Ipsofactoj.com: International Cases [2000] Part 6 Case 9 [NZCA]


COURT OF APPEAL, NEW ZEALAND

Coram

Morgan & Bank Ltd

- vs -

Gemini Personnel Ltd

GAULT J

THOMAS J 

BARAGWANATH J

30 JUNE 1999


Judgment

Baragwanath J

THE ISSUE ON APPEAL

  1. This appeal is against a judgment of Laurenson J in the High Court declining to strike out causes of action against the appellants alleging breach of fiduciary duty. The issue on appeal is whether, on the facts pleaded, a claim for breach of fiduciary duty is arguable. The first respondent plaintiff ("Gemini") claimed relief in the High Court against the first appellant Morgan & Banks Limited ("Morgan & Banks") as first defendant, the remaining appellants who were Morgan & Banks personnel as second to fifth defendants and the second respondent ("Simpson Grierson") as sixth defendant. For the purposes of the application and this appeal the truth of such pleadings is assumed.

    THE FACTS ALLEGED

  2. The Amended Statement of Claim pleads that prior to September 1993 Gemini carried on in Auckland the business of personnel recruiting, specialising in positions for secretarial and other office staff and sales and marketing personnel.

  3. Morgan & Banks were due on 27 September 1993 to be released from a restrictive covenant agreement inhibiting it from engaging in such activities. It sought to position itself to achieve gains by public float or similar restructuring, by becoming a one stop provider of secretarial and office support systems. To do so it opened negotiations with Gemini.

    Morgan & Banks’ representations

  4. Morgan & Banks made representations to Gemini that:

    1. in order to achieve a float Morgan & Banks must have the majority shareholding;

    2. as the parties had a shared interest they should save legal costs by appointing one legal firm to act for ARC and agree neither party would seek other or independent advice.

    Gemini accepted these proposals.

    The heads of agreement of 5 September 1993 and their implementation by Gemini

  5. The negotiations resulted in a written Heads of Agreement dated 5 September 1993 which included terms to the following effect:

    1. transfer of Gemini’s business to a new company ARC with effect from 27 September 1993;

    2. Gemini to hold 40 percent and Morgan & Banks 60 percent of the shares;

    3. ARC to pay Gemini $100,000;

    4. ARC’s business objective to be to acquire and expand the business of Gemini and establish a business of comparable size in Wellington;

    5. ARC’s business objective was to conduct the business with a view to maximising profit and returns to shareholders;

    6. it was intended to restructure the business, with the introduction of new external shareholders resulting in a significant consideration in cash or scrip. In such circumstances Morgan & Banks should have an option to acquire Gemini’s interest in ARC;

    7. Morgan & Banks would advance at interest agreed amounts in excess of shareholder proportions;

    8. Mrs. Webb-Speight (Mrs. Webb-Speight), a director and shareholder of Gemini, would be contracted to ARC on terms and conditions to be agreed;

    9. Morgan & Banks and Gemini would each appoint 3 directors to the board of ARC. The chairman, appointed by Morgan & Banks would have a casting vote;

  6. The parties would themselves prepare initial joint venture heads of agreement and Simpson Grierson would prepare a shareholders’ agreement, a consultancy agreement (for Mrs. Webb-Speight), articles of association and an asset share purchase agreement. The document recorded

    8.1

    Parties Bound by the Principal Terms:

    This agreement is a Heads of Agreement which binds the parties to proceed in accordance with its terms. The terms of this agreement represent all of the principal issues concerning the establishment of NewCo, establishment of a new business in Wellington and acquisition of the Business of the parties.

