Make good obligations in leases: do they apply if the premises will be demolished?

17 April, 2019

The collapse of Storm Financial Limited (Storm), a financial advice company based in Townsville, in the wake of the 2008 Global Financial Crisis garnered significant media attention and led to an inquiry and report by a Parliamentary Joint Committee.

Storm was founded by Emmanuel Cassimatis and his wife Julie Cassimatis as a private company initially. At relevant times, Mr and Mrs Cassimatis were the only executive directors of Storm. They also held all of the shares in Storm.

ASIC commenced proceedings in the Federal Court of Australia against Mr and Mrs Cassimatis alleging that they committed a single breach of their duty of care and diligence under s 180(1) of the Corporations Act 2001 (Cth). Section 180(1) is a civil penalty provision. It provides that:

“A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:

were a director or officer of a corporation in the corporation’s circumstances; and
occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.”

On 26 August 2016, Edelman J delivered judgment against Mr and Mrs Cassimatis on the issue of liability: Australian Securities and Investments Commission v Cassimatis (No 8) [2016] FCA 1023.

The judgment provides a useful reminder as to the content of the duty under s 180(1) and the applicable principles.

Nature of ASIC’s case

ASIC presented its case against Mr and Mrs Cassamatis on the basis that they breached s 180(1) by causing and/or permitting Storm to provide advice to particular investors in accordance with the “Storm model” in a manner which caused Storm to actually contravene certain sections of the Corporations Act, including s 945A(1). That provision, which was repealed in 2012, required that a financial services licensee such as Storm must only provide advice to a client if (amongst other things):

having regard to information obtained from the client in relation to their relevant personal circumstances, the providing entity has given such consideration to, and conducted such investigation of, the subject matter of the advice as is reasonable in all of the circumstances: s 945A(1)(b); and
the advice is appropriate to the client, having regard to that consideration and investigation: s 945A(1)(c).

Edelman J said that “ASIC set a high bar for itself to establish liability”, to the extent that he had “serious doubt whether an actual breach by a corporation is a necessary requirement for breach of s 180(1)”. His Honour nevertheless proceeded on that basis because it was the way that the parties had conducted their case.

In terms of the particular investors, there were 45 individuals, or 27 individuals or couples, upon whom ASIC ultimately relied. In short, these were persons who were retired, or approaching retirement, and who were particularly vulnerable to losses (on account of them having little income and few assets apart from their family home and limited superannuation).

As for the Storm model of investment advice, which Mr and Mrs Cassimatis developed, in broad summary it involved the concept of borrowing to invest more than the investors would otherwise be prepared to do, for a period (or investment time horizon) of 5 years or longer. The strategy was described by one witness as “double gearing” and involved the investors (i) borrowing against the security of their homes; (ii) obtaining a margin loan; and (iii) using the funds from these loans to invest in index funds, establishing a cash reserve, and paying Storm’s fees.

ASIC further pleaded that in causing or permitting advice to be provided in a manner which caused Storm to contravene the Corporations Act, Mr and Mrs Cassimatis exposed Storm to a foreseeable risk of harm greater than that to which a reasonable director, acting with the required degree of care and diligence, would permit Storm to be exposed.

Applicable legal principles

Edelman J observed that the dominant test for the content of the duty in s 180(1) is the decision of Ipp J in Vrisakis v Australian Securities and Investments Commission (1993) 9 WAR 395, where his Honour stated (at 450) that (underline added):

“the mere fact that a director participates in conduct that carries with it a foreseeable risk of harm to the interests of the company will not necessarily mean that he has failed to exercise a reasonable degree of care and diligence in the discharge of his duties. … the question whether a director has exercised a reasonable degree of care and diligence can only be answered by balancing the foreseeable risk of harm against the potential benefits that could reasonably have been expected to accrue to the company from the conduct in question.”

Another crucial matter to be considered in the “balancing” exercise is the burden (i.e. expense, difficulty and/or inconvenience) of alleviating action.

Edelman J further observed (at [483], [540]) that “the foreseeable risk of harm to the corporation which falls to be considered in s 180(1) is not confined to financial harm. It includes harm to all the interests of the corporation. The interests of the corporation, including its reputation, include its interests which relate to compliance with the law”, and the risks of exposure to sanctions from breach of the law (including non-pecuniary).

