Inducing breach of contract
78 These findings with respect to alleged breach of express and implied terms of the heads of agreement make it unnecessary to pursue the question whether Baulderstone and International induced and procured DSC to commit a breach of contract as against LMIA by failing to appoint LMIA as manager of the stadium. But in light of the possibility that my decision on the breach of contract question may be reviewed on appeal, I shall deal briefly with the inducement issue. I shall do so on the assumption that, contrary to my findings above, DSC was, in the circumstances existing after the execution of the Stadium Development Agreement by the parties thereto, under a contractual duty to ensure that those of them designated "Developer" appointed LMIA as manager of the stadium on the terms in the heads of agreement. I shall also assume that it was within the power of DSC to bring about such a result.
79 The plaintiffs do not seek to hold Baulderstone and International, as employers, vicariously responsible for the actions of employees who, as directors of DSC, caused that company to fail to procure the appointment of LMIA as stadium manager. As the Court of Appeal noted in Australian Development Corporation Pty Ltd v White Constructions Ltd [2001] NSWCA 9, any such attempt would fail on a twofold basis. First, directors of a company do not commit the tort of inducing breach of contract when, acting as directors, they cause their company to commit a breach. So much is established by Said v Butt [1920] 3 KB 497 and, authoritatively for present purposes, by O'Brien v Dawson (1941) 41 SR (NSW) 295 and, on appeal, (1942) 66 CLR 18. Recent examples of the application of the principle in this Division may be found in Tsaprazis v Goldcrest Properties Pty Ltd (2000) 18 ACLC 285 and Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 328. Secondly, a director installed as such on the board of another company by his or her employer is in general presumed not to be subject to the employer's direction when performing functions as a director, so that no vicarious liability attaches to the employer for the employee's conduct in that capacity: Kuwait Asia Bank EC v National Mutual Life Nominees Ltd [1991] 1 AC 187; Dairy Containers Ltd v Auditor-General [1995] 2 NZLR 30; New Zealand Guardian Trust Co Ltd v Brooks [1995] 1 WLR 96. On a different front, while the plaintiffs did seek to place some reliance upon the decision of the Court of Appeal in CSR Ltd v Wren (1998) 44 NSWLR 463, it is clear to me that the evidence in this case would not support a finding that the holding company of DSC had assumed direct responsibility to persons having relationships with the subsidiary so as to bring it within the principle involved in that case, even if that principle could somehow be extended beyond responsibility by way of a duty of care in negligence.
80 The plaintiffs' case of inducing breach of contract is founded on the general proposition that, as it was put by Mr Sullivan QC in his written outline of submissions in chief, "at all times relevant to the proceedings, SOL, DSC, Baulderstone Hornibrook, Baulderstone Hornibrook International and A W Baulderstone Holdings Pty Ltd had a common corporate mind". The need for that submission (or for some other means of attributing to Baulderstone and International knowledge possessed by DSC or natural persons making relevant decisions for DSC) arises from the central importance, in a case of inducement to breach contract, of the state of knowledge of the alleged tortfeasor emphasised in the following passage in the judgment of Isaacs J in Short v City Bank of Sydney (1912) 15 CLR 148:
"[T]he defendant must have induced or procured the doing of what he knew would be a breach of contract. A bona fide belief reasonably entertained that it was not a breach of contract would be fatal to the claim. If the defendant did not know of the existence of the contract, he could not induce its breach; if he reasonably believed it did not require a certain act to be performed, his inducing a party to the contract to do something inconsistent with it could not be regarded as an inducement or procurement knowingly to break the contract; if he believed on reasonable grounds that the contract had been rescinded, or performance waived, when in fact it had not, he could not be said to knowingly procure its breach."
81 The position was summarised by the Court of Appeal in Fightvision Pty Ltd v Onisforou (1999) 47 NSWLR 473 in these terms:
"In summary, the defendant must know of the contract and sufficient of its terms to know that what the defendant induced or procured the party to the contract to do would be in breach of the contract. If the defendant knew of the existence of the contract but believed reasonably that what the defendant induced or procured the party to do was not a breach, or reasonably believed that the contract had been rescinded or performance waived, the defendant had not knowingly induced or procured the breach."
