Knights Quest Pty Ltd v Daiwa Can Company

SUPREME COURT OF VICTORIA

COURT OF APPEAL

S APCI 2018 0116
S APCI 2018 0117

KNIGHTS QUEST PTY LTD (ACN 116 122 939)	First applicant
and
SMS MANAGEMENT PTY LTD (ACN 101 453 865)	Second applicant
v
DAIWA CAN COMPANY	First respondent
and
BAROKES PTY LTD (ACN 079 714 579)	Second respondent

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JUDGES:	BEACH, KYROU and HARGRAVE JJA
WHERE HELD:	MELBOURNE
DATE OF HEARING:	28 November 2018
DATE OF JUDGMENT:	19 December 2018
MEDIUM NEUTRAL CITATION:	[2018] VSCA 349
JUDGMENT APPEALED FROM:	Knights Quest Pty Ltd v Daiwa Can Company [2018] VSC 426 (Sifris J); Knights Quest Pty Ltd v Daiwa Can Company [No 2] [2018] VSC 551 (Sifris J)

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CONTRACT – Shareholders’ deed – Obligations to act in good faith and use reasonable endeavours – Whether majority shareholder’s continued competition with company’s business breached these obligations – Whether judge erred in finding there was no breach – Macquarie International Health Clinic Pty Ltd v Sydney South West Area Health Service [2010] NSWCA 268 considered – Leave to appeal granted but appeal dismissed.

CORPORATIONS – Oppression – Whether majority shareholder’s continued competition with company’s business constituted oppression – Whether judge erred in finding there was no oppression – Scottish Co-Operative Wholesale Society Ltd v Meyer [1959] AC 324 distinguished – Leave to appeal granted but appeal dismissed.

CORPORATIONS – Winding up – Breakdown in relationship between shareholders – Deadlock – Whether judge erred in ordering winding up of company on just and equitable ground in s 461(1)(k) of Corporations Act 2001 (Cth) – Leave to appeal granted but appeal dismissed.

PRACTICE AND PROCEDURE – Whether applicants should be given leave to pursue on appeal a case they did not pursue at trial – Leave refused.

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APPEARANCES:	Counsel	Solicitors
For the Applicants	Mr R Merkel QC with Mr N Wallwork	Nicholson Ryan Lawyers
For the First Respondent	Mr J T Gleeson SC with Mr N M Bender and Mr A M Hochroth	Yeldham Price O’Brien Lusk
For the Second Respondent	No Appearance

BEACH JA
KYROU JA
HARGRAVE JA:

Introduction and summary

The genesis of the two interrelated proceedings that have given rise to these applications for leave to appeal is the breakdown of the relationship between the applicants (‘KQ’ and ‘SMS’ respectively), and the first respondent (‘Daiwa’) as shareholders in the second respondent (‘Barokes’).

Barokes is an Australian company that produces and sells wine in a can (‘WIC’) products globally. It was established in 1997 by Gregory Stokes, the sole director of KQ, and Steven Barics, the sole director of SMS. Daiwa is a Japanese company that manufactures cans. One of its Japanese subsidiaries, Monde Shuzo Co Ltd (‘Monde’), is a wine producer which owns a plant capable of filling slim bottle cans (‘SBC’) and new bottle cans (‘NBC’).[1] Monde’s business competes with Barokes, particularly in the Japanese and Chinese markets.
[1]Monde became a subsidiary of Daiwa in August 2013. Prior to that time, Daiwa had a 34.59 per cent interest in Monde.

On 13 September 2012, Daiwa purchased a 60 per cent interest in Barokes from its then majority shareholders, two companies in the Spotlight group of companies (‘Spotlight’), and nominated two directors on Barokes’ board. The minority shareholders are KQ, with a 26.7 per cent interest and SMS with a 13.3 per cent interest. KQ nominated Mr Stokes and Mr Barics on Barokes’ board. Mr Stokes was appointed as managing director for a term of three years, commencing on 13 September 2012. Barokes’ board has since been equally split between Daiwa’s nominees on the one hand, and Mr Stokes and Mr Barics (acting together) on the other.

Also on 13 September 2012, Daiwa, the applicants and Barokes executed a shareholders’ deed which, according to recital B, ‘set out matters relating to the shareholding and ongoing management of [Barokes]’.

The shareholders’ deed does not contain a ‘non-compete’ clause prohibiting Daiwa or any of its other subsidiaries from competing with Barokes. It does, however, contain the good faith and reasonable endeavours clauses set out at [22] below.

After Daiwa acquired its 60 per cent interest in Barokes, Monde continued to conduct its WIC business in competition with Barokes. Daiwa made loans totalling $4.4 million to Barokes to assist it to develop its business.[2] There were tensions between the parties because of Monde’s competing business, assertions by Barokes that Monde was required to pay a licence fee to Barokes, and Barokes’ failure to meet its sales and revenue targets. The relationship between the parties broke down by 2015. There has not been a directors’ meeting since 24 August 2015 and the directors have not signed any annual financial statements since the 2015 financial year.
[2]As stated at [18] below, Daiwa also paid $6,428,854 to Spotlight to acquire the loans it had made to Barokes.

On 24 August 2015, Daiwa commenced a proceeding seeking an order for the winding up of Barokes on the just and equitable ground in s 461(1)(k) of the Corporations Act 2001 (Cth) (‘winding up proceeding’).[3]
[3]Section 461(1)(k) of the Corporations Act provides that the Court may order the winding up of a company if ‘the Court is of the opinion that it is just and equitable that the company be wound up’.

On 26 August 2015, the applicants commenced a proceeding against Daiwa and Barokes seeking, among other relief, an order under s 233(1)(d) of the Corporations Act that Daiwa be required to purchase the applicants’ shares in Barokes (‘oppression proceeding’).

The winding up proceeding and the oppression proceeding (collectively ‘proceedings’) were heard together.[4]
[4]Daiwa made a counterclaim against the applicants in the oppression proceeding. However, this was abandoned during the course of the trial.

On 3 August 2018, the judge published a single set of reasons for judgment for both proceedings in which he determined that Barokes be wound up and that the oppression proceeding be dismissed.[5] He made formal orders on 20 September 2018.[6]
[5]Knights Quest Pty Ltd v Daiwa Can Company [2018] VSC 426 (‘Reasons’).
[6]On 21 September 2018, the judge published further reasons in relation to some aspects of his orders. See Knights Quest Pty Ltd v Daiwa Can Company [No 2] [2018] VSC 551. The further reasons are not presently relevant.

The applicants filed applications for leave to appeal which sought to set aside the judge’s orders on 13 grounds. At the hearing of the applications, they sought leave to file amended applications for leave to appeal which substituted six new grounds for the initial 13 grounds. Daiwa objected to the new grounds on the basis that they raised a different case to that the applicants had pursued at trial. The Court granted the applicants leave to file the amended applications to enable the parties to make full submissions and postponed consideration of whether the new grounds impermissibly sought to raise a new case.

For the reasons that follow, we will grant leave to appeal but dismiss the appeals.

Events prior to execution of the shareholders’ deed on 13 September 2012

Barokes claims that it developed an integrated system for processing and packing wine to be stored in aluminium cans, which it called the ‘Vinsafe system’. Barokes holds, or is the applicant for, 97 patents for ‘Vinsafe’ in 17 countries. Those countries include Japan and China.

Since 2002, when Spotlight became Barokes’ major shareholder with 60 per cent of its shares, Barokes has carried on a business of producing and selling WIC for sale by reference to its own brands, producing WIC for third parties, and licensing third parties to use the Vinsafe system.

Neither Daiwa nor Monde holds, or has ever held, a licence from Barokes which entitled them to use the Vinsafe system.

In February 2009, Barokes alleged that Daiwa and Monde had infringed (among others) its Japanese patent. Daiwa and Monde denied the alleged infringement. Between August 2009 and June 2010, a series of meetings and email exchanges took place between representatives of Barokes, Daiwa and Monde about how the patent infringement dispute might be resolved, and also how the parties might work together in the future.

On 16 November 2011, Yoshitaka Ikeda, a senior executive of Daiwa who was one of its nominees on Monde’s board of directors, sent a letter of intent to Mr Stokes proposing that Daiwa purchase shares in Barokes. On 1–2 December 2011, Mr Ikeda and another representative of Daiwa met Mr Stokes, his wife, Irene Stokes,[7] and another representative of Barokes in Melbourne to discuss a possible joint venture between the applicants and Daiwa, and equity participation by Daiwa in Barokes. On 12–13 March 2012, further discussions took place at meetings in Melbourne between Mr Stokes, Mrs Stokes, Mr Barics, Mr Ikeda, and Tetsuo Yamashita, a director of Daiwa who was another of its nominees on Monde’s board of directors.
[7]Mrs Stokes had the title of sales and marketing director of Barokes but she was not a director of Barokes.

On 20 April 2012, Daiwa made an offer to purchase Spotlight’s shares in Barokes and Spotlight’s working capital loans to Barokes for a total of $26.4 million, subject to due diligence. The loans totalled $6,428,854. Spotlight accepted that offer on the same day. The due diligence was conducted between April and August 2012.

At a meeting on 18–19 June 2012, a draft business plan and financial forecasts for Barokes were discussed. It appears that the draft business plan was a 22-page document (‘June 2012 Draft Business Plan’). No agreement was reached on the draft business plan prior to the execution of the shareholders’ deed on 13 September 2012.

Prior to the execution of the shareholders’ deed, all the parties to the deed knew that:

(a)Barokes conducted the business of producing and marketing WIC, licensing for private label for other wine producers using the Vinsafe system, and licensing the Vinsafe system to other third parties for manufacturing and filling;

(b) Barokes’ products were produced and filled using the Vinsafe system;
(c)Daiwa was a manufacturer of cans, which it supplied to various companies in Japan and elsewhere for filling with a variety of products; and
(d)Daiwa had developed the NBC and SBC.

Provisions of the shareholders’ deed and other key contractual documents

On 13 September 2012, the following documents were executed:

(a) the shareholders’ deed;
(b)a share purchase agreement, pursuant to which Daiwa bought 60 per cent of the shares in Barokes from Spotlight;
(c)a loan agreement between Barokes and Daiwa;
(d)an executive services agreement between Barokes and Mr Stokes; and
(e)an executive services agreement between Barokes and Mr Barics.[8]

[8]Some of these documents, including the shareholders’ deed, were dated 27 August 2012 even though they were executed on 13 September 2012.

The key provisions of the shareholders’ deed are as follows:

(a)Clause 2.1 (‘objectives clause’), which provided:
The primary objectives of [Barokes] are:
(a) to carry on the Business in accordance with the Business Plan;
(b) to maximise the sustainable value of [Barokes]; and
(c)any other matters which the Shareholders agree in writing from time to time are objectives of [Barokes],
(the Objectives).

(b)Clause 1.1 (‘definitions clause’), which defined ‘Business’ and ‘Business Plan’ as follows:
Business means the business carried on by [Barokes] of:
(a) producing and marketing wine in a can;
(b)licensing for private label for other wine producers using the Vinsafe Technology; and
(c)licensing of the Vinsafe Technology to other third parties for manufacturing and filling.
…

Business Plan means the business plan and budget for the conduct of the Business as approved from time to time.

(c)Clause 2.2 (‘good faith clause’), which provided:
Without limiting the operation of any specific obligation binding on the Shareholders, each Shareholder must act in good faith in relation to all matters concerning the affairs of [Barokes] so as to achieve the Objectives.

(d)Clause 3.15 (‘nominee directors clause’), which provided that, subject to their duties as directors of Barokes, nominee directors were entitled to: have regard to and represent the interests of their nominating shareholder; act on the wishes of that shareholder; and disclose to that shareholder information obtained in their capacity as a director of Barokes.
(e)Clause 5.6 (‘reasonable endeavours clause’), which provided:
Each party will use its reasonable endeavours to ensure that the Business is conducted and managed in accordance with best commercial business practices and in accordance with the Business Plan.

