OHL Investments Pty Ltd v Belford Homes Pty Ltd
[2022] VSC 573
•30 September 2022
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
S ECI 2022 03665
| OHL INVESTMENTS PTY LTD | Plaintiff |
| v | |
| BELFORD HOMES PTY LTD | First defendant |
| GARVEY HOMES PTY LTD | Second defendant |
| SHAPE HOMES PTY LTD | Third defendant |
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JUDGE: | Nichols J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 16 September 2022 |
DATE OF RULING: | 30 September 2022 |
CASE MAY BE CITED AS: | OHL Investments Pty Ltd v Belford Homes Pty Ltd & Ors |
MEDIUM NEUTRAL CITATION: | [2022] VSC 573 |
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INJUNCTIONS – Quia timet – Plaintiff seeking injunction on a final basis – Restraint of meeting of partners – Where defendant partners seek to meet to consider proposed resolutions – Whether conduct will cause immediate and substantial damage.
BREACH OF CONTRACT – Partnership agreement – Arbitration clause – Whether the defendants’ threatened conduct would breach the contractual provisions in issue if not restrained – Whether “dispute” is one which arises “under or in relation to” the Agreement – Arbitration clause to be read in context of contract as a whole.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Ms P Neskovcin KC Mr D Porteous | Davies Collison Cave Law |
| For the First and Second Defendants | Mr M Borsky KC Mr W Newland | Maddocks |
| For the Third Defendant | No appearance |
HER HONOUR:
Introduction and background
The plaintiff, OHL Investments Pty Ltd[1] is in a partnership with the first and second defendants, Belford Homes Pty Ltd and Garvey Homes Pty Ltd. The Partnership carries on a residential and commercial construction business which is managed by Shape Homes Pty Ltd.[2]
[1]As trustee of the OHL Family Trust.
[2]Shape Homes Pty Ltd is the third defendant. It took no active part in this proceeding.
On 9 September 2022, Belford Homes issued a Notice of Meeting of the Partnership to be held on 16 September 2022 (the Meeting Notice), the purpose of which was to consider and if thought fit, instruct the Manager (Shape) to issue a notice of summary termination of Shape’s employment of its joint managing director, Mr Sean Lefoe, or in the alternative, to instruct the Manager to revise the notice for further consideration by the partners.
OHL seeks an order restraining the first and second defendants[3] from conducting the meeting of the partners the subject of the Meeting Notice (or any further meetings concerning the same subject matter) on the basis that the matters the subject of the Meeting Notice constitute a dispute between the partners that is the subject of an exclusive arbitration clause contained within the Partnership Agreement,[4] and must accordingly be referred to an arbitrator for determination. OHL seeks to restrain the proposed meeting until the parties have completed the dispute resolution process stipulated by the Partnership Agreement; and if the dispute is not resolved after that process, until the parties have referred the dispute to an independent arbitrator and the arbitration has concluded.
[3]The first and second defendants are described hereafter as “the defendants”.
[4]Partnership Agreement dated 17 June 2020 as varied by an Agreement of December 2021.
Relevantly, Sean Lefoe owns and controls OHL. Matthew Belford controls Belford Homes and Jeffrey Garvey controls Garvey Homes. Each of Mr Lefoe, Belford and Garvey is a director of Shape.[5] The partners (OHL, Belford Homes and Garvey Homes) are also the shareholders of Shape. Belford Homes and Garvey Homes between them, have controlling interests in the Partnership and in Shape.
[5]A fourth director, who does not hold an interest in Shape, either directly or through a controlled entity, took no part in this proceeding.
The proceeding was commenced by urgent application to the Practice Court and formalised by the filing of an originating motion on 15 September 2022. The defendants deny that any dispute to which the arbitration and dispute resolution provisions in the Partnership Agreement apply, has arisen. They have given undertakings to the Court not to conduct the proposed meeting or any like meeting, until the determination of the plaintiff’s application.
OHL seeks final relief by its application which is in the nature of a quia timet injunction seeking to restrain an anticipated breach of contractual rights.[6]
[6]The Court has power to grant such relief under s 37 of the Supreme Court Act1986 (Vic).
There are two central questions on this application. The first is whether the defendants’ conduct (if not restrained) would breach the contractual provision in issue. It was accepted that that question had to be decided on a final basis.
The second is whether the threatened breach has been established to the extent required for the grant of an injunction. The principles relevant to the grant of a quia timet injunction are well established. The applicant must satisfy the Court that there is sufficient risk that the acts that would result in a breach of contract will take place, so as to render it just in all the circumstances that an injunction should be granted.[7] The principles were distilled in this way in Rasco v Lucas:
(a)in order to be granted quia timet relief, the applicant must show that what the defendant intends or is likely to do will cause immediate and substantial damage;
(b)the onus is on the applicant to demonstrate that the defendant is likely to cause immediate and substantial damage;
(c)there is no fixed or absolute standard of proof required before quia timet injunctive relief will issue;
(d)in determining whether the grant relief, the Court will have regard to the degree of probability of apprehended injury, the degree of the seriousness of the injury and the requirements of justice between the parties;
(e)the degree of probability of future injury is not an absolute standard. What is aimed at is justice between the parties, having regard to all the relevant circumstances.[8]
[7]Apotex Pty Ltd v Les Laboratoires Servier No 2 (2012) 293 ALR 272, 283, [52].
[8]Rasco Pty Ltd v Lucas [2017] VSC 503, [84]-[86]; RG Murch Nominees Pty Ltd v Paul David Annesley [2019] VSC 107, [79].
