Granite Transformations Pty Ltd v Apex Distributions Pty Ltd

Federal Court of Australia|2018-05-22|Before: Ms J, Mr J, O'Callaghan J

Paragraph [15M] of the applicant's further amended statement of claim dated 27 March 2018 be struck out pursuant to r 16.21 of the Federal Court Rules 2011 (Cth).
The applicant has leave to re-plead the cause of action struck out pursuant to order 1 above. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

O'CALLAGHAN J: 1 This is an application by the first and third respondents to strike out certain paragraphs of the applicant's further amended statement of claim dated 27 March 2018 (the FASOC) pursuant to r 16.21 of the Federal Court Rules 2011 (Cth). 2 Rule 16.21(1)(e) provides that: (1) A party may apply to the Court for an order that all or part of a pleading be struck out on the ground that the pleading: ... (e) fails to disclose a reasonable cause of action or defence or other case appropriate to the nature of the pleading … 3 The relevant principles were not disputed. All of the facts alleged in the relevant pleading are to be accepted as true. Provided that a pleading fulfils its basic function of identifying the issues, that it discloses an arguable cause of action and that it apprises the other party of the case that it has to meet at trial, the pleading should be allowed to stand: see e.g. Young Investments Group Pty Ltd v Mann (2012) 293 ALR 537; [2012] FCAFC 107 at [6]. 4 The power to strike out a pleading because it discloses no reasonable cause of action should also only be exercised in a plain and obvious case: Polar Aviation Pty Ltd v Civil Aviation Safety Authority (2012) 203 FCR 325 at [43]. It must be established that the applicant's case is so untenable that it cannot possibly succeed. 5 Further, any application to strike out pleadings must be considered in the contemporary context of judicial case management. As Martin CJ observed in Barclay Mowlem Construction Ltd v Dampier Port Authority (2006) 33 WAR 82 at [6]‑[8]: [Contemporary case management techniques including preparation and exchange of witness statements and trial bundles] leave very little opportunity for surprise or ambush at trial and, it is my view, that pleadings today can be approached in that context and therefore in a rather more robust manner, than was historically the case; confident in the knowledge that other systems of pre-trial case management will exist and be implemented to aid in defining the issues and appraising the parties to the proceedings of the case that has to be met. In my view, it follows that provided a pleading fulfils its basic functions of identifying the issues, disclosing an arguable cause of action or defence, as the case may be, and apprising the parties of the case that has to be met, the court ought properly be reluctant to allow the time and resources of the parties and the limited resources of the court to be spent extensively debating the application of technical pleadings rules that evolved in and derive from a very different case management environment. Most pleadings in complex cases … can be criticised from the perspective of technical pleading rules that evolved in a very different case management environment. In my view, the advent of contemporary case management techniques and the pre-trial directions, to which I have referred, should result in the Court adopting an approach to pleading disputes to the effect that only where the criticisms of a pleading significantly impact upon the proper preparation of the case and its presentation at trial should those criticisms be seriously entertained. (This passage has been cited with approval in numerous cases, including by the Full Court in Thomson v STX Pan Ocean Co Ltd [2012] FCAFC 15 at [13] and by Edelman J in Sherrin Hire Pty Ltd v Sherrin Rentals Pty Ltd [2015] FCA 1107 at [44].) 6 In this case, the applicant also relied on the proposition that, where the facts missing from an otherwise sufficient pleading are peculiarly within a respondent's knowledge, and if the necessary evidence to plead those facts might be obtained as a result of discovery, interrogatories or evidence from reluctant witnesses, the applicant's cause of action should not be dismissed because of gaps in the applicant's case: see Classic Gourmet Sausages Pty Ltd v Leda Commercial Properties Pty Ltd (2000) 97 FCR 313 at [39] (Gallup J).

The dispute 7 Granite Transformations Pty Ltd (the applicant) sells engineered stone in Australia and New Zealand by (1) entering into franchise agreements under which franchisees agree to sell exclusively the applicant's products; and (2) entering into general distribution agreements under which distributors sell the applicant's products, but not exclusively. The applicant alleges, relevantly, that one of the applicant's directors (the second respondent, Mr Mackenzie) and one of its employees (the third respondent, Mr McDonald) established a business (the first respondent, Apex) that competed with the applicant's business. It is alleged that Apex, in turn, commenced trading in substantially the same products as the applicant's with one of the applicant's franchisees (being the fourth respondent, Mr Smith) in breach of Mr Smith's franchise agreement with the applicant. 8 It is alleged that this conduct gives rise to numerous causes of action, which include the following: breach of directors' duties under the Corporations Act 2001 (Cth) (the Corporations Act) and for accessorial liability under the s 79 of the Corporations Act; in contract, for breach of Mr Smith's franchise agreement; in tort, for inducing breach of contract; and in equity, for breach of fiduciary duty and for knowing assistance in that breach.