Edelman J also noted (at [492]) that that although the duty (of care and diligence) remains the same, the standard of care that a director or officer must meet “will depend upon the corporation’s circumstances and the officer’s position and responsibilities including his or her status as an executive or not”. His Honour referred to Shafron v Australian Securities and Investments Commission (2012) 247 CLR 465 where the High Court of Australia said (at 476 [18]), in relation to the element identified in para (b), that “the responsibilities referred to in s 180(1) are not confined to statutory responsibilities; they include whatever responsibilities the officer concerned had within the corporation, regardless of how or why those responsibilities came to be imposed on that officer”. It is for this reason that non-executive directors are not subject to the same (higher) standard as executive directors.

Mr and Mrs Cassimatis submitted that s 180(1) does not apply where the directors are the sole shareholders of a solvent company; or, more specifically, that “there is nothing per se illegal in a director of a solvent company causing or permitting a company to pursue a venture, no matter how risky or even foolhardy”, if this is authorised by the shareholders. That submission was rejected by Edelman J for a number of reasons, including that it had no support in the text of s 180(1). Edelman J concluded at [523] that “the interests of the corporation includes the interests of the shareholders. Hence, where the shareholders acquiesce to a course of conduct then that acquiescence might affect the practical content of the duty. But the acquiescence does not eliminate or relieve the duty where there are other relevant interests of the corporation apart from the interests of the shareholders”.

Resolution

The evidence established that in their day to day management of Storm, Mr and Mrs Cassamatis were both “integrally involved in almost every aspect of Storm’s business”. Further, they exerted “an extraordinary degree of control over Storm”, including over the financial advisers and the process for giving advice concerning the Storm model. One witness described board meetings as “information sessions” conducted by Mr and Mrs Cassimatis, at which the independent non-executive directors were passive. Edelman J observed that “Although there was some evidence of a desire by Mr and Mrs Cassimatis to encourage suggestions, communication, or new ideas, the control that they asserted was extensive to the point that it substantially stifled much possibility of dissent or contradiction, as they would have been aware”.

It was against this backdrop, of the responsibilities that Mr and Mrs Cassimatis actually had within Storm, that the s 180(1) assessment fell to be made.

Edelman J found that Storm had committed civil contraventions of s 945A(1)(b) and s 945A(1)(c) of the Corporations Act. His Honour further found that these breaches were not merely reasonably foreseeable. Rather, at the time of the breaches, a reasonable director with the responsibilities of Mr and Mrs Cassimatis would have known Storm’s clientele and demographic very well (better than anyone else in Storm, and far better informed than anyone outside Storm), and therefore should have regarded the breaches as likely. More specifically, a reasonable director of a company in Storm’s circumstances and with Mr or Mrs Cassimatis’ responsibilities would have been aware of a strong likelihood of inappropriate advice being given, in contravention of s 945A of the Corporations Act, if he or she did not exercise his or her powers to prevent or prohibit the Storm model from being applied in such indiscriminate circumstances, which included application to the vulnerable clients in the class pleaded by ASIC.

In terms of the consequences of breach, Edelman J found that although many of the relevant investors suffered significant, life-altering, losses after the GFC, these losses were neither necessary nor sufficient for Storm’s breach of s 945A. At the very least, a reasonable director with Mr and Mrs Cassimatis’ responsibilities, and in Storm’s circumstances, should have realised that discovery of the likely breaches at some point was, if not likely, at the very least a real possibility. The consequences of discovery included suspension or cancellation of Storm’s AFSL . On account of this being “a threat to the very existence of Storm”, Edelman J found that “[a]ny reasonable director would have taken this possibility extremely seriously”.

In terms of the burden of alleviating action, Edelman J found that “[i]t would have been simple to take precautionary measures to attempt to avoid the application of the Storm model” to the pleaded class of persons. Mr and Mrs Cassimatis were required, by the application of s 180(1), to take alleviating precautions which were sufficient in all the circumstances. However, they omitted to take any steps at all.

Accordingly breaches of s 180(1) by Mr and Mrs Cassimatis were found to have been established.

Edelman J also held that Mr and Mrs Cassimatis ought not fairly be excused from these contraventions under s 1317S. That provision enables a Court to relieve a person who has contravened a civil penalty provision either wholly or partly from liability if (i) the person has acted honestly and (ii) having regard to all the circumstances of the case, the person ought fairly be excused for the contravention.