As Chesterman J said in Kestral Coal v Construction, Forestry, Mining and Energy Union:
The decision whether or not to restrain the commission of future acts will depend upon an amalgam of factors which have to be considered and weighed. These include as well as the likelihood of the conduct occurring, the damage the plaintiff will suffer if it does occur and the hardship or inconvenience the defendant will suffer if the injunction is granted. A lesser likelihood of the conduct’s occurrence will justify the grant of an injunction where the plaintiff will suffer great loss if the conduct does occur and the defendant will not be put out by the injunction.[9]
[9][2001] Qd R 634.
For the reasons set out below, the application is refused.
Partnership – Governance and Decision Making Structures
On 17 June 2020 OHL, Belford Homes, Garvey Homes and Shape entered the Partnership Agreement (by deed) in respect of the affairs of the Partnership and separately, a Shareholder Agreement in respect of the affairs of Shape.
On the commencement of those agreements OHL held a 50% interest in the Partnership, and Garvey Homes and Belford Homes each held a 25% interest. Their shares in Shape were held in those same proportions. On 22 December 2021, the parties agreed upon a change of ownership and control. Garvey Homes and Belford Homes each purchased 10% of OHL’s interests in the Partnership and in Shape. As a consequence, each of Garvey Homes and Belford Homes now holds a 35% interest in the Partnership and in Shape, and OHL holds a 30% interest. The acquisition of OHL’s shares was proposed by the Belford-Garvey parties and accepted by OHL, on the express basis that Belford-Garvey parties wished to obtain a controlling interest in Shape.
At that time, the parties agreed to concomitant changes to voting rights such that (among other changes) a vote of 70% of the Partnership is now required for a special majority resolution (whereas a 75% vote was previously stipulated),[10] and certain matters that were required by the Partnership Agreement to have been decided unanimously, may now be decided by special majority resolution. Those matters include “the employment of any staff”. The provisions of the Partnership and Shareholder Agreements here described are the provisions as varied in December 2021.
[10]With equivalent changes to the Shareholders Agreement in respect of Shape.
From the commencement of the construction business in mid-2017 Mr Lefoe was employed by Shape as its managing director in which role, as he put it, he oversees all aspects of the business. In February 2022, Mr Belford was appointed to be joint managing director with Mr Lefoe.
Each of the partners and the Manager (Shape) are parties to the Partnership Agreement, which relevantly provides in substance as follows:
(a) by the Agreement the partners constitute the Partnership in order to conduct the business of constructing residential dwellings and other premises (cl 3);
(b) the partners have the respective interests in the Partnership as set out (and as noted above) (cl 3(b));
(c) the Partnership Agreement and Shareholders Agreement are inter-dependent in the sense that a breach, default or repudiation of one of them is taken to be a breach default or repudiation of the other (cl 4);[11]
[11]And Shareholders Agreement, cl 13.
(d) the partners covenant with each other that they will be just and faithful to each other in relation to the affairs of the Partnership; to diligently attend to the conduct of the business, consult regularly with each other and devote time and attention to managing and promoting the success of the Partnership (cl 7.1);
(e) the Manager is appointed to manage and operate the business. In particular the agreement provides:
(i) the Manager is, by the Agreement, appointed as agent for each partner severally for the purpose of entering into contracts and undertaking acts necessary for the achievement and advancement of the business as directed by the partners (cl 5.1(a));
(ii) the partners shall be the shareholders and directors of the Manager. The share capital of the Manager shall be apportioned between the partners in accordance with their respective proportions (cl 5.1(c));
(iii) the Manager shall have possession and control (but not ownership) of the Partnership assets and responsibility for the conduct of the business (cl 5.2);
(iv) the Manager covenants with each partner that it will not do or perform any act otherwise than in accordance with the provisions of the Partnership Agreement and the directions of the partners (cl 6(a));
(v) the Manager will in its conduct of the Partnership undertake the day-to-day management of the business; comply with all agreements relating to the Partnership and diligently attend to the business of the Partnership (in addition to assuming the obligations set out in respect of the business including complying with the requirements of any governmental agency in relation to the conduct of the Partnership; paying expenses when they fall due and reporting to the partners on the progress of the financial affairs of the Manager and the Partnership) (cl 9.1);
(vi) the Manager must comply with any resolutions passed by the partners in accordance with clause 11. In all other respects the Manager (and its officers and executives) shall have authority to manage the Partnership assets in accordance with delegated authority levels set by the partners in accordance with clause 11 (cl 9.2);
(f) The appointment of the Manager may be terminated or otherwise revoked by resolution approved by any two of the partners (cl 9.3);
(g) As to the structure for decision-making by the partners, clause 11 provides that:
(vii) a partners meeting may be called by any partner;
(viii) a quorum for a partners meeting is two partners;
(ix)at a partners meeting each partner has a vote based on their respective proportion of the Partnership;
(x) except as otherwise specified all decisions of the partners will be made by special majority resolution which means a resolution passed by the partners who hold at least 70% of the interest in the Partnership;
(xi)the partners acknowledge that it is their expectation that wherever possible, decision making will be by consensus without the requirement of a vote;
(xii) Notice of each partners meeting must be given to all partners, in the manner specified, except if all partners agree otherwise;
(xiii) the partners may only resolve matters specifically referred to in the agenda for the meeting except if all partners agree otherwise;
(xiv) the partners may make a decision without convening a meeting or voting, by all partners signing a document or a document recording the decision;
(xv) the partners will cause notification of the resolutions passed at a partners meeting to be provided to the Manager within 2 days of the date of a partners meeting;
(xvi) if a partner commits an event of default (as defined) that becomes the subject of a notice by the other partners and is not remedied, the Partnership Agreement provides a mechanism whereby the defaulting Partner’s interest can be acquired at a discount (cl 12);
(xvii) Clause 27.6, headed, “Dispute Resolution”, provides as follows:
a)If a dispute arises between the Partners or between the Partners or either of them and the Manager in respect of any matter arising under or in relation to this Deed, they must first seek to resolve it in accordance with the provisions of this clause. Each Partner and the Manager will continue to fulfil its obligations under this Deed during the dispute.
