectation, in the circumstances of the case, that if particular matters exist they will be disclosed.[37]
In my opinion, it was reasonable for the other directors of GA to expect that Mr Nolten was discharging his duties as managing director of GA consistently with his fiduciary and statutory obligations.
[36](1992) 39 FCR 31 (Black CJ, Gummow & Cooper JJ).
[37]Ibid [32].
In Winterton Constructions Pty Ltd v Hambros Australia Ltd[38] Hill J said:
Obviously, it is difficult to see how a mere silence could, of itself, constitute conduct which is misleading or deceptive … However, if the circumstances are such that a person is entitled to believe that a relevant matter affecting him or her adversely would, if it existed, be communicated, then the failure to so communicate it may constitute conduct which is misleading or deceptive because the person who ultimately may act to his or her detriment is entitled to infer from the silence that no danger of detriment existed.[39]
Relevantly, Article 88 of the articles of association specifically required Mr Nolten to disclose his personal interest. The other directors were entitled to infer from that what was disclosed that Mr Nolten was acting in good faith and for a proper purpose in authorising the share issue. Mr Nolten exercised the first call in circumstances where he held himself out to the other directors that the call option was properly exercisable and in circumstances where the other directors were entitled to infer that there were no proscribed circumstances that might defeat his entitlement.
[38](1992) 111 ALR 649.
[39]Ibid 666.
I find that the other directors were plainly induced by the misleading or deceptive conduct to authorise the share issue. The other directors were labouring under the erroneous assumption that there was no basis to terminate Mr Nolten’s employment in proscribed circumstances.[40] The evidence of Mr Groeneveld was that had he known of Mr Nolten’s conduct, he would have terminated him at any time as from early 2004 when Mr Nolten’s dishonest conduct commenced. Had that occurred, Mr Nolten’s options would have expired and would not have been available for exercise.
[40]Taco Company of Australia Inc v Taco Bell Pty Ltd (1982) 42 ALR 177, 200; Johnson Tiles Pty Ltd v Esso Australia Pty Ltd (2000) 104 FCR 564.
Finally I conclude that the misleading or deceptive conduct was “in trade or commerce” as that phrase appears in s 9 of the Fair Trading Act. In Concrete Constructions (NSW) Pty Limited v Nelson[41] the High Court said about the phrase “trade or commerce” in the equivalent s 52 of the Trade Practices Act 1974 (Cth):
[I]t is plain that s 52 was not intended to extend to all conduct, regardless of its nature, in which a corporation might engage in the course of, or for the purposes of, its overall trading or commercial business … What the section is concerned with is the conduct of a corporation towards persons, be they consumers or not, with whom it … has or may have dealings in the course of those activities or transactions which, of their nature, bear a trading or commercial character.[42]
Each of the activities of Mr Nolten constituting the breaches of fiduciary and statutory duties were carried out by him in his capacity as managing director of GA in the context of the commercial operations of that company. That conduct was plainly connected with the commercial activities of GA and of a commercial nature.
[41](1990) 169 CLR 594.
[42]Ibid 603-604.
Accordingly GA and GVB are entitled to relief for Mr Nolten’s contravention of s 9 of the Fair Trading Act.
(c) Deceit
GA and GVB also relied on the tort of deceit. There must be proof of fraud to sustain an action for deceit but the authorities have made it clear that fraud is proved when it is shown that a false representation had been made:
(a) knowingly; or
(b) without belief in its truth; or
(c) recklessly as to its truth or falsity.
Secondly it must be shown that the false representation was made with the intention that the plaintiff should act in reliance on it. Thirdly that the plaintiff has suffered damage as a result of relying upon the false representation.[43]
[43]Smith v Chadwick (1884) 9 AC 187; Derry v Peek (1889) 14 AC 337; Magill v Magill (2006) 226 CLR 551.
The evidence disclosed that:
(a) Mr Nolten represented to GA that he was discharging his functions and responsibilities as managing director of GA consistently with the fiduciary and statutory duties that he owed to GA by that position;
(b) Mr Nolten deliberately concealed the truth from GA;
(c) Mr Nolten intended to keep the other directors of GA in ignorance of the various activities that he had engaged in since 2004 in breach of his fiduciary and statutory duties so that they would not terminate his employment and would allot shares to him on the exercise of his options.
The representation that he was discharging his functions and responsibilities as managing director of GA consistently with the fiduciary and statutory duties that he owed to GA by that position was patently false and, in my view, was conveyed knowingly to the board of GA by holding himself out as so discharging his duties, when he knew that he was not.
I am also satisfied that the board of GA was induced by that representation to approve the share issue in ignorance that that there may be a reason to terminate Mr Nolten’s employment in “proscribed circumstances”, namely that he had committed “an act of dishonesty in relation to [GA]”.[44] It is sufficient for this purpose that the representation was an inducing cause. It did not need to be shown that it was the only inducing cause.[45]
[44]Call and Put Option Agreement dated 28 October 2003, cl. 3.2; Beach Petroleum NL v Johnson (1993) 11 ACSR 103.