The pleading 9 In general terms, as against Mr McDonald, the applicant alleges that: (1) Mr McDonald is liable as an accessory under s 79(a), (c) and/or (d) of the Corporations Act with respect to Mr Mackenzie's alleged breaches of his directors' duties (owed under ss 180, 181, 182 and 183 of the Corporations Act) to the applicant (see paragraph [17] of the FASOC); (2) Mr McDonald knowingly induced Mr Smith to breach the licence agreement that he had entered into with the applicant (see paragraphs [15K], [15L] and [15M] of the FASOC); and (3) Mr McDonald knowingly assisted Mr Mackenzie in breaching the fiduciary duties Mr Mackenzie owed to the applicant (see paragraph [17A] of the FASOC). The applicant makes these same allegations as against Apex (noting that it is pleaded that Mr Mackenzie and Mr McDonald are the directing minds and wills of Apex). 10 The FASOC contains a series of pleas that require the reader constantly to cross-refer to a variety of paragraphs in the pleading. It is not necessary for the purposes of deciding this application to recite the paragraphs which are intended to be incorporated by the device of cross-referencing adopted by the pleader. I propose, instead, to summarise the effect of those paragraphs.

Mr McDonald: accessorial liability for breach of the Corporations Act 11 Dealing first with the plea that Mr McDonald is accessorily liable for Mr Mackenzie's breaches of directors' duties, thereby contravening s 79(a), (c) and/or (d) of the Corporations Act, paragraph [17] of the FASOC alleges: In the premises, by reason of the matters set out in paragraphs 16A to 16H above, each of Apex, Mr Smith and Mr McDonald was involved in the breaches of the Mr Mackenzie's Duties, referred to in paragraph 16 above, and is liable to GTA for those breaches PARTICULARS Section 79(a), (c) and (d) of the Corporations Act 2001 (Cth) 12 Paragraph [16A] is a plea that Mr Mackenzie engaged in dishonest and fraudulent "design" by reason of conduct pleaded at paragraphs [14], [14A] and [14D]. 13 Paragraph [16D] involves further cross-references to paragraphs [14], [14A], [14B], [14D]-[14F], [16] and [16A]-[16C] in support of the plea that Mr McDonald aided, abetted, counselled or procured or was knowingly concerned in, or conspired with Mr Mackenzie in his breaches of Mr Mackenzie's Duties, pleaded in paragraph [16]. 14 The FASOC is, admittedly, a difficult pleading to follow because of the seemingly endless cross-references upon cross-references. Ultimately, however, I am satisfied, having regard to the principles set out above, that sufficient facts are pleaded in the paragraphs listed above to support a plea that Mr McDonald is liable as an accessory. For example, and among other things, it is pleaded in paragraphs [14C] and [14E] that: Mr McDonald was a director of Apex at the relevant times and that he sent and received emails using an Apex email address; he liaised with the supplier of the competing stone product in relation to Apex; and that he offered to the applicant's franchisees (on behalf of Apex) products similar to those that had previously been supplied by the applicant. See, generally, Yorke v Lucas (1985) 158 CLR 661; Giorgianni v R (1985) 156 CLR 473.