  7. Gemini pleads that the agreement included the following oral terms:

    1. Mrs. Webb-Speight would be formally appointed managing director of ARC by the consultancy agreement;

    2. she would provide services to the new structure / new purchaser for no less that 3 years;

    3. the Gemini interests would not be called upon for funding that would dilute their shareholding interest;

    4. the profits and gains of the joint venture would include gains to be made from the introduction to Morgan & Banks (and thus to ARC) of external shareholders;

    5. Gemini would participate in such gains in the proportion of:

      1. ARC’s business to the business of Morgan & Banks as a whole;

      2. Gemini’s shareholding in ARC;

    6. Morgan & Banks would provide training and support to Mrs. Webb-Speight in her position as managing director of ARC.

    Morgan & Banks contend that such oral terms are inconsistent with clause 8.1.

  8. The value of the business of Gemini was $480-580,000. The consideration received in exchange was:

    1. $100,000;

    2. the 40 percent shareholding in ARC;

    3. the expectation of the gain Gemini would receive on restructuring;

    4. career benefit to Mrs. Webb-Speight as managing director of ARC;

    5. Morgan & Banks’ provision of all capital.

    Such consideration was less than the value of the business.

  9. The parties agreed that Morgan & Banks would instruct Morgan & Banks’ solicitors Simpson Grierson to prepare the further documentation. Gemini pleads that the written heads of agreement and the oral terms constituted a joint venture agreement.

  10. On 27 September 1993 Gemini transferred its business to ARC. The second appellant Mr. Sullivan was appointed chairman and the third appellant Mr. Farrant secretary.

    Breaches by Morgan & Banks of oral terms accompanying the heads

  11. In the period from 27 September 1993 Morgan & Banks breached the pleaded oral terms in the following respects:

    1. Mrs. Webb-Speight was never appointed Managing Director of ARC.

    2. She did not receive training and support in her position as Managing Director.

    Instead the Wellington Branch Manager reported to the second appellant as Chairman of ARC rather than to Mrs. Webb-Speight. Mr. Sullivan failed to implement the undertaking to assist her in the role of Managing Director and rather acted in a manner that minimised her position.

    The Shareholders agreement 30 November 1993

  12. On 30 November 1993 the parties executed a shareholders agreement that had been prepared by Simpson Grierson. The agreement as prepared and executed contained provisions to which Gemini later took exception in their pleading. These are:

    1. Cl 9.1 which limited Morgan & Banks’ obligation to make advances for working capital cashflow purposes for a period of 12 months only;

    2. Cl 13.1 providing that if the shareholders in Gemini (which included Mrs. Webb-Speight) ceased to be involved in the business of ARC the Gemini shareholders would offer their interests in ARC to Morgan & Banks.

  13. The pleading challenged the formula for calculating Gemini’s share in the profit from the contemplated restructure on the ground that it failed to provide definition of three of the components of the formula for assessing such share. It also included the following clause:

    26.

    ENTIRE AGREEMENT

    All previous agreements and communications, whether verbal or written, between the shareholders with respect to the subject matter hereof are replaced by this agreement. No alteration of the terms of this agreement shall be binding unless it is in writing dated after the date of this agreement and executed by the Shareholders.

  14. It appears to be implicit in the pleading (para 37) as it is in terms of the heads of agreement that Morgan & Banks’ solicitors would act for ARC that Gemini did not seek independent legal advice in relation to the shareholders agreement (para 37) and that with the benefit of independent advice Gemini would have secured greater protection than that contained in the shareholders agreement.

    The period following execution of the shareholders agreement

  15. Following 30 November 1993 Morgan & Banks failed to confirm Mrs. Webb-Speight’s position by the formal agreement stipulated by s 17.2 of the shareholders agreement, which provided that settlement was conditional upon the parties’ entering into such agreement and an asset purchase agreement; such agreement was never tendered and perhaps never prepared. Its importance is seen in cl 16.7 providing for extension of the employment agreement of Mrs. Webb-Speight in the event that Morgan & Banks’ option to buy Gemini’s interests should be exercised.

  16. Management structure changes imposed by Morgan & Banks led to her stepping down from her previous position on three occasions over an 18 month period. She was required to fulfil roles of Managing Director and Auckland Branch Manager contrary to an understanding that an Auckland Branch Manager would be appointed when justified by business growth and the fact that such growth had increased by 500 percent by July 1994.

