Johnstone v Hastings Fund Management Ltd
[2005] VSC 105
•8 April 2005
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
commercial & equity DIVISION
COMMERCIAL LIST
No. 5251 of 2005
Folio 5816
| PETER JAMES JOHNSTONE | Plaintiff |
| v | |
| HASTINGS FUND MANAGEMENT LTD & ORS | Defendants |
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JUDGE: | WHELAN J. | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 7 April 2005 | |
DATE OF JUDGMENT: | 8 April 2005 | |
CASE MAY BE CITED AS: | Johnstone v Hastings Fund Management | |
MEDIUM NEUTRAL CITATION: | [2005] VSC 105 | |
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EQUITY – Application for interlocutory injunction – Disputed termination of employment – Serious question to be tried on contract construction issue – Balance of convenience favours defendant – Important for company to have chief executive officer supported by the board.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr M.A. Robins | Nathan Kuperholz |
| For the First and Second Defendants | Mr S.R. Horgan | Freehills |
| For the Third Defendant | Mr P. Zappia | Blake Dawson Waldron |
HIS HONOUR:
In this matter the plaintiff seeks an injunction restraining the third defendant from terminating the plaintiff’s employment and restraining the first and second defendants from procuring that termination until the hearing and determination of this proceeding. The plaintiff, Mr Johnstone, is, or was, the chief executive officer of the third defendant (“Goodstone”). The first two defendants are together the holders of 49.99 per cent of the shares in Goodstone. Goodstone is the parent company of a group known as the IP Group.
The first defendant (“HFM”) and the second defendant (“Seafirst”) invested $27m in Goodstone some years ago. Disputes arose consequent upon that investment including disputes concerning the plaintiff’s continuation as chief executive. There were legal proceedings and an interlocutory injunction was granted on 28 May 2003 by Cummins J enjoining the termination of Mr Johnstone’s employment. In due course those disputes were settled. A deed of settlement was drawn up and executed (“the 2003 deed”). It is dated 13 October 2003.
The 2003 deed provided, in Clause 7.1, for the future calculation of the value of the HFM-Seafirst investment. If that calculation were less than $27m, then there were provisions imposing upon what are defined as the Johnstone parties a qualified obligation to make good the shortfall.
The process whereby the calculation is to be made is relevantly provided for as follows in clause 7.1(a) of the 2003 deed:
“Subject to Clause 7.2, by no later than 31 March of each year following a Performance Period the Hastings/Seafirst Value of the Business for the respective Performance Period will be determined by the Company and agreed to between the Company and the Auditors acting as experts (and failing agreement will be as determined by the Auditors) in accordance with the following formula:
”
V=
Clause 10 of the 2003 deed deals with Mr Johnstone’s employment as chief executive officer. Amongst other things, it provides for amendment of his employment deed.
By an amending deed of 26 February 2004 (“the employment deed”) entered into pursuant to the terms of the 2003 deed, provision was made as to the term of Mr Johnstone’s continued employment as chief executive officer. Clause 4 of that deed relevantly provides:
“4.1Subject to clause 4.2 and clause 6, the Employee’s employment in the position of Chief Executive Officer of the Company will terminate, and the Employment Deed will expire on the earlier of:
(a)the date on which the Company receives the Auditor’s report in respect of the determination of the Hastings/Seafirst Value of the Business in accordance with clause 7.1 of the 2003 Deed of Settlement in respect of the Performance Period ending 31 December 2004;
(b)31 March 2005 . . .
4.2:Subject to clause 6 of this Deed of Variation, if the Hastings/Seafirst Value of the Business for the Performance Period ending 31 December 2004, calculated in accordance with clause 7.1 of the 2003 Deed of Settlement, is equal to or greater than $27m, then:
(a)the Employee’s employment in the position of Chief Executive Officer of the company will continue until 31 December 2005 … ”
In August 2004 the IP Group’s European business assets were sold. An asset sale and purchase agreement was executed with a US purchaser. The “initial consideration” for that sale was €13,100,000.
By a letter of 20 January 2005 Mr Johnstone wrote to HFM. That letter relevantly reads as follows:
“As you know, Goodstone International Pty Ltd sold IP Europe Ltd in August 2004 for approximately $20m more than its book value.
Pursuant to clause 7.1 of the Deed, the 2003 and 2004 calculations of the Hastings/Seafirst value of the Business, (i.e. ‘V’) are being prepared. The sale of IP Europe Ltd was clearly not contemplated at the time the Deed was executed, but the proceeds from the sale of IP Europe Ltd should not be treated as abnormal income. Rather they should be treated as earnings.
In addition to the profit made on the sale of IP Europe Ltd, you will be aware that there are significant abnormal items relating to the sale. All of the abnormal items resulting from the sale of IP Europe Ltd must be added back to earnings as well.