82 The directors of DSC at the material times were Mr Dempsey, Mr Forde and Mr Pritchard. Those three persons also constituted the total board of SOL and were three of the five directors making up the board of Baulderstone. Two of them - Mr Forde and Mr Pritchard - were the total board of International. All were, with others, directors of A.W. Baulderstone Holdings Pty Limited. It is in this factual context that the submission of "common corporate mind" was advanced. No evidence was given by any of these directors. There was little evidence of their acts. It was shown, however, that Mr Dempsey, as a director of DSC, sent to Mr Tabart a letter dated 30 June 1997 on DSC letterhead which, from its date and terms, may readily be inferred to have accompanied the DSC bids lodged on that date. Mr Pritchard, as chief executive of Baulderstone, sent a similar letter of the same date to Mr Tabart in relation to which I draw the same inference. A letter of 21 August 1997 (prepared on DSC letterhead, signed by Mr Dempsey and addressed to Mr Tabart) accompanied "our revised offer both on a preferred and conforming basis".
83 For the inducement to breach contract case to succeed on the strength of the "common corporate mind" submission, it seems to me that two propositions must be made out: first, that the corporate entities against which the allegation is levelled (being Baulderstone and International) possessed the degree of knowledge about the heads of agreement and their content made necessary by the above extracts from Short v City Bank of Sydney and Fightvision v Onisforou; and, second, that those corporate entities applied direct persuasion or procurement or inducement to DSC with the intention of bringing about breach by it of its contract. I note here that there is no claim that Baulderstone and International indirectly procured breach by DSC by, as it were, causing DSC to be replaced by SOL and the other two companies constituting "the Developer". As pleaded, the claim is that they induced and procured DSC to agree to SOL being permitted to take the benefit of its rights pursuant to the contract to construct and manage the stadium, thereby inducing and procuring DSC to breach the heads of agreement.
84 So far as the knowledge of Baulderstone and International is concerned, it can be said at once that neither company automatically possesses the knowledge of each of its directors. At the same time, however, a director's knowledge may become the subject of positive duties owed by the director to the company. One such duty arises when a director is in possession of knowledge that a course of action the company has in contemplation may, unbeknowns to the other directors and officers, expose the company to the prospect of harm. A director in that position incurs at least a duty to ensure that the danger of which he or she alone is aware is pointed out to relevant corporate decision makers: Permanent Building Society v Wheeler (1994) 11 WAR 187; South Australia v Clark (1996) 66 SASR 199; Fitzsimmons v R (1997) 23 ACSR 355.
85 Another species of duty to which a director may become subject in respect of his knowledge is a duty actually to communicate that knowledge to the company. Such a duty, as well as a qualification upon it, was stated by Young J (as his Honour then was) in Harkness v Commonwealth Bank of Australia (1993) 32 NSWLR 543:
"While ordinarily there will be a duty to communicate knowledge received, where the director is functioning within another corporate organisation and information comes to the director in the course of that work with the other organisation, his duty of confidentiality to that other organisation will subsume any duty he might otherwise owe to the company which appointed him to that organisation."
86 An unqualified duty to communicate information to another person will generally be presumed to be duly discharged, with the result that knowledge of the information is regarded as attributed to that other person. Although it involved a duty arising in a somewhat different way, the following passage in the judgment of Buckley LJ in Belmont Finance Corporation Ltd v Williams Furniture Ltd (No 2) [1980] 1 All ER 393 makes this clear:
"Their knowledge must, in my opinion, be imputed to the companies of which they were directors and secretary, for an officer of a company must surely be under a duty, if he is aware that a transaction into which his company is about to enter is illegal or tainted with illegality, to inform the board of that company of the fact. Where an officer is under a duty to make such a disclosure to his company, his knowledge is imputed to the company ( Re David Payne & Co Ltd [1904] 2 Ch 608; Re Fenwick, Stobart & Co Ltd [1902] 1 Ch 507)."