Mr McDonald: inducing breach of contract 15 Before turning to the particular paragraphs of the pleading which Apex and Mr McDonald challenge, it is necessary to recall the necessary elements of the tort of inducing breach of contract. 16 The cause of action for inducing breach of contract is described by Erle J in the famous case of Lumley v Gye (1853) 2 El & Bl 216; (1853) 118 ER 749, at p 232, as follows: It is clear that the procurement of the violation of a right is a cause of action in all instances where the violation is an actionable wrong, as in violations of a right to property, whether real or personal, or to personal security: he who procures the wrong is a joint wrongdoer, and may be sued, either alone or jointly with the agent, in the appropriate action for the wrong complained of. 17 In Allstate Life Insurance Co v ANZ (1995) 58 FCR 26, Lindgren J (with whom Lockhart and Tamberlin JJ agreed) cited the following passage from the judgment of Street J in Short v City Bank (1912) 12 SR (NSW) 186 (which was cited with approval on appeal by Barton and O'Connor JJ in Short v City Bank of Sydney (1912) 15 CLR 148): To make out a cause of action of this kind, it is incumbent upon the plaintiff to establish three things. He must establish in the first place that the defendant in fact induced and procured the breach complained of; in the second place that the breach was procured with the deliberate intention of injuring the plaintiff, or in such circumstances that it must have been obvious to the defendant that the reasonable consequence of what he did would be to injure the plaintiff; and in the third place that what was done did in fact injure him. In the present case the plaintiff has, in my opinion, altogether failed to adduce any evidence showing that the bank did anything for the purpose of inducing or procuring the Society to break its contract. The words 'induce' and 'procure' in their ordinary significance, I think, convey the idea of persuasion or contrivance, and I think that a person complaining of a breach of contractual relations brought about by these means must show that the person whose actions are complained of did something in the nature of effectually persuading or prevailing upon the other party to the contract to violate his obligations under it. The persuasion may take the form of advice or friendly solicitation, or it may take the form of intimidation or molestation, but in every case I think that it must be shown that the defendant deliberately intervened between the contracting parties, either with the express design of depriving the plaintiff of the benefit of his contract, or under such circumstances that he must have known that the effect of his intervention would be to deprive the plaintiff of that benefit. 18 In LED Technologies Pty Ltd v Roadvision Pty Ltd (2012) 199 FCR 20, at [54] the Full Court said that, assuming actual knowledge cannot be shown: … The question is whether … [the defendant] turned a blind eye to the possibility. That means whether they made a conscious decision not to inquire into the existence of a fact in case they "discovered a disagreeable truth". The third possible category of knowledge, namely, reckless indifference, is more difficult to describe in terms of content. I think that there is such a category, but bearing in mind that the tort under consideration is an intentional tort and gross negligence is insufficient it seems to me that reckless indifference is something quite close to wilful blindness. It will be negated by an honest belief, even one exhibiting a high degree of credulity. It will be established only if the facts show affirmatively that the alleged tortfeasor, faced with knowledge of at least a substantial prospect of a breach, proceeded not caring whether or not a breach, would occur. 19 Paragraph [15M] of the FASOC concludes the pleaded allegations against Mr McDonald in respect of the inducing of breach of contract claim as follows: By reason of the matter pleaded in paragraphs 14 to 14F, 15C, 15E to 15G, 15K and 15L above, it is to be inferred that Mr McDonald induced or procured Mr Smith to purchase products from the Competing Business and to encourage other GTA Franchisees to purchase products from the Competing Business in breach of the Smith Franchise Agreement and that Mr McDonald knew or intended that Mr Smith so act. 20 It is apparent, therefore, that the critical plea of conduct - that Mr McDonald did something in the nature of effectually persuading or prevailing upon Mr Smith to violate his obligations under Mr Smith's franchise agreement (Short v City Bank (1912) 12 SR (NSW) 186) - is a fact that is sought to be established by inference. That is permissible: see, by way of example only, Bullen & Leake & Jacob's Precedents of Pleadings, (16th ed, Sweet & Maxwell Limited, 2008), p 867. 21 In my view, however, it is not sufficient for the applicant to lump together every fact and allegation contained in paragraphs [14] to [14F], [15C], [15E] to [15G,] [15K] and [15L] and say that by reason of all of them it is to be inferred that Mr McDonald relevantly persuaded or prevailed upon Mr Smith to violate his obligations under Mr Smith's franchise agreement. By putting all the facts and allegations in one "grab-bag", Mr McDonald is entitled to complain (as he does) that he does not know the nature of the case that is sought to be made against him. 22 Accordingly, I will grant leave to the applicant to re-plead its case against Mr McDonald concerning its claim that he induced Mr Smith to breach his contract with Apex.

