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Mad Dogs Pty Ltd v Gilligan's Backpackers Hotel & Resort Pty Ltd

 

[2014] QSC 165

 

SUPREME COURT OF QUEENSLAND

 

PARTIES:

FILE NO/S:

Trial Division

PROCEEDING:

Application

ORIGINATING COURT:

DELIVERED ON:

25 July 2014

DELIVERED AT:

Cairns

HEARING DATE:

2 May 2014, supplementary submissions in writing 7 May 2014

JUDGE:

Henry J

ORDERS:

1. The defendants’ application is dismissed.

2. Argument as to costs and the hearing of the plaintiff’s application will occur at 10 a.m. on 22 August 2014.

3. The plaintiff will file and serve a further amended statement of claim on or before 15 August 2014, which further amended statement of claim shall state facts sufficient to indicate whether any of the conduct presently described in paragraph (9)(a) of the Fourth Amended Statement of Claim occurred after the service of the purported termination letter of 18 July 2007 and if so what the conduct is alleged to have been.

CATCHWORDS:

TORTS – MISCELLANEOUS TORTS – INTERFERENCE WITH CONTRACTUAL RELATIONS AND OTHER RELATIONS – OTHER PARTICULAR CASES – where the plaintiff pleads the second defendant engaged in interfering conduct on behalf of himself and the first defendant – where the plaintiff pleads the second defendant “was and is the controlling mind of the first defendant” – whether the second defendant was in substance a de facto director of the first defendant – whether an action can be maintained against the second defendant for interfering with contractual relations

CONTRACTS – GENERAL CONTRACTUAL PRINCIPLES – DISCHARGE, BREACH AND DEFENCES TO ACTION FOR BREACH – ELECTION AND RESCISSION – GENERALLY – where the first defendant sent a letter to the plaintiff purporting to terminate an agreement –where the plaintiff made application to the court for declarations and orders in relation to the agreement – where the first defendant withdrew the purported termination and the plaintiff pleads that was an implied admission that the notice to terminate was unlawful – where consent orders were made dismissing the plaintiff’s application – where the plaintiff pleads the defendants’ breach and other interfering conduct evinced an intention to no longer be bound by the agreement – where the first defendant contends the plaintiff is precluded from relying on the alleged termination by dint of the plaintiff’s election to affirm the agreement – whether by commencing court proceedings the plaintiff elected to affirm the contract – whether summary judgment should be given for the first defendant

Uniform Civil Procedure Rules 2000 (Qld) r 293

Biscayne Partners Pty Ltd v Valance Corp Pty Ltd & Ors [2003] NSWSC 874, cited

DC Wagemaker & Sons v Commonwealth Development Bank (1970) 91 WN (NSW) 614, cited

O’Brien v Dawson (1941) 41 SR (NSW) 295, cited

Ogle v Comboyuro Investments Pty Ltd (1976) 136 CLR 444, applied

Sargent v ASL Developments Ltd (1974) 131 CLR 634, applied

Spettabile Consorzio Veneziano Di Armamento E Navigazione v Northumberland Shipbuilding Co Limited (1918-1919) All ER 963, applied

Tropical Traders Ltd v Goonan (1963-64) 111 CLR 41, applied

Tsaprazis v Goldcrest Properties Pty Ltd (2000) 18 A CLC 285, cited

COUNSEL:

DP Morzone QC for the plaintiff

JH Davies for the first and second defendants

SOLICITORS:

O’Reilly Stevens Lawyers for the plaintiff

Creevey Russell Lawyers for the first and second defendants

[1] The defendants make application for summary judgment or an order striking out the entirety of the pleadings without leave to re-plead or an order staying further proceedings.  The hearing of a cross application by the plaintiff going to predominantly procedural matters has been postponed pending the outcome of the defendants’ application. 

