Forty Two International Pty Ltd V Barnes [2014]: Analysis And Findings

Question:

Discuss about the Forty Two International Ltd v Barnes case.

Forty Two International Pty Limited v Barnes [2014] is one of the significant cases of Federal Court of Australia. In this case, the applicants are Forty Two International Pty Limited (FTI), The Gang of 4 Pty Ltd (Gang of 4) and BlueFreeway Limited (BlueFreeway). The respondents are the individual founders of FTI and Gang of 4. FTI is a developing company, which sells digital marketing products. Along with this, they have operated another software program called Campaign Master. In the year of 2006, FTI introduced a business connection with Campaign Master (UK) Limited (CMUK) for the distribution of the software program Campaign Master allover digital market in the UK (Laster and Zeberkiewicz 2015).

While in 2006, BlueFreeway has expressed their interest for Share Purchase Agreement and it included the tax targets, which helps to fix the amount for the financial years, Earn-Out Payment and Additional Payment for calculating the earnings before paying the interest. In the SPA, the respondents have been entered into the service agreement. After granting a license to CMUK, it has provided help for exploiting the Campaign Master software in the UK, Finland and India. The CMUK has provided the payment of a license fee of $4.1 million to FTI (Corkery, Mikalsen and Allan 2017).

In 2007, the respondents are settled down to negotiate an Exit Agreement with BlueFreeway to leave FTI. The agreement has been formed for the resignation of the respondents and provision of $16 million payment to them according to the conditions on FTI achieving EBIT 2007. Therefore, several issues have been found in this case. BlueFreeway never entered into the Exit Agreement. The SPA has only worked according to their terms only. According to the entitlements, SPA has never included the Additional Payment or not paid $16m. Therefore, the applicants claimed damages against BlueFreeway who is liable for the damages due to the misconduct in connection with SPA. The breach of director’s duty and breach of the contract has been found according to the Corporations Act 2001 (Cth). The misleading and deceptive conducts were also found in this case under section 42 of the Fair Trading Act 1987 (NSW) (FT Act) (McKendrick and Liu 2015). 

According to the fact of the case, the court has found the terms of business efficiency, which must be implied for SPA. The respondents are bound to disclose every detail under the SPA regarding the movement of financial issues of BlueFreeway. The implied terms in SPA must be acted as a ‘freestanding obligation’ because it is the obligations of the respondents to provide monthly sales reports according to the calculation of EBIT 2007. In the court, the Judge Griffiths J has rejected the arguments of respondents because the terms are uncertain and inconsistent according to the agreement terms of SPA (Corkery, Mikalsen and Allan 2017). The implied terms have failed to provide clear concepts about the financial information according to the value of EBIT 2007. The court has also cited the case Hope v R.C.A Photophone of Australia Pty Ltd (1937) where the contract was not operated due to the implication of specific terms and must provided the business efficiency. It is also found that in the Exit Agreement, no implied terms are applied in the business efficiency (Laster and Zeberkiewicz 2015). 

Legal Issues

 According to the fact of the case, the applicants have alleged BlueFreeway and claimed damages for the breaches of various fiduciary and statutory duties under section 182 of the Corporation Act (Cth). They have claimed that the directors are improperly used their position for gaining advantages from the company which is against of director’s nature under the organization (Corkery, Mikalsen and Allan 2017). The applicants mentioned that FTI has taken advantages by receiving the license fee, which is a benefit amount but extra expenses. It has created obligation for BlueFreeway by providing Additional Payment to the respondents. Here, the directors of FTI and BlueFreeway are bound to their fiduciary and statutory duties toward FTI not to BlueFreeway. However due to such breaches of fiduciary and statutory duties of directors’, BlueFreeway has suffered loss and FTI received the license fee (Laster and Zeberkiewicz 2015). 

According to the alleged claim by the applicants, the agreement was consisted of misleading or deceptive conducts which breached the section 42 of the FT Act. The court has cited the case Australian Competition and Consumer Commission v Telstra Corporation Ltd (2007) while analyzed the facts of misleading or deceptive conducts. This case has been described two steps while represent the facts that it was consisted of misleading or deceptive conducts. The facts were need to be identified that whether any of the pleaded representation is carried the complaints, the carried out representations are false or likely to mislead or deceive or misleading or deceptive conducts (Laster and Zeberkiewicz 2015).

In this case study, the first representation has been described that the applicants have stated about the respondents who are conducted with false representation about the capacity of CMUK that they will pay the license fee to FTI, which was deceptive or misleading conducts. The court has been mentioned that the representation is being given but they did not intend to procure finance for the permitting the license fee and by the transaction, it will represent the facts of the misleading or deceptive conducts. The findings of the facts depend on the evidence where both parties have been believed on the existence of the external financier to CMUK. Therefore under the section 42 of the FT Act, the representation was not consists of misleading or deceptive conducts (McKendrick and Liu 2015).

