Author: Michael Sing

by Michael Sing

Exercising Options? Take Care

Signed an option to buy a property? Make sure you exercise it on time and in the correct manner or risk losing it!

It is commonplace for a property purchase to be commenced with an option to purchase the land for various reasons, such as to allow time for a due diligence, to secure finance or a joint venture partner.

An option is usually formally exercised in accordance with its terms by the grantee giving a formal notice and the parties executing a formal document and signing a formal contract to purchase. In many instances, the terms of the option permit the assignment or novation of the right to exercise the option to a third party. For such a novation of the option to be valid, the option needs to be properly exercised.

Recent Decision

In Kai Ling (Australia) Pty Ltd v Rosengreen [2019] NSWCA 3, the court examined the requirements for effective novation of contract by the substitution of party, and whether on the facts of that matter, an option to purchase land was properly novated in favour of the substituted grantee.

On 30 April 2015, Mr Rosengreen granted to Saadie Group Pty Ltd (“Saadie Group”), by deed, an option to purchase certain land.

On 3 May 2015, Mr Michael Saadie presented to Mr Rosengreen a single sheet of paper in the same form as the execution page of the deed of option, save that the grantee was named as Kai Ling (Australia) Pty Ltd (“Kai Ling”) instead of Saadie Group. The sheet already bore the signatures of two persons on behalf of Kai Ling. Mr Michael Saadie (who was the father of the sole director of Saadie Group and was not an officer of Kai Ling) asked Mr Rosengreen to sign the sheet, saying that “we may need to change the name of the grantee but it does not change anything”. Mr Rosengreen signed as requested and gave the sheet back to Mr Michael Saadie. Kai Ling contended that the events of 3 May 2015 had brought about a novation of the option contract so that Kai Ling was the holder of the option in the place of Saadie Group. The primary judge dismissed the proceedings. Kai Ling appealed.

The Court held, dismissing the appeal with costs that:

(1)   The evidence did not establish that Mr Michael Saadie acted with the authority of Kai Ling in dealing with Mr Rosengreen on 3 May 2015.

(2)   There was no basis for a finding that there had been created among Mr Rosengreen, Saadie Group and Kai Ling the tripartite agreement necessary to effect novation.

(3)   Mr Rosengreen and Saadie Group had, in any event, conducted themselves subsequently on the basis that they remained the parties to the option contract.

The Court approved the description of the nature of novation and of the elements that constitute it as found in  ALH Group Property Holdings Pty Ltd v Chief Commissioner of State Revenue (2012) 245 CLR 338; [2012] HCA 6:

“A novation, in its simplest sense, refers to a circumstance where a new contract takes the place of the old. It is not correct to describe novation as involving the succession of a third party to the rights of the purchaser under the original contract. Under the common law such a description comes closer to the effect of a transfer of rights by way of assignment. Nor is it correct to describe a third party undertaking the obligations of the purchaser under the original contract as a novation. The effect of a novation is upon the obligations of both parties to the original, executory, contract. The enquiry in determining whether there has been a novation is whether it has been agreed that a new contract is to be substituted for the old and the obligations of the parties under the old agreement are to be discharged.”

Further, the element of intention was important: In Vickery v Woods (1952) 85 CLR 336; [1952] HCA 7, Dixon J said that “the crux of novation is intention” in the form of consent by way of tripartite agreement; and that the intention may be express or, importantly for a case such as the present, may be implied from conduct and circumstances.

Kai Ling’s case was that the events of 3 May 2015 gave rise to a tripartite agreement among Mr Rosengreen, Saadie Group and Kai Ling by which Mr Rosengreen accepted undertakings from Kai Ling in place of those originally given to him by Saadie Group and released Saadie Group; Kai Ling gave those undertakings to Mr Rosengreen who in turn renewed in favour of Kai Ling the undertakings he had originally given to Saadie Group; and Saadie Group consented to its release by Mr Rosengreen and in turn released him from the original contract. Kai Ling maintained that all those elements, in immediately operative contractual form, can and should be found to have resulted from the events of 3 May 2015.