b)A Partner or the Manager claiming that a dispute has arisen will give notice to the other Parties specifying the nature of the dispute and the facts giving rise to the dispute (Dispute Notice). Within ten (10) Business Days after the date of service of the Dispute Notice, the Parties to the dispute will negotiate in good faith and will use reasonable endeavours to resolve the notified dispute. Such negotiation will include a good faith consideration by them as to whether an expert should be appointed to determine any factual matter which is relevant to the dispute. If the dispute is not resolved to the satisfaction of any of the Parties at the expiration of ten (10) Business Days after the date of the dispute notice, each Party shall be entitled to pursue its legal rights in respect of such dispute as it thinks fit.
c)Where there is a dispute involving the Manager (including any decision to be made by the Manager) the parties agree that such dispute shall be referred to an arbitrator, whose decision shall be binding. The appointment of an independent arbitrator is to be agreed between the parties, or failing agreement within five (5) Business Days, to be appointed by the President of the Institute of Chartered Accountants in Australia. The costs of the arbitrator appointed under this clause are to be shared equally between the Parties. The arbitration shall take place in accordance with The Institute of Arbitrators & Mediators Australia (IAMA) Arbitration Rules then in force.
The Shareholders Agreement, to which the parties are OHL, Belford Homes, Garvey Homes, Mr Lefoe, Mr Garvey, Mr Belford and the company (Shape), set out how the affairs of Shape were to be conducted and relevantly provides:
(a) that the shareholdings of the Shareholders (OHL, Garvey Homes and Belford Homes) are as set out (held in the proportions noted above) (cl 4(a));
(b) that the company’s principal activity will be to act as agent for the Partnership as directed by the Partnership and to do all acts, matters, and things to advance the business as directed by the Partnership. The board of directors of the company must decide all matters concerning the overall direction and management of the company and the formulation of policies to be applied in the conduct of the business, consistently with and subject to any decisions of the partners of the Partnership (cl 7);
(c) that the “business” of the company is the business of construction of residential dwellings townhouses apartments, mixed use buildings, commercial and/or industrial premises carried on by the company on behalf of and at the direction of the Partnership (cl 2(f)).
(d) a mechanism whereby if a shareholder or director ceases to be employed or engaged by the company in circumstances where they are a “bad leaver”, the company may buy back the shares held by the defaulting party or direct that that party transfer their shares to a person nominated by the board, at a default price, namely 50% of fair market value as determined in accordance with valuation methodology provided. A “bad leaver” is a person who cases to be employed or engaged by the company as a result, among other things, of termination by the company with cause (cll 12, 2(d));
(e) processes of the usual kind for meetings of the board of directors and shareholders;
(f) a dispute resolution procedure which stipulates in substance that a party must not commence court proceedings or arbitration relating to any dispute arising from the agreement without first complying with the clause (subject to defined exceptions). A party claiming that a dispute has arisen is to give notice of the dispute, whereupon the parties are to engaged in dispute resolution steps. If the dispute remains unresolved after certain steps have been taken, the parties may refer the dispute to an expert determination, such determination to be non-binding and non-arbitral. The process contemplates the application of the dispute resolution process to “matters of fundamental importance with regard to the operation of the company” including a matter which requires an ordinary resolution of the shareholders or directors, in order to resolve an equality of votes; or a matter which the directors cannot determine by a vote at board meeting. In that case, the dispute or deadlock must first be referred to an expert for (non-binding) determination (clause 16).
Events
As noted earlier, on 9 September 2022, Bedford Homes served the Meeting Notice, setting down a meeting of the partners on OHL to be held on 16 September 2022. The Notice set out the agenda for the meeting, as follows:
1. To consider and discuss the matters set out in the draft letter from the Manager to Mr Lefoe attached at Attachment 1.
2. To consider any material put forward by Mr Lefoe in relation to the letter (whether before or during the meeting).
3. To consider and, if thought fit, pass one of the following as a Special Majority Resolution.
To instruct the Manager, being Shape Homes Pty Ltd, to issue the notice of termination of employment attached at Attachment 1 to the Notice of Meeting to Mr Sean Lefoe.
OR
To instruct the Manager, being Shape Homes Pty Ltd, to revise the notice of termination of employment attached at Attachment 1 to the Notice of Meeting for further consideration by the partners.
The Meeting Notice set out a brief statement of “background” which stated that Mr Lefoe is employed by Shape, the Manager of the Partnership; that in February 2022 the Manager appointed Matthew Belford as joint managing director, and that Mr Belford had identified the issues set out in the Attachment to the Notice whilst Mr Lefoe had been on leave from about 1 August 2022. It was said that the attached letter sets out a proposed basis for the termination of Mr Lefoe’s employment and the reasons therefor, “based on the relevant information currently known” and that “the letter is to be discussed and considered by the partners together with any information provided by Mr Lefoe (whether prior to or during the meeting)”. It is noted that “the Manager is required to comply with any resolutions of the Partnership pursuant to clause 9.2 of the Partnership Agreement”.