Edelman J accepted that Mr and Mrs Cassimatis acted honestly, and genuinely held the view that capital loss could never occur with index fund investment in the Storm model. However, his Honour concluded that even if explained as negligence and an honest mistake, Mr and Mrs Cassimatis’ conduct “involved a high degree of departure from the care and diligence required by s 180(1)”, and that their role and responsibilities in Storm were so significant, and the contraventions were sufficiently serious, that their conduct ought not fairly be excused.

All issues concerning remedies sought by ASIC against Mr and Mrs Cassimatis were deferred to a separate hearing.

Take-home points

The duty under section 180(1) requires a director or officer to balance the foreseeable risk of harm to the corporation (the magnitude of the risk and the likelihood of its occurrence) by a certain course of action or non-action, along with the burden (expense, difficulty and/or inconvenience) of taking alleviating action.
“harm” refers to harm to anyof the interests of the corporation. Section 180(1) does not require proof of actual or prospective loss (or financial harm) to the corporation.
The standard of care required to discharge the duty will depend upon the corporation’s circumstances, the director’s/officer’s position and whatever responsibilities they have.
Where the directors are the shareholders, that can impact considerably on the content of the duties owed to the corporation. However, the corporation is a separate legal entity and the shareholders cannot release directors/officers from their duty to the corporation under s 180(1), which has a public aspect.
A director or officer who assumes vast responsibilities and exercises a very high degree of control within a corporation, as opposed to devolving functions and responsibilities to suitably experienced and qualified staff and allowing others to take an active role in participating in making decisions, will necessarily increase their level of exposure to a potential breach of s 180(1).

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Litigation and Dispute Resolution

