THE RAVENSWOOD RESORT PTY LTD (Receivers & Managers Appointed) (In liq) (ACN 064 679 698)

ADRIAN MIN YAN LEE as Trustee for the Ravenswood Trust

Practice and procedure - Application to strike out claim - Whether director liable for procuring breach of contract by company - Relevant principles - Whether director acting outside authority - Turns on own facts

Australian Development Corp Pty Ltd v White Constructions Ltd [2001] NSWCA 9

Biscayne Partners Pty Ltd v Valance Corp Pty Ltd [2003] NSWSC 874

Fightvision Pty Ltd v Onisforou (1999) 47 NSWLR 473

Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 328

Johnson Matthey (Aust) Ltd v Dascorp Pty Ltd [2003] VSC 291

LMI Australasia Pty Ltd v Baulderstone Hornibrook Pty Ltd [2001] NSWSC 886

O'Brien v Dawson [1942] HCA 8; (1942) 66 CLR 18

Performing Rights Society Ltd v Ciryl Theatrical Syndicate Ltd (1924) 1 KB 1

Pioneer Electronics Australia Pty Ltd v Lee (2001) 108 FCR 274

Rainham Chemical works v Belvedere Guano Co (1921) 2 AC 465

Root Control Technologies Pty Ltd v Root Quality Pty Ltd & Ors [2000] FCA 980; (2000) 177 ALR 231

Rutherford v Poole [1953] VicLawRp 23; (1953) VLR 130

Said v Butt [1920] 3 KB 497

Short v City Bank of Sydney [1912] HCA 54; (1912) 15 CLR 148

Tsaprazis v Goldcrest Properties Pty Ltd [2000] NSWSC 206; (2000) 18 ACLC 285

1 MASTER NEWNES: This is an application by the sixth defendant to strike out the claim against her. On the hearing of this application I was informed by counsel that the claims against the fourth and fifth defendant had been resolved and accordingly those claims were discontinued.

2 In the statement of claim the plaintiff alleges that by an agreement in writing made 2 October 1996 (the "joint venture agreement") the first, third, fourth and fifth defendants (the "joint venture participants") entered into a joint venture for the purpose of subdividing, marketing and selling parts of the first defendant's land ("the land"). It is alleged that, pursuant to the joint venture agreement, the joint venture participants appointed Ravenswood Resort Control Management Pty Ltd ("RRCM") as project manager.

3 The plaintiff alleges that by an agreement made on 19 July 2001 (the "Purchase Agreement") the joint venture participants sold to the plaintiff a number of subdivided lots for 60 per cent of the publicly listed selling price. The subdivided lots sold to the plaintiff comprised two parcels, the purchase price of one parcel being the sum of $1,671,300 and the purchase price of the other being $2,208,000.

4 It is pleaded that, pursuant to the Purchase Agreement, the plaintiff paid to RRCM, as trustee for the participants, the sum of $3,589,139. That amount was payment in full for the first parcel of lots and the sum of $2,208,000 in part payment for the second parcel.

5 The plaintiff pleads that it was a term of the joint venture agreement that the land, throughout the term of the joint venture, would remain in the name of the first defendant. The plaintiff further pleads that it was an implied term of the joint venture agreement, implied in order to give business efficacy to it, that it was the obligation of the first defendant, in whose name the land was held, to execute transfers of the developed parcels of land. I should note that the plaintiff was not a party to the joint venture agreement.

6 The plaintiff pleads that it was an implied term of the Purchase Agreement that the first defendant would, in the performance of the defendants' obligations under the Purchase Agreement, execute transfers of the land sold to the plaintiff.

7 The plaintiff pleads that the sixth defendant was at the relevant time a director of the first defendant and the holder of 1,799,999 of the 1,800,000 issued shares in the first defendant. The plaintiff says that the sixth defendant was the director of the first defendant responsible for the obligation of the first defendant to execute transfers of the land purchased by the plaintiff.