The appeal was dismissed as the Court agreed with the primary judge who held that Kai Ling had not established that, on 3 May 2015, all of Mr Rosengreen, Saadie Group and Kai Ling agreed that a new contract between Mr Rosengreen and Kai Ling was substituted for the old contract between Mr Rosengreen and Saadie Group and that the obligations of Mr Rosengreen and Saadie Group created on 30 April 2015 were discharged. His Honour’s’ conclusion was correct for three basic reasons:

1.     In the absence of proof that Mr Michael Saadie had acted on 3 May 2015 with the authority of Kai Ling, it was not shown that Mr Rosengreen and Kai Ling had engaged in any conduct of a contractual kind towards one another on that day.

2.     Even if there had been contractual conduct as between Mr Rosengreen and Kai Ling on 3 May 2015, the purpose of the contractual conduct was to deal with an apparently foreseen possible future need to “change the name” of the grantee of the option, as distinct from immediately substituting a new grantee.

3.     As at 27 November 2015, two of the three relevant parties (Mr Rosengreen and Saadie Group) acted on a clear footing that they alone remained the parties to the option agreement made between them on 30 April 2015.

Key Point

The case illustrates that the exercise of options where an interest is to be novated is a technical and a formal process that should be treated with care to ensure it is effective to novate the rights granted.

Getting this process and documentation wrong can be costly.

We are experts in property transactions. If you wish to discuss or seek advice on any aspects of options to buy property, or matters arising from this article, please contact us.

by Michael Sing

Enforcement of Shareholder Restraints

We were recently successful for a client in a fierce contest in the Supreme Court in enforcing a 12 month restraint on a shareholder working for a direct competitor contrary to the provisions in a shareholders agreement (LCR Group v Bell (2016) QSC 130).

It is commonly the case that shareholders in a company enter into written agreements which set out their rights and obligations. Shareholders agreements of this nature are designed to achieve a harmonious and profitable business operational environment with cooperation between the shareholders.

A well drafted shareholders agreement should, particularly where the shareholders are of a management or executive level contain restraints of trade, drafted to strike a balance between  achieving a harmonious and profitable business operational environment with cooperation between the shareholders, protection of the company interests, and protection of individual rights.

Recent decisions on the enforcement of restraints of trade in shareholders agreements point to a more commercial and contractual approach rather than the approach generally accepted by the courts when considering restraint of trade in an employment contract.

Restraints of trade in employment contracts are said to be void being contrary to public policy.

A well drafted restraint clause in an employment agreement will typically contain non-competition provisions, geographical and temporal restrictions.

The starting point as observed by McMurdo J in AGA Assistance Australia Pty Ltd v Tokody [2012] QSC 176 at 25 is that:

“A restraint of trade is void as contrary to public policy unless it is reasonable in the interests of the parties and by reference to the interest of the public: see Nordenfelt v Maxim Nordenfelt Guns & Ammunition Co Ltd, Amaco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd. As to the interests of the public, the onus is on the party which is subject to the restraint to establish that the restraint is harmful to the public: Herbert Morris Ltd v Saxelby.”

Restraints on post-employment activity contained in shareholders agreements indicate a different approach. Issues such as mutuality of obligations, legitimate business interests of the company, acknowledgements of independent legal and accounting advice, the risk of loss of client and customer connections and relationship, confidential information and reasonableness of the restraints are all relevant considerations.

In BDO Group Holdings (Qld) Limited & Anor v Sully [2015] QSC 166, Flanagan J considered and enforced a restraint imposed upon an accountant who became a party to a shareholders agreement and a party to an employment agreement when he sold his business into the applicants.

The restraint of trade in the shareholders agreement provided a non-competition restraint of trade which purported to restrain the respondent from engaging in any activity during the restraint period and within the restraint area which essentially competed with the business activity of the company, provision of similar services, inducing, soliciting staff or clients.

In dealing with the shareholders agreement, and Flanagan J observed that the respondent agreed to:-

• Diligently and faithfully devote…attention to the business
• To cooperate and use…best endeavours to ensure that the group successfully conducted the business
• To give approval to make decisions that were required of it in good faith and in the best interests of the group and the conduct of the business as a commercial venture

Relevantly, the shareholders agreement contained an acknowledgment that the terms of the restraint were reasonable considering the interests of each party and went no further than was reasonably necessary to protect the interests of the other shareholders, the group and the business.

In the decision of Seven Network (Operations) Limited & Ors v Warburton (No 2) [2011] NSWSC 386, Pembroke J dealt with a restraint of trade involving a senior executive of the Seven Network in the context of restraints imposed under an employment contract and a management equity participation deed.

