Korfiatis v Tremaine Developments Pty Ltd (Domestic Building) [2008] VCAT 403 (29 February 2008)

A company acts as its directors dictate but that does not necessarily mean that a tort committed by a company has also been committed by its directors. It is trite law that a company has a legal personality distinct from its members (Salomon v Salomon & Co Ltd [1897] AC 92). If a company breaches a contract, the proceedings for breach of contract must generally be taken against the company, not the director who caused it to be in breach. In Said v Butt [1920] 3 KB 497 Mc Cardie J said (at p. 506):

His Honour considered that a breach of the duty was not a necessary element of a director's secondary liability for the wrongful conduct of the corporation (see p. 226) but it is important to note that his Honour was there talking of a breach of the duty that a director owes to the company (see the reference to King v Milpurra (p.225). He was also dealing with a tort, conversion, which is not based upon a breach of duty).
In the course of his judgment his Honour referred to a number of cases which contain some useful comments as to the relevant principles.
In Pioneer Electronics Australia Pty Ltd v Lee [2000] FCA 1926; (2001) 108 FCR 216, Sundberg J said (at p. 233):

1. A director will be liable along with the company when he has procured or directed it to commit the tort: Performing Right Society Ltd v Cyril Theatrical Syndicate Ltd [1924] 1 KB 1 at 14; Kalamazoo (Aust) Pty Ltd v Compact Business Systems Pty Ltd (1985) 84 FLR 101 at 127; Martin Engineering Co v Nicaro Holdings Pty Ltd (1991) 100 ALR 358; Microsoft Corp v Auschina Polaris Pty Ltd [1996] FCA 1069; (1996) 142 ALR 111; Lott v JWB & Friends Pty Ltd [2000] SASC 3; Henley Arch Pty Ltd v Clarendon Homes (Aust) Pty Ltd (1998) 41 IPR 443 at 464.

2. A director will be liable only if he has made the wrongful act his own as distinct from it being an act of the company: Mentmore Manufacturing Co Ltd v National Merchandising Manufacturing Co Inc (1978) 89 DLR (3d) 195; White Horse Distillers Ltd v Gregson Associates Ltd [1984] RPC 61 at 91; King v Milpurrurru (1996) 136 ALR 327 at 346-351.

4. A director is not liable for procuring the company to infringe the rights of others: Said v Butt [1920] 3 KB 497; O'Brien v Dawson [1942] HCA 8; (1942) 66 CLR 18 at 32, 34; Rutherford v Poole [1953] VicLawRp 23; [1953] VLR 130; Root Quality Pty Ltd v Root Control Technologies Pty Ltd [2000] FCA 980."

In Root Quality Pty Ltd v Root Control Techonology Pty Ltd [2000] FCA 980; (2000) 177 ALR 231 Finkelstien J referred (inter alia) to these passages and said (at p265):

The decision in Natural Life Health Foods confirmed the application to directors of the "assumption of responsibility" test for third party economic loss claims in negligence which had previously been considered by the House of Lords in Henderson v Merrett Syndicates Limited [1994] UKHL 5; [1994] 3 All ER 506."

His Honour then referred to the Court of Appeal decision of Standard Chartered Bank v Pakistan National Shipping Corporation (No 2) [2000] 1 All ER 1 in which it was held that for the Plaintiff to succeed against a director who had procured the fraudulently tender bills of lading containing false dates, it must be established that the director had conveyed "directly or indirectly to the Plaintiff that he assumed a personal responsibility towards the Plaintiff". His Honour said that that view had been criticised, and he referred with apparent approval to the Court of Appeal decision of Essex Holdings Limited v Sincronette Limited [2000] EWCL 60, where Potter LJ said (at paragraph 25):

In the case of Morton v Douglas Homes Limited that his Honour refers to, directors of a building company were found liable in negligence for defective foundations. The buildings in question were built on land filled with sawdust that, to the director's knowledge, required a particular foundation. The director negligently failed to ensure that the company implemented the engineer's instructions including an important one given to him personally. It was found that in the circumstances of that case the director had assumed a personal duty of care to the subsequent owners, that is, he was directly liable for his own tort.
In a negligence context, it is difficult to see how a director can assume responsibility for the company's acts vis á vis a customer of the company without at the same time assuming a direct duty to the company's customer to take reasonable care. Although it does not appear to be expressly stated in these terms in the cases, a director does not appear to be guilty of negligence unless he himself owed a duty of care to the person who suffered the loss.
In the House of Lords case of Williams v Natural Life Foods [1998] UKHL 17; [1998] 2 All ER 577, the plaintiffs were induced to take a franchise of a health food business from the defendant company by certain negligent advice that it gave. They obtained judgment against the company for the resulting losses and also against the director of the company who had given the advice but the judgment against the director was set aside on appeal. In a judgment with which the other members of the House agreed, Lord Steyn said (at p. 582):

