Armstrong Strategic Management and Marketing Pty Limited & Ors v Expense Reduction Analysts Group Pty Ltd & Ors

Judgment (5 paragraphs)

[1]

Judgment 1In these proceedings the plaintiffs make a number of claims against the first defendant ( ERAG ), second defendant ( ERAIS ), seventh defendant ( ERAGICS ) and eighth defendant ( ERAI ) (together, the Corporate Defendants ) arising in connection with three agreements entered into between one or more of the plaintiffs and one or more of the Corporate Defendants. Those agreements are referred to as the Consulting Agreement, the Co-operation Deed and the Licence Agreement (together, the Agreements ). The details of the claims are not important for present purposes. It is sufficient to observe that under the Agreements the parties established an Australian insurance expense reduction consulting business and agreed to establish a global insurance expense reduction consulting business. Subsequently, the Corporate Defendants purported to terminate their relationship with the plaintiffs. The plaintiffs claim that, in doing so, the Corporate Defendants wrongfully repudiated the Agreements and breached fiduciary duties said to be owing to them. In addition, the plaintiffs allege that the Corporate Defendants engaged in misleading and deceptive conduct and unconscionable conduct in contravention of ss 52 and 51AC respectively of the Trade Practices Act 1974 (Cth) (now the Competition and Consumer Act 2010 (Cth)) (the TP Act ). 2The fourth defendant ( Michael ), the fifth defendant ( Marfleet ), the sixth defendant ( Clucas ), the ninth defendant ( Chapman ) and the tenth defendant ( Dormer ) (together, the Individual Defendants ) were each directors of one or more of the Corporate Defendants during some or all of the time during which the relevant events occurred. The plaintiffs claim that the Individual Defendants (not all of them in each case):

Induced the Corporate Defendants to terminate the Agreements and, as a result, are liable for the tort of inducing a breach of contract (the Inducing Breach of Contract Claims ) (paras 83 to 94 and 125 to 137 of the Amended Commercial List Statement ( ACLS ));
Knowingly participated in the Corporate Defendants' breaches of fiduciary duty (the Accessorial Liability Claims ) (paras 41 to 43D, 65 to 67D and 114 to 116D of the ACLS);

Inducing Breach of Contract Claims 6In substance, these claims involve the following allegations: (a)The relevant Individual Defendants knew of circumstances which would indicate to an honest and reasonable person that the purported termination was wrongful or wilfully and recklessly shut their eyes to whether it was wrongful; (b)In the case of those Individual Defendants who were directors of the company that wrongfully repudiated the relevant Agreement, those directors with the knowledge referred to in (a) voted in favour of a resolution to terminate the agreement and, in doing so breached their duties to the company; (c)In the case of those Individual Defendants who were not directors of the relevant company, those defendants with the knowledge referred to in (a) were party to an agreement with the directors to combine to terminate the relevant Agreement; (d)By the conduct referred to in (b) or the conduct referred to in (c), the relevant Individual Defendants induced ERAGICS to terminate the Consulting Agreement and the Co-operation Deed and ERAG to terminate the Licence Agreement. 7Mr Hyde, who appeared for the Individual Defendants, submitted that this claim should be struck out on two bases. First, so far as the directors were concerned, he relied on the principle that directors are not liable for inducing a breach of contract by a company where they are merely the individuals through whom the company acts. The principle has been applied in a number of cases. It was stated in these terms by Hodgson CJ in Eq (as his Honour then was) in Tsaprazis v Goldcrest Properties Pty Limited [2000] NSWSC 206, (2000) 18 ACLC 285 at [11]: In general, only the company is liable under such a contract, not its shareholders or directors, unless they guarantee the company's performance. Directors may become indirectly liable to other contracting parties through breach of their director's duties to the company, or through breach of the Corporations Law relating to such matters as insolvent trading. Consistently with this general approach, directors are not liable for the tort of inducing breach of contract, where, in exercising their functions as directors, they have caused the company to breach its contract ... See also Said v Butt [1920] 3 KB 497; Rutherford v Poole [1953] VLR 130 at 135 per Herring CJ. 8Second, so far as the Individual Defendants who were not directors were concerned, Mr Hyde submitted that the mere failure to take steps which might have been taken to prevent a breach of contract is insufficient to constitute the tort of inducing a breach of contract. 9I do not accept these submissions. Mr Kunc submitted that, it is at least arguable in relation to the directors that there is an exception to the principle relied on by Mr Hyde where the directors act outside the scope of their authority. In support of that proposition, Mr Kunc relied on the following passage from Balkin & Davis, Law of Torts, 4 th ed (2009), LexisNexis Butterworths at [21.14] (footnotes omitted): If the party whose breach of contract is complained about is a company, the injured person will not be permitted, as a general rule, to allege that a director of the company has induced it to act contrary to its contractual obligations. The director is regarded as the alter ego of the company, so that to allege that the director has induced a breach of the company's contract is seen as equivalent to alleging that a natural person has induced himself or herself to refuse to further perform a bargain. The suggestion has, however, been made that a director may be personally liable for this tort if it is shown that he or she has not acted bona fide and has acted outside the scope of authority . (emphasis added) Mr Kunc also relied on three cases cited by Balkin and Davis in support of the proposition stated in the highlighted sentence. They are Cook Strait Skyferry Ltd v Dennis Thompson International Ltd [1993] 2 NZLR 72; Imperial Oil Ltd v C & G Holdings Ltd (1989) 62 DLR (4 th ) 261; and Ridgeway Maritime Inc v Beulah Wings Ltd (The Leon) [1991] 2 Lloyd's Rep 611. It is sufficient to refer to Cook Strait Skyferry . In that case, the individual defendant director sought to strike out a claim made against him for procuring a breach of an agreement by a company of which he was the governing director. The Court concluded at [1993] 2 NZLR 72 at 78: Accepting therefore that a director may be liable for procuring a breach of contract by the company of which he or she is a director if he or she does not act bona fide or does not act within the scope of his or her authority and bearing in mind the high onus on a party seeking to strike out a pleading, I have come to the conclusion that it would be wrong of me to strike out the ... causes of action against the second defendant. It will be a question of fact at the end of the day whether or not Mr Thompson acted bona fide within the scope of his authority. 10Even accepting this exception to the principle stated by Hodgson CJ in Eq, it is far from clear that it applies where the relevant conduct relates to the internal management of the company. Although a director may breach a duty to the company in those circumstances, it is difficult to say that the director was acting outside his or her authority and in doing so ceased to become an organ or manifestation of the company. Nonetheless, the issue is not a straightforward one. Even if the claims were struck out, the Individual Defendants would remain parties to the proceedings because of the TP Act claims against them. Mr Hyde submitted that there would still be benefit in striking the claims out because it would narrow the factual enquiry that the Individual Defendants would have to undertake. There was, however, no evidence before me concerning what effect striking the claims out would have on matters such as the scope of discovery and the factual enquiries that the Individual Defendants would have to make. There is at least an overlap between the factual issues raised by the TP Act claims and the other claims. For example, para 144 of the ACLS alleges: During the months preceding the Purported Licence Termination, ERAI and ERAG, improperly sought to bring about circumstances in which [the second plaintiff] would be deprived of its rights under the Licence Agreement ... Each of the Individual Defendants is said to have aided, abetted etc that conduct. The Individual Defendants do not seek to strike out that claim. It seems to me it will involve investigating many of the same facts as is the subject of the Inducing Breach of Contract Claims. Nor is there any evidence before me to suggest that the Individual Defendants will suffer any particular prejudice if the claims are not struck out. In those circumstances, there is little utility in doing so. 11As to the claim against the other Individual Defendants who were not directors, the claim is not simply that they failed to take steps which might have been taken to prevent a breach of contract. Rather, it is apparent from the particulars provided by the plaintiffs that the claim is that they were a party to an agreement by which it was agreed that the directors would take the steps that they did. I do not regard that claim as so hopeless that it ought to be struck out; and again there seems to be little utility in striking out the claims. 12It follows that paras 83 to 94 and 125 to 137 should not be struck out.