[2] In summary the defendants submit:

(a) the plaintiff does not have a maintainable claim against the second defendant for the tortious claim of interfering with contractual relations (“the interfering with contractual relations argument”); and

(b) the plaintiff’s case against the first defendant, founded on an allegation of repudiation by the first defendant of its agreement with the plaintiff, is unsustainable because the plaintiff elected to affirm the agreement by applying to the court for a declaration that the purported termination of the agreement was invalid and the agreement remained in force (“the election argument”).

[3] The reliance placed on these arguments by the defendants is not materially different in respect of any of the alternative forms of relief sought. The way in which the matter was argued means if the arguments do not warrant summary judgment then the striking out of the entirety of the pleadings or a stay are not warranted either. 

Background

[4] The first defendant (“Gilligans”) operates a backpackers hotel in Cairns.  Its sole shareholder is the second defendant, Mr Ainsworth.  In February 2005 Gilligans entered into a contract with the plaintiff (“Mad Dogs”) under which Mad Dogs was to provide various food and catering services at Gilligans’ premises.  Mad Dogs allege that under the agreement it was obliged inter alia to operate Pompodoros, the main restaurant at Gilligans’ backpackers hotel. 

[5] Mad Dogs allege that in May, June and July of 2007 Mr Ainsworth engaged in an array of misconduct against Mad Dogs intending to interfere with its contractual relations with Gilligans.  The alleged misconduct, which is denied, included threatening to “take back Pompodoros” whether Mad Dogs “liked it or not”, threatening to “breach” Mad Dogs and send it bankrupt if it would not agree to terminate the agreement, threatening to break the legs of Mad Dogs director Mr Le Van and engaging in a campaign of false allegations of serious deficiencies in the quality of the service provided by Mad Dogs.  During the same period Gilligans is alleged to have stated to Mad Dogs that it was not happy with the terms of the agreement and “wanted to take Pompodoros back”.

[6] On 18 July 2007, subsequent to the alleged misconduct, Gilligans gave written notice to Mad Dogs terminating the agreement with the termination to take effect on 20 August 2007.  Mad Dogs pleads it was not in substantial, or in any, breach of the contract and Gilligans’ election to terminate the agreement was in breach of it. 

[7] Mad Dogs pleads it suffered loss and damage estimated at $520,788.58 in consequence of Gilligans alleged breach of the agreement.  It pleads an identical loss as a consequence of the alleged unlawful interference with the contractual relationship on the part of both Gilligans and Mr Ainsworth.

 

The interference with contractual relations argument

[8] The interfering conduct pleaded against Mr Ainsworth is alleged to have been committed on behalf of himself and Gilligans.  Mad Dogs pleads that Mr Ainsworth “was and is the controlling mind of the first defendant”.  The defendants deny that allegation.  In its reply Mad Dogs joins issue with that denial, alleging Mr Ainsworth had a substantial role in Gilligans’ decision making, had the capacity as sole shareholder to significantly affect Gilligans’ financial standing and was the person whose instructions or wishes the officers of Gilligans were accustomed to act in accordance with.

[9] In the present application the defendants characterise Mad Dogs’ case as alleging that Mr Ainsworth was in substance a de facto director of Gilligans. 

[10] In O’Brien v Dawson[1] Jordan CJ cited some English authorities for the proposition that:[2]

“[T]he fact that one or more directors of a company, acting as such, are the instruments by which the company, without just cause, refuses to perform a contract does not confer on the other party to the contract a right to sue the directors in tort on the footing that they have procured a breach of contractual rights.”

[11] That matter was unsuccessfully appealed to the High Court. Starke and McTiernan JJ concluded a director acting as a director did not incur independent liability as a tortfeasor.[3]

[12] More recently in Tsaprazis v Goldcrest Properties Pty Ltd[4] Hodgson CJ observed of directors’ liability under a contract entered into by a company:[5]

“[I]n general, only the company is liable under such a contract, not its shareholders or directors, unless they guarantee the company’s performance. Directors may become indirectly liable to other contracting parties through breach of their directors’ duties to the company, or through breach of the corporations law relating to such matters as insolvent trading. Consistently with this general approach, directors are not liable for the tort of inducing breach of contract, where, in exercising their functions as directors, they have caused the company to breach its contract.”[6]

