MAK INDUSTRIAL WATER SOLUTIONS PTY LTD -v- DOHERTY [No 2] [2023] WASC 279 (26 July 2023)

MAK INDUSTRIAL WATER SOLUTIONS PTY LTD -v- DOHERTY [No 2] [2023] WASC 279 (26 July 2023) - WASC 2023 case summary — Zoe

[38]

It is apparent from Mr Byk's May Affidavit that there is no dispute as to the size of the outstanding loan owed by Mr Hartnett of $21,819.22, or the number of shares previously owned by him.[28] The only difference between the parties as to the calculation of the redemption entitlement relates to the Prevailing Price.
MAK Water maintains that the Prevailing Price is $55.17. It is apparent that the difference between the parties is solely a result of the financial years from which each party has taken the EBITDA to arrive at the average EBITDA for the two preceding financial years. Whereas Mr Hartnett used the EBITDA for the financial years ending 30 June 2021 and 30 June 2022; MAK Water used the EBITDA for the financial years ending 30 June 2020 and 30 June 2021.
The explanation for the different years used by MAK Water is explained in Mr Byk's May Affidavit as follows:
1. The Plaintiff calculates the 'Prevailing Price' for the following year based on the Plaintiff's final accounts for the previous financial year.
2. That calculated 'Prevailing Price' applies to all Shares redeemed under the Plan Rules for the following 12-month period after calculation of the 'Prevailing Price' or until the Plaintiff's Board calculates a new 'Prevailing Price' based on the Plaintiff's final accounts for the next financial year.
3. On 12 December 2021, I sent an email to all the employee Shareholders, including the Third Defendant, which notified them of the new 'Prevailing Price' (which I referred to in my email as the 'share price') based on the 2021 financial year final accounts, and that price would be 'around $55'. Attached hereto and marked 'AB5' is a copy of that email.
4. Attached hereto and marked 'AB6' is a copy of a Microsoft Teams Meeting invitation to attend a meeting on 17 February 2023 sent to the Plaintiff's then current Shareholders stating that the 'share price has risen from $55.17 last year to its current price of $65.54'.
5. The 'Prevailing Price' referred to in above paragraph 22 and 23 of $55.17 applies to all Shares redeemed under the Plan Rules between January and 22 December 2022.
6. The 'Prevailing Price' referred to in above paragraph 28 of $65.54 applies to all Shares redeemed under the Plan Rules after 22 December 2022 which was set at the Plaintiff's Board meeting on 22 December 2023 (sic - 22 December 2022).
7. The Plaintiff has followed the above referred to process in setting the 'Prevailing Price' and notifying its employees of the 'Prevailing Price' since it commenced the Employee Share Plan in 2012.
8. The Third Defendant was aware of the Plaintiff's process in setting the 'Prevailing Price' and how the 'Prevailing Price was calculated because he brought those discussions up regularly including at Senior Management Meetings, which he attended, at least 2 to 3 times each year and on other occasions.
9. On or about 6 October 2022 the Plaintiff notified ASIC that it proposed to buy back the Third Defendant's 5,225 Shares. A copy of the Form 281 is attached to the Harnett Affidavit at page 34.
10. On 28 November 2022 the Plaintiff lodged with ASIC a Change to Company Details Form 484 stating that the Third Defendant's Shares in the Plaintiff had decreased by 5,225 to O and the earliest change date was 26 November 2022. A copy of the Form 484 is attached to the Harnett Affidavit at page 31.
11. Because the Plaintiff bought back the Third Defendant's Shares before the Plaintiff's Board set the new 'Prevailing Price on 22 December 2022 the applicable 'Prevailing Price' for the Third Defendant's Shares is $55.17 not $65.18 as alleged on page 155 of the Harnett Affidavit.
12. Attached hereto and marked 'APBG' is a summary of the calculations regarding the amount payable for the Third Defendant's Shares of $266,444 (Third Defendant's Redemption Price).
I note that Mr Byk deposes that, based on the information contained in the financial reports for the financial years ended 30 June 2021 and 30 June 2022, MAK Water has determined that the current 'Prevailing Price' (since 22 December 2022) is $65.54 per share. This is generally consistent with Mr Hartnett's calculation based on those financial years of $65.18. This confirms that the only issue between the parties is as to the financial years applicable to the calculation of the Prevailing Price for Mr Hartnett's Plan Shares.

