The Court refused to impose on unitholders an obligation to act rationally, reasonably and fairly, or to give reasons, in exercising their discretion under an express power in the unitholders deed to exclude another unitholder (and order the redemption of his units for nominal value). This case illustrates the unwillingness of the Courts to impose a duty of good faith in circumstances where it is contrary to broad express powers that the parties have agreed to. Contracting parties should consider carefully whether broad powers and discretions should be subject to any good faith or reasonableness requirements and if so, ensure that such requirements are clearly and expressly recorded.
Dr Arhanghelschi and four other radiologists conducted a radiology practice in Ballarat through a unit trust known as the Base Imaging Group Trust (Trust). The trustee of the family trust of each of the doctors (in Dr Arhanghelschi’s case, Cladwyn Pty Ltd (Cladwyn)) held 20% of the units in the Trust and each of the doctors was also a shareholder and director of Base Imaging Group Pty Limited (BIG) which was the trustee of the Trust. The other unitholders gave notice to Dr Arhanghelschi under clause 6.2(c) of the Unitholders’ Deed which gave a majority of the unitholders the discretion to exclude a particular unitholder and procure BIG to redeem, cancel or purchase that unitholder’s units for $1.00 per unit. The majority unitholders gave no reason for this action, but it was said in evidence that Dr Arhanghelschi was unapproachable, late to work, and less committed than the other doctors.
In dismissing Cladwyn’s claims for damages for repudiation of the Unitholders' Deed, Ferguson J found that:
- the Unitholders’ Deed must be construed objectively to ascertain the intention of the parties as expressed. While evidence of surrounding circumstances can be used to resolve ambiguity, it cannot be used to contradict the language of the clause when it has a plain meaning;
- the words in clause 6.2(c) were clear and unambiguous and did not require reasons to be given by the majority unitholders;
- the lack of an adjective such as ‘absolute’ did not affect how the discretion may be exercised. On the contrary, if the parties intended the discretion to be limited, then words of limitation would have been used;
- a concurrent obligation to conduct the business in a proper and efficient manner did not qualify the exercise of the rights under clause 6.2(c), and did not mean that words such as “rationally, reasonably and fairly considering the interests of the parties” should be read in to clause 6.2(c); and
- the terms of clause 6.2(c) clearly intend that a majority of unitholders can act legitimately in their own self-interest without giving reasons. To imply a duty to act in good faith would unjustifiably erode the broad power that the unitholders chose to give to the majority unitholders.
Ferguson J also found that the conduct of BIG in complying with a request by the majority unitholders to ask Cladwyn to relinquish its units was not oppressive. Objectively, nothing had occurred which was commercially unfair to Dr Arhanghelschi. He had chosen to enter a business governed by a Unitholders’ Deed which specifically provided for situations like the current one to be dealt with by majority and for units to be redeemed for nominal value.
See the case.