[13] Whether that exclusory principle applies to individuals who are the guiding mind of a company but are not actually directors of it was considered in Biscayne Partners Pty Ltd v Valance Corp Pty Ltd & Ors[7] where Einstein J observed:[8]

“Once a person becomes a de facto director within the meaning of Corporations Act section 9 they become exposed to the same common law and statutory duties as are applicable to directors, including of course the duties imposed by the Corporations Act itself.  It is also possible for a person to become a de facto director as a result of a defect in appointment or where there is simply a failure to formally appoint.  There is no reason in principle for regarding such a person as acting otherwise than a director where the question which arises is whether the acts of that person were the acts of the company.”

[14] The defendants submit Mr Ainsworth cannot be independently liable for the tort of interference with contractual relations because Mad Dogs’ case against Mr Ainsworth is he was the controlling mind of the company and in the same position as a director such that his acts were the acts of the company.

[15] There is some force to this argument if in the end result it is found Mr Ainsworth was in effect a de facto director of the company and, as the plaintiff alleges, its controlling mind.  However, the defendants deny that allegation, a denial with which Mad Dogs has joined issue in its reply and answer. 

[16] What if at trial it is found Mr Ainsworth is not the controlling mind of the company and thus not excluded from being independently liable for his alleged interference with contractual relations between Mad Dogs and Gilligans? 

[17] Such a finding would likely be accompanied by a finding that Mr Ainsworth’s interfering conduct, if it be made out, was not, as Mad Dogs alleges, committed on behalf of Gilligans.  It is unclear on the fourth amended statement of claim as pleaded whether it seeks to maintain a case against Mr Ainsworth in the event the Court finds he did interfere as alleged but does not find he did so on behalf of the company or in the capacity of a de facto director.  However, some of the later paragraphs of the fourth amended statement of claim leave it reasonably open to argue that even if Mr Ainsworth’s alleged actions were not committed by him in his capacity as a de facto director or a controlling mind of the company, he nonetheless committed them intending to interfere with the contractual relations between Mad Dogs and Gilligans and ought be independently liable for the consequences of those actions.

[18] For these reasons I am not satisfied Mad Dogs has no real prospect of succeeding on its claim for interference with contractual relations as against Mr Ainsworth.  Nor am I satisfied there is no need for a trial of that part of the claim.  This feature of the defendants’ application ought not result in a strike out or stay.

 

The election argument

[19] As mentioned above, on 18 July 2007 Gilligans sent a letter through its solicitor to Mad Dogs purporting to terminate the agreement (the “termination letter”).[9]  Mad Dogs pleads Gilligans did not have a right to terminate the agreement because Mad Dogs was not in breach of the agreement.[10]

[20] On 16 August 2007 Mad Dogs and other applicants associated with it applied to the Supreme Court in Cairns for declarations and orders including:

“1. A declaration that the purported terminations of the Main Kitchen Agreements entered into between the first applicant and the first respondent and the second applicant and the second respondent (“the Agreements”) are of no legal effect.

  1. A declaration that the Agreements remain valid and are enforceable by the parties thereto notwithstanding the purported termination of the agreements by the solicitors acting for the first and second respondents.
  2. An order that the respondents be restrained from doing any act or thing which would or may prevent or hinder the applicants from performing their obligations under the Agreements.”[11]

[21] On 27 August 2007 solicitors acting for Gilligans wrote to Mad Dogs withdrawing the purported termination, asserting the agreement remained valid and indicating Gilligans would pay Mad Dogs’ costs thrown away by reason of the withdrawal of the purported termination.[12]  Mad Dogs pleads that letter was an implied admission that the notice to terminate was unlawful and the letter was ineffective in purporting to withdraw the election to terminate which Gilligans had made on 18 July 2007.  Nonetheless, Mad Dogs apparently consented to a consent order of the Registrar of 30 August 2007, by which the application was dismissed and the respondents were ordered to pay the applicants’ costs. 