  17. In August 1994 Morgan & Banks further changed the management structure, dispensing with the position of National Operations Director. They told Mrs. Webb-Speight that she could seek appointment as Managing Director or Auckland Regional Manager or leave. In November 1994 Mrs. Webb-Speight became Auckland Regional Manager.

  18. The same day Morgan & Banks informed Gemini that from November 1994 ARC was to be funded by its shareholders on a pro rata basis to their respective holdings. It appears to be implied that there was breach of the oral term that the Gemini interests would not be called upon for funding so as to dilute their shareholding interests.

  19. In February 1995 Mr. Caughey, who had been appointed by Morgan & Banks as Chairman of ARC, informed Mrs. Webb-Speight that he had directed Mr. Sullivan to undertake a performance review of Mrs. Webb-Speight. Mrs. Webb-Speight sought representation at the performance review. Mr. Sullivan reacted with hostility to such advice and denied permission. It is not pleaded whether the review proceeded. By 25 February 1995 the position of Mrs. Webb-Speight as an employee of ARC had become untenable as a result of Morgan & Banks’ actions and the position of Gemini had become untenable as a result of the funding payments.

  20. On 27 February 1995 Morgan & Banks offered to buy Gemini’s shares on the basis of:

    1. cash payment of $250,000 upon execution of a share purchase agreement.

    2. payment of cash totalling $50,000 to the Gemini shareholders upon execution of restrictive covenant agreements;

    3. a further payment calculated by reference to the performance of ARC to 31 March 1995 in accordance with the following formula:

      (NPAT x 4) x 40% - $300,000 payable

      as to 60% upon termination of the amount of such additional consideration;

      as to 40% on 31 March 1997.

    The offer did not accord with the provisions in the heads of agreement by which the parties agreed to share in the restructure nor with the shareholders agreement by which Morgan & Banks agreed to pay an exercise price upon restructure.

  21. Mr. Caughey represented on behalf of the appellants that the restructure / float was a very long way off if it were to happen at all. In reliance on Mr. Caughey’s representation, in March 1995 Gemini accepted the offer of 27 February 1995 and on 29 March 1995 entered into an agreement in respect of shares by which Gemini sold its shares in ARC to Morgan & Banks in terms of the offer.

  22. Contrary to the representation by Mr. Caughey, the restructure of ARC was in fact imminent although not disclosed to Gemini or its shareholders. The restructure took place by way of sale to Morgan & Banks Limited ("MBK") a public company registered on the Australian Stock Exchange of which the fourth and fifth appellants Messrs Morgan & Banks are major shareholders in the following manner:

    1. in July 1995 MBK purchased 25.5 percent of the shares in Morgan & Banks for A$2.44 per share;

    2. in March 1996 MBK purchased 3.1 percent of the shares in Morgan & Banks for A$3.66 per share;

    3. in May, June, July and August 1996 MBK purchased 6.9% of the shares in Morgan & Banks for A$3.36 per share;

    4. in January 1997 MBK purchased the remaining 64.5% of the shares in Morgan & Banks for around A$7.64 per share.

  23. Had Gemini known that the restructure was imminent it would have continued its shareholding and involvement in ARC despite finding its position untenable; no doubt a fortiori if that had not occurred.

  24. As a result of the appellants’ failure to disclose the imminent restructure of Morgan & Banks they ensured that Gemini did not share in the restructure.

    GEMINI'S CONTENTION

  25. Gemini contends that the appellants owed a fiduciary duty which was infringed by reason of their:

    1. failure to conduct the affairs of ARC and ARC’s interrelationship honestly and in good faith;

    2. preferring the interests of Morgan & Banks and its associates over the interests of Gemini;

    3. misusing the position of Morgan & Banks and the Morgan & Banks shareholders so as to secure for themselves the profits which would result on restructure;

    4. misusing the position of Morgan & Banks and the Morgan & Banks shareholders to derive further profits for themselves from knowledge acquired [and abuse of] their dominant position.