[45]Demetrious v Gikas Dry Cleaning Industries (1991) 22 NSWLR 561, Young, Croft and Smith, On Equity (1st ed, 2009) [7.300].
Accordingly I find that the deceit claim has been made out against Mr Nolten.
(d) “Good faith” term
The plaintiffs alleged that there was a “good faith” implied term in both option agreements to the effect that Mr Nolten’s rights pursuant to those agreements were conditional on him continuing to act as managing director in the interests of GA and for a proper purpose (“the good faith term”). It was further submitted that Mr Nolten was in clear breach of the good faith term and, in consequence, that the purported exercises of the first and second calls were void and of no effect.
It is well established that the enjoyment of rights under a contract may be restricted by a “good faith” term implied into the terms of the contract.[46] The law is unsettled on whether a good faith term may be implied as a matter of legal incident out of the contract or whether such a term should be implied as a specific term of a contract.[47] In Garry Rogers Motors (Aust) Pty Ltd v Subaru (Aust) Pty Ltd[48] Finkelstein J observed that:
[46]Breen v Williams (1995-6) 186 CLR 71; Hudson Resources Ltd v Australian Diatomite Mining Pty Ltd [2002] NSWSC 314 (Unreported, Einstein J, 3 May 2002); BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266, 283.
[47]Esso Australia Resources Pty Ltd v Southern Petroleum NL [2005] VSCA 228 (Unreported, Warren CJ, Buchanan JA and Osborn AJA, 15 September 2005).
[48](1999) ATPR 41-703.
Recent cases make it clear that in appropriate contracts, perhaps even in all commercial contracts, such a term will ordinarily be implied; not as an ad hoc term (based on the presumed intention of the parties) but as a legal incident of the relationship: see eg Renard Constructions (ME) Pty Ltd v Minister for Public Works [1992] 26 NSWLR 234; Hughes Aircraft Systems International v Airservices Australia (1997) 146 ALR 1; Alcatel Australia Ltd v Scarcella [1998] 44 NSWLR 349.[49]
[49]Ibid [34].
The Victorian Court of Appeal in Esso Australia Resources Pty Ltd v Southern Pacific Petroleum NL[50] doubted that commercial contracts were a class of contracts carrying a generic implied term of good faith, so that an obligation of good faith applies indiscriminately to all the rights and power conferred by a commercial contract.[51] Buchanan JA nonetheless stated:
It may, however, be appropriate in a particular case to import such an obligation to protect a vulnerable party from exploitive conduct which subverts the original purpose for which the contract was made. Implication in this fashion is perhaps ad hoc implication meeting the tests laid down in BP Refinery (Westernport) Pty Ltd v Shire of Hastings, rather than implication as a matter of law creating a legal incident of contracts of a certain type.[52] (footnotes omitted)
Thus the approach in many cases has been to consider whether the implication of a good faith term results in the conclusion that a contracting party has acted in breach of that obligation.
[50][2005] VSCA 228 (Unreported, Warren CJ, Buchanan JA and Osborn AJA, 15 September 2005).
[51]Ibid.
[52]Ibid [25].
Although the scope of such a term is imprecise, it recognizes standards of fair dealing in the exercise of contractual rights.[53] It is not helpful in this context to attempt to define that scope, as the cases demonstrate that “good faith” is not a fixed concept.[54] It is sufficient to note that a good faith term operates to ensure that parties to a contract perform the contract that they bargained for as a matter of substance, rather than merely as a matter of form.[55] If such a term is implied, it will require the parties to act fairly and in good faith. The term may act as a restriction on the exercise of a power if breached but not conversely as a restriction on a contracting party’s legitimate interests.[56] As Finkelstein J observed in Garry Rogers Motors (Aust) Pty Ltd v Subaru (Aust) Pty Ltd:[57]
…. provided the party exercising the power acts reasonably in all the circumstances, the duty to act fairly and in good faith will ordinarily be satisfied.[58]
In other words, the implied requirement of good faith is satisfied if the party acts for a proper purpose and consistently with the intent of the bargain reached between the parties.
[53]Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234; see generally: Seddon, N.C and Ellinghaus, M.P, Cheshire and Fifoot’s Law of Contract (9th Australian ed, 2008) [10.43] – [10.446] 446-452; Carter, J.W, Peden, E and Tolhurst, G.J, Contract law in Australia (5th ed, 2007) ch 2.
[54]Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234; State of South Australia v Clark (1996) 19 ACSR 606.
[55]Metropolitan Life Insurance co v RPR Nabisco Inc (1989) 716 F Supp 1504, 1517 (Walker J).
[56]Esso Australia Resources Pty Ltd v Southern Pacific Petroleum NL [2005] VSCA 228 (Unreported, Warren CJ, Buchanan JA and Osborn AJA, 15 September 2005) [24].
[57](1999) ATPR 41-703.
[58]Ibid [37].
In my view, there is no question that the implication of a good faith term results in the conclusion that Mr Nolten acted in breach of that obligation in exercising the first and second calls and the put option, whether the term is found, by implication, to be a generic term of the contract or as a specific term in relation to the exercise of the call.