[22] The evidence presently before the court is largely silent on what actually occurred vis-a-vis the operation of Mad Dogs’ services on Gilligans’ premises after the termination letter of 18 July 2007.  The pleadings are not any more enlightening.  Mad Dogs pleads Gilligans breached the agreement by electing to terminate the agreement by the termination letter of 18 July 2007[13] and that Gilligans’ letter of 27 August 2007 purporting to withdraw “the election to terminate … was ineffective since the election to terminate was spent”.[14] Mad Dogs further pleads that by that breach and the interfering conduct alluded to earlier, Gilligans was in “substantial, wilful and persistent” breach of the agreement “in that”, amongst other things, it failed to do such things as were necessary on its part to enable Mad Dogs to have the benefit of the agreement and “prevented … the plaintiff’s rights and obligations under the agreement”.[15]  It is not readily apparent whether those descriptions are intended to relate solely to Gilligans’ conduct prior to the termination letter or to also embrace its subsequent conduct.  Mad Dogs also pleads that by the breach and the interfering conduct Gilligans evinced an intention to be no longer bound which was accepted, inter alia, by the plaintiff “by its conduct to (sic) deliver up the premises”.[16]  The reference to Mad Dogs delivering up the premises is as bereft of temporal detail as the evidence presently before the court. 

[23] Gilligans submits that once its termination letter of 18 July 2007 had been received Mad Dogs had two alternative and inconsistent rights:  to either affirm the agreement or accept Gilligans’ alleged repudiation and terminate the agreement.[17]  Gilligans submits that after receiving the termination letter Mad Dogs elected to affirm the agreement through seeking the declarations and orders sought in the proceedings instituted on 16 August 2007.   Gilligans contends that having elected to seek that relief Mad Dogs is precluded from relying upon the alleged termination of 18 July 2007.  Inherent in that submission is that Mad Dogs thereby lost the right to rely on the alleged breach of the agreement, constituted by the service of the termination letter, to sue as it now does for damages for breach of the agreement.

[24] An election between rights occurs where a party has two alternative rights and acts in a manner consistent with the exercise of one of those rights and inconsistent with the exercise of the other.[18] 

[25] Mad Dogs characterises its recourse to the court through its 2007 application as of neutral and not exclusory impact on its other rights.  Certainly the bare fact a party resorts to the assistance of the courts in connection with a contractual dispute will not bespeak an election.  For instance, in Spettabile Consorzio Veneziano Di Armamento E Navigazione v Northumberland Shipbuilding Co Limited,[19] Warrington LJ explained:

“...where one party to a contract conceives that he is no longer bound by the contract or has a right to have it rescinded or declared null and void and issues a writ for the purpose of obtaining that which he believes to be his right he does not by that mean to repudiate the performance of the contract in any event.  It seems to me that he submits to perform it if the court, as a result of the action, comes to the conclusion that he is bound to perform it, and it cannot be taken to be an absolute repudiation.”

[26] Spettabile was cited by Helsham J in DC Wagemaker & Sons v Commonwealth Development Bank[20] in observing:

“...the mere launching…of a suit...for a declaration that the contract was no longer in existence would not, if it failed, be regarded of itself as an act of repudiation...of the self-same contract.”

[27] Gilligans contends the relief sought by Mad Dogs ought not be characterised as merely declaratory and submits it was analogous to claiming an order for specific performance.  Gilligans relies upon a line of authority involving contracts for the sale of land to the effect that a party in pursuing an order for specific performance of the contract thereby elects to affirm the contract.[21] 

[28] There is some force to the characterisation of the relief sought by Mad Dogs as analogous to specific performance.  However the present case is quite different from the position of a party to a contract for the sale of land electing whether or not to proceed with the bargain.  Here the parties to the agreement had long been proceeding under it.  Mad Dogs were operating on Gilligans’ premises pursuant to the agreement for over two years before the alleged problems arose.  Whether it can here be said, in the context of commercial activity under an agreement of longstanding operation, that the relief sought constituted a choice between truly inconsistent rights, so as to forego the right to sue for damages, is much less clear than in the context of a simple election whether or not to proceed with an agreement to purchase land.