If you do not agree, then I intend seeking clarification of the effect of the sale of IP Europe Ltd on the Deed from the Supreme Court of Victoria, and therefore request that you confirm your agreement or otherwise to me in writing by the close of business on Friday 4 February 2005.” (Emphasis in original)
Mr Johnstone did not take, and has not yet taken, the course he foreshadowed in his letter of 20 January 2005. Instead he issued this proceeding on 30 March 2005 and sought an urgent injunction on short notice in the Practice Court. The matter was referred to me in the Commercial List and adjourned to 7 April. Undertakings were given to preserve the position and were extended on 7 April until 5 p.m. on 8 April.
The allegations which are made in the general indorsement on the writ are that there are implied terms in the 2003 deed and a duty to act in good faith. In substance, it is alleged that the effect of these terms and of that duty is that the defendants are obliged to “allow for a proportionate reduction of the required ‘V’ of 27 million dollars under clause 7 of the 2003 Deed given that Goodstone sold or otherwise disposed of the part of the Business comprised in the IP Europe sale.” A claim is also made in the alternative to rectify the 2003 deed so as to provide for that proportionate reduction.
In the course of the hearing on 7 April 2005 Mr Robins, counsel for Mr Johnstone, foreshadowed further claims. The first is a claim that Mr Johnstone’s employment cannot terminate until V is calculated in accordance with clause 7 of the 2003 deed. It is clear on the material that that has not yet been done. The second is a claim that V must be calculated by including the proceeds of sale of the European business as ordinary earnings and/or by reconstructing the European earnings. It is said that V will, or may, then exceed $27m. While some reference was made in earlier materials to these propositions, they were not articulated as claims to be made in this proceeding until 7 April 2005. They are not referred to in the indorsement on the writ.
Mr Robins on behalf of the plaintiff submitted that there was clearly a serious question to be tried. In relation to the alleged obligation to act in good faith he relied upon Renard Constructions (ME) Pty Ltd v Minister for Public Works;[1] Bamco Villa Pty Ltd v Montedeen Pty Ltd;[2] Golden Sands Pty Ltd v Davegale Pty Ltd;[3] and Garry Rogers Motors (Aust) Pty Ltd v Subaru (Aust) Pty Ltd.[4] As to the alleged implied terms he relied upon authorities dealing with terms which are readily implied, and in particular upon Ansett Transport Industries (Operations) Pty Ltd v The Commonwealth;[5] Breen v Williams;[6] Byrne v Australian Airlines Ltd;[7] and Secured Income Real Estate (Australia) Limited v St Martins Investments Pty Ltd.[8]
[1](1992) 26 NSWLR 234.
[2][2002] VSC 184.
[3][2003] VSC 458.
[4][1999] FCA 903; (1999) ATPR 41-703.
[5](1977) 139 CLR 54.
[6](1996) 186 CLR 71.
[7](1995) 185 CLR 410.
[8](1979) 144 CLR 596.
On the issue of alleged breach, the plaintiff’s position has not been consistent. In the letter of 20 January 2005, quoted above, the position put was that the calculation should be carried out, and indeed was being carried out, but that the proceeds of sale from Europe should be treated as earnings and that abnormal items must be “added back.” In the affidavit Mr Johnstone swore on 30 March 2005 the position deposed to was that, given the European sale, there was: “… no realistic possibility for the IP Group’s EBITDAA to come close to the amount necessary for V to reach $27 million.” (Paragraph 34 and see also paragraphs 22, 28 and 40). On 7 April 2005 a further affidavit by Mr Johnstone was filed, and submissions were made, asserting that, provided what was said to be proper allowances and adjustments were made, a V of $27m would or might be achieved. Mr Johnstone produced calculations to demonstrate this proposition as “PJJ19.” Only one of the two calculations in that exhibit does exceed $27m, and that result is achieved by adding back to earnings the difference between the actual and budgeted results for European operations. In other words, the calculation is done on the budgeted figures, not the actual figures. It is said that this is necessary because the European operations were run down at the purchaser’s request prior to sale. What justification there is, or could be, in the 2003 deed for such an approach was not made clear.
In submissions Mr Robins focused on the argument that as a matter of construction Mr Johnstone’s employment is not terminated until V is calculated. He referred to material suggesting that this could be done in approximately five weeks, and said an injunction should at least be granted until then.
As to the balance of convenience, Mr Johnstone deposed to the following detriments as a result of his termination:
(a)potential interference with complex negotiations for an acquisition in New Zealand;
(b)damage to his reputation in the industry;
(c)damage to his relationship with the group’s financier;
(d)irredeemable harm to his credibility with employees, customers and suppliers;
(e)the risk that HFM and Seafirst will not maximise Goodstone’s earnings; and
(f)he will find it much more difficult to meet personal obligations he has to financiers.
In submissions, Mr Robins emphasised the stigma which he said would attach to Mr Johnstone, the founder of the business, as a result of what he characterised as his “sacking”.
Mr Horgan, who appeared for HFM and Seafirst, submitted that there was no serious question to be tried on any of the claims made or foreshadowed. In so far as reliance was placed by the plaintiff on an obligation to act in good faith or upon implied terms not to frustrate the contract or derogate from the mutual grant of rights, he submitted that there was simply no evidence of any lack of good faith or other conduct which might breach such an implied term. He submitted that, in any event, under the employment deed termination was automatic on 31 March 2005.
