The first defendant was a property developer that had constructed a large residential complex in Brisbane’s CBD. It wished to sell the valuable right to conduct a letting agency business for the numerous residential apartments comprised in the development. It sold these rights to the plaintiff in a form which contemplated the first defendant exercising its proxy control of the body corporate so as to cause the body corporate to enter into a letting agreement for the residential units with the plaintiff.
After the contract had been executed, but prior to performance, the first defendant got wind of a sale by the plaintiff’s shareholders of those shares to a specialist in the area of letting services for serviced apartments. The first defendant gave evidence at trial that it was against its commercial interests for the plaintiff to be controlled by such a company, as it held the view that the conduct of a serviced apartments business from an upmarket residential tower would deleteriously affect the marketing of unsold units and penthouses in the complex.
The first defendant sought advice from its solicitors, who in turn obtained advice from counsel, as to a strategy that might allow it to terminate its contract with the plaintiff. Counsel advised that a refusal by the plaintiff to undertake not to conduct a serviced apartment business, or hotel, from the residential tower, would arguably amount to a refusal to comply with the plaintiff’s contract so as to constitute an anticipatory breach justifying termination.
The first defendant went further than the course discussed by counsel. In late 2005, its solicitors sent a deed of variation to the plaintiff which redefined the phrase “letting business” by the exclusion of arrangements for serviced apartments, and the confinement of the business to letting units as long term residences.
The plaintiff refused to execute the draft deed, but replied that it intended to act lawfully and to abide by the terms of the various agreements that had been entered into between the parties. The assurance was insufficient for the first defendant, who after exchange of subsequent correspondence as to the effect of the plaintiff’s assurance, terminated the suite of agreements in February of 2006.
Shortly thereafter, in March of 2006, the directors of the first defendant incorporated the second defendant with the same directorship and shareholding. The second defendant thereby had the entirety of the first defendant’s knowledge as to the circumstances leading up to the termination, including the effect of the legal advice received by the defendant.1
The first defendant promptly exercised its control of the body corporate so as to have the body corporate engage the second defendant as the letting agent for the residential tower. Justice Chesterman found that the second defendant was incorporated principally for the purpose of taking those rights in the place of the plaintiff.
Ultimately the first defendant’s termination was found to be wrongful. It was not entitled to insist on a deed of variation, nor terminate the contract in circumstances whereby the plaintiff gave an assurance as to its intention to act lawfully. The first defendant’s directors in cross-examination conceded that they knew that they couldn’t insist on any change to the contract, and that from a commercial perspective, they did not care whether their conduct constituted a wrongful repudiation of the contract.
At trial the second defendant sought to rely on the fact that it was incorporated after the first defendant’s termination of the contract, together with the fact that it relied on legal advice which was said to ground an honest belief as to the first defendant’s entitlement to do what it did.
Because the first defendant’s repudiation was ineffective, the contract remained in force when the first defendant caused the body corporate to enter the letting agreement with the second defendant. This meant that there was a continuing breach of contract by the first defendant. The second defendant’s acceptance of those contractual benefits interfered with the performance of the contract between the plaintiff and the first defendant, as it allowed the first defendant to put it out of its own power to provide the benefit of the letting agreement to the plaintiff.
It was not disputed at trial that even though a defendant is not responsible for the initial breach of contract, liability may accrue if it is responsible for continuing or furthering the breach of a still subsisting contract.2 His Honour noted the artificiality of limiting the reach of the tort of interference with contractual relations to the acts of a defendant in procuring the initial breach, but not subsequent breaches when great harm might be done to a plaintiff by procuring a continuation of the breach. There was no sensible reason why the tort should extend to one situation but not the other.
The touchstone in the case law and the texts cited by His Honour was the causing of a party to a contract to fail in the performance of an ongoing contractual obligation. In this case the only sensible inference from the evidence was that the second defendant was incorporated for the very purpose of taking the letting rights promised to the plaintiff. Because of the common directorship it took those rights in circumstances where it knew of the promises made to the plaintiff, and of the plaintiff’s insistence that the promises be honoured.
To succeed the plaintiff also had to show that the second defendant knew of the contract and that the doing of a particular act by one of the parties to it would be a breach of it, and armed with that knowledge, proceed to procure the relevant party to do the act. A bona fide belief, reasonably held, that it was not a breach of contract, is a good defence. Thus if the second defendant had believed on reasonable grounds that the contract had been rescinded, when it fact it had not, it could not have been said to have knowingly procured its breach.3
Justice Chesterman further qualified the quality of that reasonable belief by reference to Browne-Wilkinson J’s decision in Swiss Bank Corporation v Lloyds Bank Limited (1979) Ch 548 at 580 to the effect that it is insufficient to show that there is room for honest doubt as to whether the defendant’s or the plaintiff’s rights have priority. If there is such a doubt, yet a defendant chooses to adopt a course which to its knowledge would interfere with the plaintiff’s contract on one view of the law, the interferer must at least show that it was advised and honestly believed that it was legally entitled to take that course.
His Honour was not persuaded of the existence of the requisite honest belief. The first defendant, and thus the second defendant, had not received advice to the effect that the plaintiff’s refusal to undertake short term lettings would justify a termination. Referring to counsel’s advice, His Honour said that to say such a course was arguably correct was to say no more than it might be correct. The position remained unclear. Thus the second defendant chose to adopt a course which interfered with the plaintiff’s contract, on one view of the law. Notably absent was any testimony from either director that they had been advised, and honestly believed, a legal entitlement to take the course of termination.
The case has important ramifications for any commercial entity that accepts contractual benefits promised elsewhere in circumstances where there is any doubt as to the subsisting validity of the seller’s contract to sell those rights to another entity. The recipient must at least show that it was advised and honestly believed that it was legally entitled to take the course that it did. Advice that it is arguable that the seller’s initial contract was validly terminated may not suffice.
David Williams
Footnotes
- Chesterman J cited Endresz v Whitehouse (1998) 3 VR 461 and Morlea Professional Services Pty Ltd v Richard Walter (In Liq) (1999) 96 FCR 217.
- Smithies v National Association of Operative Plasterers [1909] 1 KB 310; Torquay Hotel Co Limited v Cousins [1969] 2 Ch 106 at 137; DC Thompson & Co Limited v Deacon [1952] Ch 646 at 697.
- Short v Citibank of Sydney (1912) 15 CLR 148 at 160.