[29] Further, the vendor and purchaser cases dealing with whether the seeking of specific performance constitutes an election still require that such a choice be a choice between inconsistent, truly alternative courses.  Relevantly to the present case, in Ogle v Comboyuro Investments Pty Ltd[22] the plurality resisted an action for specific performance being characterised as an election in circumstances where a defaulting party has shown and continues to show an intention to no longer be bound.  In such circumstances the party seeking specific performance is not regarded as having elected against a right to sue for damages.[23]

[30] The inconsistent, truly alternative character of the competing courses open is a vital feature of the doctrine of election.[24]  Thus the law will not characterise conduct as constituting an election to affirm a contract unless the conduct can likewise be clearly characterised as constituting an election against rescinding the contract for breach.  For example, in Tropical Traders Ltd v Goonan[25] the granting of an extension of time to make overdue payment under a contract for the sale of land was not regarded as a clear election to affirm rather than rescind the contract and rather was characterised as the announcement of an intention to refrain from electing either way until payment was made.  On the other hand, in Sargent v ASL Developments Ltd,[26] vendors who knew of a planning scheme affecting the property in a way which entitled them to rescind the contract were held to have elected to insist on continued performance, to the exclusion of the right of rescission, by receiving payments of interest and rates from the purchaser and co-operating in the lodgement of applications to bring the land under the Real Property Act 1900 (NSW). 

[31] As these contrasting examples from the field of vendor and purchaser demonstrate, whether the exercise of one right ought be characterised as inconsistent with the exercise of another and truly involves a choice between mutually exclusive courses, necessarily depends upon the individual circumstances of the case. This underscores the importance of evidentiary detail.  Because the very nature of the election argument advanced by Gilligans requires a mixed legal and factual characterisation, it ought be approached with caution in the absence of a complete evidentiary picture.  That need for caution is in any event inherent in the test for summary judgment under r 293 of the Uniform Civil Procedure Rules.  That test calls for satisfaction not only that Mad Dogs has no real prospect of succeeding in its claim as against Gilligans but also that there is no need for a trial of the claim. 

[32] The above-mentioned uncertainty regarding Gilligans’ conduct after the termination letter of 18 July 2007 and the operation of Mad Dogs’ services on Gilligans’ premises after that time makes it difficult to conclude with certainty that Mad Dogs’ application to the court of 16 August 2007 was inconsistent with it retaining a right to be compensated for damage occasioned by the purported termination.  Although probably of lesser moment it is also unclear on the present evidence what if any significance ought be attributed, in characterising the 2007 application, to the fact that application was by three applicants, only one of which was Mad Dogs, against three respondents, one of whom is not a party in the present proceedings.

[33] Considered collectively, the above discussed matters, most particularly the longstanding nature of the commercial arrangement and the limited extent of the evidence as to the parties’ conduct following the purported termination, leave me in a state of uncertainty as to whether Mad Dogs’ 2007 application ought be characterised as an election between two truly alternative courses.  The competing argument, that the application did not preclude Mad Dogs from the right to sue Gilligans for damages occasioned by its apparent breach, cannot at this stage be regarded as having no prospect of succeeding.

[34] A clearer evidentiary picture against which the competing arguments can be considered will presumably emerge at trial.  However, I am neither satisfied that Mad Dogs’ claim against Gilligans has no prospect of succeeding nor that there is no need for a trial of the claim. 

[35] The application for summary judgment by the defendants must therefore fail.  For the same reasons this feature of the application ought not result in a strike out or stay.

[36] Something should be done to address the above identified ambiguity in Mad Dogs’ pleading as to whether its damages claim as against Gilligans is intended to relate solely to Gilligans’ conduct prior to and including the service of the termination letter or to also embrace its subsequent conduct.  Mad Dogs has already flagged an intention to amend its pleading.  I will direct that its amended pleading state facts sufficient to indicate whether any of the conduct presently described in paragraph (9)(a) of the Fourth Amended Statement of Claim occurred after the service of the purported termination letter of 18 July 2007 and if so what the conduct is alleged to have been.  If such conducted occurred it is obviously a material fact[27] and, if not, the pleading should not remain ambiguous on the point.

