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Cases Update - October/November 2017
- Diverting business opportunities - when will a fiduciary relationship be qualified? DTM Constructions Pty Ltd trading as QA Developments v Poole  QSC 210
- When will a court enforce a contract entered into for an “illegal purpose”?: REW08 Projects Pty Ltd v PNC Lifestyle Investments Pty Ltd  NSWCA 269
- NSW Supreme Court considers jurisdictional issues in an online contract: Gonzalez v Agoda Company Pty Ltd  NSWSC 1133
This case provides some useful analysis of when a fiduciary relationship between a company and its directors who also have interests in competing businesses might be qualified so that the duty to avoid conflicts of interest won’t apply. Where the directors in this case diverted business opportunities to their competing businesses without declaring those interests (and actively concealed them), the fiduciary relationship was found not to be qualified in this way.
DTM Constructions Pty Ltd (trading as QA Developments) (QA) used a company owned by Mr Poole and Mr Hopkins to market and sell its home packages. Mr Poole and Mr Hopkins later became shareholders of QA and then a director (in the case of Mr Poole) and an officer (in the case of Mr Hopkins who became so involved in the operations of QA that he became an officer) . Mr Poole and Mr Hopkins subsequently established a number of other businesses which QA alleged entered into direct competition with QA (Competing Businesses).
QA argued that, by diverting business opportunities to the Competing Businesses, Mr Poole and Mr Hopkins breached their statutory duties under the Corporations Act 2001 (Cth) and their general law fiduciary duties owed to QA. In defending these claims, Mr Poole and Mr Hopkins argued that:
- this case fell within the principle articulated by Mason J in Hospital Products Limited v United States Surgical Corp  HCA 64 that certain fiduciary relationships qualify the general law of the duty not to act in conflict of interest;
- liability as a fiduciary will not arise where the fiduciary’s actions have been authorised by the circumstances of their appointment or by the effective assent of the person to who the duty is owed (Chan v Zacharia  HCA 36); and
- the mere fact that an opportunity comes to a fiduciary in the course of that fiduciary relationship does not necessarily mean that there has been a breach of duty – it depends on the character and scope of the relationship between the parties (Streeter v Western Areas Exploration Pty Ltd No 2)  WASCA 17).
In finding that the relationship between QA and Mr Poole and Mr Hopkins was not a qualified fiduciary relationship, Justice Lyons in the Supreme Court of Queensland found that:
- the fact that it was not specifically agreed that Mr Poole and Mr Hopkins would only refer business to QA did not mean that they escaped the duty to avoid conflicts of interest by referring business opportunities to QA;
- the evidence did not show that Mr Poole and Mr Hopkins were authorised to refer business opportunities to the Competing Businesses;
- Mr Poole and Mr Hopkins did not have the effective assent of QA on the basis that Mr Ham (the nominated builder for QA) knew, or must have known, of their involvement in the Competing Businesses. In this regard, Lyons J pointed to the fact that Mr Poole and Mr Hopkins:
- did not disclose their involvement in the Competing Businesses to QA or Mr Ham; and
- actively concealed their involvement in the Competing Businesses from QA and Mr Ham (they directed staff to send emails to their new email addresses or to blind copy them) and were emailing information belonging to QA to their Competing Businesses without the consent or knowledge of Mr Ham.
On the evidence, Justice Lyons found that Mr Poole and Mr Hopkins had, in certain circumstances, breached:
- their duty under section 181 of the Act perform their duties in good faith (because they did not perform their duty to make the opportunities known to QA);
- their duties under sections 182 and 183 of the Act to avoid conflicts of interest by using their positions in QA to divert opportunities from QA to the Competing Businesses to gain an advantage and improperly using information obtained as a director/officer of QA to gain an advantage; and
- their general law fiduciary duty to avoid conflicts of interest.
This case illustrates that courts will not necessarily void a contract for statutory illegality merely because it is ‘associated with or in the furtherance of illegal purposes’ but is not otherwise expressly or impliedly prohibited by the relevant statute. Rather, the Court will look at a range of other factors including how essential the illegality is to the agreement, whether the parties were aware of the illegality, whether the illegality is in fact carried into effect and also how the interests of the parties may be affected if the contract is unenforceable.
A contract dated 13 December 2013 for the sale of land from REW08 Projects Pty Ltd (REW08) to PNC Lifestyle Investments Pty Ltd (PNC) contained a provision which allowed PNC to rescind the contract and re-enter into a new contract every 3 months until the plan of subdivision was finalised. The contract also provided for the price to be reduced by $235,000 if REW08 performed all of its obligations under the contract.
After disagreement between the parties, PNC sought specific performance of a contract dated 13 June 2014 (following 2 purported rescissions since the date of the original contract). After REW08 filed a defence, PNC paid the full amount of stamp duty payable on the transactions the subject of the contract (together with interest calculated from 13 December 2013).
REW08 submitted that the trial judge erred in not finding that the relevant contracts for sale and deeds of rescission were not ‘unenforceable for illegality’. REW08 argued that the purpose of entry into the contract was to commit an unlawful act (delaying stamp duty) and the contract dated 13 June 2014 (and those dated 13 December 2013 and 13 March 2014) were therefore unenforceable under the general law for public policy reasons.
