New South Wales Rugby League Limited v Australian Rugby League Commission... [2022] NSWSC 570 | Case summary

Is NSWRL in breach of the Services Agreement?

This question raises three issues. The first is whether Mr Mezzatesta was improperly excluded from the election of Appointed Directors. The second is whether, if he was, that meant that the appointment of all directors other than the two Appointed Directors elected by Regional Members was invalid. The third is whether, if Mr Mezzatesta's exclusion did have that consequence, NSWRL was in breach of cl 3.1 of the Services Agreement.
In my opinion, Mr Mezzatesta was not disqualified from nominating for the position of a director of NSWRL because he was the chief executive officer of a member club. The disqualifying characteristic contained in the Constitution (having a "potential material conflicting interest with the interests of the Company") must be understood in the context of the Constitution as a whole, which includes membership of the board of a member club as one of a limited number of qualifying characteristics to be eligible to stand for election as an Appointed Director elected by Metropolitan Members. That characteristic could hardly also be a disqualifying factor. It is common ground that Mr Mezzatesta satisfied the requirement of being a director of a member club (that is, Cronulla).
The question is whether the fact that Mr Mezzatesta also held an executive position with Cronulla made a difference. It is difficult to see how it could. Any possible conflict arose because of the duties Mr Mezzatesta owed to Cronulla. But he owed those duties as a director. It is unclear how the nature and scope of those duties relevantly differed because he was also an employee of the club.
The suggestion appears to be that the remuneration to which Mr Mezzatesta was entitled and the likely basis of its calculation gave him a financial incentive to act in the interests of Cronulla. But even accepting that that is the case, the existence of that additional incentive did not affect the potentiality or materiality of any conflict. Any conflict arose from the duties that Mr Mezzatesta owed to Cronulla and the scope and nature of those duties did not depend on Mr Mezzatesta's remuneration. Moreover, the remuneration paid to a chief executive officer was only one incentive. In the present context, it might be thought that for many of those eligible to nominate for the position of an Appointed Director, team loyalty is likely to provide an incentive to act in the interests of a club which is at least as strong as remuneration.
NSWRL submits that the Constitution should be interpreted as conferring on the board that was responsible for conducting the election the right to determine whether a person is eligible to stand for election and, in particular, whether the person meets the requirements of cl 31(m), at least if it acts honestly and reasonably in doing so. Any other interpretation is said to be unworkable, since it would lead to countless applications to the Court.
I do not accept that submission. There is nothing in the Constitution which confers on the board the right to determine whether the requirements of the Constitution have been satisfied. Absent some specific provision to that effect, it is natural to read the Constitution as setting out the requirements of eligibility. If there is a dispute concerning those requirements, there is no reason why that dispute should not be resolved in the same way as any other dispute concerning the correct interpretation and application of a company's constitution - that is, by the Court. There is nothing unworkable in that conclusion. It was open to Mr Mezzatesta to seek urgent relief from the Court when he was told that the board had concluded that he was ineligible to stand. The fact that he chose not to do so does not demonstrate that the available remedy is unworkable.
ALRC contends that because Mr Mezzatesta was wrongly excluded from participating in the election, the election or appointment of Mr Gerard and Mr Politis itself was invalid, with the result that the appointment of the two Expert Directors and the Chairman was also invalid, leaving only the two Appointed Directors eligible for election by Regional Members. Consequently, it is said, the board of NSWRL cannot operate because there is no quorum.
In my opinion, that submission must be rejected. An irregularity in the process by which the directors who were chosen to fill vacant positions on the board does not necessarily mean that those persons were not validly chosen to fill those positions.
Courts have frequently had to consider the position where a body has not strictly followed the procedure for holding an election: see, for example, University of Technology Sydney v Gerrard [2001] NSWSC 368; Singh v Singh [2008] NSWSC 386; Ahmed v Chowdhury [2012] NSWSC 1452; Re Islamic Association Western Suburbs Inc [2015] NSWSC 638; Re Sri Guru Singh Sabah, Sydney Inc (The Sikh Association of Sydney) [2017] NSWSC 1092; Cambodian Buddhist Society of NSW v Meng Eang Thai [2017] NSWSC 1433. In that context, courts draw a distinction between provisions classified as mandatory and those classified as directory. As Kirby P explained in Rivers v Bondi Junction-Waverly RSL Sub-Branch Ltd (1986) 5 NSWLR 362 at 369: The courts insist, for the integrity of elections and for the enforcement of legislative or other provisions governing them, that rules concerning the conduct of elections should be faithfully complied with. Those rules typically include detailed provisions which may give rise to technical breaches which, although not shown to affect the outcome of the election would, if held to invalidate the election, cause expense, inconvenience and uncertainty disproportionate to the complaints made and the defaults proved. To modify the strict operation of such requirements for the conduct of elections (whether contained in legislation, informal arrangements or, as here, the articles of association of a company and a resolution of its board) the courts have had regard to the distinction between provisions classified as mandatory and those classified as directory. The former provisions must be obeyed and fulfilled exactly. In the case of the latter, it is sufficient if they are obeyed or fulfilled substantially …. Unhappily, there is no clear test for determining whether a provision is mandatory or directory: see D Pearce, Statutory Interpretation in Australia, 2nd ed (1981) par 228 at 163.