8 It is alleged that in discharge of that obligation the first defendant executed a number of transfers of land to the plaintiff. The plaintiff then pleads in par 21 of the statement of claim that, in or about August 2002, the sixth defendant, as the director of the first defendant responsible for the performance of the first defendant's implied obligation to execute transfers of land to the plaintiff, directed the first defendant not to execute any further transfers of land to the plaintiff. It is alleged in par 22 that, in or about August 2002, the plaintiff orally informed the plaintiff of that direction. In par 23 it is alleged that the plaintiff "treated [the direction] as wrongful and a fundamental breach of the Purchase Agreement and terminated the Purchase Agreement". It is pleaded in par 24 that, as a result, the plaintiff did not receive title to certain of the lots and, accordingly, was released from the obligation to pay the balance of the purchase price of $290,161 and was entitled to recover the sum of $1,917,839, which it had paid for lots it had not received.

9 The plaintiff pleads that the joint venture participants have not repaid those sums and claims to be entitled to them.

10 The substantive issue on this application was the plea in par 39 of the statement of claim. It is in the following terms:

"By reason of the matters in pleaded in par 21 the Sixth Defendant interfered with the Plaintiff's contractual rights under the Purchase Agreement with the consequence that the Plaintiff is entitled as against the Sixth Defendant to damages for the Sixth Defendant's interference with the Purchase Agreement."

11 The plaintiff's claim against the sixth defendant, as elaborated by the plaintiff's counsel in submissions, is for the tort of intentionally interfering with the plaintiff's contractual rights by procuring or inducing the joint venture participants to breach the Purchase Agreement.

12 It was contended on behalf of the sixth defendant that par 39 did not plead an arguable cause of action, or alternatively was embarrassing. It was submitted that there was no allegation that the sixth defendant was acting other than as a director of the first defendant in the conduct pleaded in par 21 and, in particular, there was no allegation that she was acting outside the scope of her authority. The sixth defendant also submitted that there was no causal connection pleaded between the direction alleged in par 21 and the course ultimately taken by the first defendant.

13 The plaintiff's counsel argued that the causal connection was sufficiently made by the plea that the sixth defendant directed the first defendant not to execute the transfers. On the question of whether, in directing the first defendant as alleged, the sixth defendant unlawfully interfered with the plaintiff's rights under the Purchase Agreement, it was contended in the written submissions that it was open to the Court to find that, by so directing the first defendant, the sixth defendant acted outside the scope of her authority.

14 In the course of oral argument, counsel for the plaintiff seemed to go substantially further than that and contend that where a director knowingly causes the company of which he or she is the director to breach a contract with another party, the director is liable for unlawful interference with the contract.

15 In Short v City Bank of Sydney [1912] HCA 54; (1912) 15 CLR 148, Isaacs J said (at 160) that to constitute the cause of action for inducing or procuring a breach of contract:

"... the 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."

16 In Fightvision Pty Ltd v Onisforou (1999) 47 NSWLR 473, the joint judgment of the New South Wales Court of Appeal (Sheller, Stein and Giles JJ), after citing the above passage, put the matter as follows (at 509):

"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."

17 It is clear that the person who commits the tort must be a third party, someone who stands outside the contractual relationship being interfered with: Rutherford v Poole [1953] VicLawRp 23; (1953) VLR 130 (FC) per Herring CJ at 135; Biscayne Partners Pty Ltd v Valance Corp Pty Ltd [2003] NSWSC 874 per Einstein J at [101].

18 The sixth defendant relied on Said v Butt [1920] 3 KB 497 for the principle that a director of a company who, acting within the scope of their authority as a director, causes the company to breach a contract it has entered into cannot be held liable for inducing or procuring the company to breach the contract.