Accessorial Liability Claims 13Subject to one exception, the Individual Defendants' objections to these claims have been cured by the ACLS. The exception is that the amendments include an allegation that the Individual Defendants are liable as accessories to the conduct of the relevant Corporate Defendants even if that conduct was not "dishonest and fraudulent". Mr Hyde submits that that allegation cannot stand in the face of the decision of the High Court in Farah Constructions Pty Ltd v Say-Dee Pty Limited [2007] HCA 22; (2007) 230 CLR 89. 14Mr Kunc makes two responses to this point. First, he says that the point was left open for consideration by the High Court itself. The passage he relies on is this (at [163]) (footnotes omitted) : Thirdly, whilst the different formulations of principle may lead to the same result in particular circumstances, there is a distinction between rendering liable a defendant participating with knowledge in a dishonest and fraudulent design, and rendering liable a defendant who dishonestly procures or assists in a breach of trust or fiduciary obligation where the trustee or fiduciary need not have engaged in a dishonest or fraudulent design. The decision in Royal Brunei has been referred to in this court several times but not in terms foreclosing further consideration of the subject in this Court, in particular, further consideration of the apparent necessity to displace the acceptance in Consul Development Pty Ltd v DCP Estates Pty Ltd of the formulation of the second limb of Barnes v Addy were Royal Brunei to be adopted in this country. Until such an occasion arises in this Court, Australian courts should continue to observe the distinction mentioned above and, in particular, apply the formulation in the second limb of Barnes v Addy . Second, Mr Kunc submitted that there was no utility in striking out the claims. 15I accept Mr Kunc's submissions. It is clearly not open to a first instance judge or an intermediate appellate court to accept this aspect of the plaintiffs' claim. However, the High Court has left the point open, and there would be difficulties in bringing the matter before the High Court if claims that raised it were always liable to be struck out. Mr Hyde submitted that the point could be raised by an appeal against a decision to strike out the claim. Mr Hyde's submission has merit if that was the only way in which the plaintiffs put their case. But here the plaintiffs allege that the relevant conduct did amount to a fraudulent and dishonest design and plead in the alternative that, even if that is not correct, the Individual Defendants have accessorial liability for that conduct. In addition, there is a substantial overlap between the factual issues raised by the Accessorial Liability Claims and the claims arising under the TP Act. For example, in para 23 of the ACLS, the plaintiffs plead that the Michael, Marfleet and Clucas made a number of representations to the first and third plaintiffs which they say were misleading and deceptive. The plaintiffs also rely on that conduct in their Accessorial Liability Claims against those defendants. Again, there is no evidence that there would be substantial savings in time if the claims were struck out. In those circumstances, there is little utility in striking out the claims: cf Telecom Vanuatu Ltd v Optus Networks Pty Ltd [2005] NSWSC 951.

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