(f)Clause 8 (‘business plan clause’), which provided for an annual business plan to be submitted for approval by shareholders. Clause 8.4 provided that, unless all the shareholders otherwise agreed, each business plan must contain at least: detailed particulars of proposed business activities; a detailed funding plan to meet budgeted expenditure; and detailed budgets for capital and operating expenditure that might be planned or provided for and cash flow. Clause 8.1 stated that the shareholders and Barokes ‘confirm that the Business Plan set out in Schedule 5 shall be [Barokes’] initial Business Plan’. Schedule 5 comprised a single page headed ‘Barokes Business Plan (Draft)’ which set out a table of Barokes’ sales targets for the financial years 2013–2018.
(g)Clause 9.7, which permitted Barokes’ directors to disclose to their nominating shareholder information relating to Barokes or the Business that they received in their capacity as directors.
(h)Clause 18, which provided that any confidential information obtained by a party in connection with the shareholders’ deed had to be kept confidential and be used only for the proper performance of the deed.
(i)Clause 20, which did not specify a fixed term for the deed but set out certain termination events, including an agreement in writing by all the shareholders to terminate the deed.
(j)Clause 21.14 (‘entire agreement clause’), which provided:
This Deed and any other documents referred to in this Deed or executed in connection with this Deed comprise the entire agreement of the parties about the subject matter of this Deed and supersede any prior representations, negotiations, arrangements, understandings or agreements and all other communications.

(k)Clause 21.22 (‘relationship clause’), which provided that unless expressly stated otherwise, the shareholders’ deed does not create a fiduciary relationship or partnership relationship between any of the parties.

The share purchase agreement contains clauses prohibiting Spotlight from competing with Barokes for specified periods (cl 11) and from using or disclosing Barokes’ confidential information (cl 14.7). Schedule 8 to the agreement sets out due diligence materials, including ‘Questions and Answers from Management Discussions’. One of the questions concerned the steps Barokes was taking or proposing to take in relation to ‘potential patent infringements by copy brands such as … MONDE Can’. Part of the answer to that question was ‘[Barokes] is currently considering its options in relation to potential patent infringements by a number of third parties including the ones stated’.

Pursuant to the loan agreement, Daiwa made a loan of $6,428,854 to Barokes to enable Barokes to discharge the working capital loan for that amount previously made by Spotlight. That agreement (and subsequent loan agreements) provided that the loan was interest-free and repayable, among other events, when Barokes became subject to a winding up application.

The executive services agreements contained a non-compete clause (cl 16) and a clause requiring Mr Stokes and Mr Barics not to misuse Barokes’ confidential information (cl 14).

Events between 13 September 2012 and the commencement of the proceedings

On 13 September 2012, Mr Ikeda and Mr Yamashita were appointed to Barokes’ board of directors as Daiwa’s nominees.

Between 11–13 September 2012, Mr Stokes, Mr Barics, Mr Ikeda, Mr Yamashita and another representative of Daiwa discussed a proposal that Barokes and Daiwa pursue a new joint patent combining Barokes’ Vinsafe system and Daiwa’s SBC technology, to be called ‘Resassure’.

Between 13 September 2012 and 18 October 2012, the parties considered various proposed business plans to replace the draft business plan in sch 5 to the shareholders’ deed. One of the business plans proposed by Mr Stokes was a 52-page presentation document titled ‘Final Version 2 Updated 17/09/2012 Business Plan (Mid Term)’ which Mrs Stokes emailed to Mr Ikeda (‘17 September 2012 Presentation Business Plan’) together with budgets for the financial years 2013–2015 and sales forecasts.[9] That business plan contained detailed proposals for expanding the sale of Barokes’ products, particularly in Japan and China, and included forecast income from the licensing of Barokes’ Japanese patent in respect of WIC products sold in SBC in Japan. The ratio of product sales to Vinsafe licensed product sales begins at around 80:20 in 2013 and reaches approximately 45:55 in favour of licensed product in 2019. That is, 55 per cent of Barokes’ product sales revenues in 2019 were forecast to be derived from sources relating to Vinsafe licensing.[10] The SBC was initially projected to be 10 per cent of total product sales, rising to 80 per cent in 2019.[11]
[9]It appears that the 17 September 2012 Presentation Business Plan was an updated version of the June 2012 Draft Business Plan referred to at [19] above.
[10]Reasons [71(e)].
[11]Reasons [71(f)].

On 1 October 2012, Mr Ikeda sent an email to Mr Stokes stating that, because Daiwa could fill the SBC with wine without use of the Vinsafe system, Barokes should not forecast income from licensing of the Vinsafe system in respect of WIC sold in Daiwa’s SBCs in Japan. On 4 October 2012, Mr Stokes stated in an email to Mr Ikeda that Monde’s SBC would be exempt from any WIC royalty to Barokes and that the new joint patent being developed by Barokes and Daiwa (Resassure) would be licensed to global customers (including Monde) who wished to use upgraded SBC technology for their wines.

On 8 and 9 October 2012, Mr Barics conducted an audit of Monde’s filling plant in Yamanashi and visited Daiwa’s Tokyo plant.

On 18 October 2012, Mr Ikeda prepared a one-page spreadsheet titled ‘Barokes Business Plan’ which contained sales targets for the financial years 2013–2019 (’18 October 2012 Spreadsheet Business Plan’). This business plan was emailed to Mr Stokes on 19 October 2012. It showed the ratio of product sales to Vinsafe licensed product sales at 80:20 for the financial years 2013–2019. Mr Stokes replied to Mr Ikeda on the same day confirming that ‘these figures can be submitted to President Yamaguchi [of Daiwa] for the purpose of obtaining funding for Barokes’.

On 31 October 2012, Daiwa advanced $1.5 million to Barokes pursuant to a loan agreement executed on that day.

In late November 2012, Mr Barics supervised the filling of a batch of Barokes’ ‘Lovers Wine’ in SBCs at one of Daiwa’s plants for the purposes of Daiwa’s end of year party.

On 5 December 2012, Daiwa advanced $1.5 million to Barokes pursuant to a loan agreement executed on that day.

In April 2013, Barokes entered into an exclusive distribution agreement with a subsidiary of the COFCO group, China’s state-owned food processing holding company. Pursuant to that agreement, Barokes appointed the subsidiary as the exclusive distributor in mainland China of certain Barokes WIC products and granted the subsidiary priority in obtaining exclusive distribution of other Barokes products.

In the course of the joint venture between the applicants and Daiwa, a plan was developed to fill SBCs with Barokes’ Lovers Wine at Monde’s filling plant. In October 2013, Mr Barics supervised a production batch of Barokes’ Lovers Wine being filled into SBCs at that plant. Mr Barics made recommendations which had the effect of rectifying a problem involving excess foaming.

On 8 April 2014, Mr Stokes signed a ‘Funding Request from Barokes’ document which set out Barokes’ funding requirements, and a revised business plan that projected total sales and revenue for the 2014–2015 financial years. Barokes did not achieve these sales and revenue targets.

On 17 April 2014, Daiwa requested that Mr Stokes and Mr Barics also contribute loan funds to Barokes. On 22 May 2014, Daiwa advanced to Barokes $1.4 million pursuant to a loan agreement executed on that day. Mr Stokes advanced $100,000 to Barokes at approximately the same time. The funds were provided by Daiwa on certain conditions due to Barokes’ worsening financial circumstances, and Daiwa’s reluctance to continue to fund Barokes in those circumstances.

At a board meeting of Barokes held on 23 June 2014, Mr Ikeda advised that Monde had recently finalised a deal to sell its WIC products in China.

On 9–10 July 2014, at a board meeting of Barokes, Mr Stokes informed the board that following a recommendation received from Barokes’ patent attorney, the joint patent combining Barokes’ and Daiwa’s technologies (Resassure) would not proceed. Also at that meeting, Daiwa disclosed that, since 2011, it had introduced its WIC products to 26 clients in Japan and that it had represented to those clients that there were no patent or licensing restrictions on using its WIC products.

Between 2 September 2014 and 12 December 2014, Daiwa indicated to Barokes that it had little or no faith in the ability of Barokes to meet its sales and revenue targets.

At a Barokes’ board meeting on 10 March 2015, Mr Stokes and Mr Barics proposed a resolution authorising the commencement of a patent infringement proceeding in Japan against Daiwa and Monde. That resolution failed because Mr Ikeda and Mr Yamashita opposed it.

On 8 April 2015, KQ commenced a proceeding in the Trial Division seeking leave to bring a derivative action on behalf of Barokes against Daiwa, regarding Daiwa’s refusal to provide further funding to Barokes. That application was refused on 30 October 2015.[12]
[12]See Knights Quest Pty Ltd v Barokes Pty Ltd [2015] VSC 601.

In July 2015, Mr Stokes caused Barokes to commence a breach of patent proceeding in China (‘Chinese patent proceeding’) against a distributor of Daiwa’s products in China, Beijing Biaxi Foodstuffs Marketing Co Ltd (‘BIX’). Daiwa provided two drawings of SBCs to BIX to assist it in defending the Chinese patent proceeding. BIX commenced a proceeding in the China Patent Office (‘CPO’) to invalidate Barokes’ Chinese patent. The patent was held to be invalid in November 2015. Barokes has appealed against this decision but judgment is still pending.

In August 2015, Mr Stokes caused Barokes to commence a breach of patent proceeding in Japan against Daiwa, Monde and others (‘Japanese patent proceeding’). The applicants commenced a separate proceeding in the Trial Division on 15 March 2016, for an order pursuant to s 237 of the Corporations Act authorising them to prosecute the Japanese patent proceeding in the name of Barokes. On 10 June 2016, the judge made an order to that effect.[13] On 6 April 2016, Daiwa commenced a proceeding in the Japanese Patent Office (‘JPO’) to invalidate the Japanese patent, and on 1 March 2018 the JPO found that the patent was invalid.[14] On 20 April 2018, the Japanese patent proceeding was dismissed on the ground that the Japanese patent was invalid.
[13]See Daiwa Can Company v Barokes Pty Ltd [2016] VSC 296.
[14]It was common ground at trial that it is standard practice for a defendant to a Japanese patent infringement proceeding to file an invalidation application with the JPO. However, neither party’s expert was aware of any case in Japan where a subsidiary had brought patent infringement proceedings against its parent, and so they were not able to give evidence as to a standard practice in that situation.

Commencement of proceedings

On 24 August 2015, Daiwa commenced the winding up proceeding in which it sought an order that Barokes be wound up on the basis (among others) that there was a deadlock between the directors and shareholders of Barokes which warranted Barokes being wound up on the just and equitable ground. The defendants to the proceeding were Barokes, the applicants and Mr Stokes. Subsequently, in July 2016, Daiwa served a notice on Barokes requiring it to repay all loans made to it by Daiwa on the basis of the commencement of the winding up proceeding.[15] The loans remain unpaid.
[15]See [24] above.

On 26 August 2015, the applicants commenced the oppression proceeding against Daiwa and Barokes, seeking, among other relief, an order that Daiwa be required to purchase the applicants’ shares in Barokes.

How the parties pleaded and conducted the proceedings

In its points of claim dated 10 November 2017, the applicants alleged the following:

(a)Paragraphs 15 and 16: By 27 August 2012, before execution of the shareholders’ deed, the parties had reached a ‘Future Conduct Agreement’ including the following terms:
(i)Barokes and Daiwa would, ‘via Barokes’, carry on the business of: producing and marketing WIC globally under the Barokes brands using wine cans supplied by Daiwa; Barokes would license wine producers to use the Vinsafe system; and Barokes would license third parties to manufacture and fill cans with wine using the Vinsafe system;
(ii)Daiwa would pay Barokes a royalty of 20 per cent of the sale price on every wine can sold by it to persons other than Barokes;
(iii)Daiwa would provide to Barokes working capital to expand the business by way of loans and filling facilities for use by Barokes;
(iv)Daiwa, the applicants and Barokes would enter into a shareholders’ agreement;
(v)Mr Stokes and Mr Barics would provide advice and assistance to Daiwa and Monde so that Monde’s filling line would become capable of producing WIC to the standard specified by Barokes;
(vi)Monde would become licensed by Barokes so that Monde’s filling line could be used to produce WIC for third parties which complied with the Vinsafe system; and
(vii)Daiwa would provide to Barokes opportunities for the commercialisation of WIC produced in wine cans, particularly in Japan.