Canadian Court elevates thumbs-up emoji to signature status

In June 2023, a Canadian Court in South-West Terminal Ltd v Achter Land and Cattle Ltd, 2023 SKKB 116, held that the "thumbs-up" emoji carried enough weight to constitute acceptance of contractual terms, analogous to that of a "signature", to establish a legally binding contract. Facts This case involved a contractual dispute between two parties namely South-West Terminal ("SWT"), a grain and crop inputs company; and Achter Land & Cattle Ltd ("ALC"), a farming corporation. SWT sought to purchase several tonnes of flax at a price of $17 per bushel, and in March 2021, Mr Mickleborough, SWT's Farm Marketing Representative, sent a "blast" text message to several sellers indicating this intention. Following this text message, Mr Mickleborough spoke with Mr Achter, owner of ALC, whereby both parties verbally agreed by phone that ALC would supply 86 metric tonnes of flax to SWT at a price of $17 per bushel, in November 2021. After the phone call, Mr Mickleborough applied his ink signature to the contract, took a photo of it on his mobile phone and texted it to Mr Archter with the text message, "please confirm flax contract". Mr Archter responded by texting back a "thumbs-up" emoji, but ultimately did not deliver the 87 metric tonnes of flax as agreed. Issues The parties did not dispute the facts, but rather, "disagreed as to whether there was a formal meeting of the minds" and intention to enter into a legally binding agreement. The primary issue that the Court was tasked with deciding was whether Mr Achter's use of the thumbs-up emoji carried the same weight as a signature to signify acceptance of the terms of the alleged contract. Mr Mickleborough put forward the argument that the emoji sent by Mr Achter conveyed acceptance of the terms of the agreement, however Mr Achter disagreed arguing that his use of the emoji was his way of confirming receipt of the text message. By way of affidavit, Mr Achter stated "I deny that he accepted the thumbs-up emoji as a digital signature of the incomplete contract"; and "I did not have time to review the Flax agreement and merely wanted to indicate that I did receive his text message." Consensus Ad Idem In deciding this issue, the Court needed to determine whether there had been a "formal meeting of the minds". At paragraph [18], Justice Keene considered the reasonable bystander test: " The court is to look at “how each party’s conduct would appear to a reasonable person in the position of the other party” (Aga at para 35). The test for agreement to a contract for legal purposes is whether the parties have indicated to the outside world, in the form of the objective reasonable bystander, their intention to contract and the terms of such contract (Aga at para 36). The question is not what the parties subjectively had in mind, but rather whether their conduct was such that a reasonable person would conclude that they had intended to be bound (Aga at para 37)." Justice Keene considered several factors including: The nature of the business relationship, notably that Mr Achter had a long-standing business relationship with SWT going back to at least 2015 when Mr Mickleborough started with SWT; and The consistency in the manner by which the parties conducted their business by way of verbal conversation either in person or over the phone to come to an agreement on price and volume of grain, which would be followed by Mr Mickleborough drafting a contract and sending it to Mr Achter. Mr Mickleborough stated, "I have done approximately fifteen to twenty contracts with Achter"; and The fact that the parties had both clearly understood responses by Mr Achter such as "looks good", "ok" or "yup" to mean confirmation of the contract and "not a mere acknowledgment of the receipt of the contract" by Mr Achter. Judgment At paragraph [36], Keene J said: "I am satisfied on the balance of probabilities that Chris okayed or approved the contract just like he had done before except this time he used a thumbs-up emoji. In my opinion, when considering all of the circumstances that meant approval of the flax contract and not simply that he had received the contract and was going to think about it. In my view a reasonable bystander knowing all of the background would come to the objective understanding that the parties had reached consensus ad item – a meeting of the minds – just like they had done on numerous other occasions." The court satisfied that the use of the thumbs-up emoji paralleled the prior abbreviated texts that the parties had used to confirm agreement ("looks good", "yup" and "ok"). This approach had become the established way the parties conducted their business relationship. Significance of the Thumbs-Up Emoji Justice Keene acknowledged the significance of a thumbs-up emoji as something analogous to a signature at paragraph [63]: "This court readily acknowledges that a thumbs-up emoji is a non-traditional means to "sign" a document but nevertheless under these circumstances this was a valid way to convey the two purposes of a "signature" – to identify the signator… and… to convey Achter's acceptance of the flax contract." In support of this, Justice Keene cited the dictionary.com definition of the thumbs-up emoji: "used to express assent, approval or encouragement in digital communications, especially in western cultures", confirming that the thumbs-up emoji is an "action in an electronic form" that can be used to allow express acceptance as contemplated under the Canadian Electronic Information and Documents Act 2000. Justice Keene dismissed the concerns raised by the defence that accepting the thumbs up emoji as a sign of agreement would "open the flood gates" to new interpretations of other emojis, such as the 'fist bump' and 'handshake'. Significantly, the Court held, "I agree this case is novel (at least in Skatchewan), but nevertheless this Court cannot (nor should it) attempt to stem the tide of technology and common usage." Ultimately the Court found in favour of SWT, holding that there was a valid contract between the parties and that the defendant breached by failing to deliver the flax. Keene J made a judgment against ALC for damages in the amount of $82,200.21 payable to SWT plus interest. What does this mean for Australia? This is a Canadian decision meaning that it is not precedent in Australia. However, an Australian court is well within its rights to consider this judgment when dealing with matters that come before it with similar circumstances. This judgment is a reminder that the common law of contract has and will continue to evolve to meet the everchanging realities and challenges of our day-to-day lives. As time has progressed, we have seen the courts transition from sole acceptance of the traditional "wet ink" signature, to electronic signatures. Electronic signatures are legally recognised in Australia and are provided for by the Electronic Transactions Act 1999 and the Electronic Transactions Regulations 2020. Companies are also now able to execute certain documents via electronic means under s 127 of the Corporations Act. We have also seen the rise of electronic platforms such as "DocuSign" used in commercial relationships to facilitate the efficient signing of contracts. Furthermore, this case highlights how courts will interpret the element of "intention" when determining whether a valid contract has been formed, confirming the long-standing principle that it is to be assessed objectively from the perspective of a reasonable and objective bystander who is aware of all the relevant facts. Overall, this is an interesting development for parties engaging in commerce via electronic means and an important reminder to all to be conscious of the fact that contracts have the potential to be agreed to by use of an emoji in today's digital age.

Published by Foez Dewan

29 August, 2023

Government

Venues NSW ats Kerri Kane: Venues NSW successful in overturning a District Court decision