In a decision notable for its clarity and analysis of both factual and legal issues, Pembroke J found that the restraints imposed in the management equity participation deed should be enforced. In analysing the circumstances relating to entry into the management equity participation deed, the commercial background and experience was detailed exhaustively. In that case Mr Warburton was a person of considerable commercial experience, knowledge and acumen. His Honour also considered that the entry into the management equity participation deed by senior executives such as the respondent was an important factor in the venture capital company’s decision to invest in the company (an investment of approximately $690 million for a 50% economic interest). The transaction involved, through an equity participation plan, senior management being given a financial incentive to strive to maximise the value of the business. By this means, the interest of the investors and senior management were aligned. In an effective practical sense, they became “owners of the enterprise”.

The commercial rationale for the deed was also analysed and His Honour commented:

“It resulted in the participating executives becoming the holders of shares and options in SMG. By this means, they acquired a shared financial interest in the enterprise with KKR and Seven Network Limited. The MEP Deed was designed, amongst other things, to enhance the prospect of senior management staying together as a team. It provided each of them with an opportunity to achieve a generous return on investment that was disproportionate to the risk being undertaken. From the perspective of KKR and Seven Network Limited, the restraints on competition served to protect their investment. But they also served to ensure that the investment of each of the senior management participants was not undermined or devalued. The object of the restraints on competition was to reduce the risk of devaluation of the business by the departure of any executives to work for competitors: to reduce the risk of the misuse of confidential information by its provision to competitors: and to reduce the risk of dissipation or reduction in the customer connection of the business”.

His Honour found that on the facts of the case, there was no logical reason for denying the existence of a legitimate financial interest to support the restraints imposed.

His Honour also dealt with the provisions in the MEP Deed which contained an acknowledgement of reasonableness of the restraints imposed. His Honour said “this is possibly the most important single factor in determining whether the restraint period was reasonable at the time it was entered into. It does not of course absolve the court from reaching its own conclusion, but as Emmett J observed in Synavant Australia Pty Ltd v Harris (2001) FCA 1517 at 85:

“The matter involves the exercise of business judgment. For that reason, considerable weight should be attached to the period the parties themselves have selected.”

His Honour further pointed to the fact that in this case, Mr Warburton had obtained legal and taxation advice at the time of entry into the deed, had been to a presentation at which attention was drawn to it and the commercial rationale and purpose behind the restraint was explained to him and he obtained written legal advice which specifically addressed the clause. Those factors reinforced the appropriateness of placing weight on his agreement as to the reasonableness of the restraint.

In LCR Group v Bell (2016) QSC 130, Byrne J enforced a 12 months restraint on a manager and shareholder, after analysing the scope of duties of the shareholder and the business interests of the company, finding that the restraint was reasonable and valid where the company and the prospective employer were direct competitors, and “there was a significant risk of appreciable detriment to LCR’s commercial interests through misuse of LCR’s confidential information.”

Enforcing restraints of trade, whether in employment contracts, business sale agreements or Shareholders Agreements is never simple and usually involves complex and contested, factual and legal issues. Where there are significant risks of serious loss and damage occurring if the restraints are not enforced ,protective and urgent injunctions are well warranted.

If you have any reason to consider action on a restraint of trade, and require urgent advice, contact us for assistance.

by Michael Sing

How hard is it to show a “genuine dispute” in setting aside a statutory demand?

Answer: Not very hard!

A party who is claiming a debt from a company will often want to consider the quickest and most cost-effective way for recovery. A drawn out court case over many months can often lead to a very unsatisfactory result, including lost time and legal fees. For these reasons, many will consider the use of a Statutory Demand under Section 459 of the Corporations Act 2001 which basically entails making a demand in a prescribed form and which allows 21 days to resolve the matter of the debt, or face a winding up on the grounds of insolvency. Properly used, it can be a fast and effective way to recover debts.

However, this process is often misused by parties particularly where the issue is not solvency of the company, but a genuine dispute as to the existence of the debt claimed.

The recent decision of ABC Constructions No 1 Pty Ltd v. Bonelli Constructions Pty Ltd [2016] QSC 35 (4 March 2016) is an illustration of this point.

Bonelli issued a statutory demand against ABC for monies it claimed were due and payable as a consequence of a payment claim made under a building contract. ABC applied to the Court to set the Demand aside. At issue was whether there was a genuine dispute about the existence or amount of the debt that was the subject of the demand, and whether there was a genuine off-setting claim.