Macfarlan JA (with Beazley P and Gleeson JA agreeing) in the New South Wales Court of Appeal started with the general rule that a contract may be unenforceable for statutory illegality even where not expressly or impliedly prohibited by the relevant statute if it is a ‘contract associated with or in the furtherance of illegal purposes’. However, a Court should not refuse to enforce contractual rights merely because this is the case.
In dismissing the appeal by REW08 (and therefore enforcing the contractual rights of PNC), the Court pointed to the following factors:
- the legislative regime for the payment and collection of stamp duty does not expressly render an agreement made for the purpose of avoiding duty unenforceable;
- PNC was not conscious that the proposed arrangements to delay paying stamp duty would not be legally effective i.e. it did not knowingly break the law;
- delaying the payment of stamp duty was not essential to the parties’ bargain for the purchase and sale of land (it was only an incidental consequence);
- the supposed illegal purpose had not been carried into effect because the stamp duty had been paid;
- to deprive PNC of the benefit of the contract would impose a penalty upon it disproportionate to its assumed wrong (particularly bearing in mind that it had now paid the stamp duty and interest); and
- to free REW08 of the obligation to perform the contract when it has suffered no loss by reason of PNC’s alleged impropriety would likely confer a windfall on REW08 (who could then re-sell at a higher price).
On the issue of PNC’s alleged lack of ‘clean hands’ (which would mean it was not entitled to equitable relief), the Court held that PNC’s alleged impropriety did not have ‘an immediate and necessary relation to the equity sued for’ because it:
- was incidental or collateral to the contract (and did not taint the whole transaction); and
- ceased when PNC paid stamp duty and interest.
This case emphasises the importance of ensuring firstly, that standard terms and conditions in an online contract are clearly brought to the attention of the counterparty (ideally by requiring that the party click through to the terms in order to proceed) and secondly, that the counterparty briefly read those terms (rather than blindly clicking on to proceed) so that they are aware of at least the key practical terms of their agreement (relevantly in this case, the law and jurisdiction that will apply to any claim under the contract). This case also provides some useful analysis of when a Court might find that a party has shown cause that they should not be held to an exclusive jurisdiction clause.
Agoda Pte Ltd (Agoda) is a Singaporean company which provides an online booking portal for booking accommodation at hotels around the world. Ms Gonzalez used her home computer in Sydney to book accommodation in Paris through the Agoda portal. The “Payment details page” included a link to Agoda’s standard terms of booking (Terms) and the words “I agree with the booking conditions and general terms by booking this room…” appeared above the “Book Now” button that Mrs Gonzalez needed to click in order to proceed. The Agoda booking portal did not require Mrs Gonzalez to check a box or click on a link to explicitly accept the Terms.
The Terms included an exclusive jurisdiction clause that designated the law of Singapore as the governing law and provided for any dispute to be submitted to the courts of Singapore.
During her trip, Ms Gonzales suffered injury which she claimed occurred because the shower screen in the bathroom of her hotel room was not correctly fitted. Ms Gonzalez brought proceedings claiming damages against Agoda in the New South Wales Supreme Court.
The relevant question for the Court was whether it should decline to exercise jurisdiction, and Button J held that:
- an exclusive jurisdiction clause in a contract should be given substantial weight; and
- on its face, the contract between Agoda and Mrs Gonzalez contained an exclusive jurisdiction clause and it was very probable that such clause was incorporated into the contract;
- the fact that Mrs Gonzalez did not explicitly need to “tick a box” with regard to the exclusive jurisdiction clause was significant but not determinative;
- on an objective analysis of the contractual intentions of the parties, the Terms were incorporated into the contract by signature and by reference. In this regard, Button J pointed to:
- the signature on the digital document by Mrs Gonzalez clicking “Book Now” by virtue of section 9(1) of the Electronic Transaction Act;
- the location of the link to the Terms above the “Book Now” button. The Terms were readily available to Mrs Gonzalez and Agoda did not try to conceal them. Any failure on Mrs Gonzalez’s part to read and comprehend the Terms was immaterial; and
- the standard nature of the Terms; and
- there wasn’t anything unfair in Agoda trying to protect itself from claims being litigated in the courts of countless countries applying countless different laws.
In finding that Mrs Gonzalez had not shown cause as to why she shouldn’t be held to the exclusive jurisdiction clause, Button J pointed to the following factors:
- the proper law of the contract was Singaporean law. Agoda was domiciled in Singapore, all of its employees were there, the contract was performed by Agoda in Singapore and the Terms were standard form that were intended to apply to contracts formed in multiple jurisdictions;
- the applicable standards of construction and maintenance of shower screens must be those of France, and neither Australia nor Singapore were optimal for the application of French law;
- inconvenience and expense were foreseeable outcomes of Ms Gonzalez (objectively) agreeing to the exclusive jurisdiction of Singapore and in any event, technological developments eased the practical issues with litigating in Singapore;
- other carers or family members could look after Ms Gonzalez’s autistic grandson during any absence from Australia (if such absence was truly necessary); and
- the evidence of Mrs Gonzales’s inability to fund litigation on a conventional basis (there is no “no win no fee” system in Singapore) was not sufficiently detailed and the principle that a person should be held to their bargain, even it turns out to be financially disadvantageous) had a role to play.