Of course, in the present case, there was not a failure to follow the required procedure for an election. Rather, a candidate was excluded from the election process. According to ARLC, that is significant because the result was that there was no election at all. In addition, ARLC points to the decisions in John v Korean Senior Citizens' Society, 2021 BCSC 1637 and Andrews v Queensland Racing Ltd [2009] QSC 338, two cases where exclusion of one or more candidates resulted in the court holding the election invalid.
However, no particular significance can be attached to the fact that the result was that there was no election. That simply followed from the fact that only three candidates were nominated for two positions, and one was thought to be ineligible to stand. Nor are the cases relied on by ARLC of much assistance. In both, multiple candidates were excluded in breach of the relevant constitution. In John v Korean Senior Citizens' Society, in addition to the improper exclusions, there were a number of other procedural irregularities adopted, perhaps in bad faith, to manipulate the number of eligible candidates. In Andrews v Queensland Racing Ltd, the election depended on the preparation of a shortlist of at least four candidates selected by an independent consultant. However, the consultant proceeded on the basis that he could only nominate a maximum of four candidates, which involved a clear misreading of the constitutional provisions, a matter that was brought to the attention of the company but ignored. In the present case, only one candidate was excluded on a ground provided for in the Constitution and on the basis of legal advice obtained by the company. Although that resulted in no election, it is unclear what, if any, effect it had on the composition of the board.
More fundamentally, the cases demonstrate that failure to comply with an election process does not lead to automatic invalidity of the results. Rather, the election is treated as valid unless a court determines otherwise. That determination must be made in proceedings brought by a person with standing to contest the outcome of the election, not a third party who simply claims that the invalidity of an election has contractual consequences.
Moreover, even assuming that Mr Gerard and Mr Politis were not validly elected to the positions they assumed following the annual general meeting, it does not follow that NSWRL does not currently have a functioning board that is able to form a quorum and otherwise fulfil the duties and functions of a board of directors. Paragraph (b)(i) of the definition of "director" in s 9 of the Corporations Act 2001 (Cth) states that, unless the contrary intention appears, a "director" includes, "a person who is not validly appointed as a director if … they act in the position of a director …". One consequence of this definition is that a person who acts as a director owes the duties imposed by the Act. Similarly, s 201M of the Corporations Act provides: Effectiveness of acts by directors (1) An act done by a director is effective even if their appointment, or the continuance of their appointment, is invalid because the company or director did not comply with the company's constitution (if any) or any provision of this Act. (2) Subsection (1) does not deal with the question whether an effective act by a director: (a) binds the company in its dealings with other people; or (b) makes the company liable to another person.
It is unclear from the evidence whether Mr Politis has been replaced. However, it seems to be accepted that the other six directors (including the Chairman) continue to act (unchallenged by any person with standing to do so) as directors of NSWRL. Consequently, they are treated as directors for the purposes of the Corporations Act and acts they take as members of the board are effective notwithstanding any invalidity in their appointment. Consequently, it is not correct to say that NSWRL does not have a functioning board or a board that is incapable of acting.
ARLC submits that as a consequence of what has happened, NSWRL cannot fulfil its functions under the Services Agreement. But why that is so is unclear. ARLC has not attempted to identify the particular Services set out in the schedule to the agreement that cannot or have not been performed to the standards set out in cl 3.1 of the agreement. It is not suggested that the persons who occupy the positions as directors of NSWRL lack the necessary qualifications or experience to supervise the provision of those services by the company.
ARLC submits that NSWRL's failure to comply with its own Constitution and the standards of proper corporate governance itself amounts to a breach of cl 3.1. Mr Walker SC, who appeared for the ARLC, summed the point up in oral submissions in this way: In particular it cannot be said that the affairs of a corporation are as well managed from the point of view of corporate governance if they are content to hold no elections and no purported appointments and simply for the same people to continue to hold office.
In this context, Mr Walker pointed particularly to the keeping of books and the making of appropriate prudential provisions with respect to liquidity and proper record keeping, all of which were said to be very relevant to whether a board is duly appointed.
