On 18 February 2014 judgment was handed down in Forty Two International Pty Limited v Barnes  FCA 85.
The judgment is relevant for the way it deals with issues such as misleading or deceptive conduct through non-disclosure or silence in the course of contractual negotiations, the application of clauses in a contract which seek to exclude liability for extra-contract representations (usually referred to as entire agreement clauses) and loss of opportunity damages.
Summary of the Facts
The applicants were Forty Two International Pty Limited (FTI), BlueFreeway Limited (BlueFreeway) and The Gang of 4 Pty Ltd (Gang of 4).The respondents were the individual founders of FTI and Gang of 4. FTI, a company that develops and sells digital marketing products, developed a software program called Campaign Master. In early 2006 it established a business connection with Campaign Master (UK) Limited (CMUK) for the distribution of Campaign Master in the UK.
In May 2006 BlueFreeway expressed an interest in acquiring FTI and Gang of 4, and in October 2006 a Share Purchase Agreement (SPA) was executed. The sale price under the SPA was calculated by reference to three amounts, which included an ‘Additional Payment’ and an ‘Earn Out Payment’ which were calculated by reference to earnings before interest and tax targets for FTI for the 2007-2009 financial years (EBIT 2007). The payment was to be made in shares in BlueFreeway and cash.
The respondents also entered into service agreements with FTI and Gang of 4 at the time the SPA was signed by which they continued employment as kjoint general managers of FTI and Gang of 4.
In May 2007 BlueFreeway granted to CMUK a licence to exploit the Campaihn Master software in the UK, Finland and India, which provided for payment by CMUK to FTI of a licence fee of $4.1 million. The respondents procured the financial means by which CMUK obtained funding to meet the licence fee payments, but failed to disclose to the applicants their involvement in the financing.
In late 2007, due to their concerns over the future of FTI and Campaign Master under BlueFreeway’s management, the respondents negotiated an Exit Agreement with BlueFreeway to leave FTI. The agreement provided for the respondents’ resignations, the inclusion of the licence fee in the calculation of EBIT 2007 and the provision of a $16 million payment to the respondents conditional on FTI achieving EBIT 2007. FTI succeeded in achieving EBIT 2007, and in November 2007 BlueFreeway made the $16 million payment to the respondents.
BlueFreeway subsequently became aware of the respondents’ involvement in the CMUK finding arrangements and perceived an opportunity to claw back the exit payments made to
the respondents. The applicants alleged that, but for the involvement of the respondents in relation to the CMUK financing, and but for their failure to disclose that involvement:
BlueFreeway would not have entered into the Exit Agreement; The SPA would have remained enforceable according to its terms; and The entitlements of the respondents under the SPA would not have included the Additional Payment and the $16m would not have been paid.
The applicants claimed that BlueFreeway was entitled to damages for the respondents’ conduct in connection with the SPA. Their claims raised the following causes of action: breach of contract, breach of directors’ common law fiduciary duties, breach of directors’ statutory duties under the Corporations Act 2001 (Cth) (Corporations Act) and misleading and deceptive conduct under s 42 of the Fair Trading Act 1987 (NSW) (FT Act).
Breach of contract
The applicants argued that a term requiring the respondents ‘to disclose to BlueFreeway all information known to them which might become relevant to the calculation’ of the EBIT 2007 should be implied into the SPA and the Exit Agreement.
Implied term in the SPA
The Court found that the term should be implied in the SPA. In coming to this conclusion Griffiths J considered whether the term was necessary to be implied for the ‘business efficacy’ of the SPA. His Honour was of the opinion that an officious bystander would consider that the respondents were obliged under the SPA to disclose their involvement in the financing to BlueFreeway, due to their ‘large degree of independence’ in the running of FTI’s business and their ‘considerably greater’ access to FTI’s financial records than BlueFreeway.
Griffiths J also emphasised that the implied term would ‘complement’ the express terms in the SPA, rather than operate as a ‘freestanding obligation’. His Honour’s reasoning was that the addition of the implied term to the respondents’ existing obligation to provide BlueFreeway with FTI’s monthly sales reports would further assist in the calculation of EBIT 2007.
In addition, Griffiths J rejected the respondents’ argument that the phrase ‘might become relevant’ in the implied term was vague and uncertain. In His Honour’s view the phrase did not prevent the implied term from being capable of clear expression and being reasonably certain in its operation. Given that the value of EBIT 2007 was dependent on the accumulation of financial information leading up to the time of its calculation, His Honour said that information which was known to the respondents and ‘might become relevant’ simply reflected the nature of the calculation process.
Finally, the Court rejected the respondents’ argument that the implied term was inconsistent with the entire agreement provision in the SPA. Griffiths J cited Hope v R.C.A Photophone of Australia Pty Ltd (1937) 59 CLR 348 in holding that such a provision does not operate to exclude the implication of specific terms that give business efficacy to a contract, unless the provision expressly refers to implied terms. The entire agreement clause in the SPA was not of this nature.
Implied term in the Exit Agreement
In contrast to the operation of the implied term in the SPA, Griffiths J was of the view that the term was not essential to give the Exit Agreement business efficacy. As such, His Honour held that the term should not be implied into the Exit Agreement.