The subject of item 1 of the Agenda is a draft letter addressed to Mr Lefoe setting out a proposed basis for Mr Lefoe’s summary dismissal from his employment with the Manager, to be signed by Mr Belford as joint managing director of Shape. The letter sets out allegations against Mr Lefoe in respect of his conduct as an employee of Shape which are said to have been deliberately inconsistent with his employment contract[12] and a “wilful failure on [his] part to follow the directions of the Board of Shape Homes and to act in the best interests of Shape Homes”, and that Mr Lefoe has been “wilfully negligent in performing [his] duties as Managing Director and, subsequently, as Joint Managing Director”.
[12]No contractual terms were in evidence; there was said to be no written contract of employment.
Mr Lefoe’s evidence was that the allegations of misconduct had not been previously raised with him and that he first became aware of them by way of the Meeting Notice. Mr Lefoe set out his response to each of the allegations in his evidence on this application, denying that any of his conduct was a breach of his employment contract or his obligations to Shape or contrary to its interests or the directions of the board. He said that the circumstances the subject of the allegations were known to and agreed by the other directors and partners, and reflected the usual and accepted manner in which the business was to be conducted. It is unnecessary to set out the allegations or the response to them. It was not contended that the resolution of the application required consideration of the substance of the issues raised by the allegations.
On 14 September 2022, the solicitors for OHL and Mr Lefoe wrote to the solicitors for the defendants. The letter recorded that OHL and Mr Lefoe deny the allegations set out in the Meeting Notice and its attachment, and deny that there is any basis for Shape to terminate Mr Lefoe’s employment. The letter went on to give notice of a dispute for the purposes of the Partnership Agreement, in the following terms –
Accordingly, our client gives notice pursuant to cl. 27.6 of the Partnership Agreement that a dispute has arisen between the Partners and involving the Manager (i.e. Shape Homes) (including any decision to be made by the Manager). That dispute comprises the matters the subject of the agenda to the Notice, being the consideration of the matters set out in Attachment 1 of the Notice and whether, on the basis of that consideration, the Manager ought be instructed to issue the notice of termination of employment attached at attachment 1, to revise that notice of termination or alternatively to take some other course of action (or no further action) (the Dispute). Pursuant to cl 27.6(c) of the Partnership Agreement, the Dispute is of a kind that must be referred to an independent arbitrator for determination, whose decision shall be binding.
(the Dispute Notice).
The plaintiff sought from the defendants an undertaking that they would not proceed with the proposed meeting and would comply with clause 27.6 of the Partnership Agreement by referring the Dispute to “binding arbitration”. The defendants responded, through their solicitors, on 15 September 2022, refusing to give the undertakings sought. It is the defendants’ position that the dispute between parties is not the kind of dispute that enlivens the operation of clause 27.6.
Consideration
Question 1 – would the threatened conduct breach contractual obligations if not restrained?
Parties’ submissions
On the first question – whether the defendants’ threatened conduct would breach the contractual provisions in issue if not restrained – the plaintiff submitted as follows.
Where the Belford-Garvey parties have made a series of disputed allegations that they say justify the termination of Mr Lefoe and they propose to consider and determine those allegations, it is clear that a ”dispute” within the meaning of the clause has arisen between the parties concerning those allegations and whether, on the basis of them, the Manager ought be instructed to summarily terminate Mr Lefoe’s employment.
That dispute is one which arises “under or in relation to” the Agreement, concerning as it does the Partnership, the conduct of the business of the Partnership by the Manager and whether the partners have a proper basis to propose and pass the proposed resolutions. The words “in relation to” in clause 27.6 must be given a wide or generous construction.[13] The phrase should be construed liberally to mean all matters of the subject of the Partnership Agreement which essentially include the Partnership, the rights and obligations of the partners and disputes arising in relation to those matters. Relatedly, it is significant that the parties have chosen to include a dispute resolution clause in such broad terms. The proper approach consistent with authorities is to give effect to the parties’ agreement in that regard. The word “dispute” itself is not defined in the Partnership Agreement, but its ordinary, well understood definition is of an argument, debate or controversy. Dispute resolution clauses such as this are to be construed liberally and not narrowly on the basis that the parties agreed prior to any dispute yet arising to adopt a particular process for the resolution of their disputes. The starting point is that the parties should be held to their bargain.[14] Clauses of this kind are not to be construed by reference to “fine shades of difference in the legal character of individual issues or by the ingenuity of lawyers in developing points of argument”.[15]
[13]Incitec Ltd v Alkimos Shipping Corporation (2004) 138 FCR 496 at 503, [32] (Incitec).
[14]Cessnock City Council v Aviation & Leisure Corp Pty Ltd [2012] NSWSC 221, [31] (Cessnock).
[15]Francis Travel Marketing Pty Ltd v Virgin Atlantic Airways Ltd (1996) 39 NSWLR 160, 165.
Sub-clause 27.6(c), which directs the parties to refer a dispute to arbitration, concerns only a sub-set of all relevant disputes, namely those “involving the Manager”. The resolutions, if passed, would direct the Manager to take a particular course of action and therefore the dispute about the proposed resolutions “involves” the Manager. The word “involving” is of very broad meaning. For the purposes of the clause the Manager need not be a participant in the dispute; it is sufficient that the Manager is the subject of the dispute, in some way. The dispute need not be about the Manager; a dispute about something the Manager is going to be directed to do or required to do for the purposes of clause 9.2 of the Partnership Agreement (as in this case) otherwise falls within the clause.