(b)Paragraph 17: the applicants, Mr Stokes and Mr Barics complied with the terms of the Future Conduct Agreement.
(c)There is no express allegation that Daiwa did not comply with the terms of the Future Conduct Agreement. However, the applicants rely on the following allegedly wrongful conduct by Daiwa:
(i)paragraph 20: without the consent of the applicants and Barokes, Daiwa has carried on the business of producing and marketing of WIC in Japan and globally by itself and/or with Monde ‘and not with Barokes’;
(ii)paragraph 21: Daiwa applied to the JPO to invalidate Barokes’ Japanese patent;
(iii)paragraph 22: Daiwa provided assistance to BIX in its application to the CPO to invalidate Barokes’ Chinese patent;
(iv)paragraph 23: Daiwa has sought to wind up Barokes in order to prevent it from carrying on its business; and
(v)paragraph 24: on 10 March 2015, Daiwa’s nominee directors on Barokes’ board opposed a resolution authorising the commencement of a patent infringement proceeding in Japan against Daiwa, Monde and others.

(d)Paragraphs 25 and 27: Daiwa’s conduct summarised at (c) above (that is, in paras 20–24 of the points of claim):
(i)breaches the shareholders’ deed because it is contrary to the objectives clause and contravenes Daiwa’s obligations under the good faith and reasonable endeavours clauses; and
(ii)constitutes conduct in the affairs of Barokes that is oppressive, unfairly prejudicial and unfairly discriminatory to the applicants and contrary to the interests of the members as a whole.

(e)Paragraph 26: By reason of Daiwa’s contraventions of the shareholders’ deed, the applicants and Barokes have lost the opportunity to achieve sales of WIC in Japan and globally in accordance with Barokes’ business plan set out in sch 5 to the deed and have thereby suffered loss and damage.
(f)On the basis of the matters set out at (a) to (e) above, the applicants sought damages, an account of profits and relief from Daiwa’s oppressive conduct under s 233 of the Corporations Act, namely, an order that Daiwa purchase the applicants’ shares in Barokes at a fair market value adjusted to take into account the effects of the oppressive conduct.[16]

[16]The points of claim also alleged that Daiwa’s conduct constituted a breach of fiduciary duty but this allegation is not presently relevant.

In its defence dated 5 February 2018, Daiwa responded to the above allegations as follows:

(a)Paragraphs 15–17: It denied that the parties entered into the Future Conduct Agreement or that any steps taken by the applicants were in performance of any such agreement.
(b)Paragraph 17: It admitted that, as part of its ‘strategic alliance or joint venture’ with the applicants, a plan was developed to fill wine cans with Baroke’s Lovers Wine at Monde’s filling facility and that Mr Barics provided assistance in that regard, but stated that this was in accordance with ‘normal practice where Wine Cans were being filled with wine from another winemaker’.
(c)Paragraph 19: It stated that the business plan in sch 5 to the shareholders’ deed was superseded by subsequent business plans.
(d)Paragraphs 20–24: It denied that it breached the shareholders’ deed as alleged in paras 20–24 of the applicants’ points of claim, and added the following:
(i)paragraph 20: at all material times, the applicants knew that Daiwa was carrying on the business of producing and marketing WIC in Japan by itself and/or with Monde and not with Barokes, and the applicants did not object to Daiwa doing so prior to approximately 28 January 2015;
(ii)paragraph 20: it did not require the applicants’ consent to carry on the business of producing and marketing WIC in Japan and globally by itself and/or with Monde and not with Barokes;
(iii)paragraph 21: it admitted applying to the JPO in response to Barokes’ Japanese patent proceeding and stated that it was reasonable for it to do so;
(iv)paragraph 22: it admitted providing documents to BIX regarding SBC and stated that it was reasonable for it to do so in order to maintain its customer relationship with BIX which had been damaged by Barokes’ Chinese patent proceeding against BIX;
(v)paragraph 23: it admitted commencing the winding up proceeding against Barokes and stated that it was entitled to do so; and
(vi)paragraph 24: it admitted that Mr Ikeda and Mr Yamashita opposed the proposed resolution and stated that it was in the best interests of Barokes for them to do so.

(e)It denied that the applicants were entitled to the relief that they sought.

In their reply, the applicants alleged that the business plan in sch 5 to the shareholders’ deed was superseded by a business plan dated 18 October 2012 which comprised ‘the [17 September 2012 Presentation Business Plan], read together with the spreadsheet entitled “Barokes Business Plan” dated 18 October 2012’.[17]
[17]See [28], [31] above.

In paras 43–44 of its written opening submissions, Daiwa summarised the key underlying differences in the parties’ cases as follows:

In some respects, the claims advanced by the parties are the mirror image of each other. Each depends upon a fundamentally different view of the basis upon which the parties entered into the Shareholders Deed and agreed to conduct the affairs of Barokes. The [applicants] appear to think that Daiwa … in buying into Barokes was abandoning its existing business of supplying cans to Monde and other customers for production of WIC. That view is highly unrealistic from a commercial perspective.
By contrast, [Daiwa’s] position is that it never agreed to abandon its existing business; and at the time of the Shareholders Deed the [applicants] knew that it retained, and would continue to retain and develop, that business. Daiwa … further says that the basis upon which the Shareholders Deed was executed was that Barokes would abandon its previous allegations of patent infringement.[18]

[18]Citations omitted.

In para 10 of their written opening submissions, the applicants relevantly summarised the issues as follows:

(a) was Daiwa’s conduct:
(i) in not requiring Monde to take a licence;
(ii)in carrying on the business of the sale and promotion of wine in cans with Monde and not with Barokes;
(iii)in instructing its nominee directors to vote against the resolution to institute proceedings to protect the Japanese patent;

(iv)      in seeking to invalidate the Japanese patent;
(v)       in assisting [BIX] to invalidate the Chinese patent;
(vi)      in seeking to call up the working capital loans;
(vii)     in bringing proceedings to wind up Barokes,
in breach of the [shareholders’ deed]? This requires the Court to determine the proper construction of the [shareholders’ deed] …

Paragraphs 25 and 26 of the applicants’ written opening submissions referred to the dispute in 2009–2010 over whether Monde was infringing Barokes’ Japanese patent and asserted that ‘[t]he dispute was resolved by Daiwa agreeing that it and Monde would cease producing the infringing WIC products’. Paragraph 29 referred to an agreement by the applicants and Daiwa to conduct a joint venture using Barokes as the joint venture vehicle, and para 31 asserted that it was agreed ‘that Monde would become the north-Asia filler for the joint venture wine until a new filling facility could be established’ and that ‘Daiwa would cause Monde to take a licence’. Paragraph 34 asserted that between October 2012 and October 2013, Monde embedded the Vinsafe system in its filling line. Paragraph 56 asserted that the good faith clause required Daiwa to cause Monde to take a Vinsafe licence and that, by allowing Monde to compete with Barokes, with the benefit of the Vinsafe system without paying a licence fee, Daiwa promoted Monde at the expense of Barokes and thereby destroyed the whole basis of the joint venture.

Paragraphs 58–59 of the applicants’ written opening submissions relevantly asserted:

In light of the above, Daiwa was acting in bad faith when it refused to require Monde to take a licence and continued to supply cans to them in preference to Barokes. Daiwa’s conduct breached Clauses 2.1, 2.2 and 5 of the [shareholders’ deed] … Daiwa agreed to carry on the WIC business with Barokes and did not do so. Instead, it carried on the business with Monde.
It is admitted that Daiwa are carrying on the WIC business with Monde and not with Barokes. This is a clear breach of the [shareholders’ deed] and is classic oppressive conduct and has been held to be so in numerous cases. …[19]

[19]The submission referred to Scottish Co-Operative Wholesale Society Ltd v Meyer [1959] AC 324 (‘Scottish Co-Op’) and Ubertini v Saeco International Group Spa Societa A Socio Unico [No 4] (2014) 98 ACSR 138 (‘Ubertini’), and stated that, as the facts in the present case bear a striking resemblance to those in Scottish Co-Op, the Court will ‘be greatly assisted by a close consideration of that case’.

In their written closing submissions, the applicants referred to the scope of contractual obligations of good faith, as discussed in Macquarie International Health Clinic Pty Ltd v Sydney South West Area Health Service,[20] and Masters Home Improvement Pty Ltd v North East Solution Pty Ltd.[21] In para 31, they asserted that Barokes’ business plan provided for Barokes to earn Vinsafe commission from Daiwa and to earn licensing fees. The conduct that was said to constitute a breach of the good faith and reasonable endeavours clauses was the conduct set out in paras 20–24 of the applicants’ points of claim.[22] They argued that this conduct rendered Barokes incapable of fully and properly pursuing its Business and Business Plan, which is the opposite of what Daiwa had covenanted to do (para 47). In paras 49 and 50, the applicants contended that Daiwa’s conduct in breaching the good faith and reasonable endeavours clauses was ‘conduct of Barokes’ affairs’ which was oppressive to the applicants.
[20][2010] NSWCA 268 (‘Macquarie’).
[21][2017] VSCA 88 (‘Masters’).
[22]See [48] above.

During his opening address, senior counsel for the applicants (who was not the senior counsel who appeared on the appeal) made the following statements about the parameters of the applicants’ case:

It was part of the joint venture … that Daiwa were going to supply the cans, Monde was going to be the North Asia filling station for the business and Barokes was going to supply wine to Monde, which Monde would fill according to the Vinsafe system. … The question is, under the joint venture agreement, was Monde required to take a licence to use the Vinsafe system? We say yes; Daiwa says no.
…
The whole purpose of the shareholders’ deed and the joint venture came about and arose out of the Monde infringement, the whole purpose was to fix up the Monde infringement so that Monde would take a licence and produce [Barokes’] wine using the Vinsafe system … We knew full well that Monde were infringing if they produced … They said they’d stop, they said they’d stop infringing, they said they’d stop producing. That is denied and we can have a fight about that if you want, but contextually … if you’re going to sell Barokes wine in a can worldwide or simply through Japan, that has to have the Vinsafe system installed in it.
…
My learned friends, no doubt, will want to say you’ve got to construe this shareholders’ deed in context and we need to look at … what the parties knew and thought at the time. So the conduct prior to entering into the shareholders’ deed is important, but most of that is documented.
…
[T]here are three matters, as we understand it, in issue in this case. The first is a factual matter and that factual matter is, was the Vinsafe system installed at Monde? Daiwa is saying no …
The second issue … is when you look at it do you read, because of the context both before the signing of the contract and before the final approval of the summarised chart on 18 October 2012, was it agreed that Monde would not take a licence and that Daiwa was able to compete with the joint venture with its subsidiary, Monde. That question will be determined by having regard to the contemporaneous record of documents and it leads to this conclusion: that stamped across every obligation in the business plan you should read the words, ‘subject to Daiwa being able to compete with this joint venture as it wishes, when it wishes’.
…
The third issue is, is [Barokes] really insolvent? …[23]

[23]Transcript of Proceedings (27 February 2018) 6, 8, 19–20, 23; Transcript of Proceedings (26 March 2019) 84–5 (emphasis added).

The following exchange took place between the judge and senior counsel for Daiwa:

[SENIOR COUNEL]: Your Honour has identified that paragraphs 20–24 of the [applicants’ points of] claim are the four key particulars of the alleged breach and the alleged oppression. I will say something about each of those, firstly paragraph 20. This is probably the biggest issue in the case. The contention is that the deal in August 2012 was that Daiwa … had to give up any business of manufacturing and supplying cans for wine and fold everything into Barokes. The allegation is, ‘Daiwa … continued to carry on a business ... (reads) ... but not with Barokes.’ So the essence of the deal, as put, is if Daiwa … wants to continue what’s an existing business it is running, it must do it ‘with Barokes’. There might be some fluidity around what ‘with Barokes’ means, but essentially it means you cannot run the business that you are currently running of manufacturing and supplying cans for wine.