The McCabes Government team are pleased to have assisted Venues NSW in successfully overturning a District Court decision holding it liable in negligence for injuries sustained by a patron who slipped and fell down a set of steps at a sports stadium; Venues NSW v Kane [2023] NSWCA 192 Principles The NSW Court of Appeal has reaffirmed the principles regarding the interpretation of the matters to be considered under sections5B of the Civil Liability Act 2002 (NSW). There is no obligation in negligence for an occupier to ensure that handrails are applied to all sets of steps in its premises. An occupier will not automatically be liable in negligence if its premises are not compliant with the Building Code of Australia (BCA). Background The plaintiff commenced proceedings in the District Court of NSW against Venues NSW (VNSW) alleging she suffered injuries when she fell down a set of steps at McDonald Jones Stadium in Newcastle on 6 July 2019. The plaintiff attended the Stadium with her husband and friend to watch an NRL rugby league match. It was raining heavily on the day. The plaintiff alleged she slipped and fell while descending a stepped aisle which comprised of concrete steps between rows of seating. The plaintiff sued VNSW in negligence alleging the stepped aisle constituted a "stairwell" under the BCA and therefore ought to have had a handrail. The plaintiff also alleged that the chamfered edge of the steps exceeded the allowed tolerance of 5mm. The Decision at Trial In finding in favour of the plaintiff, Norton DCJ found that: the steps constituted a "stairwell" and therefore were in breach of the BCA due to the absence of a handrail and the presence of a chamfered edge exceeding 5mm in length. even if handrails were not required, the use of them would have been good and reasonable practice given the stadium was open during periods of darkness, inclement weather, and used by a persons of varying levels of physical agility. VNSW ought to have arranged a risk assessment of the entire stadium, particularly the areas which provided access along stepped surfaces. installation of a handrail (or building stairs with the required chamfered edge) would not impose a serious burden on VNSW, even if required on other similar steps. Issues on Appeal VNSW appealed the decision of Norton DCJ. The primary challenge was to the trial judge's finding that VNSW was in breach of its duty of care in failing to install a handrail. In addition, VNSW challenged the findings that the steps met the definition of a 'stairwell' under the BCA as well as the trial judge's assessment of damages. Decision on Appeal The Court of Appeal found that primary judge's finding of breach of duty on the part of VNSW could not stand for multiple reasons, including that it proceeded on an erroneous construction of s5B of the Civil Liability Act 2002 and the obvious nature of the danger presented by the steps. As to the determination of breach of duty, the Court stressed that the trial judge was wrong to proceed on the basis that the Court simply has regard to each of the seven matters raised in ss 5B and 5C of the CLA and then express a conclusion as to breach. Instead, the Court emphasised that s 5B(1)(c) is a gateway, such that a plaintiff who fails to satisfy that provision cannot succeed, with the matters raised in s 5B(2) being mandatory considerations to be borne in mind when determining s 5B(1)(c). Ultimately, regarding the primary question of breach of duty, the Court found that: The stadium contained hazards which were utterly familiar and obvious to any spectator, namely, steps which needed to be navigated to get to and to leave from the tiered seating. While the trial judge considered the mandatory requirements required by s5B(2) of the CLA, those matters are not exhaustive and the trial judge failed to pay proper to attention to the fact that: the stadium had been certified as BCA compliant eight years before the incident; there was no evidence of previous falls resulting in injury despite the stairs being used by millions of spectators over the previous eight years; and the horizontal surfaces of the steps were highly slip resistant when wet. In light of the above, the Court of Appeal did not accept a reasonable person in the position of VNSW would not have installed a handrail along the stepped aisle. The burden of taking the complained of precautions includes to address similar risks of harm throughout the stadium, i.e. installing handrails on the other stepped aisles. This was a mandatory consideration under s5C(a) which was not properly taken into account. As to the question of BCA compliance, the Court of Appeal did not consider it necessary to make a firm conclusion of this issue given it did not find a breach of duty. The Court did however indicated it did not consider the stepped aisle would constitute a "stairway" under the BCA. The Court of Appeal also found that there was nothing in the trial judge's reasons explicitly connecting the risk assessment she considered VNSW ought to have carried out, with the installation of handrails on any of the aisles in the stadium and therefore could not lead to any findings regarding breach or causation. As to quantum, the Court of Appeal accepted that the trial judge erred in awarding the plaintiff a "buffer" of $10,000 for past economic loss in circumstances where there was no evidence of any loss of income. The Court of Appeal set aside the orders of the District Court and entered judgment for VNSW with costs. Why this case is important? The case confirms there is no obligation in negligence for owners and operators of public or private venues in NSW to have a handrail on every set of steps. It is also a welcome affirmation of the principles surrounding the assessment of breach of duty under s 5B and s 5C of the CLA, particularly in assessing whether precautions are required to be taken in response to hazards which are familiar and obvious to a reasonable person.

Published by Leighton Hawkes

18 August, 2023

Litigation and Dispute Resolution

Expert evidence – The letter of instruction and involvement of lawyers

The recent decision in New Aim Pty Ltd v Leung [2023] FCAFC 67 (New Aim) has provided some useful guidance in relation to briefing experts in litigation.