87 Reference may also be made to the discussion of these matters by von Doussa J in Beach Petroleum NL v Johnson (1993) 43 FCR 1 and to the following observation of Vaughan Williams J in Re Hampshire Land Company [1896] 2 Ch 743 approved by the House of Lords in J.C. Houghton & Co v Nothard Lowe & Wills Ltd [1928] AC 1:
"Knowledge which has been acquired by the officer of one company will not be imputed to the other company, unless the common officer had some duty imposed on him to communicate that knowledge to the other company, and had some duty imposed on him by the company which is alleged to be affected by the notice, to receive the notice."
88 The principle is of more general application in the field of principal and agent, as is shown by the following observation of Mason J in Sargent v ASL Developments Ltd (1974) 131 CLR 634 concerning information received by a solicitor acting for clients on the purchase of land:
"Consequently, as the information as to zoning which Mr Sweeting acquired was within the ambit of his authority from the Turnbulls and as he was under a duty to communicate it to the Turnbulls once he had received it, his knowledge is to be imputed to them."
89 How did the duty to communicate described by Young J in Harkness v Commonwealth Bank (above) in relation to what might be termed an "installed" director operate in this case? Context is, of course, critical. The present context is the familiar one of a group of companies in which a holding company is, in a legal or beneficial sense or both, the sole owner of all shares in a number of subsidiaries, some of which are likewise the sole owners of all shares in yet further companies. It must be recognised, of course, that each company in such a group is a separate entity and may have interests distinct from those of other group members or the group as a whole: Walker v Wimborne (1975) 137 CLR 1; Industrial Equity Ltd v Blackburn (1977) 137 CLR 567. Equally, however, there can be no doubt that the ultimate holding company has a clear power to control the conduct of each subsidiary, even to the extent of altering the subsidiary's constitution to allocate to the members in general meeting (effectively, the immediate holding company by which all shares are owned) key decision making powers commonly entrusted to directors and to prohibit the directors doing certain things for the company. This is the effect of the well-known statement of Greer LJ in John Shaw & Sons (Salford) Ltd v Shaw [1935] 2 KB 113 concerning the interaction of shareholders with directors. In addition, of course, the ultimate holding company, while not able to require the directors of a wholly owned subsidiary to act in a particular way, may, either directly or by procuring appropriate action by some intermediate holding company, authorise in advance or ratify retrospectively acts of those directors which would otherwise entail breach of duty by them, thus making directors willing to act as the ultimate holding company wishes. This is the principle enunciated in cases such as Hogg v Cramphorn Ltd [1967] Ch 254, Bamford v Bamford [1968] 3 WLR 317, Winthrop Investments Ltd v Winns Ltd [1975] 2 NSWLR 666 and Kinsela v Russell Kinsela Pty Ltd (1986) 4 NSWLR 722. The ultimate holding company can also cause the composition of the board of directors of any wholly owned subsidiary to be changed as and when it wishes. In these ways, behaviour of a wholly owned subsidiary may be strongly influenced and even dictated by its holding company acting not as a negotiating or persuading outsider but as a participant in the subsidiary's own internal decision making.
90 These realities are even more pronounced when a company is formed as a wholly owned subsidiary in order to undertake a particular activity. Such a situation was examined by the Full Court of the Supreme Court of South Australia in Pascoe Ltd v Lucas (1999) 75 SASR 737. That case concerned an allegation that a director of a wholly owned subsidiary had breached his duties to the subsidiary by committing it to an improvident transaction at the behest of the holding company. Lander J, with whom Millhouse and Duggan JJ agreed, said:
"When a company is incorporated for the sole purpose of entering into a transaction at the behest of its sole shareholder, provided that the company is at the time solvent and provided that the transaction is intra vires and the directors are not acting in bad faith the company cannot later complain about that transaction, provided of course that the directors have made full disclosure of that which is required to obtain the consent of its shareholders.