To resolve that issue, Your Honour is going to have to go to a couple of places. One is going to be construction of the shareholders’ [deed], and I will say a bit about that in a moment, but that is one important place. Secondly, there is going to be some material prior to the contract which is admissible under the Codelfa principles. The essence of that will be that Daiwa …, as an existing can manufacturer, was supplying cans to fillers for the production of wine.
HIS HONOUR: These are context matters known to each party?
[SENIOR COUNEL]: Known to each party, yes. The first is it was carrying on that business. The second is the business was supported by patents held by Daiwa ... The third is there was a threat by Barokes to restrain the business of one of the customers, Monde. The fourth was that there were lengthy discussions, the effect of which was that if Daiwa … came into business with Barokes, its customers would not face threats of infringement. The fifth is that Daiwa … and its customers’ businesses, continued, to the knowledge of the Barokes parties, up to and past the date of the [shareholders’ deed] and objectively it would make no sense if Daiwa … invested $30 million into a company, only to find itself being sued for its continuing business.
That’s a shorthand summary of a whole series of contextual matters, but we will try and prove those within Codelfa.[24]

[24]Transcript of Proceedings (27 February 2018) 38–40 (emphasis added).

Before Mr Stokes commenced his evidence in chief, an issue arose about the admissibility of certain paragraphs of his witness statement which referred to discussions between the parties prior to the execution of the shareholders’ deed. The following exchange took place between junior counsel for the applicants (who was not the junior counsel who appeared on the appeal) and the judge in relation to the admissibility of the proposed evidence:

[COUNSEL]: These statements [by Daiwa’s representatives] occurred at the time the parties were having discussions towards entering into the joint venture or strategic alliance that they ultimately entered into in August, September 2012. They plainly form part of the context in which the agreement was reached. It was, I had understood, both parties’ contention that in understanding or construing the shareholders deed, the written agreement, that it was entitled to and must have regard to the context in which that agreement was entered. That plainly includes statements of the most senior Daiwa officers made in the preceding months.
HIS HONOUR: To what issue is it directed in the pleadings? Tell me where in the pleading … [Paragraphs 20–24 of the applicants’ points of claim set] out the basis on which you contend [there] were breaches. Which one of those does this relate to?
[COUNSEL]: I put it, your Honour, in going to the manner in which the contract should be construed and in particular, I refer to the good faith obligation in clause 2.2 of the shareholders deed. I didn’t put it as going to the breach, I put it as going to the construction of the written contract.
It is a matter of great contention between the parties what in fact Daiwa was required to do pursuant to its good faith obligations. I say in considering what good faith obligations [were] imposed on Daiwa, it’s of central relevance to know what Daiwa was saying it intended to do prior to entering into the contract. I refer your Honour to points of claim paragraph 18 which alleged the good faith obligations owed. Then there’s an allegation of breach in paragraph 25, being an allegation of a breach by Daiwa of the obligation to act in good faith. As my learned leader reminds me, it gives context to the obligation to act in good faith towards its joint venturers, fellow joint venturer.[25]

[25]Transcript of Proceedings (26 March 2018) 156–7.

Senior counsel for the applicants added the following observations:

It has never been the case, your Honour, that the evidence is limited in showing context to allege matters that might have been the subject of a breach. When one asks what did the parties say and do in accordance with Codelfa, one looks at what the parties said or did and we are showing what a senior manager owner said to my client. That is relevant to the question of interpretation. It is relevant to the conduct that your Honour will have to have regard to in determining whether or not there’s been oppression and it is not to be confused with a claim for breach.[26]

[26]Transcript of Proceedings (26 March 2018) 159–60.

In his closing address, senior counsel for the applicants made the following submissions:

[I am going] to look at the context in which the shareholders deed came into existence, go to the terms of the deed itself and invite your Honour to make the conclusion that it is an essential part of this contract, this unambiguous deed, that Daiwa take a licence and if Daiwa didn’t take a licence there could not have been a joint venture.
…
What happens is that when you get to — the obligation of Daiwa when it gets to the joint venture is to ensure that Monde takes a licence, exactly like the [Scottish Co-Op] case; we relied on their absolute good faith for Monde to get the licence. None of this could work unless Monde was an [accredited] licenced filler. The whole thing is meaningless.[27]

[27]Transcript of Proceedings (4 April 2018) 489, 497 (emphasis added).

In his closing address, senior counsel for Daiwa characterised the applicants’ case as ‘the big case’. He described it as a ‘non-compete case’ which seemed to ‘involve the proposition that Daiwa … promised to give up its existing independent business and to procure that Monde gives up its independent business and both of them are to … use the Vinsafe technology for all purposes … and pay licence fees’.[28] Senior counsel submitted that the applicants also presented a ‘smaller case’ which seemed to be that ‘while [Daiwa and Monde] can continue to conduct independent businesses, [they] must take Vinsafe technology and pay a fee’.[29] Senior counsel submitted that the two cases were inconsistent with each other, with the terms of the shareholders’ deed and with the surrounding material.
[28]Transcript of Proceedings (5 April 2018) 547.
[29]Transcript of Proceedings (5 April 2018) 550.

The trial and the judge’s reasons for his orders

The proceedings were heard together between 26 March 2018 and 5 April 2018. Mr Stokes, Mrs Stokes and Mr Barics gave oral evidence on behalf of the applicants. Daiwa did not call any witnesses and instead relied upon documentary evidence in the court book to which witnesses were taken, and cross-examination of the applicants’ witnesses.[30]
[30]The judge found that an adverse inference based on Jones v Dunkel (1959) 101 CLR 298 should not be drawn against Daiwa for failing to call any witnesses: Reasons [167]–[168]. That finding is not the subject of the appeal.

In his reasons, the judge described the parties’ competing cases as follows:

The gravamen of the case advanced by the [applicants] is that it was always assumed and must have been the case that Monde (and Daiwa) was required to be licenced so that the necessary revenue could flow to meet the budgets and forecasts in effect prepared by Daiwa, and that to this end the Vinsafe technology was transferred as embedded into the Monde technology. This enabled Monde, a subsidiary of Daiwa, to compete with Barokes, a position that it is suggested could hardly have been intended. It was suicidal for Barokes.
The counterargument was that it would be hugely detrimental to Monde to require it to pay licence fees and royalties to Barokes, a position that it was suggested could hardly have been intended.[31]

[31]Reasons [153]–[154] (emphasis added).

The judge rejected key aspects of the applicants’ oral evidence. He made factual findings primarily on the basis of the contemporaneous documents which he held contradicted most, if not all, of the applicants’ case regarding the negotiations and agreements between the parties in the lead up to the execution of the shareholders’ deed.[32] The judge held that at the time of the execution of the shareholders’ deed, Daiwa had continuously and consistently asserted that it was not infringing Barokes’ Japanese patent, and that it was not required or prepared to take a licence or pay any royalties to Barokes for either its use, or Monde’s use, of Vinsafe technology.[33] He also found that Daiwa and Monde intended to continue their WIC business unaffected by the shareholders’ deed, and that Barokes was aware of this intention both before and after the execution of the deed.[34]
[32]Reasons [127], [166].
[33]Reasons [126].
[34]Reasons [127].

The judge rejected the applicants’ contention that the parties settled their dispute over whether Monde was breaching Barokes’ Japanese patent, and entered into the shareholders’ deed on the basis that:

(a)Daiwa and Monde would cease production and sale of their own WIC products;
(b)Daiwa and Monde would produce Barokes’ WIC products using the Vinsafe system; and
(c)licensing or royalty fees arising from Daiwa’s manufacture of cans, the sale of those cans to Monde or the sale by Monde of WIC would be payable by Daiwa or Monde to Barokes.[35]

[35]Reasons [21], [23], [54], [126]–[127].

The judge said that ‘the nature and extent of the “good faith” and “[reasonable] endeavours” clauses … must be assessed against the terms and context thereof’ including the judges’ findings on the parties’ intentions, as known to each other, at the time the shareholders’ deed was executed.[36] The judge added:

In giving context to the clauses and determining their ambit, extent and presumed intent — against which any breach can be assessed — it is necessary and of the first importance to have regard to the terms of the Shareholders Deed and the background facts and circumstances known to both parties, as referred to in detail above, and which inform the critical findings referred to in the previous section. It should also be recalled and emphasised that the critical obligation of the parties was to endeavour to achieve the Business Plan.[37]

[36]Reasons [128].

[37]Reasons [131].

The judge held that Daiwa had not, either directly or through Monde, breached the good faith and reasonable endeavours clauses by carrying on the business of producing and marketing WIC. That was because:

(a)there was never any agreement that Monde would stop its pre-existing business of producing WIC for sale in the Japanese market;
(b)neither Daiwa nor Monde considered that Monde’s continued production of WIC, or Daiwa’s supply of cans to Monde for that purpose, involved any infringement of Barokes’ patent, which view was consistently communicated to Barokes;
(c)neither Daiwa nor Monde agreed that Monde was required to pay a licence fee to Barokes in relation to its production of WIC and Monde was unwilling to do so, which view was consistently communicated to Barokes; and
(d)the applicants were aware of each of the above matters.[38]

[38]Reasons [132].

The judge said that there was no express provision in the shareholders’ deed that prohibited Daiwa or Monde from continuing to produce and market WIC and no ‘Business Plan from time to time’ imposed an obligation on Daiwa to stop supplying cans to Monde or for Monde to stop selling WIC.[39] He accepted Daiwa’s submission that, absent an express provision to that effect, it would be ‘commercially absurd’ to construe Daiwa’s obligation to act in good faith as requiring it to sacrifice it and Monde’s existing WIC business, and the Court should be slow to construe the deed as containing an obligation that would have enormous ramifications for Daiwa.[40] The judge concluded that ‘Daiwa and Monde were entitled to carry on the business of producing and marketing WIC’, that they ‘made no representations and gave no assurances to the contrary’ and that ‘the Shareholders Deed does not restrict such activity’.[41]
[39]Reasons [133], [135].
[40]Reasons [134], [136], [139].
[41]Reasons [139].

The judge also found that it was unlikely that Mr Barics’ visits to Monde’s filling plant in October 2012 and October 2013 resulted in Vinsafe being ‘embedded’ in the Monde filling facility.[42] He said that the applicants had ‘not established with any precision what the Vinsafe technology or system entails, and how, when and to what extent it was implemented or embedded into Monde and Daiwa’s facilities’.[43]
[42]Reasons [105].
[43]Reasons [106].

The judge stated that Daiwa was persistent and unequivocal in its refusal to take a licence, which it repeatedly communicated to Barokes and the applicants.[44] He also stated that Mr Stokes had attempted to have Daiwa and/or Monde sign a confidentiality or non-disclosure agreement in relation to its use of the Vinsafe system on three occasions, but no such agreement was ever executed. He concluded that the most that could be said was that ‘if the Vinsafe technology was embedded, this was done in the context of a joint venture in which the parties progressed forward together and shared technical know-how without obligation’.[45]
[44]Reasons [107].
[45]Reasons [108].

The judge considered the parties’ competing contentions as to which version of the Business Plan was adopted by Barokes to replace the draft business plan in sch 5 to the shareholders’ deed. He concluded that, although the 18 October 2012 Spreadsheet Business Plan was not formally adopted by Barokes in accordance with the shareholders’ deed, as Mr Stokes had explicitly approved it, that business plan ‘accurately reflect[s] the sales targets that the parties had intended Barokes to achieve’.[46] The judge also found that the revised sales projections in Mr Stokes’ ‘Funding Request from Barokes’ document dated 8 April 2014[47] was accepted by Barokes notwithstanding that it was not adopted in accordance with the shareholders’ deed. The judge went on to find that Barokes did not achieve the sales targets in this document or the 18 October 2012 Spreadsheet Business Plan and that ‘[r]egardless of which document was in fact the contractual Business Plan, Barokes did not meet its targets and Daiwa was entitled to respond in order to protect its exposure’.[48]
[46]Reasons [79].
[47]See [37] above.
[48]Reasons [87].

The judge held that Daiwa had not breached its obligations to use reasonable endeavours in respect of the Business Plan or management of the Business (as defined in the definition clause), because no version of the Business Plan imposed an obligation on Daiwa to stop supplying cans to Monde, or to stop Monde from selling WIC.[49]
[49]Reasons [135], [139].

As a consequence of the above findings, the judge concluded that Daiwa did not breach its obligations under the shareholders’ deed by its nominee directors voting against the resolution to institute the Japanese patent proceeding or by applying to invalidate the Japanese patent.[50] Rather, so the judge determined, Mr Stokes was acting inconsistently with the deed by commencing that proceeding.[51] The judge found that the steps Daiwa took were reasonable in protecting its ongoing business.[52] According to the judge, Daiwa ‘was left with no choice’, ‘[i]n defence of a serious and ill-founded allegation [of infringement] made against it … took a reasonable course that was available’, ‘can hardly be criticised’ and ‘has been entirely vindicated’.[53]
[50]Reasons [129], [140], [144], [149].
[51]Reasons [140], [144].
[52]Reasons [141], [144].
[53]Reasons [144], [149].

