Liability of company officers and the limited effect of certain contractual exclusions
Nov 2011 |Introduction
In October 2011, the Queensland Court of Appeal (QCA) (McMurdo P, Muir JA and Wilson AJA) delivered judgment in Stewart v White.1 The case involved allegations of negligence and breaches of the Trade Practices Act 1974 (Cth) (TPA) in respect of financial advice, and gave consideration to the effect of contractual exclusion clauses and whether a director was knowingly concerned in the activities of his company.
Facts
Warren White (White) approached Douglas Stewart (Stewart) for loan assistance in 2002. Other financial services were provided throughout the remainder of 2002 and during October 2003, when White asked Stewart to recommend "something which would make money". Stewart informed White of a development at Pacific Pines that involved investors purchasing parcels of land and building houses for re-sale. Stewart made a number of representations relating to the development, the number of parcels of land that needed to be purchased, the amount of profit that would be realised on each parcel of land and the time in which that would be achieved.
White relied on the representations and entered into a joint venture agreement (the agreement) with Stewart and Michael Astill (Astill), who facilitated finance. The agreement included exclusion clauses which did not permit White to "have any recourse to Stewart or Astill for the failure of the Venture" and that "the parties acknowledge that Stewart and Astill are not liable for any loss of profit from the Venture".2
Re-sale of the properties resulted in White incurring a loss.
The initial proceedings were commenced by White against Stewart and his company, Douglas Ian Stewart Financial Services Pty Ltd (the company). White claimed damages for negligent financial advice and misleading and deceptive conduct.
To succeed, White needed to establish that Stewart was concerned, both directly and knowingly, in the company's contraventions.
Decision of the Supreme Court of Queensland
At first instance, the primary judge held that, as Stewart was the only person acting on behalf of the company, Stewart was an agent of the company and had "actual knowledge" of its actions and therefore was concerned, both directly and knowingly, in its contraventions.3
The primary judge inferred Stewart had knowledge that there were no reasonable grounds for the company to make the representations to White. Stewart's evidence supported this inference, because he admitted he did not have experience in purchasing and selling parcels of land in a development, and did not obtain valuations or conduct appropriate research.
The primary judge therefore found in favour of White, on the basis Stewart and the company owed White "a duty to take reasonable care not to cause loss through giving misleading information or advice",4 and that duty was breached because the representations could not be supported by evidence.
The trial judge also held that the exclusion clauses within the agreement did not protect Stewart and the company from liability, because the wording of the exclusion clauses did not apply to tortious acts which took place prior to the agreement.
On appeal, Stewart submitted that the joint venture agreement provided that he owed no liability to White and that he was not "knowingly involved" in the company's conduct.
The Queensland Court of Appeal (QCA) dismissed the appeal with costs.
Grounds for decision
Stewart submitted that the exclusion clauses must be considered by applying "their natural and ordinary meaning in the light of the contract as a whole". The primary judge had found that the exclusion clauses within the agreement did not protect Stewart from pre-contractual breaches of his duty of care.
In the QCA, it was noted by Muir JA that the exclusion clauses were drafted to enable Stewart and Astill to receive a 25 per cent share of the profits, however without any obligation to share any loss. The exclusion clauses also referred to limited liability in the sense of a "failure of the Venture" rather than a person negligently providing representations and information which was misleading and deceptive. The QCA also supported the trial judge's findings with respect to Stewart being knowingly involved in the company's representations.
The QCA therefore found Stewart was liable for White's losses.
Impact
Two key issues in Stewart v White5 were whether the exclusion clauses within the agreement limited Stewart's liability and whether Stewart was "knowingly involved" in the company's conduct.
An agreement and its exclusion clauses must be carefully constructed to clearly define the circumstances which limit liability of the parties, and carefully analysed before any litigation is pursued. In this case, the exclusion was ineffective because it did not extend to pre-contractual misrepresentations or breaches of duty.
This case also highlights that a Court can readily make an inference that, when a representation is made by a company, a person who is the sole director and secretary of the company will know there was no reasonable basis for the representation.
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1 Stewart v White [2011] QCA 291.
2 Stewart v White [2011] QCA 291 at [15].
3 White v Douglas Ian Stewart Financial Services Pty Ltd & Anor [2011] QSC 81 at [61].
4 Stewart v White [2011] QCA 291 at [16].
5 Stewart v White [2011] QCA 291.