[46]

Clause 14 however is clearly a provision as to the 'Provision of Information', as its heading reveals. The company is required to advise the shareholders of the EBITDA and the 'applicable Prevailing Price'. Clause 14 does not enable the Company however to 'set' or 'determine' the Prevailing Price. That is determined by the formula in the Plan Rules.
Clause 14 recognises that there may be some delay between the end of the financial year and the finalisation of the accounts for that year. That is also reflected in the fact that the definition of EBIDTA includes that it is 'as determined by the final accounts for the Company for that financial year'. In that regard, until the final accounts for the financial year have been completed, it may not be possible to ascertain the Prevailing Price by applying the formula in the Plan Rules. That, however, is purely a matter of the timing at which the amount owing for a redemption can be properly ascertained; it does not affect the substantive basis upon which the Prevailing Price is to be determined.
Indeed, while it may be MAK Water's practice (or 'process') to set a Prevailing Price once a year for all redemptions in the upcoming year, such a practice is not contemplated by the Plan Rules; save for the notification on one occasion in cl 14.
Indeed, upon its proper construction it is apparent, in my view, that the Redemption Price (and Prevailing Price) is to be determined at the time of the precipitating event in cl 7.1(a) to (d) of the Plan Rules. In that regard, it is possible that the Prevailing Price could change over the course of a year because, while the average EBIDTA cannot change in any given financial year, it is possible that the 'number of Shares then on issue' (being part of the definition of Prevailing Price) might change from time to time. The definition of the Prevailing Price would, in those circumstances, produce a different result.
In my view, there is no textual foothold for MAK Water's application of the Plan Rules. It does not raise a triable issue.
As an aside, in the course of the hearing of the application, counsel for MAK Water referred to cl 15 of the Plan Rules, which provides:

[73]

MAK Water, maintains that this term operates, in effect, as a contractual set-off for amounts that might be owing to it by way of compensation. Even assuming this provision formed part of the terms of Mr Hartnett and Mr Matthews' contracts of employment, in my view, real questions would arise as to whether it was capable of applying to all of the amounts claimed by Mr Hartnett and Mr Matthews in their counterclaims.
For example, the context of the provision, particularly the immediately preceding sentences, rather suggests that the right to withhold monies relates to property damage to company property that had been in the employee's possession or control. It is not immediately apparent to me that this provision would enable MAK Water to withhold payment of entitlements due to an unliquidated claim for damages or equitable compensation. Moreover, in relation to Mr Hartnett and Mr Matthews' claims with respect to the redemption of their Plan Shares, as the parties identified by reference to cl 15 of the Plan Rules, it is difficult to see that the right to be paid the redemption price with respect to the ownership of shares could properly be characterised as 'pay' or remuneration to which a provision such as this would apply.
Nevertheless, notwithstanding these ambiguities, I will proceed on the basis that these issues as to the application of the 2019 Standard Conditions are at least triable.
The real issue in relation to these provisions is that both Mr Hartnett and Mr Matthews contend that the 2019 Standard Conditions never formed part of their contracts of employment.
In that regard, there is no evidence that either Mr Hartnett or Mr Matthews ever expressly agreed to be bound by the 2019 Standard Conditions. Each was employed well before the 2019 Standard Conditions were produced and there is no evidence that either of them were ever asked to accept or to sign them.
For his part, Mr Hartnett deposes to being aware of the existence of the 2019 Standard Conditions, due to his attendance at National Executive Meetings. While Mr Hartnett deposed that he was aware of other employees being asked to sign the 2019 Standard Conditions as a condition of a pay rise, he says that he was never asked to do so and, would not have done so as he 'considered this would require a full re‑negotiation of by employment terms including my salary and remuneration package'.[45]
Significantly, it appears that the only document relevant to Mr Hartnett's contract of employment following the creation of the 2019 Standard Conditions is the Hartnett Variation Letter. That document confirms the new remuneration package attaching to Mr Hartnett's contract of employment, but does not refer to the 2019 Standard Conditions.
As far as Mr Matthews is concerned, he did sign an earlier set of Standard Conditions of Employment for Full Time and Part Time Employees.[46] They did not contain the terms relied upon from the 2019 Standard Conditions. Mr Matthews deposes to attending only one Executive Team meeting, as a guest on 23 August 2022.[47] As in Mr Hartnett's case, the Matthews Variation Letter confirms the new remuneration package attaching to Mr Matthew's contract of employment, but does not refer to the 2019 Standard Conditions.
MAK Water's case in relation to the 2019 Standard Conditions is that both Mr Hartnett or Mr Matthews agreement to be bound by those conditions, is evidenced by a course of conduct.[48] The parties referred in that regard to Industrial Rollformers Pty Ltd v Ingersoll-Rand Australia Ltd[49] and Absolute Analogue Inc v Sundance Resources Ltd [No 3].[50]
The applicable principles are set out, for example, in Industrial Rollformers:[51]

