Bloss Holdings Pty Ltd v Brackley Industries Pty Ltd

Amaca Pty Ltd formerly known as James Hardie & Coy Pty Ltd v CSR Ltd [2001] NSWSC 324 Bank of Credit and Commerce International SA v Ali [2002] 1 AC 251 Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 CASES CITED : Grant v John Grant & Sons Proprietary Limited (1954) 91 CLR 112 London & South Western Railway Co v Blackmore (1870) LR 4 HL 610 Qantas Airways Ltd v Gubbins (1992) 28 NSWLR 26 Toll (FGCT) Pty Limited v Alphapharm Pty Limited (2004) 219 CLR 165

Bloss Holdings Pty Limited (P) PARTIES : Brackley Industries Pty Limited (D1) Lamajon Pty Limited (D2)

COUNSEL : G J Drake (P) M A Ashhurst (Ds)

SOLICITORS : Mark Phillip Symonds (P) Kemp Strang (Ds)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

3558/03 BLOSS HOLDINGS PTY LIMITED v BRACKLEY INDUSTRIES PTY LIMITED & ANOR JUDGMENT 1 HIS HONOUR: ISSUE 2 Maria Vermunt (formerly Papadatos, nee Pates) was employed by the first defendant Brackley Industries Pty Ltd ("Brackley") as a sales manager. She found favour with Gary Abrams, the principal of Brackley. As a result, Brackley entered into an agreement whereby it promised that it would give to Bloss Holdings Pty Ltd ("Bloss Holdings"), a company of Mrs Vermunt, 10 per cent of the shares in Brackley and 10 per cent of its profits. Subsequently, relations between Mrs Vermunt and Mr Abrams cooled. By a further agreement Lamajon Pty Ltd ("Lamajon"), another company of Mr Abrams, agreed to pay to Bloss Holdings $150,000, but included in the agreement relating to this payment a release. The issue is whether that release released Brackley from its obligations to Bloss Holdings in respect of shares and profits. The determination of that issue requires the determination of factual questions as to the circumstances in which various documents were executed and what was said at the time and a question as to the construction of the release. FACTS 3 The following facts are undisputed or easily found, except where otherwise indicated. 4 Mrs Vermunt commenced employment with Brackley as a sales manager in February 1998. Mrs Vermunt was very successful at her job and found high favour with Mr Abrams. As a result, in October 1998, she was granted by agreement an opportunity to acquire an interest in Brackley ("the share and profit agreement"). 5 The terms of the share and profit agreement were that, if Mrs Vermunt remained as an employee of Brackley until 27 February 2000 ("the effective date") (and Mr Abrams was then still alive), Bloss Holdings would be entitled to receive 277 "A" class shares in Brackley (10 per cent of the issued share capital). Further, between the date of the share and profit agreement and 30 days after the effective date, Bloss Holdings was entitled to receive 10 per cent of the net profit of Brackley. 6 At the end of 1998, Mrs Vermunt continued in favour with Mr Abrams. She was at that time married to John Papadatos. He was known to Mr Abrams and, indeed, continues in a business partnership with Mr Abrams to this day. Mr Abrams agreed to provide an interest free loan of $550,000 to Mrs Vermunt so that she could purchase a new home. There is no dispute that this agreement ("the loan agreement") was entered into and, indeed, implemented. There is a dispute as to whether it was ever recorded in writing. But there is no doubt that the loan agreement contained terms that the house be purchased in Mrs Vermunt's name alone; that she reside in the house; and that Bloss Holdings forego any claim for profits under the share and profit agreement during the term of the loan. After initially denying the last mentioned term of the loan agreement, Mrs Vermunt eventually conceded it during cross examination. 7 Mr Abrams says that in April 1999 a written agreement recording the terms of the loan agreement was executed by him and Mrs Vermunt ("the written loan agreement"), but no copy can now be found. Mrs Vermunt denied the existence of the written loan agreement. As found below, the Court accepts that such a document was created and executed. However, this is of little moment (except as to credit), as there is no real controversy over the terms of the loan agreement and the loan has now been repaid. 8 The loan was advanced and Mrs Vermunt, with its assistance, bought a house in The Promenade, Sans Souci ("the Sans Souci house") and lived in it with Mr Papadatos. In August 2000 Mrs Vermunt left the Sans Souci house and Mr Papadatos. Mr Abrams advised her that she was therefore in breach of the terms of the loan agreement and requested that an amending deed be executed that gave Mrs Vermunt six months in which to return to the Sans Souci house or sell it. That deed was executed on 21 August 2000 by Mr Abrams, Mrs Vermunt and Mr Papadatos ("the deed of acknowledgment and variation"). It acknowledged the incorporation of the loan agreement in "a Deed of Loan/Loan Agreement in 1999" and the parties' obligations under that Deed/Agreement and proceeded to vary those obligations along the lines set out above. 9 Mr Abrams says that by the end of 2001 Mrs Vermunt's previously exemplary performance as an employee had become unsatisfactory. On 19 November 2001 he issued her with warnings in the form of a letter and a memorandum, both concerning her conduct. The allegations included absenting herself from work on false pretexts and telling untruths about her dealings with customers. Mrs Vermunt concedes the receipt of those warnings and concedes that at least some of the allegations made in them were correct. She claimed (for the first time) in cross examination that Mr Abrams subsequently recanted the effect of these warnings over a lunch. This he denies. 10 It was also stated in the warnings that she would not thereafter accompany Mr Abrams on overseas selling trips, as she had previously been accustomed to do. She claims that, despite this, she accompanied him on a trip to South Africa in 2002. However, he denies this and travel and immigration records appear not to verify, but to negate, this claim by her. 11 In January 2002 Mrs Vermunt asked Mr Abrams for assistance to pay credit card bills that she could not meet in the amount of $49,667. Mr Abrams says that he agreed to pay Mrs Vermunt $150,000 from which she could pay these debts, if she agreed to give up any claim that she and Bloss Holdings had against the defendants. Mrs Vermunt says that Mr Abrams offered to give her the $150,000 with nothing in exchange. This is the most critical conflict in the evidence in these proceedings. 12 The parties executed a written agreement dated 25 January 2002 in respect of the $49,667 credit card debt. That agreement was in the form of a letter of that date addressed to Mrs Vermunt with provision at the end for execution by various parties. Those who executed included Mrs Vermunt and Bloss Holdings. The document recorded the following: "You have requested Brackley Industries Pty Limited ("Brackley") to advance funds as below to enable you to retire personal debt ………