  26. They seek an inquiry as to the profits that ARC ought to have made and judgment for the amount; alternatively judgment for $6,529,336. In the alternative Gemini claims that Morgan & Banks wrongly manipulated the overheads of ARC to remove any profit in ARC for the year ended 31 March 1996 and seeks an account as to the true overheads figure and the result of proper application of the contractual formula. By way of further alternative the third cause of action Gemini alleges breach of contract by Morgan & Banks for wrongful manipulation of the overheads. That claim is not challenged in the strike out application. A distinct cause of action which the appellants seek to have struck out is a claim against the second-fifth appellants stripping their profits from sales of their shares to third parties on the grounds of their implication in Morgan & Banks’ breach of fiduciary duties. Again an account is sought and alternatively $6,529,336. A final cause of action is brought against Simpson Grierson alleging breach of fiduciary duty on its part by reason of alleged failure properly to look after Gemini’s interests. There is no application to strike out this cause of action.

    THE APPELLANTS' ARGUMENT

  27. The appellants assert that Gemini and Morgan & Banks were in contract with one another and in accordance with the ordinary expectation that the law of contract rather than provisions as to fiduciary obligations governs contracts between commercial parties dealing at arms length pursue the strike out.

  28. They seek to cite in support the principles stated by the High Court of Australia in Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41, this Court in Auag Resources Ltd v Waihi Mines (1995) 5 NZBLC 103, 601, the English Court of Appeal in Bristol and Wells Building Soc v Mothen [1996] 4 All ER 698 and essays by Finn J in Youdan (ed) Equity, Fiduciaries and Trusts Carswell 1989 pages 39-40 and by Nolan A Fiduciary Duty to Disclose? (1997) 113 LQR 220.

  29. In their written submissions the appellants contended that three periods require consideration:

    1. The period up to 27 September 1993 when the parties were negotiating at arms length to enter a profit making venture;

    2. The period from 27 September 1993 to 30 November 1993 representing the 63 days after the heads of agreement had been executed and after Gemini had transferred its business to ARC but before the shareholders agreement had been executed;

    3. The period from 30 November 1993 to 29 March 1995 being the period during which ARC was operated in accordance with the shareholders agreement which ended when Gemini accepted Morgan & Banks’ offer to buy its shares in ARC.

  30. The appellants contended that the relationship at stage 1 was incapable of giving rise to fiduciary obligations because the parties were negotiating at arms length to enter a profit making venture. They said that a fiduciary obligation could not have arisen in relation to the period before Gemini agreed to enter the relationship. Up until that stage the parties were at arm’s length.

  31. They contended that the relationship at stage 3 is incapable of being a fiduciary relationship, because after the shareholders agreement was executed on 30 November 1993 the terms of the relationship were regulated by a comprehensive written agreement the terms of which govern the aspects of the relationship about which Gemini now complains. They relied particularly on the "Entire Agreement" clause: Auag Resources Ltd v Waihi Mines Ltd; Petrocorp v Minister of Energy [1991] 1 NZLR 1 at 36.

  32. In their written submissions they acknowledged that the second period could possibly give rise to fiduciary duties between the parties. Such duties would however be of a limited nature and merely serve to enforce Morgan & Banks’ obligation to execute a shareholders agreement incorporating the heads of terms of agreement.

  33. They stated the question to be whether there was conduct of such nature as could arguably have constituted breach of a fiduciary duty that existed concurrently with the contractual provisions, or perhaps that overrode them.

  34. While there was the opportunity for the existence of a fiduciary duty and consequently for its breach they denied that had occurred.

  35. In his oral argument Mr. Galbraith QC resiled from the appellants’ concession that the second period from 27 September until 30 November 1993 could have given rise to a fiduciary duty. He contended that the parties’ relationship was to be characterised throughout as governed by the law of contract and company law which left no room for the disinterested duty of loyalty to another that he submitted to be the essence of a fiduciary relationship. He initially took the position, supported by observations in the leading judgment of Gibbs CJ in Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41 at 71, adopting the test stated by the Court of Appeal (pp 68-9) in that case, that the test is whether

    The fiduciary undertook .... to act in the interests of another and not in his own.

