HIS HONOUR: The plaintiff (or the Vendor) sues the defendant (or the Purchaser) for specific performance of the written "Binding Heads of Agreement" (the HOA) which they executed on 31 October 2019 and, in the alternative, for damages. The HOA appears as a schedule to these reasons.
Clause 2 of the HOA records that the Vendor owns all of the goodwill, plant and equipment, intellectual property, Material Contracts, [1] and all other assets in relation to the business known as 'Northshore Classic Auto Body Centre', 'North Shore Classic Auto Body', 'NSC Collision Centre', 'NSC Collision Repairs', and 'NSC Smash Repairs' (the Business), and that the parties agree to enter into Business Sale Agreements subject to the terms and conditions set out in the HOA.
The transaction is not insubstantial. The purchase price exceeds $6 million.
The HOA is, to put it mildly, an infelicitous instrument.
This dispute centres on cl 7(b) of the HOA, which provides:
(b) all necessary third party consents, authorisations and approvals being obtained (including the Purchaser's Board approval);
Clause 7, which is headed 'Conditions Precedent', has no chapeau. The HOA does not stipulate a time within which any of the conditions in cl 7 must be met, nor does it identify what is dependent upon fulfilment of the stated conditions. Clause 13, which is headed 'Definitions and interpretation', states that 'Conditions precedent is defined in clause 8' but it is not defined there. The collective description 'Conditions Precedent' is given to all of the conditions at the end of cl 7 but the expression 'Conditions Precedent' is not defined.
ASSK Investments Pty Limited v AMA Group Limited [2020] NSWSC 1756 | Case summary | Zoe
The plaintiff's sole director is Mr Avedis (Avik) Kalloghlian (Kalloghlian).
Mr Stephen Harding-Smith (Harding-Smith) is the defendant's Chief Financial Officer. According to him, the defendant runs a group of companies, mainly in the panel shop and car repair business space. One of those groups is known as Gemini.
In around April 2018, a representative of Gemini approached Kalloghlian about the possible sale of the Business to Gemini. On about 10 April 2018, the plaintiff and Gemini entered into a Mutual Confidentiality Non-Disclosure Agreement. Over the period 4 May 2018 to September 2018, the plaintiff made financial information available to the defendant as part of a so-called 'due diligence process'. During the period September 2018 to October 2019, various offers were apparently exchanged between the parties.
On 31 October 2019, the parties executed the HOA. Kalloghlian signed for the plaintiff. A director, Mr Andrew Hopkins, and the then company secretary, Terri-Anne Bakos, signed for the defendant under the following notation:
EXECUTED for and on behalf of ASSK INVESTMENTS PTY LTD (ACN - 095 307 636) in accordance with Section 127(1) of the Corporations Act 2001 by authority of the Directors;
At the time, AMA had five other directors. No director gave evidence.
On the same day, the plaintiff signed a Mutual Confidentiality Agreement and sent it to the defendant for execution. The following day, the defendant sent the plaintiff a request for information in a document called 'Due Diligence Checklist'. The defendant made a number of other requests of the plaintiff for information which, it seems, the plaintiff met. An issue of concern arose for the plaintiff about the maintenance of confidentiality and the potential effect on staff and on the Business' reputation if news of the transaction got out. The defendant did not immediately send back an executed copy of the Mutual Confidentiality Agreement, but did ultimately sign it nearly a month later on 26 November 2019. It therefore came into effect some time later than the HOA.
Thereafter, the due diligence process continued.
Under cl 3 of the HOA, the anticipated Completion Date was 31 days after the HOA, which was 2 December 2019.
On 9 January 2020, Mr Steve Bubulj, the Chief Executive Officer of the defendant, phoned Kalloghlian and told him that the defendant could no longer proceed with the deal.
On 10 January 2020, the defendant sent the following letter to the plaintiff.
We refer to recent communications in this matter.
We refer in particular to the Binding Heads of Agreement signed by the parties on 31st October 2018 [sic] ("HOA").
We note that pursuant to clause 2(b) of the HOA, the parties agreed to enter into a Business Sale Agreement. The parties have not as yet entered into such an agreement.
We note clause 6(b) of the HOA states that, subject to the Purchaser completing its due diligence enquiries, the transaction is to be recorded in a Business Sale Agreement. Our client is not satisfied with its due diligence enquiries.
We further note that the HOA is subject to certain conditions precedent. In particular, clause 7(b) states that the approval of the Purchaser's Board is to be obtained.
We are now instructed that our client's Board has not approved the purchase and has decided to not proceed with the purchase.
We note certain other conditions precedent which have also not been satisfied.
Our client accordingly terminates the HOA, and the matter is at an end.
Mr Harding-Smith gave evidence that between 30 December 2019 and 8 January 2020, he did work on understanding the financial position of the Business and had a number of concerns. He says that as a result of various factors, the deal 'in its current form' did not meet the requirements of the Board for an acquisition and that it was not his practice to submit an acquisition for Board Approval until such time as he had a 'strong confidence level' that the due diligence would be satisfactory. He says that he was one of the most senior employees of the defendant involved in the due diligence around the acquisition of the Business. He says that the Board required the approval of the executive team of the Panel Division of the defendant, of which he was a member. He says he did not provide his approval for the transaction to proceed.