According to the second representation, it has been required to found whether the agreement was false, likely to mislead or deceive or misleading or deceptive conducts. The applicants have argued on this issue that the payment of license fee was misleading or deceptive conduct because it was paid to FTI by CMUK. Therefore, an important question has been found about the facts where the respondents were must not disclosed about their involvement in the financing amounted which was deceptive or misleading conducts. In this representation, the court had cited the case Miller & Associates Insurance Broking Pty Ltd v BMW Australia Finance Ltd (2010) which has addressed similar legal principles of two steps representation (Laster and Zeberkiewicz 2015). The applicants are not aware of the roles and functions of the respondents while the non-disclosure of the facts consists of misleading or deceptive conducts. The court has approached the facts according to the legal principles in the cases of Rhone-Poulenc Agrochimie SA v UIM Chemical Services Pty (Ltd) (1986) and Hornsby Building Information Centre Pty Ltd v Sydney Building Information Centre Ltd (1978) (Laster and Zeberkiewicz 2015). In the cases, the respondents are found with the act of ‘intention to mislead or deceptive conducts’ which were not important provisions according to the section 42 of the FT Act (Corkery, Mikalsen and Allan 2017). 

Breach of Director's Duty and Misconduct

In this case, one of the respondents has mentioned that there were no such casual links were present between that conducts and the damages, which has been suffered by the applicants. However, the court has stated that the applicants have relied upon the conducts and a causal link was also found between the conduct which caused damages to BlueFreeway. Therefore, as per the terms of the agreement, BlueFreeway has rights to claim the damages. The directors’ has knowledge about the involvement in financing and not provided their votes in favor of BlueFreeway while conducting the Exit Agreement. While conducting on the issues, the court has cited another case Campbell v Backoffice Investments Pty Ltd (2009), where the similar conducts have been expressed. The damages has only awarded to the applicants if the Exit Agreement is conducted with misleading or deceptive facts (Laster and Zeberkiewicz 2015).

The applicants can claim the damages if the respondents breached the terms of contract according to the section 42 of the FT Act. The primary claim can be operated if the damages caused by the respondents for disclosing their involvement in the financing without conducting in the Exit Agreement. The amount of $16 million would not be paid by the SPA and they would not have made the Additional Payment. Therefore, if the respondent makes the disclosure, the negotiations are also possible in Exit Agreement (Corkery, Mikalsen and Allan 2017).

The alternative claim of damages have only processed if the respondents disclosed their involvement in the financing and the applicants made the negotiations in the Exit Agreement. Therefore, the issue has been identified when the respondents failed to establish the facts to disclose the opportunities to negotiate a substantially lesser figure than the $16 million paid to them. Sellars v Adelaide Petroleum NL (1994) is one of the significant cases where the High Court has been identified the issues. The court has identified that the applicants have no requirements for providing the balance of probabilities. Therefore, it proves the facts that the opportunities can be negotiated in the Exit Agreement when the terms can be negotiated for the termination of the payment less than $16 million. The court has also conducted the issue of causation and cited legal provision according to the case facts of Daniels v Anderson law (1995).  It has only conducted when the determination of causation depends on the balance of probabilities (McKendrick and Liu 2015). Therefore, a link has been conducted between the conducts of respondents and damages of BlueFreeway while negotiating a lower termination payment (Laster and Zeberkiewicz 2015). 

Conclusion

According to the above finding, the court has identified the issues where the breaches of the statutory duties conducted by the respondent for the implied terms in the agreement. The misleading or deceptive conducts are found while the terms are implicated in the financial transactions. The court has evaluated the shreds of evidence and found that the respondents have been driven by their personal concerns to maximize their earn-out payments. Therefore, BlueFreeway was awarded with $2 million for the damages, for loss of the opportunity or chance to negotiate a termination payment.

According to the decision of the court, it helps to highlight the importance of the provisions, which is poorly structured in it and the transaction is actively involved in the acquired business. The decision also enforced the need for companies to have in place for appropriate reporting and disclosure procedures, when directors and management are acting on behalf of the company. 

Reference

Forty Two International Pty Limited v Barnes [2014] FCA 85

Hope v R.C.A Photophone of Australia Pty Ltd (1937) 59 CLR 348

Australian Competition and Consumer Commission v Telstra Corporation Ltd (2007) 244 ALR 470

Miller & Associates Insurance Broking Pty Ltd v BMW Australia Finance Ltd (2010) 241 CLR 357

Hornsby Building Information Centre Pty Ltd v Sydney Building Information Centre Ltd (1978) 140 CLR 216

Rhone-Poulenc Agrochimie SA v UIM Chemical Services Pty (Ltd) (1986) 12 FCR 477, a

Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304 at [130]

Sellars v Adelaide Petroleum NL (1994) 179 CLR 332

Daniels v Anderson (1995) 37 NSWLR 438 at 530-1

McKendrick, E. and Liu, Q., 2015. Contract Law: Australian Edition. Palgrave Macmillan.

Corkery, J., Mikalsen, M. and Allan, K., 2017. Corporate social responsibility: The good corporation. Centre for Commercial Law.

Later, J.T. and Zeberkiewicz, J.M., 2015. The rights and duties of blockholder directors. Bus. Law. 70, pp.33-54.

Knepper, W.E., Bailey, D.A., Bowman, K.B., Eblin, R.L. and Lane, R.S., 2016. Duty of Loyalty (Vol. 1). Liability of Corporate Officers and Directors.