The judge similarly found that Daiwa had not breached the good faith or reasonable endeavours clauses by assisting BIX with its application to invalidate the Chinese patent.[54] He stated that Daiwa’s assistance to BIX was not unreasonable or lacking good faith in the light of Mr Stokes’ conduct in causing Barokes to commence proceedings against BIX which undermined the basis upon which the shareholders’ deed had been agreed, and Daiwa’s commercial relationship with BIX, which was a customer of Monde in China. The judge said that even if BIX had been assisted by Daiwa’s provision of drawings of SBCs to it, there was no evidence to suggest that this impacted on the outcome of the Chinese patent proceeding, or caused any loss to the applicants.[55]
[54]Reasons [146], [148].
[55]Reasons [145]–[148].

Regarding Daiwa’s conduct in calling up its loans to Barokes, the judge stated that the negotiations surrounding the Business Plan were relevant because shortfalls in meeting Barokes’ targets would bear upon the reasonableness of Daiwa’s decision to call up those loans.[56] Among other things, the judge had regard to the intention of the parties that only 20 per cent of Barokes’ total sales would be derived from the sale of licensed product during the period 2013–2019. According to the judge, the applicants must have realised that Barokes would not derive a large proportion of its revenue from companies that entered into licensing arrangements for the Vinsafe system.[57]
[56]Reasons [69(b)].
[57]Reasons [80]–[81].

In the light of Barokes’ failure to meet the goals identified in the 18 October 2012 Spreadsheet Business Plan, the judge found that Daiwa was entitled to call up the loans it had given to Barokes, and commence winding up proceedings.[58]
[58]Reasons [130], [149]–[150].

For the above reasons, the judge concluded that Daiwa had not breached its obligations under the shareholders’ deed and that it was appropriate that Barokes be wound up on the just and equitable ground.[59] He found that the joint venture between Barokes and Daiwa had failed and there was a clear deadlock such that the board could not function properly.[60] He referred to: the lack of board meetings of Barokes in the previous 3 years; the deadlock that would occur if the board did meet; the fact that the applicants caused Barokes to sue Daiwa without board authority; Daiwa’s successful application to have the Japanese patent invalidated; Mr Stokes and Mr Barics’ belief that Daiwa and Monde wrongfully took the benefit of the Vinsafe system; and the relief sought by Daiwa and the applicants in the winding up and oppression proceedings, which would have the effect of ending their legal and commercial relationship.[61] The judge also relied on the facts that Mr Stokes’ term as managing director had expired and Barokes had failed to produce accounts since 2014.[62]
[59]Reasons [157]–[160], [170].
[60]Reasons [14], [157].
[61]Reasons [158]–[159].
[62]Reasons [159].

Paragraphs 151–156 of the judge’s reasons deal specifically with the applicants’ oppression claim. He said that, ‘substantially’ for the reasons he gave for rejecting the applicants’ breach of contract claim, ‘the oppression claim has not been made out’.[63] This was because ‘[t]he conduct relied on [by the applicants] to contend that Daiwa was in breach of the Shareholders Deed [was], for the most part, the same as the conduct relied on to contend that the conduct of Daiwa was unfair, prejudicial and consequently oppressive’.[64] The judge said that ‘for the reasons given, [no part] of the conduct was relevantly oppressive … within the provisions of s 232 of the [Corporations Act]’.[65] The judge added: ‘[p]ut simply, Daiwa did not do anything that it was not permitted to do or that fell within the provisions that qualified its behaviour, that is the requirement to act in good faith and use reasonable endeavours’.[66]
[63]Reasons [151].
[64]Reasons [152].
[65]Reasons [152].
[66]Reasons [152].

The judge concluded his analysis of the oppression claim as follows:

The fact is that the evidence does not support the case advanced by the [applicants] for the reasons given. As pointed out, the critical assumption is not made out on the evidence and the opposite appears to be the case. The exposure to competition (by Monde and Daiwa) was not specifically restricted and in the circumstances and given their ongoing operations, and persistent denial (subsequently vindicated) of any infringement [of Barokes’ Japanese patent], any restriction would need to be specifically dealt with. It never was. There were ongoing discussions, but nothing was resolved. The good faith and reasonable endeavours mechanism are not sufficient for so serious an inroad into a party’s ability to trade, particularly when the circumstances surrounding the party sought to be restricted are known.[67]
[67]Reasons [156]. The critical assumption to which the judge referred is the assumption set out at para 153 of his reasons (see [63] above) that Monde was required to be licensed to use the Vinsafe system.

Proposed grounds of appeal

As we have already stated, the applicants’ amended applications for leave to appeal rely on six proposed grounds of appeal. Grounds 2–4 deal with the judge’s findings on the applicants’ breach of contract claim while grounds 5 and 6 deal with his findings regarding the oppression claim. Ground 1 is generic and relates to both claims.

For convenience, we will deal with grounds 1–4 together before considering grounds 1, 5 and 6.

Grounds 1–4: Breach of contract claim

Grounds 1–4 are as follows:

1The trial judge erred by failing to determine in accordance with law, or at all, the breach of contract and oppression cases pleaded and argued by the Applicants.
2The trial judge erred by failing to construe in accordance with law the relevant contractual provisions, being cll 2.1, 2.2, 5.6 and 21.14 of the Shareholders’ Deed (the Deed), in its proper context, but, rather, construed the Deed by impermissibly relying upon pre-contractual negotiations, background events and his view of the common understanding of the parties as to their respective obligations.
3The learned trial judge erred by addressing the applicants’ breach of contract case by reference to whether Daiwa was under a contractual obligation not to compete with the applicants, rather than by reference to the proper construction and operation of the good faith and reasonable endeavours obligations in cll 2.1, 2.2 and 5.6 of the Deed.
4The trial judge erred by failing to address and make specific findings about the ‘Business’ and the ‘Business Plan’ of Barokes for the purpose of determining the proper construction and operation of the good faith and reasonable endeavours obligations in cll 2.1, 2.2 and 5.6 of the Deed.

Legal principles relevant to grounds 1–4

Ordinarily, a good faith clause in a contract encompasses the following obligations:

(a) to act honestly and with a fidelity to the bargain;
(b)not to act dishonestly and not to undermine the bargain entered or the substance of the contractual benefit bargained for; and
(c)to act reasonably and with fair dealing having regard to the interests of the parties which will, inevitably, at times conflict, and to the provisions, aims and purposes of the contract, objectively ascertained.[68]

[68]Macquarie [2010] NSWCA 268 [12], [146]; Masters [2017] VSCA 88 [99]; Sentinel Robina Office Pty Ltd v Clarence Property Corporation Ltd [2018] QCA 314 [15].

The good faith obligation calls for good faith, or fair dealing, between commercial parties dealing at arm’s length, by reference to the bargain and its terms, as assessed and interpreted in the light of that obligation.[69] The contractual and factual context is vital to understand what, in any case, is required to be done or not done to satisfy the obligation.[70] The obligation must be construed having regard to the terms of the contract and the circumstances in which it was entered into that were known to the parties.[71]
[69]Macquarie [2010] NSWCA 268 [13]–[14].
[70]Macquarie [2010] NSWCA 268 [17].
[71]Macquarie [2010] NSWCA 268 [137]–[138].

In contracts containing express good faith clauses that have a necessary place in the performance of the contract, an objective element of reasonableness in fair dealing is appropriate, in addition to honesty and fidelity to the bargain in furtherance of the contractual objects and purposes of the parties, as objectively ascertained.[72]
[72]Macquarie [2010] NSWCA 268 [15].

However, an assessment of the standard of fair dealing or reasonableness required of a party must recognise that parties to a contract have differing interests.[73] An obligation of good faith requires a party to have regard to the legitimate interests of both parties but it does not require the interests of one party to be subordinated to those of the other.[74] Therefore, the question of what a party must do to comply with its obligation of good faith is informed by the contractual, commercial and factual context.[75]
[73]Macquarie [2010] NSWCA 268 [17].
[74]Macquarie [2010] NSWCA 268 [13], [17], [147]; Esso Australia Resources Pty Ltd v Southern Pacific Petroleum NL (rec and mgr apptd) (admin apptd) [2005] VSCA 228 [29]; Masters [2017] VSCA 88 [99].
[75]Masters [2017] VSCA 88 [99].

In Electricity Generation Corporation v Woodside Energy Ltd,[76] the High Court stated the following about the obligation imposed upon contracting parties by a ‘reasonable endeavours’ clause:

(a) The obligation is not an absolute or unconditional one.
(b)The nature and extent of the obligation is necessarily conditioned by what is reasonable in the circumstances, which can include circumstances that affect the business of a party who owes an obligation of reasonable endeavours. An obligation of reasonableness involves recognition that the interests of a party cannot be paramount in every case; in some cases the interests of the other contractual party must prevail. However, an obligation to use reasonable endeavours does not oblige a party to achieve the contractual object to its own ruin, or sacrifice its freedom to act in its own business interests.
(c)Some contracts containing an obligation to use reasonable endeavours to achieve an object contain their own internal standard of what is reasonable.[77]

[76](2014) 251 CLR 640 (‘Woodside’).

[77]Woodside (2014) 251 CLR 640, 659–60 [41]–[43].

The principles for interpreting a commercial contract are well known. They were conveniently summarised by the High Court in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd as follows:

The rights and liabilities of parties under a provision of a contract are determined objectively, by reference to its text, context (the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract) and purpose.
In determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable businessperson would have understood those terms to mean. That inquiry will require consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract.
Ordinarily, this process of construction is possible by reference to the contract alone. Indeed, if an expression in a contract is unambiguous or susceptible of only one meaning, evidence of surrounding circumstances (events, circumstances and things external to the contract) cannot be adduced to contradict its plain meaning.
However, sometimes, recourse to events, circumstances and things external to the contract is necessary. It may be necessary in identifying the commercial purpose or objects of the contract where that task is facilitated by an understanding ‘of the genesis of the transaction, the background, the context [and] the market in which the parties are operating’. It may be necessary in determining the proper construction where there is a constructional choice.
…
Each of the events, circumstances and things external to the contract to which recourse may be had is objective. What may be referred to are events, circumstances and things external to the contract which are known to the parties or which assist in identifying the purpose or object of the transaction, which may include its history, background and context and the market in which the parties were operating. What is inadmissible is evidence of the parties’ statements and actions reflecting their actual intentions and expectations.
Other principles are relevant in the construction of commercial contracts. Unless a contrary intention is indicated in the contract, a court is entitled to approach the task of giving a commercial contract an interpretation on the assumption ‘that the parties … intended to produce a commercial result’. Put another way, a commercial contract should be construed so as to avoid it ‘making commercial nonsense or working commercial inconvenience’.
These observations are not intended to state any departure from the law as set out in Codelfa Construction Pty Ltd v State Rail Authority (NSW) and Electricity Generation Corporation v Woodside Energy Ltd.[78]

[78](2015) 256 CLR 104, 116–17 [46]–[52] (citations omitted) (‘Mount Bruce’). See also Woodside (2014) 251 CLR 640, 656–7 [35].

In Codelfa Construction Pty Ltd v State Rail Authority (NSW),[79] Mason J held that evidence of certain pre-contractual discussions between the parties was admissible because the discussions were not about the parties’ actual intentions and expectations or about the terms of the contract. Instead, ‘the evidence revealed a matter which was in the common contemplation of the parties yet was not a contractual provision actually agreed upon for the simple reason that it was a matter of common assumption’.[80]
[79](1982) 149 CLR 337 (‘Codelfa’).
[80]Codelfa (1982) 149 CLR 337, 354.

Where evidence of pre-contractual discussions or events is admissible in construing a contract in accordance with the above principles, an ‘entire contract’ clause does not have the effect of rendering the evidence inadmissible.[81]
[81]John v Price Waterhouse [2002] EWCA (Civ) 899 [67].