This letter/document sets out the agreed terms and conditions upon which Brackley is prepared to advance you said funds. By signing this document you explicitly agree to be bound by the following terms ….

10 In consideration for the advance of the said funds Maria Papadatos and Bloss Holdings Pty Ltd expressly releases Gary Abrams, Brackley, Brackley Industries (Australia) Pty Limited & Lamajon Pty Limited from any legal claim whatsoever for any performance under any legal contract or obligation in respect of any monetary advances in force at this date including this agreement."

It did not mention the payment of $150,000. 13 The parties executed a further written agreement dated 26 January 2002 in respect of that subject matter. This was in the same letter form. The payment of $150,000 by Lamajon to Bloss Holdings was specifically provided for. This further agreement included the following: "Should the [$550,000] not be repaid to Brackley prior to disposal of the property Brackley is willing to accept the following settlement procedure:

1 Maria Papadatos repays to Lamajon $550,000.00 2 Lamajon pays to Bloss Holdings $150,000.00 3 Maria Papadatos pays to Brackley $49,667.00 (or any lesser amount if interim amounts have been paid.)

This procedure will expunge fully the advance of the said funds and the repayment of the advance to acquire residential property.

This document does not detract from any of the obligations and terms under signed agreement dated 25 January 2002 only sets out agreed settlement procedures." 14 There is considerable dispute as to the circumstances in which the written agreements of 25 and 26 January 2002 were executed and what was said at the time. These disputes will be dealt with below. 15 On 23 April 2002 Mrs Vermunt asked for a further advance to meet credit card debt. On that day she sent Mr Abrams an email specifying the sum of $14,570. Mr Abrams says that he responded by email on the same day, attaching two further agreements in letter form and stating: "Please sign and return, this additional advance just to be clear comes off the $150,000 which will be paid to you in full and final settlement of all obligations to Bloss under previous agreement and also imposes penalties for payment not made before the end of financial year." 16 Mrs Vermunt and Bloss Holdings undoubtedly executed these two agreements, which were in terms substantially similar to the agreements of 25 and 26 January 2002, except that they included reference to the additional advance of $14,570 and provided that it should also be deducted from the payment of $150,000. In particular, the first of those agreements contained a passage substantially similar (with that adjustment) to the passage from the agreement of 26 January 2002 set out in [13] above. 17 However, Mrs Vermunt denies that she received the email to which Mr Abrams says that the two agreements were attached and says that the agreements signed on 23 April 2002 were printed out in his office in her presence and that she signed them there. This conflict is also dealt with below. 18 In June 2002 the sale of the Sans Souci house was completed and the $550,000 loan repaid. In mid 2002 Mr Papadatos and Mrs Vermunt negotiated their family law property settlement. 19 In October 2002, Mrs Vermunt started making claims on Mr Abrams for a "profit cheque". Mr Abrams suggested to Mrs Vermunt that she seek legal advice regarding her entitlements. Mrs Vermunt continued to press for "profit cheques". Mr Abrams "fobbed her off" and did not expressly deny her entitlement to such cheques by reason of the transactions set out above. Mr Abrams explained this temporising approach by saying that there were reasons for his not dismissing Mrs Vermunt out of hand at the time and that she had considerable capacity to cause the defendant companies financial damage, which he feared she would do, if told that that he unequivocally rejected her demands. 20 In February 2003 Mrs Vermunt married Rick Vermunt. There was some suggestion that Mr Abrams was romantically attracted to or interested in Mrs Vermunt. It may be that there was some attraction that played some part in his generous treatment of her in early days. But it must be remembered that she did perform exceptionally well in the job at that time. It must also be remembered that she was then married to and living with Mr Papadatos, with whom Mr Abrams was and remains friendly. I do not conclude that there was ever any romantic relationship between Mrs Vermunt and Mr Abrams. I certainly do not accept that their relationship soured by reason of any personal rejection of Mr Abrams by Mrs Vermunt, rather than by reason of her conduct which he complained of in 2001 and which she has in part admitted 21 Mrs Vermunt's employment by Brackley was finally terminated in February 2003. On 3 February 2003 the parties held a without prejudice meeting concerning Mrs Vermunt's claims. That meeting was unsuccessful in reaching a resolution. These proceedings were commenced on 1 July 2003. CREDIT OF WITNESSES 22 The principal oral evidence in the case was given by Mrs Vermunt and Mr Abrams. Important issues turn on the resolution of conflicts between their evidence. Oral evidence was also given by John Papadatos, David Greenstein, solicitor, and Sharna Taylor, who works in