If the defendants proceed with the proposed meeting, the purpose of which is to consider and determine the matters in dispute between the parties, the Belford-Garvey parties will be acting in contravention of clause 27.6 of the Partnership Agreement, which requires that disputes not be considered and determined in that way. The plaintiff will be denied the right to have the matters in dispute between the partners determined by an independent arbiter. The denial of those rights is not something that can be remedied once it has taken place. In a closely analogous context, courts frequently stay proceedings brought in breach of agreements of this kind, to submit disputes to arbitration.[16]
[16]Cessnock (n 2).
The obligation to negotiate in good faith imposed by sub-clause (b) is relevant regardless of whether or not sub-clause 27.6(c) has effect. It is in the least necessary before any meeting occurs for good faith negotiations to occur.
The defendants submitted that there can be no doubt that the partners are, consistently with the Partnership Agreement, entitled to meet and conduct the proposed meeting for the purposes of considering and if thought fit, passing one of the proposed resolutions. The first and second defendants constitute a majority controlling interest, as a result of the changes to the Partnership effected by agreement (a partial buy-out of OHL’s interests), from which there is no demur by OHL. The partners are entitled to vote in accordance with their interest and voting rights and the procedure specified on all subject matter, including the employment of staff. The removal of the requirement that staff employment be determined only by a unanimous vote was the specific subject of agreement in the course of the buy-out and change of control agreements. Because there is undoubted power for the partners to meet and proceed as proposed in the Meeting Notice, there is no “dispute” that attracts the operation of clause 27.6.
Furthermore, to refer to an arbiter the factual basis for a question for resolution by the partners is to construe the process “backwards”, by seeking a determination before there is any dispute to which the clause may attach. The circumstances that have now arisen might in general terms be described as a “dispute” between partners but it is not a dispute attracting the operation of the clause. A relevant dispute might subsequently arise, for example, once a decision is made and further steps are taken. But that is hypothetical future event.
The plaintiff’s proposition that absent unanimity upon a matter proposed to be the subject of a resolution by the partners there is a right to arbitration under clause 27.6(c), is irreconcilable with the decision-making process established by the Partnership Agreement (see clause 11), under which there is no reservation of any subject matter for unanimous decision-making. By the Partnership Agreement, the parties have determined that a special resolution is the highest threshold for decision-making. As it happens, also by agreement, the defendant partners have acquired the rights to exercise sufficient votes to pass a special resolution.
The purpose of clause 27.6(b) is to prevent court proceedings or other legal processes being instituted unless and until the parties have negotiated in the manner specified. The defendants do not want to institute court proceedings; all they wish to do is to convene a meeting. Doing so would not amount to the instigation or vindication of legal rights. If they do convene a meeting, they will not be in breach of the Partnership Agreement.
The “dispute” is in any event, not one “involving the Manager”. The opening line of sub-clause 27.6(a) distinguishes between two kinds of disputes, namely a dispute between the partners and a dispute between the partners and the Manager. If there is a dispute between the partners and the Manager, then sub-clause (c) applies. The expression “dispute involving the Manager” in sub-clause (c) should be construed conformably with sub-clause (a). The result is that in order for sub-clause (c) to take effect, the Manager must be a participant in the dispute. In this case that does not arise because if the partners are permitted to meet and decide to exercise their voting power, the Manager is automatically required to give effect to that in this case, by clause 9.2 of the Partnership Agreement.
Analysis
It is instructive to focus first on the conduct of the defendants in issue (i.e., what it is that the plaintiff seeks to enjoin), commencing with the form of relief sought.
As the Dispute Notice set out above makes plain, it is apparent that the plaintiff contends that the same matters the subject of the Meeting Notice comprise a dispute between the partners for the purposes of clause 27.6 of the Partnership Agreement.
The plaintiff initially sought a permanent order in these terms –
An order restraining the first and second defendants from conducting the meeting of partners of the Shape Homes Partnership the subject of the [Meeting Notice], or any further meeting of the Partners comprising the same subject matter.
After the hearing of the application the plaintiff sought to vary the form of relief so as to restrain the partners from conducting the said meeting,
(a) until the parties have completed the dispute resolution process stipulated by clause 27.6(b) of the Agreement and (b) if the dispute is not resolved under that process, until the parties refer the dispute the subject of the Dispute Notice, to an independent arbitrator pursuant to clause 27.6, and until that arbitration has concluded.
The original form of relief was consistent with a view that once the dispute was referred to arbitration it would be determined in a binding way and there would be in effect, nothing left to decide. The revised form of relief[17] admitted of the prospect that a decision of the Partnership might be needed to give effect to an arbitral decision. The resolution of this application does not turn on the difference in the form of the relief sought. As the plaintiff put it in argument, by proposing to proceed with the meeting the defendants will be acting in contravention of clause 27.6 which requires that disputes not be considered and determined in that way. If the injunction is refused, the plaintiff’s right to have the matters in dispute decided by an independent arbiter, will be denied. As a secondary point, the plaintiff’s case was that the meeting could not permissibly occur without the dispute resolution process (good faith negotiation) first having been undertaken.
[17]The revised form of relief was articulated in response to a question from the Court about the ambit of the plaintiff’s case. I would grant leave to the plaintiff to amend the originating motion in the terms indicated by the plaintiff’s solicitors.