We now turn to the principles for determining when a party may be permitted to pursue on appeal an issue that was not pursued at trial.[82]
[82]The summary of the principles in [92]–[94] has been adapted from Vlahos Pty Ltd v Vlahos [2017] VSCA 166 [49]–[51].

There is a fundamental principle that a point not taken at first instance cannot be taken on appeal if evidence could have been given at the first instance trial which, by any possibility, could have prevented the point from succeeding.[83] Exceptional circumstances will be required in order for a party to introduce an issue for the first time on appeal. Even where the new point sought to be raised is a point not capable of being affected by further evidence, such as an argument as to the construction of a statute or document, the court may not permit it to be relied upon.[84]
[83]Devon v Capital Finance Australia Ltd [2014] VSCA 73 [75] (‘Devon’) citing Suttor v Gundowda Pty Ltd (1950) 81 CLR 418, 438; Coulton v Holcombe (1986) 162 CLR 1, 7–8 (‘Coulton’); Water Board v Moustakas (1988) 180 CLR 491, 497; Banque Commerciale SA, En Liquidation v Akhil Holdings Ltd (1990) 169 CLR 279, 284; Whisprun Pty Ltd v Dixon (2003) 200 ALR 447, 461 [51].
[84]Devon [2014] VSCA 73 [76] citing Multicon Engineering Pty Ltd v Federal Airports Corporation (1997) 47 NSWLR 631, 645–6 and Geelong Building Society (in liq) v Encel [1996] 1 VR 594, 605–7.

In Coulton v Holcombe,[85] Gibbs CJ, Wilson, Brennan and Dawson JJ stated that ‘[i]t is fundamental to the due administration of justice that the substantial issues between the parties are ordinarily settled at the trial’.[86] They quoted with approval the following statement from Metwally v University of Wollongong [No 2]:[87]

It is elementary that a party is bound by the conduct of his case. Except in the most exceptional circumstances, it would be contrary to all principle to allow a party, after a case had been decided against him, to raise a new argument which, whether deliberately or by inadvertence, he failed to put during the hearing when he had an opportunity to do so.[88]

[85](1986) 162 CLR 1.

[86]Coulton (1986) 162 CLR 1, 7.

[87](1985) 60 ALR 68, 71.

[88]Coulton (1986) 162 CLR 1, 8.

Gibbs CJ, Wilson, Brennan and Dawson JJ then referred to the underlying reasons for the above principle. The reasons were: the finality of litigation; the difficulty of inducing an appeal court to consider new facts; the undesirability of encouraging tactical decisions to keep an issue in reserve for an appeal rather than presenting it at first instance; and the need to avoid injustice to a party having to meet new factual or legal issues for the first time on appeal.[89]
[89]Coulton (1986) 162 CLR 1, 8. See also Marriner v Australian Super Developments Pty Ltd [2016] VSCA 141 [186]–[187].

Parties’ submissions on grounds 1–4

The applicants submitted that the judge erred by failing to consider their breach of contract claim in accordance with established legal principles. They contended that those principles required the judge to firstly construe the meaning and scope of the good faith and reasonable endeavours clauses in the context of the shareholders’ deed, read as a whole, and the other transactional documents, and to then decide whether the facts as admitted by Daiwa or found by the judge established a breach of those clauses.[90] According to the applicants, instead of adopting this conventional approach, the judge rejected their breach of contract claim by erroneously relying on pre-contractual negotiations and background events and his view of the common understanding of the parties as to their respective obligations. They argued that in circumstances where there was no specific issue of construction arising from any clause of the shareholders’ deed that required resolution by reference to those matters, the judge’s approach resulted in a failure to give effect to the entire agreement clause.
[90]The applicants relied on Mount Bruce (2015) 256 CLR 104, 116 [46], 117 [50].

The applicants submitted that the judge erred by defining Daiwa’s obligations by reference to whether it specifically agreed not to compete with Barokes in the WIC market, rather than by reference to the operation of the good faith and reasonable endeavours clauses. They contended that Daiwa was not restricted from competing with Barokes at all, and that in circumstances where it was common ground that the shareholders’ deed did not contain an express non-compete clause, the judge should not have addressed this question. Rather, so it was said, the judge should have adopted the following approach. First, he should have considered the extent to which the good faith and reasonable endeavours clauses imposed restrictions on Daiwa in the conduct of it and Monde’s WIC business insofar as promotion of that business would adversely affect Barokes’ WIC business and its ability to achieve the outcomes set out in its adopted business plan. Secondly, the judge should have considered the competition which arose between Daiwa and Barokes and Daiwa’s impugned conduct to determine whether those clauses were breached.

The applicants emphasised that, as it was not a party to the shareholders’ deed, Monde was not in any way restricted in the operation of its existing WIC business. It contended that Daiwa’s breach arose not from its continued operation of its existing WIC business, but its operation of that business ‘not with Barokes’. According to the applicants, this was the case that it ran at trial and now argued on appeal, rather than either the ‘big case’ or the ‘trip the wire’ case to which Daiwa referred in its submissions.[91] The ‘smaller case’ advanced at trial[92] was abandoned on appeal.
[91]See [103] below.
[92]See [61] above.

The applicants contended that it is apparent on the face of the shareholders’ deed and the other transactional documents that the parties placed emphasis on the intellectual property and know-how of Barokes. The parties’ bargain as recorded in the shareholders’ deed was said to incorporate a commitment to develop Barokes’ WIC business and to grow that business in global markets — particularly Japan and China — in accordance with Barokes’ business plan, including by utilising Monde’s filling plant. According to the applicants, Daiwa was under a duty to act with fidelity to that bargain and not to undermine it, or the substance of the contractual benefit bargained for.

The applicants submitted that Barokes’ business plan is of critical importance to the operation of the shareholders’ deed because one of the three primary objectives of Barokes was ‘to carry on the Business in accordance with the Business Plan’ and both the good faith clause and the reasonable endeavours clause referred to the business plan. Notwithstanding this, so it was said, the judge failed to make a finding as to what document constituted the ‘Business Plan’ for the purposes of determining their case, or what the ‘Business’ was, and thus failed to decide their case by first determining the scope of Daiwa’s obligations under the good faith and reasonable endeavours clauses.

The applicants contended that the judge should have found that the applicable ‘Business Plan’ was the 17 September 2012 Presentation Business Plan, which included detailed particulars of proposed business activities and budgets, rather than the 18 October 2012 Spreadsheet Business Plan, because the latter document was not capable of constituting a business plan as it merely comprised sales figures. They argued that the shareholders of Barokes agreed that the sales targets in the 18 October 2012 Spreadsheet Business Plan were to be achieved in the manner set out in the 17 September 2012 Presentation Business Plan.

The applicants submitted that, if the judge had properly construed the good faith and reasonable endeavours clauses, he would have found that Daiwa had breached those clauses by:

(a)producing and marketing WIC globally — particularly in Japan and China — by itself and/or with Monde in competition with Barokes rather than ‘with Barokes’;
(b)having the benefit of unfettered access to Barokes’ know-how, confidential information and detailed marketing plans, particularly for Japan and China, developing WIC markets in Japan and China with Monde to the exclusion of Barokes;
(c)conducting business in China in a manner that jeopardised — and was contrary to — Barokes’ commercial interests and obstructed Barokes’ efforts to protect those interests;
(d)taking steps, in response to Barokes’ commencement of patent infringement proceedings in Japan and China, which had the effect of destroying key assets of Barokes in those markets;
(e)calling up its loans; and
(f)applying to wind up Barokes.

The applicants submitted that by failing to properly construe the good faith and reasonable endeavours clauses and addressing the wrong questions, the judge failed to determine their breach of contract claim as required by law.

Daiwa described the applicants’ case at trial as the ‘big case’[93] and the case they have sought to argue on appeal as the ‘trip the wire case’. It contended that the big case had been that Daiwa could not compete with Barokes in the WIC business, and that if it wanted to carry on that business, it had to do so with Barokes. Thus, so it was said, Daiwa would be able to continue to sell cans, and Monde would be able to continue to fill cans with its own wine, or allow its filling facility to be used by others, only if they took a licence to use the Vinsafe system from Barokes.
[93]See [61] above.

The trip the wire case, Daiwa submitted, stood in opposition to the applicants’ big case, in that they now argued that Daiwa was not entirely prevented from competing with Barokes but at some point, by its conduct, Daiwa tripped a wire such that it breached the good faith and reasonable endeavours clauses by impeding Barokes’ ability to sell wine in competing markets.

Daiwa argued that, in the light of the big case that was run at trial, the judge was correct to focus his analysis on the circumstances surrounding the parties entering into the shareholders’ deed to determine whether an obligation not to compete with Barokes arose from the good faith and reasonable endeavours clauses. It contended that the trip the wire case was a fact-driven enquiry that would have required the judge to make factual findings on, for example, whether Daiwa’s conduct caused harm to Barokes’ business in Japan and China. It further contended that, had the applicants presented that case at trial, Daiwa would have cross-examined witnesses on that issue and, implicitly, would have called evidence if necessary.

Daiwa submitted that the judge had correctly rejected the applicants’ contention at trial that the 17 September 2012 Presentation Business Plan was the relevant business plan and instead found[94] that the 18 October 2012 Spreadsheet Business Plan correctly reflected the sales targets that the parties intended Barokes to achieve.[95] It contended that finding was correct because the 18 October 2012 Spreadsheet Business Plan was the only document which the parties agreed upon as a business plan, and that critical elements of the 17 September 2012 Presentation Business Plan had been rejected, or superseded by later agreements between the parties.
[94]Reasons [79].
[95]See [71] above.

Daiwa argued that, although the 18 October 2012 Spreadsheet Business Plan did not include the matters anticipated by the shareholders’ deed to be included in the Business Plan, it was open under the business plan clause for the parties to ‘otherwise agree’ to adopt the one-page spreadsheet as the Business Plan, which is what occurred.

Decision on grounds 1–4

In our opinion, grounds 2–4 and ground 1, insofar as it concerns the breach of contract claim, must be rejected.

As is apparent from our summary of the applicants’ points of claim and their written and oral submissions at trial, their breach of contract case was, in substance, as follows:

(a)The negotiations between the parties prior to the execution of the shareholders’ deed culminated in agreements between them which included as their key elements that:
(i)Daiwa would cease carrying on its WIC business with Monde and carry on that business with Barokes;
(ii)Monde would take a licence from Barokes to use the Vinsafe system and pay licence fees to Barokes;
(iii)Monde’s filling facilities would be used to produce Barokes’ WIC products for sale in the Asian market; and
(iv)Daiwa would cause Monde to effectively fold its WIC business into the joint venture WIC business being conducted by the applicants and Daiwa via Barokes.

(b)These agreements were highly relevant to the construction of the good faith and reasonable endeavours clauses. Construed in the light of those agreements, those clauses had the effect of obliging Daiwa to take the steps set out in (i)–(iv) above even though the shareholders’ deed did not contain any express obligations to that effect.
(c)The 17 September 2012 Presentation Business Plan together with the 18 October 2012 Spreadsheet Business Plan comprised Barokes’ business plan. The emphasis in the business plan on expanding Barokes’ business in Asia and the earning of licence fees supported the contention that the good faith and reasonable endeavours clauses had the effect set out in (b) above.
(d)The practical effect of the good faith and reasonable endeavours clauses, construed in this manner, was that notwithstanding that the shareholders’ deed did not contain a non-compete clause, Daiwa was, directly and through Monde, obliged to cease competing with Barokes in the WIC market, particularly in Japan.
(e)Daiwa breached the good faith and reasonable endeavours clauses, construed in this manner, by:
(i)continuing to sell its own WIC products through Monde and thus continuing to compete with Barokes;
(ii)not requiring Monde to take out a licence for use of the Vinsafe system and pay licence fees to Barokes;
(iii)undermining Barokes’ patents in Japan and China by: instructing its nominee directors to vote against the resolution to institute patent infringement proceedings in Japan; seeking to invalidate the Japanese patent; and assisting BIX in its application to invalidate the Chinese patent;
(iv)calling up the loans to Barokes; and
(v)commencing the winding up proceeding.

This is precisely the case that the judge decided.

Rather than committing an error in principle by examining and reaching conclusions on the parties’ pre-contractual negotiations, the manner in which the applicants articulated their case required the judge to undertake this task. He did so in a manner that was consistent with the principles for interpreting commercial contracts set out at [88]–[90] above.