Bre ac h of dire c tors’ fiduc ia ry a nd sta tutory d uties
The applicants claimed that BlueFreeway was entitled to damages for the respondents’ breaches of various fiduciary and statutory duties owed to FTI, including the duty under s 182 of the Corporations Act not to improperly use their position to gain an advantage for themselves or someone else. The applicants also contended that the duties should extend to circumstances where, although FTI gained a benefit by receiving the licence fee, that benefit was at the expense of an increased obligation on the part of BlueFreeway to provide the Additional Payment to the respondents.
The Court rejected these claims. Griffiths J held that, because the respondents were directors of FTI and not BlueFreeway, they only owed fiduciary and statutory duties to FTI not to BlueFreeway. His Honour also emphasised the fact that although BlueFreeway suffered an arguable loss as a result of FTI receiving the licence fee, FTI itself did not.
Misleading or deceptive conduct
The applicants also argued that the respondents made two representations that amounted to misleading or deceptive conduct in breach of s 42 of the FT Act. In determining this issue, Griffiths J applied the two-step analysis described by Gordon J in Australian Competition and Consumer Commission v Telstra Corporation Ltd (2007) 244 ALR 470. His Honour’s approach involved asking two question: first, ‘whether each or any of the pleaded representations is conveyed by the particular events complained of ’, and second, ‘whether the representations conveyed are false, misleading or deceptive or likely to mislead or deceive’.
The applicants contended that the respondents’ false representation that CMUK itself had the capacity to pay the licence fee to FTI was misleading or deceptive conduct.
Griffiths J was of the view that the evidence presented to the Court clearly established that the respondents did make representations of this kind at various times. However, His Honour did not believe that the respondents intended to procure finance to permit the licence fee transaction when they made those representations. His Honour’s finding was based on evidence suggesting that both parties believed in the existence of an external financier to CMUK when the representations were made.
As such, Griffiths J held that the representation was not misleading or deceptive under s 42 of the FT Act.
The applicants also argued that the respondents’ act of procuring and guaranteeing payment of the licence fee was misleading or deceptive conduct, because it represented to the applicants that CMUK itself had paid the licence fee to FTI. The Court therefore faced the task of assessing whether the respondents’ non-disclosure (or silence) of their involvement in the financing amounted to misleading or deceptive conduct. In determining this issue Griffiths J applied the relevant legal principles addressed by French CJ and Kiefel J in Miller & Associates Insurance Broking Pty Ltd v BMW Australia Finance Ltd (2010) 241 CLR 357 in addition to the two-step process in his analysis.
Griffiths J first approached the question of whether the applicants were ever aware of the respondents’ roles as financiers, and upon consideration of the evidence formed the view that they were not. Second, His Honour assessed the respondents’ conduct from an objective point of view, and found that it was misleading or deceptive.
In coming to his decision His Honour made reference to the Courts’ decisions in Hornsby Building Information Centre Pty Ltd v Sydney Building Information Centre Ltd (1978) 140 CLR 216 and Rhone-Poulenc Agrochimie SA v UIM Chemical Services Pty (Ltd) (1986) 12 FCR 477, and held that an ‘intention to mislead or deceive is not a necessary ingredient of liability for provisions such as s 42 of the FT Act’. As such he did not consider it necessary to determine whether or not the respondents intended to mislead or deceive the applicants through their non-disclosure.
His Honour took into account the respondents secretly financing the licence fee transaction, their ‘major conflict of interest’ in standing to gain a ‘substantial personal financial advantage by having the transaction included in the EBIT for 2007’, as well as BlueFreeway’s ‘reasonable expectation’ that the respondents would disclose their involvement in the financing in forming his view that the respondents’ non-disclosure in the circumstances of the case did amount to misleading or deceptive conduct.
As a point of interest, the respondents argued that because the second representation was closely connected to the first representation, and because the first representation was not misleading or deceptive, the second representation was also not misleading or deceptive. Griffiths J rejected this submission, and held that the nature of an earlier representation does not determine the nature of a later representation of which it is a subset. In contrast, His Honour held that the earlier representation could be used to provide important context to the overall conduct of the later representation, and assist in the determination of whether it is misleading or deceptive.
Reliance and causation?
One of the respondents’ contentions was that the applicants had not relied upon the respondents’ conduct of non-disclosure and/or there was no causal link between that conduct and the loss suffered by the applicants.
Upon considering the evidence presented to the Court, His Honour formed the view that the applicants did rely on the conduct and that there was a causal link between that conduct and any loss suffered by BlueFreeway so as to give rise to an award of damages to BlueFreeway. His Honour put special emphasis on the evidence relating from the three directors of BlueFreeway that, had they known of the nature and extent of the respondents’
involvement in financing the transaction, they would not have voted in favour of BlueFreeway executing the Exit Agreement.
In addition, citing the High Court in Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304 at , Griffith J held that the entire agreement clause in the Exit Agreement did not stand in the way of BlueFreeway being awarded damages for misleading or deceptive conduct. His Honour held that the question of whether conduct is misleading or deceptive is a question of fact to be decided by reference to all of the relevant considerations, and that the entire agreement clause was only one of those considerations.
