Badgin Nominees Pty Ltd v Oneida Limited [1998] VSC 188

Supreme Court of Victoria|1998-12-18|Before: Gillard J

The application spawned four affidavits by the managing director of the second defendant, Mr Gregg Denny and two affidavits from Mr William Rogers, the managing director of the plaintiff.

The affidavits contain allegations counter-allegations and allegations in reply.

One thing they clearly establish, and that is, there is a dispute between the parties with respect to the amount to be paid for the trading stock.

It is necessary to consider the scheme of the purchase agreement with respect to the purchase price.

Clause 3 is concerned with the purchase price but it is clear that it was a common intention of the parties that the price was to be adjusted in certain circumstances.

The first step in the ascertainment of the price was what one might describe as the base price of M$8.1 which was to be finally determined taking into account the price for plant and equipment, the price for good will which was agreed at M$3.1 and finally -

"(c) the price for the trading stock will be calculated in accordance with clause 4."

The price was subject to adjustment in accordance with clause 3.5.

The second defendant was obliged to pay the purchase price by payment of M$7.8 on 30 June 1998 (being the completion date) and by the payment of the balance, if any, on the third business day after the completion of the "Completion Accounts" in accordance with clause 3.3.

The completion accounts were to be prepared in accordance with the number of clauses including clause 3.1(c) of the agreement and this in turn required the price for the trading stock to be calculated in accordance with clause 4.

Going to clause 4, the agreement provided a procedure to determine the value of the trading stock. In my opinion the procedure set out required agreement by the parties. Absent such an agreement and the trading stock figure was not calculated. This is made clear by clause 4.

It is common ground that the parties never agreed on the value of the trading stock.

Clause 4 set out a step by step procedure which is as follows -

(i) On 30 June 1998 the plaintiff as vendor was obliged to carry out a stock take of the trading stock at which the second defendant was entitled to have present a representative.

(ii) Once the stock was ascertained and quantified then it was to be valued on the bases which involved considering silver, current stock, discontinued stock, work in progress and packaging and packaging material.

The dispute which has arisen between the parties concerns the value of the "Current Stock" and "Discontinued Stock". The current stock was to be valued "at the lower of the average landed cost of replacement value as shown in the business records" and "discontinued stock" at "the lower of 50% of the average landed cost or the amount that appears in the Business Records".

It is necessary to go back to the definition of these two terms. Clause 1.1 provides -

"The following definitions apply unless the context requires otherwise - 'Current Stock' means stock which is in the vendor's day to day

Price Lists as at the completion date and which is saleable in the ordinary course of business, unless otherwise agreed by the parties.

...

'Discontinued Stock' means stock which is not Current Stock."

(emphasis added.)

The dispute which has arisen between the parties is whether certain stock falls within the definition of current stock or whether it is discontinued stock. By referring back to clause 4.2 it is clear that the valuation of the two categories is substantially different.

The real dispute comes down to whether the stock falls into one of the two categories, "Current Stock" or "Discontinued Stock". Once that decision is made the value is readily ascertained by reference to the business records and application of the formula.

Clause 4.3, sets out the dispute resolution procedure.

The independent valuer has authority to resolve any dispute in relation to the "quantity, quality or value of the trading stock" and I am quite satisfied that there is a dispute with respect to both the quality and value of the trading stock.

The evidence establishes that on 24 July 1998 the second defendant's solicitors received from the plaintiff's solicitors a copy of the purported completion accounts. By 28 July 1998, some four days later, the solicitors acting for the plaintiff had been made aware that there was some concern about the age of certain stock. By letter dated 28 July 1998 the second defendant's solicitors raised the question of a possible dispute and on the same day Mr Denny on behalf of the second defendant sent a facsimile to Mr Rogers of the plaintiff informing him that a substantial portion of the stock was discontinued stock and that there should be an adjustment in the completion accounts and concluding by suggesting an independent valuer be nominated pursuant to paragraph 4.3 of the agreement.

I am satisfied by that moment in time which is a mere four days after the completion accounts were sent to the second defendant as purchaser, that there was a dispute between the parties.

