Disclosure by Dropbox: It's a Thing (Sometimes, Maybe)

In the recent Queensland Supreme Court decision of FKP Commercial Developments Pty Lt d v Albion Mill FCP Pty Ltd 2017, the Court considered whether a Seller of real estate had satisfied a statutory obligation to provide written notice of particular information to a buyer before entering into a contract.

The written notice was “given” to the buyer by way of an email with a hyperlink to an electronic data room that contained search results detailing the particular information required to be disclosed by statute. Did that constitute giving written notice?

Before the relevant contract was entered into an employee of a company related to the buyer requested that the Seller provide information (for the conduct of due diligence) by way of a data room/drop box or file share mechanism. The Seller then uploaded files to a data room and sent that employee an email containing a hyperlink to the data room. The employee subsequently sent an email to the Seller notifying that he had access to the folders and files in the data room. Shortly after that the documents in the data room were downloaded by the employee or someone using that employee’s access. It was not disputed that the employee or someone enabled by him downloaded the relevant documents. Those documents included a copy of search results on the land that stated the site was included on the Environmental Management Register (“EMR”) as a site that had been subject to a Notifiable Activity pursuant to the Environmental Protection Act (“EPA”).

Negotiations for the proposed sale of the land continued and a few days before the contract was entered into a new company was nominated to be the buyer under the contract. The employee mentioned above was the sole director of that company (‘the Buyer”).

Subsequently the Buyer purported to rescind the contract on the basis that before the contract was entered into the Seller had failed to give the Buyer written notice under the EPA that the land was recorded on the EMR. The Seller commenced proceedings against the Buyer for approximately $6 million as damages for breach of contract. The Buyer counterclaimed to recover a $2.75 million deposit paid under the contract before it was rescinded.

The issue to be determined was whether the Seller had given written notice to the Buyer in compliance with section 421(2) of the EPA before agreeing to sell the land to the Buyer. Section 421 applied to owners of land in circumstances including where particulars of land are recorded in the EMR. Section 421(2) provided:

“If the owner proposes to dispose of the land to someone else (the buyer), the owner must, before agreeing to dispose of the land, give written notice to the buyer—

(a)  if particulars of the land are recorded in the environmental management register or contaminated land register—that the particulars have been recorded in the register…”.

If an owner did not comply with section 421(2) a buyer could rescind the agreement before completion of the agreement or possession under the agreement. Section 421 has since been repealed and replaced by section 408 which is not identical but is similar to section 421.

The bases of the Buyer’s argument that the Seller failed to give written notice as required included:

1. that providing the relevant documents electronically by uploading them to the data room was not giving written notice,
2. that providing the search responses for the contaminated lots among other information was non-compliant,
3. that providing access to the search responses without specifying that doing so constituted giving written notice under s 421 was non-compliant, and
4. that any notice that was otherwise compliant was given to related company, not to the Buyer.

In considering the purpose of section 421 the Court applied a statutory rule of interpretation – an interpretation that best achieves the purpose is to be preferred to any other interpretation. The court found that the purpose of section 421 was to prevent a buyer from acquiring land on either register without first being informed of the land’s status.

In dealing with the question about whether uploading the information constituted giving the Buyer written notice, the Court considered the application of section 11 of the Electronic Transactions Act (“ETA”) which essentially provides that if, under a State law, a person is required to give information in writing, the requirement is taken to have been met if the person gives the information by an electronic communication and (1) at the time the information was given, it was reasonable to expect the information would be readily accessible so as to be useable for subsequent reference; and (2) the person to whom the information is required to be given consents to the information being given by electronic communication.

The Court found that the requirement to give the written notice under section 421 of the EPA was a requirement under State law to give information in writing and that the process of uploading data to a server, described as a data room, in the form of text files able to be viewed and/or down-loaded by a specific intended recipient may constitute giving information by an electronic communication. The request by the employee (of the company related to the Buyer) for information to be provided by way of a data room, Dropbox or file sharing mechanism was unambiguous and the Court likened it to a request for information to be posted to a nominated post office box. Accordingly, section 11 of the ETA applied and written notice under section 421 of the EPA could be given in such a manner.

Although the search results were in a data room with other documents the Court found that they were in a separate folder clearly identified as “Land Contamination”, that information was accessed by the employee and the Buyer was aware of it when it entered the contract.

The Court noted that section 421 did not require that the written notice must take a particular form. The Court also found that there was no express or implied requirement that the written notice must expressly be given under s 421, in other words, there was no requirement that the notice must identify that it was being given under section 421.

Was notice given to the related company and not the Buyer? About 2 weeks before the contract was formed, information relating to the contamination of the land (as disclosed in the “Land Contamination” folder in the data room) was raised in correspondence by the employee. About a week later that employee was appointed the sole director of the Buyer and a week later the contract was formed. All the shares in the first company were held by the same individual who held all the shares in the Buyer. The Court found the employee to be the “directing mind” of the Buyer before the contract was formed and as the sole director of the Buyer, his knowledge was the knowledge of the Buyer. Given the circumstances, the Seller had complied with the obligation to give notice in writing under the EPA.

The decision is under appeal but for now it appears that in certain circumstances a statutory obligation to give written notice might lawfully be satisfied by way of uploading information to a data room, Dropbox or file sharing mechanism.

If you wish to discuss the matters raised in this email, please contact David Patton in our Townsville office or any of our property lawyers.