The judge rejected the applicants’ evidence regarding the nature and effect of the discussions between the parties prior to the execution of the shareholders’ deed. He found not only that the agreements alleged by the applicants were not made but, on the contrary, the common understanding of the parties was that Daiwa strongly asserted that it and Monde had not breached Barokes’ patents, that neither of them was required to take a licence from Barokes, and that both of them would continue to conduct their WIC business notwithstanding Daiwa’s entry into the shareholders’ deed. There is no appeal from these factual findings.

Contrary to the applicants’ submissions, the judge did make findings as to Barokes’ operative business plan. He found that Barokes did not approve the 17 September 2012 Presentation Business Plan. He also found that the 18 October 2012 Spreadsheet Business Plan which Daiwa had proposed was ‘explicitly approved’ by Mr Stokes.[96] The applicants have not demonstrated that these findings were not open to the judge.
[96]See [71] above.

We reject the applicants’ submission that the shareholders of Barokes agreed that the sales targets in the 18 October 2012 Spreadsheet Business Plan were to be achieved in the manner set out in the 17 September 2012 Presentation Business Plan. The judge did not make any such finding and the documentary evidence does not support any such finding. The sales figures in the 18 October 2012 Spreadsheet Business Plan were based on a fundamentally different strategy to the 17 September 2012 Presentation Business Plan, namely, a focus on product sales rather than licence fees.

We also reject the applicants’ contention that the 18 October 2012 Spreadsheet Business Plan cannot constitute a ‘Business Plan’ within the meaning of that expression in the definitions clause and the business plan clause. Schedule 5 to the shareholders’ deed indicates that a single page containing sales targets can constitute a ‘Business Plan’. This is consistent with cl 8.4 of the deed which provides that the shareholders can ‘otherwise agree’ in relation to the required contents of a business plan.

The judge’s findings about the adopted business plan were significant because they meant that the adopted business plan focused on revenue from the sale of Barokes’ WIC products rather than revenue from licence fees. They also meant that the adopted business plan did not include any of the specific action items in the 17 September 2012 Presentation Business Plan, including those that would have involved concerted efforts to promote Barokes’ WIC business in Asia, particularly in Japan and China.

The effect of the above factual findings is that the shareholders’ deed had to be interpreted in the context that it was not part of the deed’s commercial purpose, nor was there any common contemplation or assumption by the parties, that Daiwa (directly or through Monde) would be precluded from competing with Barokes or would be required to take a licence from Barokes. These contextual features of the shareholders’ deed are supported by the express inclusion of a non-compete clause in the share purchase agreement between Daiwa and Spotlight and the executive services agreements between Barokes and Mr Stokes and Mr Barics respectively, and the absence of such a clause in the shareholders’ deed.

The contextual features are also supported by the fact that neither the draft business plan in sch 5 to the shareholders’ deed nor the 18 October 2012 Spreadsheet Business Plan required Daiwa to take a licence from Barokes (or to cause Monde to take a licence) or to promote Barokes’ WIC business in Asia at the expense of Daiwa and Monde’s business. Further, the contextual features are supported by the due diligence material in sch 8 to the share purchase agreement, which clearly indicates that neither Daiwa nor Monde agreed to cease competing with Barokes in the Japanese market.[97]
[97]See [23] above.

It follows from the above discussion that the judge was right to construe the shareholders’ deed having regard to its commercial purpose and context. He was also right to find that, construed in that manner, it was not possible for the good faith and reasonable endeavours clauses to have the far-reaching effect contended for by the applicants. That effect, in substance, would have been that Daiwa could not (directly or through Monde) compete with Barokes in the WIC market. It would be the opposite of the effect the parties commonly contemplated or assumed and thus be inconsistent with the deed’s commercial purpose and the contextual matters which bore upon its construction.

Our conclusion that the judge was right to find that the good faith and reasonable endeavours clauses did not preclude Daiwa from competing with Barokes in the WIC market (directly or through Monde), or require a licence from Barokes, means that the judge did not err in finding that Daiwa had not contravened those clauses by taking steps to protect its business from Barokes’ allegations of patent infringement. Likewise, as BIX was a Daiwa customer whose relationship with Daiwa was being damaged by Barokes’ Chinese patent proceeding, Daiwa’s provision of information relating to its own SBC did not contravene those clauses.

The judge found as a fact that the relationship between Daiwa as the majority shareholder of Barokes, and the applicants as the minority shareholders, had broken down and that there was a deadlock in the management of Barokes’ affairs. That finding is not the subject of appeal. Having regard to that finding and the judge’s finding that Daiwa had not breached the shareholders’ deed, the judge was right to conclude that Barokes should be wound up on the just and equitable ground. In these circumstances, the judge was also right to find that Daiwa’s commencement of the winding up proceeding did not constitute a breach of the good faith and reasonable endeavours clauses. It must also follow that, as the commencement of winding up proceedings constituted an event that entitled Daiwa to call up its loans under its loan agreements with Barokes, the judge was also right to conclude that the calling up of the loans did not constitute such a breach.

The applicants’ submissions in support of grounds 1–4 seek to argue a case that is entirely different from that they advanced at trial. In our opinion, Daiwa’s characterisations of the applicants’ big case at trial and its trip the wire case on appeal are apt. As we have already demonstrated, the applicants’ case at trial was, in substance, that the shareholders’ deed precluded Daiwa from competing with Barokes in the WIC market. A key plank in the applicants’ case was that Daiwa and Monde were required to take a licence from Barokes and pay licence fees. The applicants’ new case on appeal was based on the following premises:

(a)although there was no absolute bar to Daiwa continuing to conduct its WIC business in competition with Barokes’ WIC business, the good faith and reasonable endeavours clauses placed constraints on the steps that Daiwa could take in promoting it and Monde’s business insofar as those steps adversely affected Barokes’ business; and
(b)it was not necessary for the Court to determine the precise boundaries separating those steps in the promotion of Daiwa’s and Monde’s business which did not breach the good faith and reasonable endeavours clauses from those steps that did because, irrespective of where the dividing line was located, the steps about which the applicants have complained crossed that line.

Not only did the applicants not run this case at trial, it is glaringly inconsistent with the case they presented at trial. Faced with these inconsistencies, senior counsel for the applicants asked this Court ‘to put [licensing] to one side, because it caused the judgment and much of the case to derail’. He continued:

So it is not part of our case on appeal and the way that it is put below is all sorts of octopus tentacle ways because of this licensing problem. That really caused a lot of difficult[y] for his Honour, because it addressed issues that we say should never have — well, I won’t say that — the issues that are irrelevant to the case, ultimately, that we are putting here on appeal, but it was the case put below.[98]

[98]Transcript of Proceedings (28 November 2018) 60–1.

Senior counsel was then asked by a member of the Bench whether his submissions, taken to their logical conclusion, would mean that, in order for Daiwa to meet its putative obligation to maximise sales of Barokes’ WIC products in Japan and China, it would have to cease sales of Monde’s WIC products in those markets. Senior counsel responded as follows:

No, Your Honour. We don’t want to get into hypotheticals, because we accept there may be questions of fact and degree. What we have to ask is: look at what they actually did and look at the business plan, define it, look [at] what the plan’s objectives were.
And it’s undeniable that the business plan objective was to achieve those sales in a joint venture between Barokes – using Barokes’ technological capacities, Barokes’ patent protection – to go and have cans from Daiwa using Monde’s facility, using the Vinsafe system to try and have growth in the Japanese and Chinese markets. Instead of doing that, what Daiwa did is got a higher percentage of its subsidiary – 53 per cent – and did exactly what the business plan planned for it to do with Barokes. It did on its own, because it found for its commercial benefit or purpose, it didn’t need Barokes and it went on its own way.
It’s that context in which the issues arise and when the inevitable problem is, ‘Hey, what about our patents?’ they then move to destroy the very asset – the very benefit they acquired. So this case doesn’t raise issues of could they have done what Your Honour had asked me to do? It becomes a question of fact and degree. There’s no non-compete obligation, but there is an obligation in terms of the clauses we rely upon, to be [interpreted] and applied in the way in which the Macquarie case would have them applied. And that’s just simply as it happened.[99]

[99]Transcript of Proceedings (28 November 2018) 61–2.

Self-evidently, the applicants’ trip the wire case involves questions of fact and degree. Senior counsel for Daiwa described it as ‘a fact-intensive case’.[100] Such a case could only be resolved on the basis of precise factual findings. Because that is not the case that the applicants pursued at trial, it was not necessary for Daiwa to adduce evidence on issues such as any relevant differences between Barokes’ WIC products and Daiwa’s WIC products, relevant differences between the markets for those products and any causation between the steps about which the applicants have complained and any detriment to Barokes’ business. For the same reason, it was not necessary for the judge to make findings on such issues.
[100]Transcript of Proceedings (28 November 2018) 69.

We accept Daiwa’s submission that, had the applicants pursued the trip the wire case at trial, it would have conducted its case differently by cross-examining the applicants’ witnesses on matters relevant to that case. In these circumstances, in accordance with the principles summarised at [92]–[94] above, the applicants should not be permitted to seek to impugn the judge’s decision on the basis of a case that was not run at trial.

Grounds 1, 5 and 6: oppression claim

Grounds 1, 5 and 6 are as follows:

1The trial judge erred by failing to determine in accordance with law, or at all, the breach of contract and oppression cases pleaded and argued by the Applicants.
…
5The trial judge erred by assessing the allegation of oppression for the purposes of ss 232 and 233 of the Corporations Act 2001 (Cth) (‘the Oppression Claim’) solely by reference to the question of whether Daiwa was in breach of its contractual obligations.
6The trial judge erred by failing to properly consider the Oppression claim:
aby reference to the authorities relied on by the applicants and, in particular, Scottish Co-Operative Wholesale Society v Meyer [1959] AC 324; and
bby reference to the view a reasonable commercial bystander would take of whether the conduct the subject of the claim was oppressive conduct in accordance with principles stated in the Wayde v New South Wales Rugby League (1985) 180 CLR 459 at 472–3.

Statutory provisions and legal principles relevant to grounds 1, 5 and 6

Upon an application by certain persons set out in s 234 of the Corporations Act, including a member, s 233 relevantly provides that the Court may make any of the following orders in relation to a company:

233 Orders the Court can make
(1)The Court can make any order under this section that it considers appropriate in relation to the company, including an order:
(a) that the company be wound up;
…
(d)for the purchase of any shares by any member …;
…

The circumstances in which the Court may make an order pursuant to s 233 of the Corporations Act are relevantly set out in s 232 of that Act, as follows:

232 Grounds for Court order
The Court may make an order under section 233 if:
(a) the conduct of a company’s affairs; or
…

is either:
…
(e)oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or in any other capacity.

…

The expression ‘oppressive to, unfairly prejudicial to, or unfairly discriminatory against’ in s 232 of the Corporations Act is a compound expression and is concerned with commercial unfairness.[101] It is not necessarily unfair for nominee directors to, in good faith, advance one of the objects of their nominating parent company, where that advancement necessarily entails prejudice to another shareholder.[102] However, a decision by nominee directors in good faith but for a purpose which reasonable directors would think to be unfair may be sufficient to warrant the intervention of a court.[103] The relevant question, in determining whether conduct is oppressive, is whether, objectively, in the eyes of a commercial bystander, there has been conduct that is so unfair that reasonable directors who consider the matter would not have thought the decision fair.[104] It is not necessary for a plaintiff to demonstrate a lack of probity, a want of good faith[105] or breach of contract.[106]
[101]Joint v Stephens [2008] VSCA 210 [134].
[102]Wayde v New South Wales Rugby League Ltd (1985) 180 CLR 459, 472 (‘Wayde’); Wilmar Sugar Australia Ltd v Mackay Sugar Ltd (2017) 345 ALR 174, 178–9 [13] (‘Wilmar’).
[103]Wayde (1985) 180 CLR 459, 473; Wilmar (2017) 345 ALR 174, 178–9 [13].
[104]Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692, 704; Wayde (1985) 180 CLR 459, 472–3.
[105]Wayde (1985) 180 CLR 459, 471.
[106]O’Neill v Phillips [1999] 1 WLR 1092, 1098–1102.