For completeness I must deal with some decisions on the point in this Tribunal to which I have been referred by counsel.
In Perry v Binios &ors [2006] VCAT 1604 the Applicant sought to join a director of a company that had allegedly entered into a contract with her to complete the construction of a house. Joinder was refused because the claim that the director, as distinct from his company, was liable, was not properly articulated.
In Brien v Brighton Pool Shop Pty Ltd & anor [2006] VCAT 1810 the Applicant sought damages from the director of a pool company with respect to a defectively constructed pool. The pool was constructed pursuant to an agreement entered into between the Applicant and the pool company. The director was not a party to that agreement. The claim against the director as dismissed. The Tribunal said:

"I consider I would be disregarding numerous authorities if I were to proceed to hold the Second Respondent himself personally liable to pay such sum. The decision of Redlich J in Johnson Matthey (Aust) Pty Ltd v Dascorp Pty Ltd [2003] VSC 291, as I indicated to the parties, is not one which I consider I am bound to apply or should apply in the circumstances of this case. I agree with the substance of paragraph 4 of the Second Respondent's Defence. There are grounds for saying that the liabilities of directors needs to be reconsidered by Parliament but this is neither the time nor the place to engage in discussion of that issue. I do wish, however, to make it clear that, in the absence of statutory intervention, the time may arise, in some future case, where it is appropriate to hold directors of a company personally liable for the defaults of the company - especially if the company is put out of business to defeat rightful claimants. Or, if an individual is a director of several or numerous companies in a group deliberately structured to confuse and mislead the public."

In Rosenthal, Munckton & Sields Pty Ltd v McGregor & anor [2004] VCAT 2429, application was made by the owners to join the sole director of the builder as a party to the proceeding on the ground that he was the person with whom they dealt on behalf of the building company, he was the Registered Building Practitioner for the company for the job and, it was argued, he owed them a duty of care to do the work properly. The Tribunal considered Johnson Matthey and Pioneer and other authorities and concluded that the law was unsettled. Joinder was allowed on the basis that whether or not the director was personally liable was a matter for trial.
In Cantar v Harper & ors [2007] VCAT 650 money was owed to a subcontractor by a building company. An order was also made against the directors of the building company because it was found that they had assumed personal liability for the debt. That was a claim in contract and is of no assistance here.
In Lawley v Terrace Designs Pty Ltd [2006] VCAT 1363 a director of a building company was sued in negligence for the builder's defective workmanship. The claim was dismissed. Senior Member Young said (at para177)

In the case as articulated, reliance is placed upon the degree of personal involvement and control Ktori had over aspects of the work. Even if all that is established on the evidence, in the light of the authorities referred to, I do not think that this is amounts to an assumption of responsibility in the required sense. What Ktori is said to have done would suggest nothing more than his acting as an employee and director of Tremaine. It is not suggested that he had any independent arrangement or agreement with any of the Applicants or undertook any personal responsibility directly to them. His actions did not extend beyond the contractual obligations that Tremaine assumed by entering into the building contract. This is not sufficient to show an assumption by Ktori of any duty of care to the Applicants or to any of them.
Mr Forrest submitted that I should apply the "direct or procure test" to found liability in Ktori. He relied upon Foxtel management Pty Ltd v The Mod Shop Pty Ltd [2007] FCA 463, a case of copyright infringement, and Coastal Recycled Cooking Oils Pty Ltd v Innovative Business Action and Strategies Pty Ltd [2007] NSWC 831, a case of conversion. The "direct or procure test" is not of any assistance in this case because it is a claim in negligence, a very different kind of tort, and the authorities referred to have used a different approach in such cases.
The direct and procure test used in Johnson Matthey might have application in a building context in some fact situations; where, for example, the director intentionally sabotaged the work or procured or caused a breach of the contract otherwise than while acting bona fide within the scope of his authority. However it is not of assistance where all that is alleged is that the company was negligent (Said v Butt; Williams v Natural Life Foods).
In addition, as Redlich J pointed out in Johnson Matthey (p.227):

It is not suggested that Ktori knew about the content of the conversations that his son intended to have with the Applicants and it is simply not possible to show that he was at all involved in the contravention.
In the case of Yorke v Lucas [1985] HCA 65; (1985) 158 CLR 661 the High Court considered the meaning of s75(B) of the Trades Practices Act 1974 (Cth) which is in identical terms to s145 of the Fair Trading Act 1999. In the majority judgement (Mason ACJ, Wilson, Deane and Dawson JJ) considered, as to subsection (a), that it would only apply to a person who intentionally aided, abetted, counselled or procured the contravention. Because the defendant in that case lacked any knowledge of the falsity of the representations made he could not form the required intent. As to subsection (c), their Honours said (at p.670):

Korfiatis v Tremaine Developments Pty Ltd

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Korfiatis v Tremaine Developments Pty Ltd (Domestic Building) [2008] VCAT 403 (29 February 2008)