The alleged implied terms having the asserted effect of reducing the threshold figure for V were, he submitted, without basis and clearly outside the requirements of Codelfa Construction Pty Ltd v State Rail Authority (NSW).[9] As to the foreshadowed claim that as a matter of construction, Mr Johnstone’s employment is not terminated until V is calculated, he submitted that as a matter of construction that claim was not arguable. Further, he submitted it was Mr Johnstone’s responsibility to ensure that V was calculated by 31 March 2005. Mr Horgan relied upon material suggesting there was no prospect that any proper calculation of V would approach $27m or any figure near it.
[9](1982) 149 CLR 337.
Mr Horgan also submitted courts are, and should be, reluctant make orders the effect of which are to specifically enforce contracts of personal service. Counsel before me debated the authorities on this issue, but in the end each reached a similar position, it seems to me; namely, that such orders can be made in an appropriate case, but there is a reluctance to do so where the effect is to force unwilling parties to continue a relationship which is or ought to be based on trust and co‑operation.
As to the balance of convenience, HFM and Seafirst rely heavily upon the fact that they, as substantial shareholders, have lost confidence in Mr Johnstone and upon the fact that on any view Mr Johnstone’s departure must occur on 31 December 2005. As to the specific detriments suggested by Mr Johnstone, HFM and Seafirst rely on the fact that Mr Johnstone will remain a non-executive director. They say he has other business interests. They say the suggestions of loss of credibility and reputation are without substance. They reject the suggestion the company would not seek to maximise earnings if Mr Johnstone was not CEO, and as to his personal hardship they point to his entitlement to a termination payment of $70,000.
Mr Horgan also submitted that the plaintiff had been guilty of delay such as to disentitle him to relief. He points in this regard to the letter of 20 January 2005 and to the fact that this application was not made until 30 March 2005, literally the last day.
Mr Zappia appeared on behalf of the company and indicated that there were no submissions which the company wished to make.
In my view, there is a serious question to be tried here. I base that conclusion substantially upon the foreshadowed claim that on a proper construction of clause 4 of the employment deed Mr Johnstone’s employment is not terminated until V is calculated.
Notwithstanding that conclusion, the following features of the case have relevance to the issue of whether relief ought to be granted:
(a)Mr Horgan’s submissions as to the case based on implied terms and a duty of good faith have force. The plaintiff will, it seems to me, face significant obstacles in establishing these claims.
(b)The indorsement on the writ is confined to the claims which seem to me to face significant obstacles.
(c)The shifting position Mr Johnstone has adopted suggests to me that he is, or has been, searching for, rather than pursuing, a case.
(d)The aspect of the foreshadowed claims which has most substance would only delay termination for a period of weeks, unless it does transpire that V is calculated at a figure equal to or exceeding $27m.
I take these matters into account when I turn to assess the balance of convenience.
I am not persuaded that the balance of convenience favours the plaintiff here. It seems to me that the position now pertaining where there is uncertainty as to whether the chief executive officer is currently holding his office, HFM and Seafirst contending termination was automatic on 31 March 2005; where the chief executive officer is in litigation with the company and two of the major shareholders; and where on any view that chief executive officer must leave in nine months, is an entirely unsatisfactory position and one which represents a considerable risk to the interests of all shareholders.
The rights and wrongs of what has occurred can be litigated later and damages can be awarded if it is found that wrongs have been committed, but it seems to me that the interests of the company now would be best advanced if there were a chief executive who had the support of the board and who is focused exclusively on management of the company. Mr Johnstone will not have the complete support of the board. His focus must be, at least to some extent, on his own personal position within the company.
Mr Johnstone is on the board of directors. In submissions I was told that he would remain so. Mr Johnstone has the support of another director. HFM and Seafirst have appointed two directors. There is an independent chairman. Mr Johnstone is, and will apparently continue to be, in an excellent position to monitor and protect both his interests and the company’s interests, as he perceives them to be, even if he is not the chief executive.
I am not persuaded by the unsubstantiated assertions of loss of reputation and credibility. On any view Mr Johnstone must leave on 31 December. I accept the position put on behalf of HFM and Seafirst in relation to the New Zealand negotiations and the asserted personal hardship.
Given the matters to which I referred in relation to the plaintiff’s case on the issue of whether there is a serious question to be tried, I would have required a compelling case in favour of the plaintiff on the balance of convenience, and that compelling case is not there. Rather, it seems to me that the balance falls the other way.
Two final matters are important. First, delay is a factor here which militates against the grant of the relief sought. Secondly, the circumstances which have traditionally prevented specific performance of contracts of personal service, and which still result in a reluctance by courts to take the course, apply here and militate against the relief sought. My principal concern in this context is that the position of chief executive is one of great responsibility and one where a good working relationship with board members is important. To enforce the continuation of that relationship by court order would rarely be the most appropriate course, and in the circumstances here, in my view it is not an appropriate course.
The application for interlocutory relief is dismissed.
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