For the purposes of addressing the requirements of a quia timet injunction (the risk of the plaintiff suffering irreparable harm), the plaintiff’s case was that if the meeting proceeded it was inexorable that Mr Lefoe’s position would be terminated, with the further result that OHL would be vulnerable to the forced acquisition of its shares at a discounted value. However, the conduct sought to be restrained was the holding of the meeting for the said purposes, and not any subsequent steps that might follow. And nor was the conduct the subject of the application said to be the threatened making of a decision by the partners in bad faith or for an improper purpose. The plaintiff emphasised that the partners were obliged to conduct themselves in good faith and to make decisions on a proper basis (which point is addressed below) but the application was not put in that way.[18]
[18] I.e., the question of the propriety or lawfulness of any decision made at the proposed partners’ meeting (whether such a decision might be made in bad faith or for an improper purpose) was not the subject of this application.
Would the defendants’ threatened conduct, if not restrained, amount to breach of clause 27.6 of the Partnership Agreement? In my view it would not, for the reasons that follow.
The plaintiff relied principally on the broad language of clause 27.6(a). I accept that the language, “a dispute between the partners… in respect of any matter arising under or in relation to this deed”[19] is broad, and that such language must be given a wide or generous construction.[20] Taking those words by themselves without more, one might be tempted accept the plaintiff’s proposition, that where the Belford-Garvey parties have made a series of allegations that they say justify the termination of Mr Lefoe and they propose to consider and determine those allegations, which are denied by OHL, a “dispute” within the meaning of the clause has arisen between the parties.
[19]It was not said that the dispute in question had arisen between the partners and the Manager.
[20]Incitec (n 1).
However, further consideration is required. The relevant question is not whether the circumstances here meet the description of a “dispute” as defined in sub-clause (a) read in isolation, but whether the conduct sought to be restrained is caught by any obligation imposed by clause 27.6. The Plaintiff did not purport to read the opening words of sub-clause (a) in isolation but ultimately its construction was not consistent with a contextual reading of the Agreement, including the whole of clause 27.6.
The principles governing the construction of the Agreement were not in dispute. The meaning of particular words in a contract must be determined in light of the context provided by the contract as a whole and the circumstances in which it was made.[21] The whole of the contract has to be considered since the meaning of any one part of it may be revealed by other parts and the words of every clause must, if possible, be construed so as to render them all harmonious with one another.[22] The need to consider the whole contract reflects the general proposition that words take their meaning from the context in which they are found. A corollary of the principle that each part of a document must be construed in relation to the other parts, is that effect must be given to each part the document. A court will strain against an interpretation that renders parts of a contract ineffective unless it is impossible to reconcile conflicting parts.[23] Words and expressions in a commercial contract should be given a ‘business sense’, that is, the sense which a reasonable business person in the context of the contract would give them.[24] Unless contrary intention is indicated, a court is entitled to approach the task of interpreting a commercial contract on the assumption that the parties intended to produce a commercial result. A commercial contract should be construed so as to avoid making commercial nonsense or working commercial inconvenience.[25] In this context, the parties’ commercial relationship is one of partnership, with its attendant obligations.
[21]Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41, 64.
[22]Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99, 109 (Gibbs J); his Honour was in dissent, but not in respect of this principle.
[23]See, for example, Chapmans Ltd v Australian Stock Exchange Ltd (1996) 67 FCR 402 at 411.
[24]Bergl (Aust) Ltd v Moxon Lighterage Co Ltd (1920) 28 CLR 194, 199.
[25]Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104, 116-17, [46]-[51] (French CJ, Nettle and Gordon JJ).
Before turning to the language of clause 27.6 it is convenient to consider the broader context of the Agreement. In short, I accept the defendants’ submission that the plaintiff’s proposition that absent unanimity upon a matter proposed to be the subject of a resolution by the partners there is a right to arbitration under clause 27.6(c), is irreconcilable with the decision-making process established by the Agreement, under which there is no reservation of any subject matter for unanimous decision-making, and by which the parties have determined that a special resolution is the highest threshold for decision-making.
The relevant provisions of the Agreement are set out earlier. The Partnership is constituted for the purposes of conducting the business. The Agreement establishes a structure for decision-making in respect of the Partnership (and its conduct of the business including by directing the Manager) by special majority vote, while expressing an expectation that where possible decisions will be made by consensus. The partners have agreed that except as otherwise specified all decisions of the partners will be made by special majority resolution, meaning a resolution passed by the partners who hold at least 70% of the interest in the Partnership. Any partner may call a meeting, and a formal notice of meetings is required. The partners may only resolve matters specifically referred to in the agenda for the meeting of the partners meeting except if all partners agree otherwise, and may also make decisions without convening a meeting. The decisions so made are to be put into effect by the Manager, who covenants with each partner that it will not do or perform any act otherwise than in accordance with the provisions of the Agreement and the directions of the partners. The Manager must comply with any resolutions passed by the partners in accordance with clause 11.
In that way, the Agreement provides a mechanism for the resolution of differences of view between the partners, including the resolution of disputes about how the Manager is to be directed.
On the plaintiff’s reading of clause 27.6 and its application to these facts, the partners may not meet and consider and vote upon the matters the subject of a duly served notice of meeting, because one of them (the plaintiff) disputes the matters set out in the Meeting Notice. On the plaintiff’s case, where one partner disputes the proposed factual basis for a partners’ resolution and there is a dispute about how the matter put forward for resolution ought be resolved,[26] provided that dispute “involves the Manager”, it cannot be determined by the partners meeting to resolve the issue, but must be determined by arbitration. Furthermore, on the plaintiff’s case any proposed direction to the Manager to take a particular course of action (whether or not by resolution) would “involve” the Manager.