Apparently the Board of the defendant has not actually determined not to give approval for the acquisition. As mentioned earlier, none of the directors gave evidence. Mr Harding-Smith was apparently one of a number of members of the executive team of the Panel Division but nothing is said of any of the other members. In resiling from the transaction, the defendant relies exclusively on cl 7(b).
[3]
THE PROCEEDINGS
These proceedings were commenced on 25 May 2020.
On 7 August 2020, I fixed them for hearing on 30 November 2020 on an estimate of three days. The trial was conducted with admirable economy by Counsel on both sides. The hearing was completed in one day.
The primary relief sought by the plaintiff is specific performance of the HOA. In the alternative, it claims damages.
A joint report on damages by a forensic accountant, Ms Dawna Kathleen Wright, was admitted into evidence. She opined that the net present value of the loss suffered by the plaintiff as a consequence of the non-performance of the HOA is $2,225,435 (exclusive of pre-judgment interest). The figure is challenged by the defendant on a narrow basis, which is dealt with below. She was the only witness cross-examined.
The Court had the benefit of comprehensive written submissions from both sides.
[4]
THE ARGUMENTS
It is not in dispute (the defendant having correctly accepted) that the HOA, as its name conveys and as the warranty in paragraph 1.2 of Schedule 1 to the HOA expressly provides, is a binding contract. The question is: what did it bind the parties to do?
The defendant's position, which is slightly different from that which it took in its 10 January 2020 letter, is that the HOA does not bind it to buy. [2] It argues that the HOA is not a contract for the sale of the Business. It argues that the sale of the Business is to be effected by the Business Sale Agreements referred to in cl 2(b) and that the coming into effect of those Agreements was subject to the condition precedent in cl 7(b), which has not been fulfilled.
On this analysis, as the defendant put it, the HOA is no more than agreement under which the plaintiff would make available to the defendant information about the Business and the defendant would have an unfettered, unilateral option to determine whether or not to proceed with the acquisition. It argues that the HOA imposes no obligations on it, but gives it only rights.
The plaintiff argues that by the HOA, the parties, in binding fashion, agreed to sell and buy respectively, and that cl 7(b) is not a condition precedent to the sale of the Business.
It argues that if Board Approval was required, it was in any event given when 'by the authority of the Directors' the HOA was signed by a director and the company secretary.
[5]
DECISION
The HOA is a commercial contract which is to be given a business-like interpretation. Interpreting it requires attention to the language used by the parties, the commercial circumstances which it addresses, and the objects which it is intended it secures. The meaning of the words chosen is determined objectively by reference to its text, context, and purpose, the question being what a reasonable person would have understood them to mean. Preference is given to a construction supplying a congruent operation to the various components of the whole and so as to avoid commercial inconvenience. Where language is open to more than one construction, the Court will prefer a construction which avoids consequences which are capricious, unreasonable, inconvenient or unjust: see Australian Broadcasting Commission v Australasian Performing Rights Association Ltd (1973) 129 CLR 99 at 109; McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579 at 589 [22]; Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 at [22]; Zhu v Treasurer of the State of New South Wales (2004) 218 CLR 530 at 559 [82]; Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522 at 528 [15]; Electricity Generation Corporation Ltd v Woodside Energy Ltd (2014) 251 CLR 640 at [35]; Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104 at 117.
The effect of cl 7(b), whatever its description, is the crucial issue, and its effect is a matter of contractual construction: see Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537 at 541. The descriptor 'condition precedent' yields to the effect of the words which the parties chose.
In my view, the defendant's characterisation of the HOA is inaccurate. It is far more than an agreement for the provision of information coupled with an option in its favour. It is not an agreement under which the plaintiff bound itself to sell (at the defendant's whim) but the defendant did not bind itself to buy. The instrument records that the parties agree to enter into Business Sale Agreements.
The object which it intends to secure is the sale and purchase of the Business, not the gathering of information by the defendant to enable it to make a decision.
The defendant's proposition is undermined by a number of factors.
The instrument legislates comprehensively for the sale and purchase of the Business. It contains detailed machinery for the ascertainment of the purchase price (cl 4), including a mechanism for resolving disagreement on the value of work in progress (cl 5). It incorporates comprehensive warranties (cl 9 and Schedule 1) and a restraint (cl 10). It makes provision for the Purchaser, acting reasonably, to insert further warranties which it considers necessary by reason of its due diligence enquiries (cl 9(a)). It is plainly capable of operating as an effective sale without entry into any further agreement.
The HOA contemplates the entry into of subsequent Business Sale Agreements, but the execution of those agreements is not a precondition for a binding sale. As cl 9 records, the transaction will be 'recorded' in a Business Sale Agreement. Paragraph 1.2 in Schedule 1 records that:
1.2 This Agreement constitutes (and all instruments, documents and agreements to be executed and delivered in connection with this Agreement on execution will constitute) a legally valid and binding obligation of the Vendor and the Coventantor [sic] and the Purchaser and is enforceable in accordance with its terms.