19 In Said v Butt, the plaintiff had gone to the theatre to see a play. The defendant, the managing director of the theatre company, instructed the attendants that the plaintiff was not to occupy his seat and his money was to be returned to him. The plaintiff was refused admission to the performance. He sued the defendant on the ground that the defendant had wrongfully and maliciously procured the theatre company to breach the contract made when the plaintiff had purchased a ticket entitling him to view the performance. Although McCardie J found against the plaintiff because he could not establish the existence of a contract, his Lordship went on to consider what would have been the position had there been a contract. His Lordship said (at 504 - 505):

"If the plaintiff is right in his contention, it seems to follow that whenever either a managing director or a board of directors, or a manager or other official of a company, causes or procures a breach by that company of its contract with a third person, each director or official will be liable to an action for damages, upon the principle of Lumley v Guy as for a tortious act. So, too, with the manager or other agent of a private firm who does the like thing. This far-reaching result of the principle here suggested by the plaintiff is emphasised, when it is remembered that in an ordinary action for breach of contract the plaintiff recovers his pecuniary loss only: whereas in an action for wrongfully procuring a breach of contract the damages against the wrongdoer are at large, and they may vastly exceed the sum recoverable in a mere claim for breach of contract ..."

20 In the result, his Lordship concluded that no such action lay. He went on (at 505 - 506):

" ... the servant who causes a breach of his master's contract with a third person seems to stand in a wholly different position. He is not a stranger. He is the alter ego of his master. His acts are in law the acts of his employer. In such a case it is the master himself, by his agent, breaking the contract he has made, and in my view an action against the agent under the Lumley v Guy principle must therefore fail, just as it would fail if brought against the master himself for wrongfully procuring a breach of his own contract ..."

21 In O'Brien v Dawson [1942] HCA 8; (1942) 66 CLR 18, the plaintiff sued a company and two of its directors for conspiracy to injure the plaintiffs in connection with an agreement to grant to the plaintiff leases of two theatres. One of the directors, Dawson, was also at the relevant time employed by the plaintiff as general manager of the theatres. The action failed, it being found, among other things, that there was no enforceable agreement to grant leases of the theatres. In the course of the judgments in the High Court, consideration was also given to whether a director who causes the company of which they are a director to breach a contract could be liable for the tort of inducing a breach of the contract.

"A company cannot act in its own person for it has no person (Ferguson v Wilson (1866) LR 2 Ch App at 89). So it must of necessity act by directors, managers or other agents. The company, if it were guilty of a breach of its contract in this case, acted through its director, the respondent Doyle, but it is neither 'law nor sense' (Lagunas Nitrate Co v Lagunas Syndicate [1899] 2 Ch 392 at 431) to say that Doyle in the exercise of his functions as a director of the company combined with it to do any unlawful act or became a joint tortfeasor. Again, it is equally fallacious to assert that Doyle knowingly procured the company to break its contract. The acts of Doyle were the acts of the company and not his personal acts which involved him in any liability to the plaintiff. But I would add that it does not follow that a director of a company would escape personal liability under cover of the company's responsibility if he himself became an actor and invaded the plaintiff's rights, as by trespassing on his land, or seizing his goods and so forth. And for similar reasons the contention is equally untenable that Doyle and the respondent Dawson combined together or engaged in common in knowingly procuring a breach by the company of its contracts. Dawson if he is guilty of a breach of his contract with the plaintiff is of course liable in damages. And here, I think, there is some evidence that the company knowingly, through its director Doyle, procured the breach of Dawson's contract with the plaintiff. Doyle was I think, acting within the scope of his functions as a director of the company in procuring Dawson to terminate his employment with the plaintiff and to enter into an agreement with the company. It was an unlawful act of the company done through its director Doyle. But Doyle is not involved in the act otherwise than as a director. It was again the company's act. "

"A commits an actionable wrong against B if he procures C to break its contract with B... Hence McCardie J said in Pratt v British Medical Association [1919] 1 KB 244 that it is necessary in dealing with actionable conspiracy to distinguish it at once the line of decisions which establish this proposition. He added: 'An individual can commit the tort as effectively as an aggregate of persons. The effect of a conspiracy to commit a wrong within Lumley v Gye is of importance only in considering the weight of the acts alleged and the extent of the resultant damage ... But an action by the plaintiff would not lie against the company for procuring a breach of its own contract with him nor against the individual defendants on that cause of action if in terminating the agreement they were acting in pursuance of their authority as directors ... There is no evidence that they were not acting in pursuance of that authority."