The expression ‘conduct of a company’s affairs’ in s 232 of the Corporations Act is broad, and non-exhaustively defined in s 53 of that Act.[107] It can encompass, among other things:

(a) the acts or omissions of the majority shareholder’s nominee directors;[108]
(b)the internal management and proceedings of the company (s 53(c));
(c)control, business, trading, transactions and dealings of the company (s 53(a)); and
(d)the power of persons to exercise, or control the exercise of, the rights to vote attached to shares in the company (s 53(f)).
[107]Scottish Co-Op [1959] AC 324, 366–7; Ubertini (2014) 98 ACSR 138, 225 [490].
[108]Ubertini (2014) 98 ACSR 138, 237 [532]–[533].

Parties’ submissions on grounds 1, 5 and 6

The applicants submitted that the impugned conduct of Daiwa as the majority shareholder of Barokes, and that of its nominee directors, constituted ‘the conduct of [Barokes’] affairs’ within the meaning of s 232(a) of the Corporations Act because:

(a)the conduct includes the nominee directors’ obstruction of certain resolutions of Barokes;
(b)the conduct is within the scope of the shareholders’ deed which provides for the rights and obligations of the shareholders of Barokes;
(c)cl 21.4 of the shareholders’ deed provides that the deed overrides Barokes’ constitution in the event of any inconsistency; and
(d)the conduct is comparable to that held by Scottish Co-Operative Wholesale Society v Meyer[109] and Ubertini v Saeco International Group Spa Societa A Socio Unico [No 4][110]to constitute ‘the conduct of a company’s affairs’.

[109][1959] AC 324.

[110](2014) 98 ACSR 138.

The applicants submitted that the judge erred by assessing the question of oppression for the purposes of ss 232 and 233 of the Corporations Act solely by reference to the question whether Daiwa was in breach of its contractual obligations and not by assessing whether Daiwa’s conduct was commercially unfair. This was said to be contrary to the manner in which the applicants had put their case at trial, which was that the judge should find oppression because the circumstances of the case were analogous to those in Scottish Co-Op, where oppression was found against a holding company in relation to a subsidiary notwithstanding that the conduct was not in breach of any contractual or other legal obligation.

The applicants argued that the assessment of reasonableness in the contractual sense is of the conduct, whereas the assessment of oppression is of the outcome or effect of the conduct, and that the judge erred by failing to determine their case by reference to the latter.

The applicants contended that the judge failed to consider whether a reasonable commercial bystander would regard Daiwa’s conduct as set out at [101] above, and the conduct of its nominee directors, as commercially unfair in circumstances where that conduct was contrary to the purpose and objectives of the joint venture. They argued that, when regard is had to the reasonable commercial bystander approach, a finding that Daiwa engaged in oppressive conduct without breaching its obligation of good faith was open and therefore the judge erred in not dealing with oppression independently of the breach of contract claim.

By way of example, the applicants submitted that, even if the opposition by Daiwa’s nominee directors to the resolution authorising Barokes to commence a patent infringement proceeding in Japan was not in breach of the shareholders’ deed, it was commercially unfair to Barokes. This was said to be because the only conclusion that could be drawn from the evidence is that the nominee directors preferred the interests of Daiwa in opposing the resolution.

More broadly, the applicants submitted that Daiwa’s nominees ‘did not even go so far as to purport to act in the interests of Barokes while acting in their capacity as directors of it in relation to its affairs’.

The applicants also contended that the judge treated the aspirational sales targets in the 18 October 2012 Spreadsheet Business Plan as contractual obligations, and failed to consider whether Daiwa’s obstruction of Barokes’ pursuit of its own corporate interests in China and Japan, and Daiwa’s deference to its separate and conflicting interests, was commercially unfair to the applicants as minority shareholders.

Daiwa submitted that the judge had determined the applicants’ case on both contractual and oppression bases. It contended that was so because the judge had regard to the parties’ contractual obligations including reasonableness and good faith, which were the types of issues that would be considered in an oppression case. It argued that the judge, when dealing with the applicants’ breach of contract case also made findings relevant to the oppression case, and that having found that Daiwa had acted in good faith and satisfied the standard of reasonableness, the judge could not have been satisfied its conduct was oppressive.

Decision on grounds 1, 5 and 6

In our opinion, grounds 5 and 6 and ground 1, insofar as it concerns the oppression claim, are not made out.

The applicants’ oppression claim was, in substance, based on its breach of contract claim. Understandably, the failure of the breach of contract claim strongly influenced the judge’s decision to reject the oppression claim.

However, as is apparent from the principles set out at [130] above, the authorities make it clear that a majority shareholder can be found to have acted oppressively notwithstanding that it did not breach any contract. The applicants relied on the similarities between the present case and Scottish Co-Op, as a basis for their oppression claim, that did not depend on success in their contract claim.

In Scottish Co-Op, the Scottish Co-Operative Wholesale Society Ltd (‘Society’) and two individuals who had experience and connections in the rayon industry (‘minority shareholders’) incorporated a company (‘subsidiary’) in 1946 for the purpose of manufacturing and selling finished rayon fabric. At that time, the rayon industry was under strict regulation and the Society required the minority shareholders’ skill and experience to obtain necessary manufacturing licences. The Society held 51 per cent of the shares in the subsidiary and the minority shareholders held the remaining 49 per cent. Three nominees of the Society — who were also directors of the Society — and both of the minority shareholders became directors of the subsidiary. The subsidiary obtained its woven cloth from a mill that was owned by the Society by placing orders as required. It did not enter into a formal supply contract with the mill that guaranteed supplies at specified prices.

The subsidiary’s business became very successful. In November 1951, the Society offered to buy shares from the minority shareholders at par in order to increase its majority shareholding, but this offer was refused. From that time, the Society’s attitude towards the subsidiary became hostile. Regulations on the industry were lifted in June 1952. This meant that the Society could conduct the business of manufacturing and selling finished rayon fabric without the minority shareholders. By the end of 1952, the Society adopted a policy of destroying the subsidiary’s business. Among other things, the policy involved the Society commencing a competing business as an internal division of the Society and causing its mill to refuse to supply woven cloth to the subsidiary except at commercially unviable prices. The effect of this policy was to dramatically reduce the scale of the subsidiary’s operations, and thus the value of its shares while at the time significantly boosting the business of the internal division.

The Society’s nominees on the subsidiary’s board of directors were aware of the Society’s policy but did not take any steps to oppose it or to assist the subsidiary to counter it. In February 1953, the Society refused an offer from the minority shareholders to sell their shares in the subsidiary for a price to be negotiated, and determined that it should be liquidated. The effect of liquidation would be to render the shares in the subsidiary worthless.

The court at first instance held that the Society’s conduct was oppressive and ordered the Society to buy the minority shareholders’ shares in the subsidiary at the value they would have had if not for the minority shareholders’ oppressive conduct. The Society’s appeal to the House of Lords was unsuccessful. The House of Lords held that the Society had acted in an oppressive manner towards the minority shareholders in its conduct of the affairs of the subsidiary and had exercised its majority power in a ‘burdensome, harsh and wrongful’ manner.[111]
[111]Scottish Co-Op [1959] AC 324, 342.

In our opinion, Scottish Co-Op is distinguishable. In that case, there was no pre-existing competition between the Society and the subsidiary. The subsidiary had been formed by the Society in partnership with the minority shareholders to conduct a new business because at that time the Society was unable to manufacture rayon without the minority shareholders. The Society and the subsidiary carried on a successful business together for a number of years before the Society attempted to assume control of the subsidiary’s business and destroy the subsidiary by oppressive conduct. By contrast, Daiwa and Barokes conducted existing businesses in the same industry and Barokes was aware that Daiwa manufactured cans and supplied them to Monde to be filled and sold in the Japanese market in competition with Barokes’ products. Moreover as early as 2009, before the parties contemplated embarking on a joint venture, a dispute had arisen as to whether Daiwa and Monde were infringing Barokes’ Japanese patent.

Additionally, the conduct of the Society in Scottish Co-Op involved the adoption of a deliberate policy that was designed to destroy the subsidiary’s business in its entirety by depriving it of the supplies it needed to operate. There was no evidence of any such policy in the present case. Daiwa provided working capital loans to Barokes to support its business and worked collaboratively with the applicants until their relationship broke down.

Apart from Daiwa’s continuation of its pre-existing business and rejection of the applicants’ contention that it was obliged to take a licence from Barokes and pay licence fees, the applicants’ main complaint related to Daiwa’s conduct in relation to Barokes’ patents. They alleged that, by Daiwa’s nominee directors opposing a resolution authorising Barokes to sue Daiwa and Monde for breach of its Japanese patent, and by Daiwa instituting proceedings to invalidate that patent and assisting BIX to resist the Chinese patent proceeding, Daiwa destroyed Barokes’ key assets.

The judge was correct to conclude that the conduct complained of did not constitute oppressive conduct. This conclusion was inevitable in the light of the judge’s finding that it was the common contemplation and assumption of the parties in entering into the shareholders’ deed that Daiwa would continue to conduct its own WIC business via Monde. That common contemplation and assumption was part of the factual matrix by reference to which the oppression claim had to be considered. In circumstances where Daiwa was able to continue its WIC business in competition with Barokes’ WIC business, the judge was right to find that the actions taken by Daiwa were reasonable and not commercially unfair to Barokes. That is because those actions were directed at protecting Daiwa’s business from the legal attacks upon it by Barokes. It is worth noting that those legal attacks were instigated by Mr Stokes without the authority of Barokes’ board of directors.[112]
[112]The judge held that Mr Stokes’ conduct was inconsistent with the shareholders’ deed. See Reasons [140], [144] and [73] above.

The same analysis applies in relation to Daiwa’s nominee directors. Their conduct must be considered in the context of Daiwa being able to continue its WIC business in competition with Barokes’ WIC business and the provisions of the nominee directors clause. That clause expressly authorised the nominee directors to represent the interests of their nominated shareholder and act on the wishes of that shareholder. Having regard to these considerations, the judge was right to conclude that the opposition by Daiwa’s nominees to the resolution authorising Barokes to institute a patent infringement proceeding against Daiwa and Monde in Japan did not constitute oppressive conduct. Daiwa had always maintained that neither it nor Monde had breached Barokes’ Japanese patent and this position was ultimately vindicated when the JPO held that the patent was invalid. This outcome meant that, subject to the result of any appeal against the JPO’s decision, Barokes incurred legal costs for no benefit.

It is not possible for us to deal specifically with the applicants’ more general submission that Daiwa’s nominees ‘did not even go so far as to purport to act in the interests of Barokes’. That is because this broad allegation was not put at trial and is not the subject of a finding by the judge. Broad allegations of this nature are difficult to make out unless they are accompanied by particulars of the conduct complained of and evidence to support those particulars. The allegation, not having been put at trial, must be rejected.

We also note that, in Scottish Co-Op, the relationship entered into between the Society and the minority shareholders was treated by Lord Keith of Avonholm as a partnership. The Society was formed as a separate entity because the minority shareholders refused to become employees of the Society.[113] However, in the present case, the relationship between the parties was governed by the relationship clause, which expressly states that the parties do not owe each other obligations either as partners or fiduciaries.
[113]Scottish Co-Op [1959] AC 324, 337, 361.

It is not necessary for us to consider the different views in Scottish Co-Op about the meaning of the phrase ‘the conduct of the company’s affairs’ or to examine how that phrase has been interpreted by subsequent authorities. That is because, irrespective of which view is correct, the conduct of Daiwa about which the applicants have complained was neither in breach of the shareholders’ deed nor inconsistent with the common contemplation and assumption of the parties in entering that deed. As such, for the reasons we have already stated, the impugned conduct cannot be regarded as commercially unfair to Barokes.

In conclusion, although the judge did not analyse Scottish Co-Op and did not expressly address the applicants’ contention that the facts of that case were similar to the present case, his failure to do so does not vitiate his decision to reject the applicants’ oppression claim. That is because, for the reasons we have given, the facts in Scottish Co-Op are not analogous to the present case.

Conclusion

As the proposed grounds of appeal were arguable, we will grant leave to appeal. However, as we have not upheld any of the grounds, the appeals will be dismissed.

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[2018] VSCA 349

19 December 2018