Clause 7(b) is to be construed in the context of cl 7 and the HOA as a whole. Clause 7 seems to have no unifying, underpinning concept. Some conditions in it are plainly not of the nature of conditions precedent to a sale transaction because they envisage things happening much later than that. It is a collection of conditions of differing types. Some of them require the plaintiff to do things which the defendant will no doubt be entitled to have the plaintiff do as a condition of completion so that each party gets the benefit of the agreement: see Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596.
In my view, in so far as cl 7(b) is a condition precedent to anything, it is to the entry into of the further Business Sale Agreements, not the sale transaction which the HOA seeks to secure. The result of non-fulfilment is simply that there will be no further Business Sale Agreement and the sale transaction is governed by the HOA on its own.
To construe cl 7 as incorporating the defendant's own Board Approval as a condition precedent which, if not fulfilled, brings down the entire transaction has potentially capricious, unreasonable, inconvenient, and unjust consequences because other so-called conditions precedent require acts of performance by the plaintiff. Objectively viewed, I do not think that the parties intended this to be the case.
For example, cl 7(c) requires transfer of Business names and domain names. If this were a condition precedent to the sale, the plaintiff might transfer these to the defendant and, if the board did not approve the sale, the defendant would have the plaintiff's property but the plaintiff would have no agreement. The same consideration applies to cl 7(d), which requires names to be changed, and to cl 7(k), which requires Key Personnel to be transferred.
Clause 7(k) provides, as part of the conditions, that the covenantor is to continue employment with the Purchaser for a maximum of 12 months following the Completion Date. This condition cannot rationally be viewed as one precedent to the sale transaction which would have already been completed. Clause 7(f) incorporates as part of a condition precedent a Succession Plan being signed off one year after Completion. This condition also cannot rationally be viewed as one precedent to the sale transaction.
Moreover, cl 7(b) incorporates the word 'necessary'. Having committed itself to the transaction by a director and company secretary with the authority of the directors, further Board Approval was not 'necessary'.
[6]
RELIEF
The plaintiff seeks specific performance.
The defendant's position is that if relief is to be granted, it should sound in damages, although it puts that the plaintiff has suffered none. If the plaintiff had suffered no damage, it seems to me this would be an additional consideration favouring an order for specific performance.
The defendant does not rely on the non-fulfilment of any other supposed conditions precedent and it does not suggest that any others (so far as they are conditions precedent) have not been, or will not be, fulfilled.
The subject matter of the sale is unique and specific performance is available as a remedy in relation to a contract for the sale of a business. In my opinion, it is the appropriate remedy in this case.
If, however, I were to award damages, I would assess them at $2,225,435, plus pre-judgment interest.
Ms Wright valued the Business as at 30 November 2019, prior to the COVID-19 pandemic, on a future maintainable earnings basis using an EBIT (Earnings Before Interest and Tax) multiple of 3.9. She assessed the total loss suffered by the plaintiff as at 1 December 2019, if the sale did not complete, at $2,225,435 plus pre-judgment interest of $87,472.
What really caused the plaintiff's loss, according to her, is that the Business is now worth less than it was earlier because of volatility brought about the COVID-19 pandemic which makes its business more risky and warrants a lower multiplier.
In her opinion, the appropriate EBIT multiplier is now 2, rather than 3.9. She was challenged on this. It was suggested that there should be no reduction. Her analysis was based partially on an examination of what has happened to the defendant's share price, which since December 2019 steadily dropped (with minor peaks and troughs) some 47% to 31 August 2020 and has not significantly recovered since then.
I accept her opinion that the value of the business has been affected by the pandemic and that an adjustment to the multiplier is appropriate. The defendant did not suggest any other appropriate adjustment. I accept her opinion on the extent of the appropriate adjustment. I would assess damages as calculated by her.
[7]
ORDERS
There will be an order that the defendant specifically perform the Binding Heads of Agreement entered into by the parties on 1 November 2019 within 31 days after the date of this order (or, using the terminology of the HOA, such other date as the parties agree to), together with any appropriate ancillary orders to make the order effective.
The parties are to bring in Short Minutes.
I provisionally order that the defendant is to pay the plaintiff's costs. The order will solidify within 21 days after this judgment unless a party notifies my Associate and its opponent in writing that some other order is sought, stating briefly the grounds, in which event the order will not take effect and directions will be made for the determination of costs and any other outstanding issues.
The parties have liberty to apply.
The exhibits are to be returned.
[8]
Endnotes
Defined in cl 13 of the HOA.
In its written submissions it argued that the terms of the agreement were uncertain or incomplete, but Counsel was not able to identify any element of substance which was missing for the sale of the Business. A submission that the plaintiff had failed to lead any evidence which establishes that it was ready, willing, and able to fulfil the contract was not developed.
[9]
Amendments
08 December 2020 - Schedule attached
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Decision last updated: 08 December 2020