In making that submission, Mr Walker also called in aid what was said to be the relationship between ARLC and NSWRL. ARLC was the paramount body which, following the agreements in 2012, was entrusted with the proper administration and the promotion and success of Rugby League in Australia. In that position, it was to be understood as having a supervisory role, largely through its control of funding over subordinate bodies, including the NSWRL.
Three points may be made about these submissions. First, whatever may be said about the supervisory role of the ARLC, the question in this case is whether NSWRL is in breach of cl 3.1 of the Services Agreement. No doubt, the Services Agreement is to be interpreted "by reference to its text, context (the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract) and purpose" as well as "the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract": Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37 at [46]-[47] per French CJ, Nettle and Gordon JJ. But that does not mean that the ARLC has some general right of supervision in relation to provision of the Services leading to a right of termination beyond what is conferred by the agreement.
Second, the question that cl 10.2 relevantly requires to be addressed is whether there has been an actual failure to perform a provision of the Services Agreement, not whether, as a consequence of how the NSWRL board has been constituted, the risk of a failure has been increased. In the present context, that required ARLC to identify at the time it served its notice how the provision of the Services fell short of the requirements of cl 3.1. It does not do that by identifying risks or possibilities arising from the way in which the board of NSWRL was constituted that could have that result.
Third, it is not difficult to conceive of cases where the corporate governance of NSWRL has failed to an extent which means that it is unable to comply with its obligations under cl 3.1 of the Services Agreement. But that is not this case. The question was raised with the board whether Mr Mezzatesta was eligible to stand for election. The question having been raised, the board quite properly sought legal advice on it. The board acted on that advice. There is no suggestion that the advice was not sought or given in good faith. The board properly concluded that no election was necessary in circumstances where only two candidates remained. No challenge has been made to any of the persons who currently act as directors of NSWRL by any person with standing to do so. And, as I have said, no attempt has been made to identify particular conduct engaged in by those who occupy the position of director which means that NSWRL falls short of its obligations under cl 3.1 of the Services Agreement.
It follows that the NSWRL was not in breach of the Services Agreement at the time ARLC sent its notice dated 5 April 2022 and, to the extent that that notice purports to be a notice for the purposes of cl 10.2(c) of the Services Agreement, it is ineffective.
There is a question of what relief, if any, NSWRL is entitled to. By an Amended Summons filed on 2 May 2022, the only relevant relief sought by NSWRL is a declaration that "in the events that have transpired as set out in the Commercial List Statement, the Plaintiff has not breached the Services Agreement".
It may be that the declaration would be better framed as a declaration concerning ARLC's right to terminate the Service Agreement in the events that have happened. That point aside, ARLC submits that there is no utility in granting a declaration. It may or may not serve a notice terminating the agreement. If it does not, no issue arises. If it does, NSWRL has a choice. It could accept the notice as a wrongful repudiation of the contract, terminate the contract and sue for damages. Alternatively, it could affirm the contract and seek whatever other relief it is entitled to. In either event, a declaration would serve no purpose.
In my view, a declaration would serve some utility. As things stand, the Services Agreement remains on foot. I have concluded that ARLC is not entitled to terminate it. That conclusion affects the legal rights and obligations of the parties and may affect the future course of the relationship between them. It is appropriate, therefore, that the conclusions of the Court are expressed in the form of a formal declaration.

Orders

It follows that NSWRL is entitled to a declaration in its favour concerning the question whether it has breached the Services Agreement. It is not entitled to any other relief.
It is appropriate to give the parties a period of time to see whether they can agree on a form of declaration that gives effect to these reasons for judgment and on the questions of costs.
Accordingly, the Court makes the following orders: 1. Direct that within 21 days of the date of these reasons for judgment, the parties bring in short minutes of order that give effect to these reasons for judgment and, if costs can be agreed, deal with the question of costs; 2. If the parties cannot agree on the form of orders to be made by the Court (including in relation to costs), direct that: 1. Within 21 days of the date of these reasons for judgment, the parties provide to my Associate proposed short minutes of order for which they contend (including in relation to costs) together with written submissions not exceeding five pages in support of those orders; 2. The form of orders (including in relation to costs) be determined on the papers.

New South Wales Rugby League Limited v Australian Rugby League Commission Limited

At a glance

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Judgment (6 paragraphs)

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Legislation Cited (1)

Cases Cited (10)

Cited By (2)