ABC claimed that the debt claimed under the statutory demand was genuinely in dispute. Bonelli had failed to submit documentary evidence supporting its progress claim; the debt has been the subject of a Principal’s Notice to Show Cause with a subsequent termination of the building contract by the applicant; and there are differences between separate progress claims issued by the respondent, at a relevant point in time.

ABC also contended that under the building contract it had a right to claim delay costs subject to a specified procedure, which had not been followed by ABC. ABC expressly disputed Bonelli’s right to make any claim for delay costs prior to service of the statutory demand.

Finally, ABC claimed that the statutory demand was issued in circumstances where there was a pre-existing dispute between the parties resulting in a termination of the contract by it.

On all of its arguments, ABC asserted a genuine dispute existed and that the Statutory Demand should be set aside with costs.

The Court agreed and set aside the Statutory Demand and ordered that Bonelli pay the costs of the application.

In reviewing the well-established principles and cases, the Court had no hesitation in finding a genuine dispute existed. Importantly, the court emphasised the relatively low threshold required to show a “genuine dispute”:

“No in-depth examination or determination of the merits of the alleged dispute is necessary, or indeed appropriate, as the application is akin to one for an interlocutory injunction. Moreover, the determination of the “ultimate question” of the existence of the debt should not be compromised.”

The Court  quoted with approval the decision of TR Administration Pty Ltd v Frank Marchetti & Sons Pty Ltd in which Dodds-Stretton J said:

“As the terms of s 459H of the Corporations Act 2001 and the authorities make clear, the company is required, in this context, only to establish a genuine dispute or off-setting claim. It is required to evidence the assertions relevant to the alleged dispute or off-setting claim only to the extent necessary for that primary task. The dispute or off-setting claim should have a sufficient objective existence and prima facie plausibility to distinguish it from a merely spurious claim, bluster or assertion, and sufficient factual particularity to exclude the merely fanciful or futile… it is not necessary for the company to advance, at this stage, a fully evidenced claim. Something “between mere assertion and the proof that would be necessary in a court of law” may suffice. A selective focus on a part of the formulation in South Australia v Wall, divorced from its overall context, may obscure the flexibility of judicial approach appropriate in the present context if it suggests that the company must formally or comprehensively evidence the basis of its dispute or off-setting claim. The legislation requires something less.”

In other words, a party does not need to actually prove their case to show that a “genuine dispute” exists, but it should show the basis or grounds do actually exist. This usually requires the presentation of an affidavit that exhibits relevant correspondence and documents, and setting out of relevant facts to show a credible basis for a genuine dispute.

This recent decision is another of many examples where a party has been punished with a costs order for issuance of a statutory demand where a clear genuine dispute existed.

It illustrates the need to have good legal advice and to choose an appropriate way to resolve disputes, and particularly those which may involve the Court having to decide questions of fact and the meaning and effect of contracts and credit of witnesses. Such disputes are clearly not able to be decided under a Statutory Demand process.

If you have any reason to consider recovery of a debt or have received a statutory demand, and require urgent advice, contact us for assistance.

by Michael Sing

An Employer’s Liability as an accessory for misuse of confidential information by its own employees.

It is commonly the case that executives and senior managers seeking to jump ship from one employer to another either by themselves or through recruitment agents, actively promote themselves with promises that they can bring significant business with them thereby adding to their value and increasing their worth to a prospective employer.

The recent decision of Lifeplan Australia Friendly Society Limited v Ancient Order of Foresters in Victoria Friendly Society Limited [2017] FCAFC 74 is a stark reminder of the risk to not just those employees who take and purport to misuse confidential information of former employers but also to the new employer.

In the Foresters decision, the court ordered that the new employer (Forester) should account for profits generated by business developed and managed by two former employees of Lifeplan.

The former employees of Lifeplan that joined Foresters in senior roles implemented business plans and drew clients away from their former employer. The court found that they did so whilst still employed by Lifeplan and had used and misused highly confidential information to do so.

On appeal, the court found that there was a causal relationship between the breach of the employee’s duties and the profits generated in their new employer. Further, the court found that Forrester’s as the second employer had knowingly acted upon the information, were implicated in the steps taken by the employees before jumping ship to join their company. As a consequence, the profits made by Forrester’s relied entirely upon the employees misusing the confidential information taken from their former employer and with the assistance and complacency of the new employer. Accordingly, the court ordered that Forrester’s pay damages in the sum of $6,200,000.00 representing profits made from the breaches of their employees against the former employer.