Mr McDonald: knowing assistance in breach of fiduciary duties 23 The pleading further alleges in [17A]: Further, in the premises, by reason of the matters set out in paragraphs 16 and 16A to 16H above, each of Apex, Mr Smith and Mr McDonald knowingly assisted in Mr Mackenzie's dishonest and fraudulent design and is liable to GTA for those breaches. 24 To plead a cause of action for knowing assistance in breach of fiduciary duties (in addition to pleading the facts alleged to comprise the assisting conduct), pleaded facts must demonstrate that: (1) the fiduciary who breached their responsibilities had a dishonest and fraudulent design; and (2) the assistant (in this case, alleged to be Mr McDonald) had knowledge, which can include knowledge of circumstances which would indicate the facts to an honest and reasonable man: see Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 159 at [160]. 25 The critical cross-referenced paragraphs are paragraph [16A] (that is, that Mr Mackenzie engaged in conduct pleaded in paragraphs [14], [14A], [14D] that was a dishonest and fraudulent design) and paragraph [16C], which concerns allegations of Mr McDonald's knowledge. Paragraph [16C] relevantly provides as follows: At all relevant times, Mr McDonald either knew the following, wilfully shut his eyes to the following, wilfully and recklessly failed to make such inquiries as an honest and reasonable person would make or was aware of circumstances that would have indicated the following to an honest and reasonable person: (a) Mr Mackenzie was a director of [the applicant]; (b) Mr Mackenzie was managing director of [the applicant] with responsibilities of the type set out in paragraph 4 above; (c) Mr Mackenzie owed [the applicant] duties of the kind referred to in paragraph 13 above; (d) Mr Mackenzie had engaged in the conduct pleaded in paragraphs 14 and 14D above; and (e) Mr Mackenzie's conduct in paragraph 14 and 14D above was in breach of the duties pleaded in paragraph 13 above. … 26 In my view, those paragraphs do plead facts that, if established, would meet the requirements of a cause of action for knowing assistance in breach of Mr Mackenzie's duties. Importantly, the FASOC pleads that Mr Mackenzie had the requisite dishonest design and that Mr McDonald had the requisite degree of knowledge. As such, that pleading is sufficient.

Apex: strike out application with respect to allegations about Apex 27 Substantially identical allegations are pleaded against Apex. However, in circumstances where the second respondent Mr Mackenzie, (who is also alleged to be a directing mind and will of Apex) does not seek to challenge the allegations made against him, I am not prepared to strike out the claims made against it.

Potentially widened scope for discovery 28 Mr Knackstredt, who appeared on behalf of Apex and Mr McDonald, submitted that the pleading goes too far because it alleges in various places (including at paragraph [14E]) that Mr McDonald offered for sale, and sold, to the applicant's franchisees and other distributors of the applicant's products, products offered by Apex, when the only particulars provided of such breaches involve a single example of offering for sale, or selling, products. 29 I do not accept that submission. In my view, Ms Granger (who appeared for the applicant) was correct in her oral submission as follows: … it is not in the knowledge of GTA, as an entirely separate third party, to know which products were in fact sold by the competing business. That is a situation that arises very often in commercial cases, where conduct is known about at a level of generality, by reference to what one might describe as secondary evidence - ie, there is information that is disclosed which says that certain conduct has taken place, but the specificity or particularity of that evidence is not known until discovery or other interlocutory steps are taken. 30 Ms Granger also relied on Classic Gourmet Sausages Pty Ltd v Leda Commercial Properties Pty Ltd (2000) 97 FCR 313, and, in particular the passages at paragraphs [39]-[40] as follows: … By launching the application to strike out, the respondent undertook the burden of establishing that there was no triable issue. On such an application the respondent bears the onus of proof and where the facts are peculiarly within the respondent's knowledge the appellants' statutory cause of action should not have been dismissed because of gaps in the appellants' case if the necessary evidence might be obtained as a result of discovery, interrogatories or evidence from reluctant witnesses (see Wickstead v Browne (1992) 30 NSWLR 1 per Handley and Cripps JJ at p 11). The Federal Court has also cautioned, in TPC v Pioneer Concrete (1994) 124 ALR 685 per Sheppard J at p 695, that: ... a court asked to strike out all or part of a pleading needs to be careful to ensure that giving effect to the application does not prevent a party from making a case which it is entitled to make. One has to err on the side of caution lest one be deprived of a case which in justice it ought to be able to bring. 31 In my view, the question whether Apex supplied products of Apex to the applicant's franchisees, and other distributors of the applicant's products, is within its own knowledge. It is not appropriate to limit discovery to the one instance particularised, as counsel for Apex submitted.

Conclusion 32 Accordingly, I propose to order as follows: (1) Paragraph [15M] of the applicant's further amended statement of claim dated 27 March 2018 be struck out pursuant to r 16.21 of the Federal Court Rules 2011 (Cth). (2) The applicant has leave to re-plead the cause of action struck out pursuant to order 1 above. I certify that the preceding thirty two (32) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice O'Callaghan.

Associate: Dated: 22 May 2018 Schedule No: VID 911 of 2017 Respondents Fourth Respondent: ARTHUR EDGAR ARUNDEL SMITH

CROSS CLAIM Cross-Claimant: ARTHUR EDGAR ARUNDEL SMITH Cross-Respondent: GRANITE TRANSFORMATIONS PTY LTD (ACN 074 218 778)

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