Illegal contracts and other circumstances where the Building and Construction Industry Security of Payment Act 1999 (NSW) will be ineffective

12 October, 2015

Often in the early stages of establishing a company resources are pooled and liabilities are met equally. As a result, directors agree to divide the company in half with each getting 50% of the shares with a view to working together amicably for the foreseeable future. However, as the business matures disputes can break out and because of the 50/50 structure all it takes is for one director to put their foot down and the company is placed into deadlock. So, what can shareholders do in this situation?

Previously, we considered how an action for statutory oppression under section 232 of the Corporations Act 2001 (Cth) (the Act) could play out in the context of a dispute within a family run business, and that article can be found here.

In this week’s article, we will continue our focus on statutory oppression but slightly shift our focus to a different context in which oppression is often claimed. Namely, when two (or potentially more) directors, who are also both equal shareholders with equal voting rights (‘further referred to as the 50/50 company’) have a dispute which leaves the company in deadlock.

In this context, it is not uncommon for directors to assert that the other director (i.e. the other 50% shareholder) is engaging in oppressive conduct contrary to section 232 of the Act and that the Court should make appropriate orders under section 233 to bring the oppressive conduct to an end. The question then, is how would a Court deal with oppressive conduct in the context of a deadlock in a 50/50 company?

Well firstly, can we talk about it?

Before we dive into the case law, it’s important to keep in mind that alternative dispute resolution may be helpful and, in some instances, highly effective in resolving on-going deadlock in a commercial and cost-effective manner, as opposed to outright litigation.

Often in these circumstances, parties may not be willing to talk to each other but given the opportunity to come to the table and air out their grievances in a controlled manner, the parties may be able to solve their dispute without costly litigation, keeping in mind not only the cost to business but also the personal cost in failing to break the on-going deadlock.

How would a Court deal with deadlock and a claim of statutory oppression pursuant to Section 232?

Assuming negotiations have proven inconclusive and parties cannot reach an agreement, the next likely step is that the parties proceed to Court to assert that the company’s affairs are being conducted in a way which is either:

(1) contrary to the interests of the members as a whole (s 232(d)) or

(2) oppressive, or unfairly prejudicial to, or unfairly discriminatory against, a member or members (s 232(e))

As noted in the previous article concerning statutory oppression, section 232(d) and section 232(e) operate distinctively from each other¹ and for the purposes of this article we will remain focused on ‘oppressive’ conduct under s 232(e) as it relates to a 50/50 company stuck in deadlock.

Difficulty in oppression proceedings and 50/50 companies

Generally, the conduct which section 232 is dedicated towards is behaviour where the unfairness results from the abuse of majority power or control.² Therefore, in the context of a 50/50 company, both shareholders are not necessarily the majority or the minority so there is a question as to whether two people of “equal strength of character” can in fact engage in oppressive conduct against each other since neither holds a majority.

However, after a series of decisions³ the principle which emerged was stated in Munstermann v Rayward ⁴ namely, that:

A shareholder of 50 per cent of the shares in a company can seek relief for oppressive conduct because they do not have control in the form of power to prevent the oppression, particularly where individual strong arm tactics are used (Patterson v Humfrey [2014] WASC 446 at [52]-[53] (Le Miere J). [22]

Justice Stevenson’s statement of principle does not on the face of it preclude findings of oppression when neither party can be attributed with engaging in “strong arm-tactics”. In fact, in Beaumont v Peel (2019) Justice Black recognised that when a deadlock leaves the board unable to conduct its affairs with the appropriate decision-making capacity, this may still constitute oppression in the absence of fault on the part of any party.⁵

The breakdown between the parties has to be more than transient, for instance, a ‘breakdown in communications does not by itself give rise to an inference of oppressive conduct on the part of either of the joint directors’⁶ and neither will the breakdown of the relationship between the parties without a consequential inability to manage the company’s affairs in a proper manner.

So where does that leave us?

Ultimately, what constitutes oppression is broad but as a general rule the Court must be satisfied that ‘objectively in the eyes of a commercial bystander, there has been unfairness, namely conduct that is so unfair that reasonable directors would consider the matter would not have thought the decision fair’.⁷

What will constitute oppressive conduct will be determined on a case-by-case basis given the differing circumstances which may lead up to the deadlock in a 50/50 company, and this in turn may impact the relief that the Court would be willing to grant in any claim involving oppression.

For example, in Catalano v Managing Australia Destinations Pty Ltd ⁸ which involved a company in deadlock, the Court determined that both parties had engaged in mutually oppressive conduct and that if the parties could not reach a commercial resolution, a liquidator would be appointed.

In contrast, in Munstermann v Rayward the Court ordered that the director, which was found to have caused the deadlock, should sell his shares to the other shareholder at their fair market value. The director’s conduct included bullying, attempting to increase his own salary and reducing the salary of the other director, refusing to authorise financial statements and budgets and then resigning his directorship.

What if neither of us are at fault, can oppression still be made out?

Sometimes the relationship between directors may simply just breakdown which could result in a deadlock. In these circumstances, is it necessary to show fault on the part of either director to be successful in a claim of oppression?

The short answer is no. In Beaumont v Peel ⁹ the Court agreed to make consent orders to reconstitute a company board to cure a deadlock in absence of any identifiable fault by either party other than a breakdown of the relationship. The Court noted that:

“where the board is in deadlock, unable to conduct its affairs with appropriate decision-making by the board, and with no apparent means of resolving that deadlock. That does not require any finding of fault on the part of [either party] … a breakdown of the relationship is not necessarily sufficient to establish oppression, but here, as I have noted, the breakdown of the relationship is combined with a consequential inability to manage the company’s affair in a proper manner”.¹⁰

Therefore, in the absence of any fault by either party the Court can make orders which cure the deadlock in order to facilitate the company returning to normal operations. In Beaumont that meant ordering the board to be reconstructed but if this order is inappropriate the Court may also order the company to be wound as an option of ‘last resort’ pursuant to section 233(1) of the Act, along with a whole suite of orders contained in section 233(1).

Moving forward

The key takeaway is that oppression is capable of being alleged by a shareholder in a 50/50 company but what will constitute oppressive conduct will vary depending on the facts of the given situation and what conduct gave rise to the deadlock.

We at McCabes have extensive experience in dealing with corporate oppression claims and regularly advise on either future proofing company constitutions or shareholder agreements to reduce the likelihood of deadlock.

¹ Turnbull v National Roads and Motorists Association Ltd (2004) 50 ACSR 44 [34].
² Wayde v NSW Rugby League (1985) 180 CLR 459 [472].
³ Campbell v Backoffice Investments Pty Ltd [2008] NSWCA 95 [433]; Tomanovic v Global Mortgage Equity Corporation Pty Ltd [2011] NSWCA 104 [321] (Young JA); Patterson v Humfrey [2014] WASC 446; 103 ACSR 152.
⁴ Munstermann v Rayward [2017] NSWSC 133 [22].
⁵ Beaumont v Peel [2018] NSWSC 95 [13].
⁶ Patterson v Humfrey [2014] WASC 446; 103 ACSR 152 [207].
⁷ Morgan v 45 Flers Avenue (1986) 10 ACLR 692 [704].
⁸ Catalano v Managing Australia Destinations Pty Ltd [2014] FCAFC 55.
⁹ J E Beaumont v D M Peel [2018] NSWSC 95.
¹⁰ J E Beaumont v D M Peel [2018] NSWSC 95 [13].

published by

Andrew Lacey

Managing Principal

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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