Further conduct of the application

[37] It will be necessary to hear the parties as to costs.

[38] It also remains to hear the cross application.

[39] The matter will be listed for further hearing, allowing sufficient time in the meantime for Mad Dogs to file and serve its further amended statement of claim. 

Orders

[40] My orders are:

1. The defendants’ application is dismissed.

2. Argument as to costs and the hearing of the plaintiff’s application will occur at 10 a.m. on 22 August 2014..

3. The plaintiff will file and serve a further amended statement of claim on or before 15 August 2014, which further amended statement of claim shall state facts sufficient to indicate whether any of the conduct presently described in paragraph (9)(a) of the Fourth Amended Statement of Claim occurred after the service of the purported termination letter of 18 July 2007 and if so what the conduct is alleged to have been. 

Footnotes

[1] (1941) 41 SR (NSW) 295.

[2] Ibid, 308 (citations omitted).

[3] O’Brien v Dawson (1942) 66 CLR 18, 32-33, 34.

[4] (2000) 18 A CLC 285, [11].

[5] Ibid, [11] (citations omitted).

[6] Also see Root Quality Pty Ltd v Root Control Technologies Pty Ltd (2000) 177 ALR 231, [113]- [134], TS and B Retails Systems v 3 Fold Resources Pty Ltd & Ors (No3) (2007) 158 FCR 444, [186].

[7] [2003] NSWSC 874.

[8] Ibid, [115].

[9] Fourth Amended Statement of Claim [7].

[10] Fourth Amended Statement of Claim [8]; Reply & Answer [8(b)]

[11] Affidavit of Simon Trewavas doc 55 ex SWT1 p1.

[12] Affidavit of Simon Trewavas doc 55 ex SWT1 p200.

[13] Fourth amended statement of claim [7].

[14] Fourth amended statement of claim [8A].

[15] Fourth amended statement of claim [9].

[16] Fourth amended statement of claim [9].

[17] Applicants’ (Defendants’) Outline of Submissions [15].

[18] Bibby Financial Services Australia Pty Limited v Sharma [2014] NSWCA 37 [115] Gleeson CJ.

[19] (1918-1919) All ER 963, 966; (1919) 121 LT 628, 633.

[20] (1970) 91 WN (NSW) 614, 622 E-F; also see to the same effect Highmist Pty Ltd v Tricare Limited (2005) QCA 357, [54]-[58].

[21] Eg. Highmist P/L v Tricare Ltd [2005] QCA 357; Caprice Property Holdings Pty Ltd v McLeay & Anor [2013] QCA 125.

[22] (1976) 136 CLR 444, 461-462.

[23] See for example the observations of Windeyer AJ in Kelly v Galafassi & Anor [2013] NSWSC 680, [23] and McMurdo J in Dunworth v Mirvac Qld Pty Ltd [2012] 1 Qd R 207, 224.

[24] Sargent v ASL Developments Ltd (1974) 131 CLR 634, 641, 655; Khory v Government Insurance Office (NSW) (1983-84) 165 CLR 622, 633.

[25] (1963-64) 111 CLR 41.

[26] (1974) 131 CLR 634.

[27] UCPR r 149.

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Editorial Notes

  • Published Case Name:

    Mad Dogs Pty Ltd v Gilligan's Backpackers Hotel & Resort Pty Ltd & Anor

  • Shortened Case Name:

    Mad Dogs Pty Ltd v Gilligan's Backpackers Hotel & Resort Pty Ltd

  • MNC:

    [2014] QSC 165

  • Court:

    QSC

  • Judge(s):

    Henry J

  • Date:

    25 Jul 2014

Litigation History

No Litigation History

Appeal Status

No Status