    The learned Chief Justice considered that the defendant in that case

    Did not undertake .... to act solely in the interests of [the plaintiff] and not in its own interests.

  36. Mr. Galbraith accepted however as a correct statement of principle the wider formulation by Mason J (dissenting) at 99

    The classical illustrations of the fiduciary relationship are those in which the fiduciary is under a duty to act not in his own interests or solely in his own interests but in the interests of another or jointly in the interests of another and himself, e.g. a trustee and a partner. In the present case the nature of the distributorship relationship and the best efforts promise with its attendant standard of reasonableness necessarily entailed that HPI could make some business decisions by reference to its financial interests, without subordinating them to the promotion of the market for USSC’s products, so long at any rate as HPI did not deliberately do something, or omit to do something, for the purpose of destroying or injuring that market. And, as we know, HPI when it entered into a contract to sell USSC’s products to an Australian customer was not acting as trustee or agent for USSC. The contractual rights which arose against the customer were held by HPI in its own right and were not the subject of any trust in favour of USSC. HPI was entitled to recover and retain the purchase price for its own benefit, being under no duty to account to USSC.

    But entitlement to act in one’s own interests is not an answer to the existence of a fiduciary relationship, if there be an obligation to act in the interests of another. It is that obligation which is the foundation of the fiduciary relationship, even if it be subject to qualifications including the qualification that in some respects the fiduciary is entitled to act by reference to his own interests. The fiduciary duty must then accommodate itself to the relationship between the parties created by their contractual arrangements. And entitlement under the contract to act in a relevant matter solely by reference to one’s own interests will constitute an answer to an alleged breach of the fiduciary duty. The difficulty of deciding under the contract when the fiduciary is entitled to act in his own interests is not in itself a reason for rejecting the existence of a fiduciary relationship, though it may be an element in arriving at the conclusion that the person asserting the relationship has not established that there is any obligation to act in the interests of another.

    There has been an understandable reluctance to subject commercial transactions to the equitable doctrine of constructive trust and constructive notice. But it is altogether too simplistic, if not superficial, to suggest that commercial transactions stand outside the fiduciary regime as though in some way commercial transactions do not lend themselves to the creation of a relationship in which one person comes under an obligation to act in the interests of another. The fact that in the great majority of commercial transactions the parties stand at arm’s length does not enable us to make a generalization that is universally true in relation to every commercial transaction. In truth, every such transaction must be examined on its merits with a view to ascertaining whether it manifests the characteristics of a fiduciary relationship.

    We have emphasised the passages of particular relevance to the appeal.

    DISCUSSION

  37. Morgan & Banks have failed to satisfy us that on the facts pleaded the claim of breach of fiduciary duty must inevitably fail. In the essay already cited Finn J observes:

    .... difficulties have tended to surface when the characterisation issue is whether the relationship, or powers in it, exists for the parties’ several rather than for their joint interest. Contention has been acute in what may be described as "cooperative enterprises": non-partnership joint ventures, distributorships, franchises and the like. An initial problem lies, often, in the identification of the true nature of the relationship itself. What in name is a joint venture may in fact be a partnership, a distributorship in fact a true agency and thus both fiduciary. But this apart, the matter for determination is no more than that stated above: the purpose of the relationship and of the parties in it.

    These are questions of fact and degree which in the present case must await trial.