The court also discussed the provisions of section 79 of the Corporations Act 2001 (Cth) (“the Corporations Act”) which provides that a person may be involved in a contravention if and only if the person:

a)     has aided, abetted, counselled or procured the contravention; or

b)     has induced, whether by threats or promises or otherwise, the contravention; or

c)     has been in any way, by act or omission, directly or indirectly, knowingly concerned in, or party to, the contravention; or

d)     has conspired with others to effect the contravention.

The importance of this section lies in the fact that the former employees were claimed to have breached various provisions of the Corporations Act as officers of their former employer and they had been obliged in their capacity to exercise their powers and discharge their duties with a reasonable degree of care and diligence in good faith and in the best interests of the corporation and for proper purposes without improperly using their position to gain advantage or cause the corporation detriment and as officers they had obtained information that they were obliged not to use improperly or to gain advantage or to cause the corporation detriment. Those were civil penalty provisions of the Corporations Act section 180, 181, 182 and 183 and by section 79 of the Corporations Act, accessorial liability was established.

In fact, the court found that on the facts before it, “there was no doubt that the board of Forrester’s was actually aware, had actual knowledge, of the taking and using in breach of duty of confidential information. The board was not a passive observer of this; it did not prepare it but it used it in its decision-making process and after employing FPA in the governance process of checking performance. Likewise, Mr … knew of the clearly wrongful solicitations of funeral directors as the business venture was being agreed”. The court found that given the actual knowledge of the Forrester’s board in its participation of breached of the Corporations Act by the former employees, it would “not draw back from a conclusion that Forrester’s was knowingly concerned in those breaches”.

The decision is a stark and practical reminder of the risk in taking on new employees who promise to bring business and work from their former employer. Often, the promise of such new work proves irresistible to the new prospective employer, and the risks are either overlooked or ignored. The decision dealt with above clearly shows that the risk of damages are real.

If you have any queries in respect of these matters please do not hesitate to contact us for timely advice which may save expensive and troublesome litigation.

by Michael Sing

The Rectification of Wills

What happens when the intentions of the testator are not reflected in the will?

This situation can arise from many reasons-but more commonly from poor drafting or miscommunication.

This arose in Rose v Tomkin & Ors (2017) QCA 157, where the Court had to consider the terms of a will dealing with the residuary estate.

The current rectification power is contained in s 33 of the Succession Act 1981 (Qld) which provides:

S.33 Court may rectify a will

(1) The court may make an order to rectify a will to carry out the intentions of the testator if the court is satisfied that the will does not carry out the testator’s intentions because—

(a) a clerical error was made; or

(b) the will does not give effect to the testator’s instructions.

In order that the power to rectify a will be enlivened under s 33 of the Act, a party is required to satisfy the Court that the Will did not carry out the testator’s intentions because the terms of the Will did not give effect to their instructions and wishes. That intention must be examined as at the date of the will, not the date of death.

The legal principles in respect of the rectification power in s 33(1)(b) of the Act may be summarised as follows:

• The Court must ascertain the testator’s intention, that is, the actual intention of the testator reflected in the instructions given by the testator, not what would probably have been the intention in the circumstances that eventuated.
• The Court must construe the provision of the will sought to be rectified.
• The Court is required to compare the relevant provision of the will properly construed with the testator’s intention as ascertained.
• The Court must be satisfied the relevant provision of the will does not carry out the testator’s intentions because it does not give effect to the testator’s instructions and that rectification in the terms sought would give effect to those instructions.
• The Court must be so satisfied on the balance of probabilities, on clear and convincing proof.

The Court found after reviewing the evidence before it, as to the instructions given for the will that “the Will did not carry out Ms Jones’ intentions because it did not give effect to her instructions that her half interest go to her children. The Will was only capable of achieving the result that her children received a half interest in the event that her partner’s will was (and remained) in the same terms. The Will as drafted was not capable of guaranteeing that a half interest pass to them. But it is evident that Ms Jones’ instructions were to safeguard her children’s inheritance without qualification. That is consistent with the advice given to her by her solicitor to sever the joint tenancy.”

Having found that there was clear and convincing proof that the will did not carry out the testatrix’s intentions because it failed to give effect to her instructions, the Court ordered that the will be rectified

If you have any queries in respect of these matters please do not hesitate to contact us.