24 The principle enunciated in Said v Butt and O'Brien v Dawson, that where an agent, acting within the scope of their authority as agent, causes their principal to breach a contract with a third party, the agent cannot be held liable for inducing or procuring the principal to breach the contract, has been applied in many cases in Australia in relation to directors of a company, including by the Federal Court in Root Control Technologies Pty Ltd v Root Quality Pty Ltd & Ors [2000] FCA 980; (2000) 177 ALR 231 (where the authorities are reviewed in detail), by the Supreme Court of Victoria in Rutherford v Poole (supra) and Johnson Matthey (Aust) Ltd v Dascorp Pty Ltd [2003] VSC 291 and by the Supreme Court of New South Wales, most recently in Tsaprazis v Goldcrest Properties Pty Ltd [2000] NSWSC 206; (2000) 18 ACLC 285, Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 328 at [22], Australian Development Corp Pty Ltd v White Constructions Ltd [2001] NSWCA 9; LMI Australasia Pty Ltd v Baulderstone Hornibrook Pty Ltd [2001] NSWSC 886, affirmed on appeal in [2003] NSWCA 74, and in Biscayne Partners Pty Ltd v Valance Corp Pty Ltd & Ors (supra), where the authorities are reviewed in detail.

25 In my view it is clearly established that an agent acting within the scope of their authority cannot be liable for the tort of inducing the breach of a contract entered into by their principal. The agent's acts are the acts of the principal. If it were otherwise, the effect would be that the principal would be inducing a breach of its own contract. Accordingly, a director of a company who, acting within the scope of their authority as a director, causes the company to breach its contract cannot be held liable for inducing or procuring the company to breach the contract

26 Counsel for the plaintiff referred to Performing Rights Society Ltd v Ciryl Theatrical Syndicate Ltd (1924) 1 KB 1, in which the plaintiff claimed against the defendant company and its managing director for the tort of infringement of copyright, and in particular relied upon the following statement of Atkin LJ (at 14 - 15):

"Prima facie a managing director is not liable for tortious acts done by servants of the company unless he himself is privy to the acts, that is to say unless he ordered or procured the acts to be done."

27 Counsel also referred to Rainham Chemical works v Belvedere Guano Co (1921) 2 AC 465, in which the plaintiff claimed against the defendant company and two of its directors under the principle in Rylands v Fletcher for damage done to the plaintiff's property by an explosion of dangerous materials brought on to the defendant's neighbouring land. Counsel relied on the following passage from the judgment of Lord Buckmaster (at 476):

"If a company is formed for the express purpose of doing a wrongful act or if, when formed, those in control expressly direct that a wrongful thing be done, the individuals as well as the company are responsible for the consequences."

28 Those cases, however, were concerned not with the question of the personal liability of a director for causing the company of which he is a director to breach a contract, but the question of in what circumstances a director will be personally liable for a tortious act committed by the company. That a director may be personally liable for tortious acts of the company was expressly recognised in the judgment of Starke J in O'Brien v Dawson, in the passage cited earlier.

29 Reliance was also placed by the plaintiff on Pioneer Electronics Australia Pty Ltd v Lee (2001) 108 FCR 274 at 283, where Sundberg J referred to four lines of authority on the personal liability of a director for corporate torts, as follows:

"1. A director will be liable along with the company when he has procured or directed it to commit the tort: [authorities cited omitted].

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: [authorities cited omitted].

3. A director will be liable if he has assumed responsibility for the company's acts: [authorities cited omitted].

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."

30 Sundberg J observed that the authorities were in an uncertain state, but that the preponderance of authority in the Federal Court favoured the first approach.