I am equally satisfied that in accordance with the terms of the purchase agreement the completion accounts had to be agreed to by the parties and once that was done the purchase price would be adjusted accordingly, if there was the need for adjustment. But the final purchase price had to be determined after the trading stock had been valued and as at 28 July 1998 there was a dispute between the parties which the second defendant wished to refer to an independent valuer.

The evidence shows that steps were taken by the second defendant to nominate a valuer. The plaintiff did not agree to the appointment. It ignored the steps taken.

Mr Loewenstein of counsel who appeared for the plaintiff drew the court's attention to the fact that there was some change in position by the second defendant with respect to some stock, that it had taken steps to sell some of the old stock, that there were errors made by Mr Denny in relation to the matters deposed to in earlier affidavits and submitted that there was not a dispute between the parties within the meaning of clause 4.3.

He submitted that on a proper analysis of the assertions made by the parties, the real complaint concerned categorisation of the stock as at 30 June 1998. That is whether it was current stock or discontinued stock.

He submitted that this was not a dispute concerning the "quantity, quality or value of the Trading Stock".

The opening words of clause 4.3 are - "if any dispute arises in relation to". The phrase "in relation to" are words of wide import and should be construed as such. It is a question of determining the common intention of the parties and in my opinion the word "quality" covers the situation of making an assessment as to the type of stock concerned. In any event the determination of the value assumes the first step in the appraisal, namely, the categorisation of stock because it is that step which sets in train the ultimate value.

In my opinion clearly there is a dispute falling within clause 4.3 and the court does have jurisdiction to grant a stay.

Mr Loewenstein on behalf of the plaintiff submitted that the court in the exercise of its discretion should not grant a stay. He contended it was more appropriate in the circumstances that the court should hear the proceeding. It was the just and convenient route to follow.

In a nutshell he submitted the absence of any guidelines in the agreement as to procedure to be followed, the way the dispute has evolved and in particular the way the second defendant has shifted ground with respect to its complaints, and the difficulties involved in the interpretation of the agreement have made the exercise too complicated for a valuer to deal with.

In support he drew attention to the following matters:

(i) That because the way the dispute has evolved it is difficult to define what the dispute is between the parties and he emphasised the changes in the second defendants arguments with respect to valuation, that the second defendant was selling the stock and the disputed evidence that the second defendant had changed the nature of the business.

(ii) That there were no rules, principles or procedures to apply to the valuation and therefore the valuer was left to do his best in uncharted seas.

(iii) That there were a number of difficult issues facing a valuer which involved questions of law and he itemised those as the interpretation of the agreement, what is meant by "Trading Stock" in clause 4.2, what were the parameters for the determination of the important question of what is "saleable in the ordinary course of business", and precisely what the valuer was being asked to value. Again he emphasised the change in complaint put by Mr Denny, and the fact that it was arguable that the purchaser had changed the nature of the business, and whether that had any effect upon the valuation at the completion date?

He also emphasised that there was some factual questions that had to be resolved concerning the change in the nature of the business sold, whether there was obsolete stock and what the vendors ex-employees had told the purchaser.

He also raised the question of the bona fides of the purchase which he said were in question because of their changing attitude to the dispute and taking into account that they had exercised a due diligence procedure prior to the completion date which involved looking at the stock.

Mr Loewenstein contrasted all those problems with the proceeding remaining in the court and the value of the trading stock being determined by a special referee pursuant to Order 50 of the Rules of Court. He pointed out that before that step was taken, the parties by their pleadings would define the issues, that the court would decide what questions were to be decided by the referee and would give directions with respect to procedure, evidence and the question of granting a hearing to the parties.

He submitted that a court controlled reference would overcome all the matters of concern which he had outlined.

In this regard he also relied upon the power in the court to appoint a special referee with the necessary qualifications to deal with the particular dispute.

Often in the course of his submissions, Mr Loewenstein made observations which would have the effect of turning what was meant to be an inexpensive and expeditious dispute resolution procedure into a full adversarial contest between the parties.

I am satisfied that that is not what the parties agreed to. Indeed the suggestion of keeping the proceeding in the court and going down the path of a reference out of court pursuant to Order 50 would result in a more expensive dispute resolution method which the parties clearly wished to avoid.