[26]As the plaintiff put it, it was clear from the Annexure to the Meeting Notice that Belford Homes and Garvey Homes intended to resolve to terminate Mr Lefoe’s position; it was also clear that OHL does not accept that that should occur.
The incoherence in the plaintiff’s reading lies in the fact that decision-making by the partners by consensus or by a special majority vote in accordance with the respective interests of the partners, is an entirely different process from the submission of a dispute for determination to an arbitrator. Once a dispute (for example, as in this case, whether the partners ought direct the Manager to terminate Mr Lefoe) has been determined by an arbitrator in a binding way, the partners are no longer free to decide the matter including by exercise of vote in the manner they see fit. It is significant that clause 27.6(c) provides for a binding determination of a dispute by an arbitrator, and not, for example, for an expert determination of a matter on which the parties might require assistance on technical matters, which might then inform how they make decisions, including by passing resolutions. In this respect clause 27.6 may be contrasted with the dispute resolution clause in the Shareholders Agreement (described above) which provides that where on a matter of fundamental importance to the operation of the company there is an equality of votes on a matter requiring an ordinary resolution, the deadlock is to be first referred to an independent expert for non-binding determination. A clause of that kind is evidently intended to operate conformably with the company’s internal decision making processes, indeed to assist them.
The plaintiff submitted that the resolution mechanism in clause 27.6 of the Agreement is not intended to interfere with the decision-making process for the Partnership as expressed in clause 11. However, because the relationship that is governed by the Agreement is one of partnership, where the parties owe fiduciary obligations to one another, decisions must be in taken good faith and in the interests of the Partnership. The result is that where there is a dispute about a proposed resolution, particularly where a question arises as to whether there is a proper basis to take a proposed course of action, there must be an opportunity to challenge what is proposed. Because of the nature of the relationship the parties must be taken to have agreed that where the partners are in dispute in this way, they are entitled to have their differences resolved by an independent arbiter. The point is illustrated by the example of a resolution put forward for decision for an improper or collateral purpose. As the plaintiff put it, an affected partner must have the ability to challenge such a proposal, and the partners have in fact provided a mechanism for such a challenge.
That argument did not assist the plaintiff. A partnership is indeed a paradigm fiduciary relationship[27] in which partners owe one another both contractual and fiduciary obligations, and are required to exercise their rights and powers accordingly. Partners are nevertheless free to agree upon the terms of their relationship, and their fiduciary relationship must accommodate itself to the terms of their contract.[28] It was not contended that partners cannot agree upon a structure for decision-making by majority vote, consistently with the fiduciary nature of their relationship. Such contention would not have been sustainable. It is certainty true that actions taken in bad faith or without a propose purpose may be impeached. That fact however, does not have the result that the dispute resolution clause in this Agreement must be read in the way that the plaintiff contends. If the dispute resolution clause is not suited to the purpose for which the plaintiff would employ it, the fiduciary nature of the parties’ relationship does not make it otherwise.
[27]Birtchnell v Equity Trustees, Executors and Agency Co Ltd (1929) 42 CLR 384, 407.
[28]Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41, 97.
Although the plaintiff submitted that in the context of the way the dispute has arisen, the dispute is whether or not there is a proper basis for the defendants to propose the resolution that they have proposed, the plaintiff did not engage with what a determination of those questions themselves would mean for the conduct of a vote by the partners; and in any event the plaintiff contends that the whole of the dispute described in its Dispute Notice must be referred to arbitration, including the question whether the Manager ought be instructed to issue a notice of termination. As the plaintiff’s argument recognised, it would artificial to separate out the basis for a decision and how the decision should be made, in referring a matter to be determined by a binding arbitration.
Ultimately, the plaintiff’s case accepted as its foundation, the proposition that the obligations to refer a dispute for determination by arbitration and otherwise to “first negotiate in good faith”, could be predicates to, or substitutes for, the ordinary decision-making processes provided for in the Agreement. In my view that reading of clause 27.6 is not consistent with its broader context and does not yield a result that the parties must be taken, objectively, to have intended as a commercially workable governing arrangement, even having regard to the fiduciary nature of their relationship.
The issue cannot be determined by reference to context alone. It is convenient now to return to the text of the dispute resolution clause. In short, the alternative reading of the clause and its application to these facts (the reading for which the defendants contend), does not lead to incoherence, textually or contextually.
Both parties accepted that clause 27.6 should be construed as a whole, with each sub-clause informing the meaning of the other, and read in the context of the entire agreement. The difficulty with the plaintiff’s analysis is the concentration on the initial words, read without sufficient regard to the nature of the obligations imposed by the clause. Read contextually, the clause operates in the following way.
First, the disputes that attract the obligations imposed by the clause are delineated in sub-clause (a) which adopts, as I have said, very broad parameters.
Secondly, the parties to such a dispute may be the partners, or a partner or partners and the Manager.[29]
[29]The Manager, Shape, is a party to the Partnership Agreement.
Thirdly, the processes provided by the clause are to be initiated by a party serving a notice as specified in sub-clause (b).
Fourthly, the obligations in respect of dispute resolution imposed by the clause are these:
(a) Sub-clause (a) stipulates that if a relevant dispute arises, the parties to that dispute “must first seek to resolve it in accordance with the provisions of this clause”. Sub-clause (b) sets out what they must first do – namely, upon service of a notice of dispute, negotiate in good faith and use reasonable endeavours to resolve the dispute – after which time, if the dispute is not resolved within 10 business days, each party to the dispute “shall be entitled to pursue its legal rights in respect of such dispute as it thinks fit”.