There were two bases (detailed below) to the applicants’ claims for damages for the respondents’ breach of contract and contravention of s 42 of the FT Act.
The applicants’ primary claim for damages was based on the hypothetical situation where , if the respondents had disclosed their involvement in the financing, no Exit Agreement would have been executed, the SPA would have stayed on foot and the $16 million would not have been paid. The applicants relied on the actual results of FTI’s 2008 and 2009 EBIT, and contended that under this hypothetical situation the EBIT target of $2.5 million in 2007 would not have been reached and the Additional Payment would not have been made.
However, upon consideration of the evidence presented to the Court, Griffiths J formed the view that even if the respondents had made disclosure, the parties would still have negotiated an Exit Agreement. His Honour’s findings turned on the evidence which showed that the respondents were, regardless of their involvement in the financing, eager to leave FTI due to their concerns for FTI’s future under BlueFreeway’s management. Accordingly Griffiths J considered that the alternative claim was more likely to arise than the primary claim for damages.
Alternative claim and loss of opportunity damages
The applicants’ alternative claim for damages was based on the hypothetical situation where, if the respondents had disclosed their involvement in the financing, the parties would still have negotiated an Exit Agreement. The issue before the Court was whether the respondents’ failure to disclose resulted in the applicants’ loss of opportunity to negotiate a substantially lesser figure than the $16 million paid to the respondents.
In determining this issue the Court relied on the High Court decision in Sellars v Adelaide Petroleum NL (1994) 179 CLR 332. In agreement with the majority in Sellars, Griffiths J held that the applicants were not required to show, on the balance of probabilities, that there was some prospect of deriving a benefit from the opportunity which is lost. Rather, His Honour held that it was sufficient for the applicants to show by reference to degrees of possibilities and probabilities that there were some prospects of deriving that benefit. In Griffith J’s view the evidence clearly showed that if the applicants had not lost its opportunity to renegotiate an Exit Agreement, there was a prospect of them negotiating a termination payment less than $16 million.
Griffiths J then considered the issue of causation. Applying the New South Wales Court of Appeal decision in Daniels v Anderson (1995) 37 NSWLR 438 at 530-1, His Honour held that the determination of causation ‘should be approached upon the basis of proof upon the balance of probabilities’. In the Court’s view the evidence clearly established a causal link between the respondents’ conduct and BlueFreeway’s lost opportunity to negotiate a lower termination payment.
Finally the Court turned to the issue of valuing the lost opportunity. Citing Daniels again Griffiths J held that the question of whether the lost opportunity had a value is to be based on the degree of ‘possibilities or probabilities of the case’. His Honour held that the Court is ‘required to offer a sound or informed basis for the assessment of its value of the loss…aided by relevant evidence’ or ‘in the absence of such evidence…with the materials before it.’ His Honour, referring to previous case law, also emphasised the point that ‘while a percentage figure can be used in calculating the amount of an award of damages for loss of an opportunity, the Court is also entitled to take a global approach and award a lump sum’.
In determining the value of the applicants’ lost opportunity, the Court considered a variety of factors including the respondents’ determination to leave FTI for a termination payment of
$16 million, the majority of directors giving evidence that they would not have contracted for a $16 million payment and the uncertainty behind how the other directors would have negotiated for the termination payment if renegotiations had taken place. Griffiths J, taking into account all the materials before the Court, concluded that there was a ‘real and non- speculative chance’ that BlueFreeway would have negotiated a payout of less than, but not substantially less than, $16 million. As such, His Honour valued the lost opportunity at $2 million.
The Federal Court decision is significant for clarifying the operation of the law behind implied terms in contract, misleading or deceptive conduct through non-disclosure or silence and loss of opportunity damages.
For companies engaging in contracts involving entire agreement clauses, the Court’s approach is particularly relevant. The decision provides the following takeaways:
It re-confirms the traditional approach that courts may imply a term into a contract, if it gives ‘business efficacy’ to the contract and complements the express terms within the contract;
Entire agreement clauses do not operate to automatically exclude the implication of terms that otherwise give business efficacy to a contract, unless the provisions expressly refer to the exclusion of implied terms. Entire agreement provisions need to be carefully drafted to expressly exclude the implication of terms into the contract (other than those which cannot, by law, be excluded);
Entire agreement clauses do not operate to exclude representations amounting to misleading or deceptive made external to the written contract. The question of whether conduct is misleading or deceptive is a question of fact to be decided by reference to all of the relevant considerations. Entire agreement provisions are not a universal panacea;
It is unlikely that non-disclosure or silence will amount to misleading or deceptive conduct unless, in the particular circumstances, there is a reasonable expectation that a relevant factor will be disclosed if it exists and is known only to the other party;
For the purpose of loss of opportunity damages, a possible prospect of deriving a benefit is sufficient to show that an opportunity has been lost;
The standard of proof for causation between a lost opportunity and damages suffered is the balance of probabilities;
The value of a lost opportunity will be based and calculated on the degree of ‘possibilities or probabilities of the case’; and
Each case will be decided on its own facts.