[83]

The evidence in relation to Mr Matthews is in identical terms.[54]
In my view, the evidence produced by MAK Water falls well short of establishing an arguable case that Mr Hartnett's contract of employment or Mr Matthews' contract of employment were varied by a tacit understanding or agreement.
First, it is clear that both were existing employees, subject to specific contracts of employment. This is not a case where the existence of a contract needed to be inferred from the conduct of the parties. They each had a contract of employment which was entire and complete and they had operated under those contracts for many years. The question here is whether the course of conduct was such that there is an arguable case that the Court can positively conclude that the parties tacitly agreed to vary their contracts of employment.
Secondly, the conduct relied upon by MAK Water, at its very highest is evidence of consistency between their conduct and the 2019 Standard Conditions. That conduct is however equally consistent with the contracts of employment to which they had been parties since 2009 and 2013 respectively. There is nothing in their conduct that has been identified that is specifically referable to any change in the terms of their employment that could be referrable to the 2019 Standard Conditions. There is no evidence, indeed, that there had been any change at all as to the matters referred to in Mr Byk's affidavit as to performance review, allowances timesheets, applications, and use of cars and mobile phones.
For example, Mr Hartnett's contract of employment and Mr Matthews' contract of employment always appear to have been subject to performance reviews that have occurred since those contracts of employment commenced. In those circumstances the fact that conduct such as performance reviews had occurred before, and continued to occur, could not amount to evidence which positively pointed to a tacit understanding or agreement to be bound by new substituted conditions.
In my view, there is no triable issue that Mr Hartnett's contract of employment and Mr Matthews contract of employment were varied so as to include the 2019 Standard Conditions.

[111]

Because the Second Defendant operates in direct competition with the Plaintiff including in relation to its reverse osmosis plants, sewerage treatment plants, water and wastewater systems and OWS systems there is the risk that the Second Defendant, together with the Third Defendant and Fourth Defendant, whilst using the Plaintiff's Confidential Information will be successful in obtaining the Plaintiff's clients.
Further, because of the average length of time that it takes to scope and complete projects, it is possible that the Second Defendant, together with the Third Defendant and Fourth Defendant, has not yet realised identifiable clients and/or profits, which might otherwise have been available to the Plaintiff as its clients or profits.
In relation to the evidence concerning Crushing International, both Mr Hartnett and Mr Matthews depose that Crushing International has been a client of ABCO since at least 16 February 2010 and that ABCO received an email from Crushing Services International notifying it of an upcoming tender and requesting capability statements.[70] Mr Hartnett and Mr Matthews each depose that Crushing International has not awarded any of the work referred to in Mr Beck's affidavit to ABCO.[71]
There are three issues in relation to the claim for a set off that lead me to conclude that there is no triable issue that there is a defence of an equitable set-off sufficient to defeat Mr Hartnett and Mr Matthews' claims.
First, and notwithstanding that the proceedings have now been on foot for over six months, there is still no evidence that the defendants have, in any way, breached any obligations they owed to MAK Water arising out of their employment. That is in circumstances in which the parties have gone on oath in relation to those matters, both in relation to these applications and the application for an interlocutory injunction (which affidavits were relied upon for the purposes of these applications).
At most, thus far, the evidence does not rise above legitimate suspicions on the part of MAK Water that something may be awry (based on the files accessed referred to in Mr Byk's December affidavit). Those suspicions have been expressly denied on oath. On the current state of the material in my assessment MAK Water's claims, at least against the Mr Hartnett and Mr Matthews, are best described as weak.
Secondly, those claims, whatever they may be, are currently wholly unquantified. The conclusions of the Court of Appeal in Field Camp, to which I have earlier referred, are in my view directly applicable in the present case. There is no basis upon which this Court could conclude that there would be a set-off in an amount that would defeat, or set-off, the claims that are made by Mr Hartnett and Mr Matthews.
Thirdly, in my view, there is an insufficient connection between MAK Water's claims and Mr Hartnett and Mr Matthews' employment entitlements, such as to be able to say that the former impeaches the title of Mr Hartnett and Mr Matthews claims to the latter.
The fact that the transactions broadly arise out of an employment relationship between the parties, in my view, does not have that consequence (namely that one claim impeaches the other).
The claims themselves are quite separate. Mr Hartnett and Mr Matthews' claims are for remuneration for the service they have already rendered to MAK Water and for the redemption of their property (i.e. the Plan Shares). Those are accrued rights arising from their work for MAK Water and as owners of the Plan Shares.
For example, the circumstances by which Mr Hartnett and Mr Matthews earned commissions and accrued long service leave did not bring about or contribute to any alleged loss and damage to MAK Water.
In this regard, in Siah v Wong, Smith J referred to Gummow J's observations in James v Commonwealth Bank of Australia [72] to the following effect:[73]