(b) As the parties in this proceeding agreed, sub-clause (c) concerns a particular category or sub-set of disputes defined by sub-clause (a), namely those involving the Manager. Where there is “a dispute involving the Manager (including any decision to be made by the Manager),” that dispute shall be referred to an arbitrator whose decision shall be binding.
Returning to the requirement to negotiate in good faith, the obligation is to do so before pursuing legal rights. The parties to any dispute must “first” negotiate, then each party is free to pursue such legal rights as it thinks fit. The purpose of the clause is to require good faith negotiation before legal rights are pursued. The pursuit of legal rights by a party to a dispute without having engaged in that process would place the party in breach of that clause. That construction is consistent with the language of sub-clauses (a) and (b) when read together.
This reading of the text of the clause is also consistent with the broader context within which the clause sits, which supports the conclusion that the obligation to first negotiate is intended a predicate to the exercise of legal rights, and not as predicate or alternative to the exercise of the ordinary decision-making processes provided for in the Agreement.
Sub-clause 27.6(c) should be read in a similar way. That part of clause 27.6 is intended to provide that disputes involving the Manager, meaning disputes between a partner or partners and the Manager, be determined by arbitration. For the reasons set out earlier, construing the reference to disputes “involving the Manager” as extending to decisions about whether the Manager ought be directed to take a particular course of action, does not allow the clause to operate consistently with the decision-making structures established by the Agreement. Furthermore, concentrating on the text of clause 27.6, sub-clause (a) makes plain that the mechanisms it stipulates apply to both disputes between partners and disputes between partners and the Manager. Sub-clause (b) provides the partners or the Manager may initiate the dispute resolution process. The clause as a whole deals with the Manager as a participant in a dispute. To construe the expression “involving the Manager” as connoting the participation of the Manager as a disputant does not stretch the ordinary language of that expression (which I accept, linguistically, is broad). The clause, read in that way, has a particular commercial utility, namely providing a process by which disputes between the Manager and partners may be resolved without litigation, and is not attended by the difficulties discussed earlier.
Read in this way, the Agreement is in relevant respects, coherent.
The plaintiff submitted that were the defendant’s construction accepted it would render the arbitration clause nugatory, because the Belford-Garvey parties could pass any resolution which the Manager must comply with and thereby prevent the plaintiff from availing itself of the process that the parties agreed ought govern the resolution of a dispute. On the reading of the clause that I prefer, I accept that OHL as a partner with a minority interest, is constrained by the allocation of decision-making power upon which the parties have agreed. The majority parties must exercise their powers for a proper purpose and in good faith. If they do not, OHL will have legal remedies which it may elect to pursue.
It follows from the above that I accept the defendants’ submission that if they proceed to convene the proposed meeting (which is the conduct sought to be restrained) they will not be, by doing so, in breach of the Partnership Agreement. They will not be pursuing legal rights without first having negotiated in good faith. They will not be seeking to determine a matter “involving the Manager” when in fact that matter ought to have been submitted for determination by an arbitrator. It must be recalled that there is here, no dispute about the invocation of the decision-making processes for which the Agreement provides. There is no contention that the partners are not entitled to meet for some reason other than the failure to implement the dispute resolution clause. Differently put, the plaintiff does not have a contractual right to have this particular dispute determined by arbitration or negotiated before a partners meeting takes place. The service of a notice of dispute by the plaintiff did not itself create those rights.
It might be said that for the reasons discussed, there is no “dispute” within the meaning of clause 27.6, the Agreement having otherwise provided for the resolution of such a dispute by the decision-making processes it stipulates. However, the better conceptual paradigm is in my view the analysis set out above, which commences by asking whether by engaging in the threatened conduct, would the defendants be in breach of any obligation imposed on them by clause 27.6. For the reasons set out, the answer to that question, is no. I accept that as a general proposition, stipulations by contracting parties that they wish disputes to be determined in particular ways, ought be broadly and liberally construed. But that proposition is directed to the desirability of holding the parties to their bargain. In this case, the bargain was not as the plaintiff contended.
Question 2 – whether the threatened breach has been established sufficiently for the grant of a quia timet injunction
Because of the way I have answered the first question, the second question does not arise. However, I will make these brief observations.
Had the plaintiff been correct in submitting that clause 27.6 required the defendants to submit the dispute for binding determination by an arbitrator or at least to first negotiate according to the process set out in sub-clause 27.6(b) before holding a meeting, it would follow that the defendants were intending to take a course that would deprive the plaintiff of its contractual rights to have the dispute determined in that way. The loss of those rights would be immediate, and the grant of an injunction would be just.
There is force in the plaintiff’s further contention that the emphatic language of the annexure to the Meeting Notice, understood in the context of the partners’ respective voting entitlements, raises the real prospect that the defendant partners will in fact vote in favour of the first of the proposed resolutions and instruct the Manager to terminate Mr Lefoe’s employment, if the meeting proceeds.
The plaintiff then put that the injury to OHL is its vulnerability to a forced buy-out of its interests, under the “bad leaver” provisions to which reference is made above. The plaintiff submitted that in weighing the degree of probability of apprehended injury, the degree of the seriousness of the injury and the requirements of justice between the parties, observing that the degree of probability of future injury is not an absolute standard but what is aimed at is justice between the parties, it is just to restrain the defendants from embarking upon that course by holding the proposed meeting.
The defendant submitted that the ultimate outcome that would (on the plaintiff’s case) comprise a loss to OHL (the acquisition of its interests at a discount) would be predicated on the occurrence of a number of presently hypothetical events, that cannot be taken as likely to occur.
It is unnecessary to decide that point.
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