Litigation and Dispute Resolution

High Court to consider enforceability of promise that lessee would be ‘looked after at renewal time’

29 March, 2016

A lightning rod for the attention of commercial lawyers and their clients alike is when proceedings concerning directors’ duties goes to the High Court. The issue in question? Limitation periods. Specifically, at what point do they start ticking? If, for example, directors pass a resolution that would be in breach of their duties, but wait to pass a subsequent resolution that formalises the breach of duty, when has the breach occurred?

This question becomes all the more critical when the first resolution is outside the limitation period, but the second resolution is within it. Is the second resolution just an innocent formalisation of the breach, or does the invalidity of the first resolution reach out to poison the second? The High Court has (unanimously) provided us with the answer.

The tale of two meetings

Australian Property Custodian Holdings Ltd (APCHL) created a unit trust, called the Prime Retirement and Aged Care Property Trust (Trust), which was in the business of retirement villages and aged care facilities. The Trust was registered with ASIC as a managed investment scheme, and the trust deed became its constitution. APCHL managed the Trust, and by 2006 was moving towards listing the Trust on the ASX. The Trust had gross assets of approximately $568 million, and net assets of approximately $212 million.

The directors of APCHL sought to make amendments to the Trust’s constitution without consulting its members. The amendments proposed were various fees of 2.5% of the gross asset value of the Trust to be paid to APCHL upon the listing of the Trust on the ASX and the removal of APCHL as the responsible entity of the Trust. No corresponding benefit would be introduced for the members of the Trust to account for these fees.

The constitution provided that APCHL could amend the constitution of the Trust. However, the relevant clause read that it was subject to a requirement that any amendment complied with the Corporations Act 2001 (Cth) and that any variation “shall not be in favour of or result in any benefit to APCHL”.

At a board meeting on 19 July 2006, the directors of APCHL unanimously approved the amendments. The deed of variation was executed, but lodgement with ASIC was held back until it could be lodged with an amended product disclosure statement. On a further board meeting on 21 August 2006, the directors resolved to lodge the deed of variation and product disclosure statement with ASIC. The directors resolved to list the trust in June 2007, and APCHL was paid a listing fee of approximately $33 million.

The differing views of the Federal Court

ASIC subsequently investigated and sought to bring proceedings against the directors of APCHL for a breach of numerous directors’ duties, including failing to exercise reasonable care, failing to act in the best interests of the members of the Trust, making improper use of their position, and failing to comply with the Trust’s constitution.

However, by the time ASIC commenced proceedings, six years had passed from 19 July 2006, and accordingly the limitation period had expired. However, six years had not passed from 21 August 2006. Accordingly, the breaches ASIC relied on did not arise out of the resolution to make the amendments. Rather, ASIC relied on the resolution to lodge  the amended constitution, and pay the fees to APCHL in compliance with it, as giving rise to the breach of directors’ duties.

At first instance, the Federal Court of Australia found for ASIC. The court held that the resolution to amend  the constitution was invalid, and therefore the resolution to lodge  the constitution and pay the fees, was based on an invalid amendment and was accordingly a breach of the directors’ duties. The Court ordered a series of declarations against the directors, that they be disqualified from managing corporations for various periods of time, and that they pay pecuniary penalties.

This decision was appealed to the Full Court of the Federal Court. The Full Court agreed that the resolution to amend the constitution was invalid, but found that the amendments had “interim validity”, in that they were valid once lodged with ASIC until they were set aside. The Full Court’s approach gave the amendments a peculiar status at law: the lodging of the constitution retroactively validated the amendments unless and until they were set aside. The Full Court accordingly reversed the decision of the Federal Court.

The High Court rejects “interim validity”

On appeal to the High Court of Australia, the Full Court’s decision was unanimously overturned. The High Court found that the amendments were invalid: they had to be done in accordance with the Corporations Act (requiring a special resolution of members), or not contain a change that would adversely affect the members. Neither was the case. The Court also rejected the idea of “interim validity”, stating that it would have “considerable tension with the structure of the Corporations Act”.

The High Court reiterated that, because the amendments were invalid, it follows that the resolutions to lodge the amendments and make the payments were also invalid. Accordingly, the directors had  breached their duties and the majority of the declarations made by the Federal Court were to be restored.

However, ASIC did not seek that the High Court reinstate any of the declarations with respect to one of the directors. This was because he was appointed after the first board meeting in July 2006 (when the amendments were approved), but before the second board meeting in August 2006 (when the amendments were agreed to be lodged). This is notwithstanding the fact that the Federal Court was critical of this director’s actions, stating that if he:

“had given proper consideration to the matters before him then he should have understood their deleterious effects, APCHL’s conflict of interest, and the lack of any countervailing benefit to the members for the imposition of substantial additional fees”.

Accordingly, the parties conducting the proceedings saw it as relevant that this director was not appointed at the time the first resolution was passed. We do not know if the High Court would have agreed.

Take away points

The decision of the High Court makes it clear that a resolution of directors that does nothing more than formalise an earlier resolution that is a breach of duty, is itself a breach. That is, formalising an invalid resolution is a breach of directors’ duties. This may sound like an academic distinction, but when a limitation period ends between these two dates, it can make all the difference.

However, because it is the first resolution that invalidates the second, it may ultimately be relevant if a director was not appointed at the time of that first resolution. Unfortunately, we do not have an answer to this question, but incoming directors would be prudent to heed the words of the Federal Court and give “proper consideration to the matters before them” so as to work out if they can glean any “deleterious effects”.

McCabes has experience in advising its clients on a wide range of Corporations Act  disputes, including disputes concerning directors’ duties and the rights of shareholders.

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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 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
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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. 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Published by Leighton Hawkes
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