First, had GA known about the breaches before the first call was made, GA had cause to consider whether it could terminate Mr Nolten’s employment for a “proscribed circumstance”, which included “any dishonesty in relation to GA”.[59] The options would have been cancelled immediately if his employment was terminated for a proscribed circumstance.
[59]Call and Put Option Agreement dated 28 October 2003, cl. 3.2; Beach Petroleum NL v Johnson (1993) 11 ACSR 103.
Secondly, Mr Nolten owed fiduciary and statutory duties to GA by reason of his position as managing director.
Thirdly, Mr Nolten deliberately and consciously led GA to believe that he was discharging his functions and responsibilities as managing director of GA consistently with the fiduciary and statutory duties that he owed to GA. Mr Nolten knowingly held himself out to the board of GA that he was so discharging his duties.
Fourthly, I have found and Mr Nolten has conceded that he had acted in breach of his duties and had so acted prior to his exercise of the options.
Fifthly, had Mr Nolten not been in breach of his duties, a good faith term would not in the circumstances have prevented him from exercising his contractual right. The implication of a good faith term is entirely consistent with the express terms of the contract.
Accordingly, I am satisfied that a good faith term is found by implication in the Call Option Agreement in relation to the exercise of call options and that the term was breached.
F. Declarations
The plaintiffs have sought declarations against Mr Nolten under s 1317E of the Corporations Act2001 (Cth) (“Corporations Act”)that he breached:
(a)his duty as prescribed by s 181 of the Corporations Act to exercise his powers and discharge his duties in good faith in the best interests of GA and for a proper purpose;
(b)his duty as prescribed by s 182 of the Corporations Act not to use his position as managing director improperly to gain an advantage for himself or someone else or to cause detriment to GA; and
(c)his duty as prescribed by s 183 of the Corporations Act not to use information improperly obtained by him in his capacity as managing director of GA to gain an advantage for himself or someone else or to cause detriment to GA.
The plaintiffs have also sought declarations that Mr Nolten:
(a) contravened the fiduciary duties that he owed to GA;
(b)contravened his contractual obligation to act honestly and in the best interests of GA; and
(c)is estopped from relying on or seeking to enforce his contractual rights under the call option agreement and the call and put option agreement.
It was submitted for Mr Nolten that the declaratory relief should not be granted because the relief would have no practical utility, given that judgment against him on the plaintiffs’ claims will result in monetary awards becoming payable to the plaintiffs.
The plaintiffs do not have standing to seek declarations under s 1317E of the Corporations Act in relation to Mr Nolten’s breaches of his statutory duties. Section 1317J(1) of the Corporations Act provides that such declarations can only be applied for by ASIC. Accordingly, I refuse to grant any declaratory relief under s 1317E of the Corporations Act.
I am also of the view that there is no utility in granting the declarations for breaches of general law duties. In Ainsworth v Criminal Justice Commission[60] the plurality of the High Court stated:
[60](1992) 175 CLR 564 (Mason CJ, Dawson, Toohey, Gaudron JJ).
… declaratory relief must be directed to the determination of legal controversies and not to answering abstract or hypothetical questions. The person seeking relief must have a “real interest” and relief will not be granted if the question “is purely hypothetical”, if relief is “claimed in relation to circumstances that [have] not occurred and might never happen” or if “the Court’s declaration will produce no foreseeable consequences for the parties.”[61] (footnotes omitted)
The plaintiffs are entitled to remedies for breach of fiduciary and statutory duties without the need for the Court to make the declarations that are sought. The foundation for those remedies is contained in the findings in this judgment. The plaintiffs are entitled to judgment against the defendants accordingly and appropriate remedies based on those findings. Declarations for breaches of general law duties will produce no foreseeable consequences for the parties.
G.Conclusion
[61]Ibid 582.
For these reasons, the plaintiffs are entitled to judgment on all claims against the defendants. I propose to provide a short time to the plaintiffs to submit a form of order that will give effect to these reasons for decision.
SCHEDULE OF PARTIES
| S CI 2009 07564 | |
| BETWEEN: | |
| GROENEVELD AUSTRALIA PTY LTD (ACN 070 025 795) | Firstnamed Plaintiff |
| GROENEVELD TRANSPORT EFFICIENCY INTERNATIONAL HOLDING BV | Secondnamed Plaintiff |
| GROENEVELD TRANSPORT EFFICIENCY BV | Thirdnamed Plaintiff |
| - and - | |
| WOUTER NOLTEN | Firstnamed Defendant |
| BARRY WOODS | Secondnamed Defendant |
| LUBECORE (AUST) PTY LTD (ACN 136 643 019) | Thirdnamed Defendant |
| COMPUTER COMMUNICATIONS TECHNOLOGY (ACN 114 131 163) | Fourthnamed Defendant |
| TTM AUSTRALIA PTY LTD (ACN 114 895 215) | Fifthnamed Defendant |
| NOLTEN INVESTMENTS PTY LTD (ACN 113 166 448) | Sixthnamed Defendant |
3
18
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