Litigation and Dispute Resolution

In-N-Out of court: Trade mark wars

8 March, 2021

In March 2020 the Full Federal Court, in a considerably lengthy judgement, dismissed (2-1) an appeal by the former directors of Storm Financial Pty Ltd (Storm), which infamously collapsed in the wake of the Global Financial Crisis in the second half of 2008. On appeal, the Full Court reconfirmed that the former directors had breached their duties as directors under s 180(1) of the Act, in particular because they had caused Storm to contravene the then s 945A of the Corporations Act 2001 (the Act) which, if discovered, posed a threat to the corporation’s very existence.

Section 945A required a reasonable basis for financial product advice, characterised as “personal advice”, given to the client. That section has since been repealed and replaced with the obligation to act in the best interests of the client in relation to the provision of personal advice (section 961B of the Act).

Our previous article in relation to the first instance decision of Edelman J, ASIC v Cassimatis (No 8) [2016] FCA 1023, can be found here.

The “primary basis” for the appeal was that the trial judge misapplied s 180(1) of the Act and the “secondary basis” was that the primary judge erred in finding that Strom contravened s 945A. This article will only consider the primary contention that s 180(1) was misapplied.

Was section 180(1) misapplied, generally?

Section 180(1) of the Act sets an objective standard of care and diligence that all directors and other officers of corporations must meet when exercising a power or discharging a duty. In the words of Greenwood J at [194]:

“The objective standard is measured by the degree of care and diligence that a reasonable person would exercise if they were a director, in the corporation’s circumstances, occupying the office held by the appellants and having the same responsibilities as the appellants.”

Storm was engaged in the business of providing financial product advice, characterised as “personal advice”, to retail investors or retail clients. This had the effect of imposing on Storm the obligations required to be discharged under s 945A of the Act (now repealed). That section cast a requirement upon the financial advice providing entity to have “a reasonable basis for the advice given to the client”.

The Court noted that Mr and Mrs Cassimatis, as directors of Storm, held and maintained a high degree of control of the company, which the primary judge described as “extraordinary”, and which ranged from the highest level of executive decisions to even mundane day to day matters. This meant that as directors the scope of Mr and Mrs Cassimatis’ responsibilities under s 180(1)(b) was significantly widened, and in the circumstances, this had implications as to whether they had discharged their duties under s 180(1).

Important to the outcome of this case is the reference in the terms of s 180(1) to a reasonable person having “the same responsibilities” as the director whose conduct is impugned, as on the facts, the Court concluded that Mr and Mrs Cassimatis’ extensive involvement in all aspects of the company’s operations meant they had equally extensive responsibilities. This lead to the finding that a reasonable director in the same circumstances as Mr and Mrs Cassimatis would have been aware that inappropriate advice was likely being given to financially vulnerable clients (who were retired or approaching retirement), giving rise to contraventions by Storm of s 945A of the Act.

It was further found that a reasonable director, with the responsibilities of the directors of Storm Financial, occupying the same position, would have taken “some alleviating precautions to prevent the giving of that advice, so at guard against the devasting consequences for investors in the vulnerable class”. However, Mr and Mrs Cassimatis failed to take any such precautions.

By failing to take precautions to prevent the giving of inappropriate advice to financially vulnerable clients, the directors ignored what was viewed as a reasonably foreseeable risk of serious harm to Storm’s interests arising from likely contraventions of s 945A of the Act, including “potential loss of its AFSL and potential harm in the form of a threat to the company’s “very existence”.

Thus, the directors fell short of their objective obligations under s 180(1) through their conduct, and no error was made by the primary judge.

The majority (Greenwood and Thawley JJ) rejected the notion that the above line of reasoning was in error as it involved a “stepping stone approach” or “back-door means for visiting accessorial liability on a director”. They emphasised that Mr and Mrs Cassimatis’ contravention of s 180(1) did not arise simply because they caused Storm to contravene s 945A of the Act. Rather, properly characterised, it was the direct failure of Mr and Mrs Cassimatis to meet the standard required of them by s 180(1) that exposed the corporation to contravention of s 945A.

Whether as sole shareholders Mr and Mrs Cassimatis could validate their breaches of directors’ duties

Mr and Mrs Cassimatis also argued that the interests of the company were wrongly identified by the primary judge in an “abstract” and “theoretical” rather than in a “subjective and factual” manner. That is, Mr and Mrs Cassimatis argued that as sole shareholders and directors of Storm, they were entitled to determine what the interests of Storm were, and in particular they were entitled to prioritise the provision of advice in line with the Storm business model over “the risk of adverse action being taken by ASIC or disgruntled investors”. They argued if the Court accepted this characterisation of the interests of Storm, then no breach of s 180(1) could be found.

The majority (Greenwood and Thawley JJ)dismissed this line of argument observing that the burden cast by s 180(1) is of normative character, being a matter of public concern, not just private rights. Their Honours further held as follows:

“shareholders cannot sanction, ratify or approve, qua themselves as directors, their own conduct in contravention of s 180. Nor can they release themselves from such a contravention. That follows because of the normative, objective, irreducible standard of care and diligence directors must live up to, as adopted by the Parliament according to the text of the section …” (at [196] per Greenwood J)

“… it is step too far to say that 100% shareholders can approve their own contravention of s 180(1) as directors. Shareholders cannot release directors from the statutory duties imposed by ss 180, 181 and 182” (at [472] per Thawley J).

Key takeaways

  • A director must always engage with their powers and duties with the degree of care and diligence that a reasonable person would exercise if they were a director of the corporation, in the corporation’s circumstances and occupying the office held by the director, and having the same responsibilities within the corporation as that director.
  • It does not necessarily follow from a corporation contravening the law, even where the contravention may have extremely serious consequences for the corporation, that a director has breached his or her duty under s 180(1). The fact of the contravention will be relevant as part of the factual matrix to be considered. However, all the individual circumstances must be taken into account, including the responsibilities of and degree of control over the corporation’s affairs exercised by the director.
  • The shareholders of a corporation cannot validate breaches of the above duty of care and diligence prescribed by s 180(1) of the Act. The standard is objective and mandated.
  • As an artificial person, a corporation does have interests beyond simply those of its shareholders, including its reputation as well as “its continued existence and its interest in pursuing lawful activity”.

McCabes Litigation and Dispute Resolution and Corporate teams have significant knowledge and experience in the area of directors’ duties. Do not hesitate to contact us if we may be of assistance.

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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
29 August, 2023

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.

Published by Justin Pennay
10 August, 2023