Turning to the alleged complexity of the valuation it is my opinion that the dispute is not complex and involves very few issues.

Clause 4 is concerned with valuing trading stock. It proceeds on the basis that the vendor will carry out a stock take and in the end the purchaser will agree to the value. Not surprisingly the parties have provided a dispute resolution procedure in the event they cannot agree. The fact is they cannot agree.

In my opinion the only issue that confronts the valuer is to determine what categories of stock, which are in dispute, fall into "current stock" and "discontinued stock".

In my opinion a valuer would have no difficulty in performing that task based upon his experience, skill and knowledge. He will devise his own procedures to follow and no doubt initially will seek to ascertain from the parties the nature of the dispute. What he does thereafter in order to fulfil the task given to him is a matter for his own judgment and common sense.

But in any event the mere fact that there is a degree of complexity involved does not mean that the chosen procedure should be abandoned.

In Karen Lee Nominees v. Gollin & Co [1983] VicRp 61; (1983) 1 VR 657 at 669 the Full Court said-

"In cases of this kind it is important to bear in mind that the parties have contracted that their rights are to be determined by one or more valuations.

The valuation of land and building involves matters of judgment. Opinions notoriously vary on this subject matter - it would be surprising to find two valuers who agreed on the valuation to be given to land and buildings of the nature of the subject premises. There is no scientific exactitude in the valuations of land and buildings. They are as hypothetical as is the hypothetical purchaser whom they assume. Nonetheless the present parties wish to make a contract which would not be void for uncertainty."

In the later case of Email Limited v. Robert Bray (Langwarren) Pty Ltd [1984] VicRp 2; (1984) VR 16 at p.23 the Full Court said -

"Mr Gillard advanced an argument that it would be an impossible task for a valuer to determine what was relevant and give effect thereto. He drew attention to some remarks of Megarry, J in Cuff v. J. & F. Stone Property Co Ltd (1979) AC 87, as to the difficulties likely to

be encountered by a valuer in determining a 'reasonable rent'.

In this case, the task of the valuer may be difficult but we cannot accept that it is impossible. In any event, the task was expressly given to him by the parties. " (Emphasis added)

As I have stated in my view the issue is not complicated and in any event the parties entrusted this particular valuation issue to a particular type of valuer.

I have already made my observations with respect to the criticisms of no rules principles or procedure and confirm that in my opinion that is a matter for the valuer.

I do not believe that the interpretation of the agreement is a difficult one. The valuer will have to determine what in his opinion is meant by the phrase "which is saleable in the ordinary course of business" as at 30 June 1998. He will evaluate the facts as he ascertains them with respect to the business at the relevant date. He will then determine what he thinks is stock which was saleable in the ordinary course of business at that date.

The fact that the purchaser may have changed the nature of the business since the commencement date, the fact that the purchaser may have changed its views with respect to obsolete stock and its arguments and what the vendor's ex-employees may have said about the purchase in my opinion are irrelevant to the question that the valuer has to decide. But if in his wisdom he considers that they are relevant in any way to the procedure which he adopts in order to properly carry out his function, then they are matters of which he, no doubt can make his own assessment and decision. I do not believe that even if they were considered relevant by the valuer that he would have any difficulty in deciding what the facts are and what weight he should attach to them.

The question whether the purchaser may lack bona fides in relation to its attitude to valuing the stock again does not seem to me to be of any great moment. Either there is a dispute or there is not a dispute. The valuer will determine that. Whether or not the purchaser is bona fide in its attitude to the dispute is of little moment in the determination of the ultimate question as to the value of the trading stock at 30 June 1998.

One might criticise their attitude bearing in mind the opportunities they had to consider the stock prior to taking possession of the business, and one may even argue that they are being obstructive but in the end result it is of little moment to a valuation process. Either stock is current stock or discontinued stock? That is the question.

That is the question the parties have left to an independent valuer. In my opinion a valuer having some experience in the area of cutlery and crockery would have very little difficulty in making up his mind based upon his experience, skill and knowledge and after gathering what evidence he thought appropriate to determine whether the particular stock was "saleable in the ordinary course of the business" as at 30 June 1998.