[124]

In New Resources Holdings Templeman J, drawing upon Bingham LJ's judgment in Burnet v Francis Industries plc,[80] identified eight general matters relevant to the exercise of the discretion to stay execution of judgment in light of a counterclaim. I have had regard to each of those matters. It is not necessary to refer to them each in detail.
The matters that, in my view, are particularly relevant in the present case include the following.
First, the interrelationship of the respective claims and the identity of the parties. In the present case the parties are identical and the claims are interrelated inasmuch as they arise out of the employment relationship. As I have said they are not so closely related so as to involve one claim impeaching the other, as would be required for an equitable set-off. Nevertheless, in my view it is clear from the context that, as the discretion is only applicable to counterclaims as such, that the interrelationship need not necessarily be the kind of interrelationship that would give rise to an equitable set-off. The claims in this case nevertheless potentially give rise to competing liabilities arising from the employment relationship generally.
Secondly, in relation to the strength of the claim, as I have indicated, I am presently of the view that the claims made by MAK Water are not strong. At present, having regard to the affidavits that have been filed in two applications, there is no evidence of the improper use of confidential information in a manner that could give rise to a claim for damages, equitable compensation, or an account of profits. What there is, is the suspicion that arises by reason of the matters deposed to in Mr Byk's December affidavit at [108].
The next relevant factor is prejudice to Mr Hartnett and Mr Matthews. No particular prejudice has been identified in relation to a stay. Nevertheless, Mr Hartnett and Mr Matthews are out of their money, which is always a form of prejudice and, in the circumstances of the present case, the persons who are out of their money are former employees who are seeking remuneration and entitlements directly arising from their employment relationship. So while no particular prejudice is identified, I accept that there is general prejudice of that nature.
Another consideration identified by Templeman J in New Resources Holdings is the likely delay before the merits of the other claim will be adjudicated.
This is, in my view, the most significant issue in the particular circumstances of this case. In my view, given the current state of the evidence, it would be quite unjust to keep Mr Hartnett and Mr Matthews from the fruits of their judgments for an indefinite period of time pending the ultimate trial of any action if the primary proceedings were not pursued with alacrity or, at least, if interlocutory processes of the court did not produce some more substantial basis for the claims made by MAK Water.
On the other hand, if MAK Water's claims could be progressed quickly, then, in my view, a stay of execution for a short period could well be justified in order to finally resolve all outstanding issues and claims between the parties and any competing liabilities that they may have. In that regard both parties accepted that it would be appropriate for this case to be entered into the Commercial and Managed Cases List to be judicially case managed. I am of the view that that is an appropriate order and that these proceedings ought to be brought to a resolution as soon as is practicable.
The prospect that these proceedings as a whole might be brought to a speedy resolution and all outstanding issues and potential competing liabilities between the parties may be resolved in the short term, in my assessment tips the balance in favour of a stay of execution, subject to further order of the court. In all of the circumstances, I am therefore prepared to order a stay of execution of the judgments.
Nevertheless, given that the stay has been granted, as the late Chief Judge Kevin Hammond AO would have said, by 'the merest of margins', the suspension or stay of execution will be on condition that MAK Water pay security into court, in the amount of the judgment sums.
The parties will have liberty to apply in relation to the suspension or stay of execution. In particular, I envisage that if the proceedings are not progressed quickly or if interlocutory processes of the court do not produce some more substantial basis for the claims made by MAK Water, the stay of execution will be lifted and the security released.

At a glance

Court

Decision date

Before

Source

Judgment (210 paragraphs)

Mr Hartnett's calculation of the Prevailing Price

MAK Water's calculation of the Prevailing Price

Which calculation of the Prevailing Price is correct?

Legislation Cited (1)

Cases Cited (11)