It is not necessary that a formal decision of the shareholders should be made; an informal consent will be sufficient: Re Duomatic Ltd [1969] 2 Ch 365. Again it follows that where the corporation has only one shareholder there is even less need for a formal meeting.
Again provided that the company was solvent when it entered into these transactions and when the authority or ratification was given by the directors a liquidator subsequently appointed to the company is in no better position than the shareholders who authorised or ratified the transaction: Multinational Gas and Petrochemical Co v Multinational Gas and Petrochemical Services Ltd per Dillon LJ at 290, A-G Canada v Standard Trust Co of New York [1911] AC 498 at 501."
91 This passage emphasises the point that informal action by a sole shareholder can be sufficient to constitute conduct on its part having such constitutional significance within a wholly owned subsidiary as to be a determinant of that subsidiary's own conduct. There is, to my mind, no difference between such action of a holding company, whether formal or informal, in relation to a wholly owned subsidiary and actions of directors of the subsidiary which likewise shape its conduct as a corporation. Just as directors commonly make for a company the decisions which, as a mere legal construct, it has no mind of its own to make, so too may a holding company which is the sole owner of the shares in the subsidiary be, in a realistic sense, the source of such decisions.
92 In the present case, the actions of DSC were dictated by decisions made within the established management structure of the Australian group of companies constituted by A.W. Baulderstone Holdings Pty Limited and its wholly-owned subsidiaries. I have mentioned that the DSC bids submitted to the Authority on 30 June 1997 were accompanied by covering letters from Mr Dempsey as a director of DSC and Mr Pritchard as chief executive of Baulderstone. Also sent to the Authority on that occasion was a similar letter from Mr Greiner, chairman of A.W. Baulderstone Holdings Pty Limited. It may readily be inferred from these letters that DSC acted in accordance with a plan developed and implemented by A.W. Baulderstone Holdings Pty Limited in conjunction with other wholly-owned subsidiaries, including Baulderstone and International.
93 I am satisfied that, having regard to the circumstances in which they occupied their offices, each of the directors of DSC was under a duty of the kind described by Young J in Harkness v Commonwealth Bank and that no obligation of confidentiality owed to DSC itself intervened to preclude the presumption that that duty was duly discharged. All knowledge and information possessed by each DSC director by virtue of his directorship of DSC was therefore attributed to each other company in the wholly-owned A.W. Baulderstone Holdings group of which he was a director. All such knowledge and information possessed by any director of DSC must therefore be regarded as having been within the possession of both Baulderstone and International at the relevant times. On that footing, each of those companies must be taken to have had knowledge of the existence and content of the heads of agreement. Any other conclusion would disregard the realities of the wholly-owned group structure.
94 Once that point is reached and it is accepted that Baulderstone and International, the alleged tortfeasors, possessed the degree of knowledge about the heads of agreement and their content made necessary by the quoted extracts from Short v City Bank of Sydney and Fightvision v Onisforou, it must be decided whether Baulderstone and International applied direct persuasion or procurement or inducement to DSC with the intention of bringing about breach by it of its contract.
95 It may readily be accepted that any failure by DSC to act as required by the heads of agreement was produced, in an immediate sense, by failure of its directors and officers to cause it to do so, coupled with failure of its immediate and ultimate holding companies to exercise their undoubted power to avoid or remedy the deficiency. That dual failure no doubt resulted from a decision made by one or more natural persons. The evidence shows that, in a practical sense, the chief decision-maker was Mr Wise. It is he who had, within the A.W. Baulderstone Holdings group, the main responsibility for progressing the bids and looking after the group's interests in relation to the stadium project. The decision to introduce SOL and to adopt the revised structure in which the developer was to be SOL together with the trustee and manager of a unit trust, thereby displacing DSC, was Mr Wise's decision. But it was a decision he made within a framework of authority which must have been created by or through the board of directors of the ultimate holding company, A.W. Baulderstone Holdings Pty Limited. That framework of authority may be taken to have applied throughout the group of wholly-owned subsidiaries, including DSC, SOL, Baulderstone and International.