  38. Gemini’s essential complaint is that it was "squeezed out" of the joint venture company by unconscionable means. Gemini asserts that during the period from 27 September to 30 November 1993 it committed itself irrevocably to a venture containing the elements:

    1. it relinquished its independent existence and subjected itself to the majority control by Morgan & Banks in terms of both shareholding (60/40) and board authority;

    2. the raison d’être of the exercise was to take advantage of Morgan & Banks’ strength and position to secure a favourable restructuring involving the introduction of outside capital;

    3. that having occurred Gemini would either be 40 percent shareholders in a substantial operation or its share would be bought out by Morgan & Banks;

    4. it entered the arrangement on the basis that Mrs. Webb-Speight would be confirmed both in form and, with Morgan & Banks’ active assistance, by training and support, to be the effective managing director of ARC;

    5. that with such support her position (and therefore that of the Gemini interests) would be consolidated;

    6. as a result when the time came to sell Gemini would receive the benefit of a pooling of the parties’ contributions.

  39. It is to be assumed that the common expectation of the parties was that Gemini should relinquish its independent existence and yield authority to Morgan & Banks in order to achieve a result of successful introduction of outside funding, something of benefit to both.

  40. We are satisfied that it is arguable that the relinquishing of its independent existence and yielding of authority to Morgan & Banks brings Gemini’s case within the principles of LAC Minerals Ltd v International Corona Resources Ltd (1989) 61 DLR (4th) 14, United Dominion Corp v Brian Proprietary Ltd (1985) CLR 1 and Coleman v Myers Ltd [1977] 2 NZLR 225 at 298ff (CA).

  41. It is implicit in Gemini’s pleading that instead of securing Morgan & Banks’ support for Mrs. Webb-Speight it diminished her position — both before and after 30 November 1993.

  42. On that basis there is in our opinion a tenable argument that as a result Gemini brought to the negotiations resulting in the agreement of that date both a bargaining position weakened by the absence of confirmation of the position of Mrs. Webb-Speight as managing director and an absence of the independent legal advice required to preserve Gemini’s position.

  43. From that it could follow that both the shareholders agreement of 30 November 1993, including cl 26 which goes beyond cl 8.1 of the Heads and also the agreement of 29 March 1995, were secured by breach of the fiduciary duty. On that basis Auag Resources Ltd v Waihi Mines Ltd, in which the contract including the "Entire Agreement" clause constituted the commencement of the parties’ relationship, is distinguishable.

  44. Gemini is not to be constrained by provisions secured by prior breach of duty; and Morgan & Banks are not to be treated as inoculated by them from fiduciary liability for the events that followed.

  45. Those are said to have been first the continued and exacerbated breach of Morgan & Banks’ duty to confirm Mrs. Webb-Speight’s position and generally to nurture and sustain her status and secondly the imposition of financial pressure on Gemini, permitted by cl 9.1 of the shareholders’ agreement, so as to make their position intolerable and then the withholding of valuable information that restructuring was imminent.

  46. On such assumed facts it is arguable that Morgan & Banks were in material breach of fiduciary duty as a result of which Gemini failed to achieve the benefits it would otherwise have derived on restructuring and sale of their shares.

    RESULT

  47. Accordingly the appeal fails and is dismissed.

  48. While Gemini will no doubt revise its pleading following discovery. It may wish to be more explicit as to the facts said to give rise to the fiduciary duty and to constitute its breach.

  49. Gemini will have costs of $5,000 together with travelling and accommodation expenses for two counsel as agreed or fixed by the Registrar.


Cases

LAC Minerals Ltd v International Corona Resources Ltd (1989) 61 DLR (4th) 14; United Dominion Corp v Brian Proprietary Ltd (1985) CLR 1; Coleman v Myers Ltd [1977] 2 NZLR 225 at 298ff (CA); Auag Resources Ltd v Waihi Mines (1995) 5 NZBLC 103 (dist); Bristol and Wells Building Soc v Mothen [1996] 4 All ER 698; Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41

Authors and other references

Finn J in Youdan (ed) Equity, Fiduciaries and Trusts Carswell 1989

Nolan A Fiduciary Duty to Disclose? (1997) 113 LQR 220.

Representations

A R Galbraith QC and B Taylor for appellants (instructed by Russell McVeagh McKenzie Bartleet & Co, Auckland)
G J Judd QC and J McCartney for first respondent (instructed by Judith Collins, Auckland)


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