31 Whilst it can readily be accepted that the state of the authorities on the question of when a director will incur personal liability for the tortious acts of a company is by no means clear, as Redlich J observed in Johnson Matthey (Aust) Ltd v Dascorp Pty Ltd (supra), at [112], the statement of principle which Sundberg J draws from the cases cited in respect of the fourth approach is, with respect, too widely expressed and does not accurately reflect the more limited principle stated in those cases. Those cases stand for the proposition that a director who repudiates a contract of his company will not be liable for inducing the company to breach the contract, not for a wider principle that a director may not be personally liable for a tort committed by the company. Redlich J went on to say that the cases cited in respect of the fourth approach do, however, establish that there is no personal tortious liability incurred by the authorised directors of a company who resolve that the company will not perform a contractual commitment.

32 Counsel for the plaintiff also relied on the following passage in the judgment of Williams J in O'Brien v Dawson (supra) (at 42) for the proposition that a director of a company may be liable for involvement in procuring a breach of a contract entered into by the company:

"It was no part of the business of the company to procure such a breach of this contract. It is difficult to see how Doyle and Dawson could be heard to say that in doing so they were acting as agents of the company, and the belief that the company had the right to determine that the agreement of 12 July could not provide any justification for such actions."

33 That passage, however, has been taken out of context. In that case, although Dawson was a director of the company, he was also, at the relevant time, employed by the plaintiff as general manager of the theatres. In the action, the plaintiff had contended that the defendants had interfered with his rights under an enforceable contract for the grant of leases of the theatres for 12 years. Williams J found that no such contract existed. However, in his judgment Williams J went on to say that there were nevertheless two contracts in existence. The first was a contract by which the plaintiff was entitled to use the theatres to carry on his business until his right to do so was determined by the company on reasonable notice and the other was a contract between Dawson and the plaintiff by which Dawson was appointed as the plaintiff's general manager. In his judgment Williams J said (at 41 - 42) as follows:

"But, since in August 1940 Dawson was in the employment of the plaintiff, there is evidence that Doyle, and the company by them as its agents did combine to induce and procure Dawson, in breach of his obligations to the plaintiff, under the subterfuge of acting as the plaintiff's general manager, secretly and surreptitiously to enter into occupation of theatre on behalf of a company, dismiss the plaintiff's employees and ruin the plaintiff's business ... It was no part of the business of the company to procure such a breach of this contract. It is difficult to see how Doyle and Dawson could be heard to say that in doing so they were acting as agents of the company, and the belief that the company had the right to determine the agreement of 12 July could not provide any justification for such actions. ... It appears therefore that ... the plaintiff may have rights of action against the defendants as joint tortfeasors for this tort ..."

34 That, of course, is not inconsistent with the principle stated by Starke J and MacTiernan J in that case, namely that a director, acting within the scope of their authority as a director, will not be liable for inducing or procuring the company which he or she is a director to breach a contract.

35 In the present case it is not alleged that, in giving the alleged direction to the first defendant, the sixth defendant was not acting within her authority as a director of the first defendant. I do not accept the plaintiff's submission that that can be inferred simply from the fact that the direction was, it is alleged, in breach of the Purchase Agreement. A lack of authority cannot be inferred simply because the action (or inaction) of the director is in breach of the terms of a contract entered into by the company.

36 Nor, I should add, is it alleged that in failing or refusing to sign further transfers the first defendant was acting outside the scope of its authority as the agent of the other joint venture participants to sign the transfers. Once again, the fact (if it be the fact) that in so doing the first defendant was in breach of the Purchase Agreement does not mean that it was not authorised by the other joint venture participants so to act.

37 In my view, the plaintiff's claim against the sixth defendant, as it is currently, framed discloses no arguable cause of action. I would therefore strike out par 39 of the statement of claim with leave to the plaintiff to replead.

38 I will hear the parties on the form of orders and costs.