I have carefully weighed up the criticisms made by Mr Loewenstein on behalf of the plaintiff and the difficulties that he submits will face the valuer but in my opinion the parties intended that the valuation should be carried out by a valuer in the circumstances provided for in the agreement and I do not accept that the task is too complex for a valuer to perform..

In this regard I refer to what Lawton, LJ said in Baber v. Kenwood Manufacturing Co Ltd & Anor (1978) 1 Ll. R 179 at p.181 -

"They (the auditors) were to be experts. Now experts can be wrong; they can be muddle headed; and, unfortunately, on occasions they can give their opinions negligently. Anyone who agrees to accept the opinion of an expert accepts the risk of these sorts of misfortunes happening. What is now acceptable is the risk of the expert being dishonest or corrupt."

I refer to what I said in the Commonwealth of Australia case, supra at p.5 as to what the parties should accept on a reference to an expert. I said -

"The parties to a contract agree that the value is to be determined by an expert acting as such using his own skill, judgment and experience. He is not a lawyer. His authority derives from the contract. The terms of the contract are to be considered by him. It would be contrary to the parties common intention to expect the valuer to construe the contract and apply it as a court would. The parties have entrusted the task to an expert valuer, not a lawyer. They must be taken to accept the determination 'warts and all' and subject to such deficiencies as one would expect in the circumstances. The parties put in place a procedure, they must accept the result unless it would be contrary to their common intention."

In my opinion the matters raised by Mr Loewenstein are matters which the parties contemplated. They put in place the procedure and if it involves a question of law as to construction of the agreement, the gathering of evidence without regard to rules or procedures, a determination in which the expert may rely upon his own experience and knowledge and without hearing the parties or any valuation experts on their behalf, the parties are bound by it.

In regard to the question of the discretion I have not overlooked the observations made in the recent English case of Cott UK Ltd v. F.E. Barber Ltd, supra. The learned judge relied upon a number of factors which resulted in the exercise of his discretion refusing the stay.

I would beg to differ with respect to some of the matters which the learned judge took into account. The matters in question concern the fact that there were no rules governing the form of dispute resolution, that the valuer had no experience with respect to the issues raised and that there were no rules or principles laid down pursuant to which the expert was to approach or determine the dispute.

However, I do respectfully agree that the fact that there were issues concerning a number of legal questions, whether there was a breach of any of the terms of the agreement and whether there was an entitlement to damages are matters which may be of some importance in deciding against the grant of a stay on the basis that it could not have been the common intention of the parties to refer disputes of mixed facts and law to an untrained and inexperienced person. These are questions which are more appropriate to a court proceeding. But in the end it is a question of what the term of the contract provides and the nature of the dispute.

These latter considerations may be relevant to an issue whether the parties intended the dispute to be resolved by arbitration rather than by an expert despite what the words of the agreement provided.

Here it is a straightforward valuation exercise following on from a stock take in which the parties disagree as to the value and quality of certain stock.

In my opinion the defendants are entitled to a stay of the proceeding pending the resolution of the dispute concerning the value of trading stock pursuant to clause 4.3 of the purchase agreement.

Subject to the submissions of counsel I propose to make the following orders -

(i) That the proceeding be stayed pending the determination by a valuer in writing of the dispute between the parties concerning the valuation of the trading stock pursuant to clause 4.3 of the agreement made between the plaintiff and the first defendant dated 5 June 1998 and the subsequent agreement made dated 1 July 1998 between the plaintiff and the second defendant with respect to the same subject matter.

(ii) That there be liberty to apply generally upon seven day's written notice to the other side.

(iii) That the plaintiff pay the defendants' costs of their summons filed 7 October 1998.

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Arbitration Act 1984

In Huddart Parker Ltd v. The Ship Mill Hill [1950] HCA 43; (1950) 81 CLR 502, Dixon, J stated the principles which should guide a court in an application to stay a court proceeding because of an arbitration agreement.

I refer to the oft quoted dictum of Lord Tomlin that "the dealings of men may as far as possible be treated as effective, and that the law may not incur the reproach of being the destroyer of bargains" - Hillas & Co v. Arcosi Ltd [1932] UKHL 2; (1932) 38 Com. Cas. 23 at 29.

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