96 In such circumstances, there is a distinct air of unreality about the proposition that one wholly-owned subsidiary within and subject to the framework of authority acts intentionally to cause another wholly-owned subsidiary within and subject to the same framework of authority to behave in a certain way when both are actuated by and subject to the common authority.
97 The notion that directors of a company are not guilty of the tort of inducing breach of contract when, duly acting as directors, they commit their company to a course involving such breach was explained by Jordan CJ in O'Brien v Dawson (above) in this way:
"The next question is whether, if an ordinary limited liability company is a party to a contract, and its directors acting as such, and in the course of conducting the company's business at a Board meeting, resolve that the company shall refuse to perform a contract to which it is a party, the directors knowing that the refusal cannot be legally justified, and effect is given to this resolution, the directors concerned are guilty of the tort - and presumably also of the crime - of conspiracy. I am of opinion that in such a case it is entirely artificial to speak of the directors as 'procuring' the company to break its contract in the sense in which this word is used in the Lumley v Gye type of case. An incorporated company is a figment of the law. It is incapable of acting except through agents. Its directors are persons who have been authorised by the constituent members of the corporation to cause acts to be done on its behalf. They are its agents who have power to control its acts. It cannot act at all except through them or through some other authorised agents. They are not in the position of outsiders who are influencing the independent volition of a contracting party who is capable of exercising volition for himself. It is their volition and theirs only which determines the making, the performance or the breach of the company's contract. In my opinion on the state of facts assumed, they stand in the same position as regards liability to a charge of conspiracy as do joint contractors. This is not to say that every boardroom constitutes an Alsatia in which persons may conspire to their heart's content and with complete impunity so long as they do so in the character of directors of a company and employ the machinery of their company for carrying their conspiracy into effect. It means only that the mere fact that the directors who determine whether or not a company shall perform the obligations of a contract are several in number makes them no more subject to the law of conspiracy than would be a single managing director if it were he who determined it …… Directors of a company are, however, personally responsible for any torts committed by their company in the procuring of which they are personally implicated … But there is authority for the proposition that the fact that one or more directors of a company acting as such, are the instruments by which the company, without just cause, refuses to perform a contract does not confer on the other party to the contract a right to sue directors in tort on the footing that they have procured a breach of contractual rights ….."
98 Central to this notion is recognition that the directors of a corporate contracting party are not in the position of outsiders influencing the independent volition of a contracting party capable of exercising volition for himself; and that it is the directors' volition which determines the making, the performance or the breach of the company's contract. The directors' volition is thus the company's volition. Within the confines of a group of companies where a holding company such as A.W. Baulderstone Holdings Pty Limited possesses, in relation to each of several wholly-owned subsidiaries, full and sole capacity to control the content of the corporate constitution (even to the extent of allocating to itself powers otherwise exercisable by the directors), to relieve the directors of the consequences of breach of duty by advance authorisation or retrospective ratification and to change at will the composition of the board of directors, it seems to me to be the case that the holding company, like the subsidiary's directors, is not in the position of an outsider influencing the independent volition of the subsidiary. In such a situation, it is the holding company's volition which, sometimes formally by exercise of legal powers but often informally in the way mentioned in Pascoe Ltd v Lucas (above), determines the making, the performance or the breach of the subsidiary's contract. The holding company does not engage in what Herring CJ described in Rutherford v Poole [1953] VLR 130 as "actionable intervention". There is really no "intervention" at all. The subsidiary makes the relevant decision but that decision proceeds from an exercise of the holding company's will within and through the subsidiary, rather than upon it.
99 If breach of the heads of agreement by DSC were established, I would therefore conclude that neither Baulderstone nor International induced or procured the breach in such a way as to be actionable on the basis pleaded.