the Brackley office. They gave their evidence in a straightforward way and there is no reason to think that they were not giving the Court their best recollection of the limited matters to which they deposed. Mr Papadatos' and Mr Greenstein's evidence do not really play any part in my decision of the matter; Ms Sharna Taylor's does play a part. 23 Mrs Vermunt was an unsatisfactory witness. Her demeanour was unconvincing. More importantly, her evidence contained many inconsistencies, several of them on matters of central importance. An important example was that she gave at least three different, inconsistent versions of the circumstances in which the documents of 25 and 26 January 2002 came to be executed and the surrounding conversations. These are recorded chapter and verse in the defendants' written submissions. There are also instances where her evidence is in conflict with concrete evidence relating to the subject matter. Thus, her evidence as to her 2002 trip to South Africa with Mr Abrams is inconsistent with travel documents and immigration records. Similarly, her evidence that the 23 April 2002 documents were printed out while she was with Mr Abrams in his office is at odds with independent evidence as to the location of printers in the offices. The evidence as to unsatisfactory conduct of which Mr Abrams complained in his warnings and which she in part admits is not to her credit. I formed the view that she was capable of convincing herself of the truth of propositions which she wanted to believe. I came to the conclusion that her credibility was so poor that her evidence should be accepted only when corroborated by documentary or other credible evidence. 24 Mr Abrams was a much more credible witness. He was a man of somewhat stiff manner and bent of mind. However, his evidence was generally precise and consistent and I formed the view that he was attempting to give the Court his best recollection of events and that his recollection was reasonably accurate. In general terms, I accept his evidence where it conflicts with that of Mrs Vermunt. DISPUTED FACTS 25 (1) Whether the written loan agreement was executed by Mr Abrams and Mrs Vermunt as deposed to by Mr Abrams, although no copy can now be found. I find that it was. I rely on my preference of Mr Abrams' evidence to Mrs Vermunt's. I also rely on the reference to the written loan agreement in the deed of acknowledgment and variation. As previously stated, this dispute is of little moment. It is relevant primarily to credit. 26 (2) Whether over a lunch after the delivery of the warnings of 19 November 2001 Mr Abrams recanted the warnings. I do not accept the allegation of recantation. I rely on my preference for Mr Abrams' evidence over Mrs Vermunt's. I am also of the view that it is against the probabilities that he should recant the warnings, bearing in mind the detail with which the allegations were set out, the nature of the conduct and his obvious disappointment in it. 27 (3) Whether Mrs Vermunt accompanied Mr Abrams on a trip to South Africa in 2002 and on that trip rebutted a suggestion by him that their relationship progress from friendship to something more emotionally involved. This is again of only peripheral significance, bearing principally on credit. In this case, to my general preference of Mr Abrams' evidence is added the fact that the evidence of travel and immigration records supports his rather than her version. I find that she did not accompany him on a trip to South Africa in 2002 and her evidence in this regard is wrong. That being so, she cannot have rebutted during that trip a suggestion that they become more emotionally involved. 28 (4) Whether, when Mr Abrams in January 2002 offered to pay Mrs Vermunt $150,000 from which she could have an immediate advance to pay her credit card debts, he stipulated that it was on the basis that she give up any claim that she and Bloss Holdings had against the defendants or whether, as Mrs Vermunt says, Mr Abrams offered to give her the $150,000 with nothing in exchange. Again, in addition to my preference of Mr Abrams' evidence, I rely on what I regard as the probabilities inherent in the situation. Mr Abrams was now disillusioned with an employee with whom he had previously been very pleased. He had formally warned her in a fashion which would help validate her dismissal, which he now contemplated as a possibility. Whether or not he yet regarded that as inevitable, it is hardly likely that he would, as well as maintaining her entitlement to a 10 per cent interest and profit share in the company, at that stage of the relationship, make her a gratuitous gift of the large sum of $150,000. It is much more likely that he would make her an offer which would solve her immediate problems, and would withdraw her ongoing interest in the company, in return for a sum which approximated its value at that time, perhaps in recognition of the value of her earlier services to the business. In this regard, there was evidence which indicated the value of the company as about $1.5m at that time, on the basis of shareholders' funds. She did give up any profit share to date, but in view of the fact that that entitlement was suspended during the term of the loan agreement, that concession was not large.

Mr Abrams says that the documents were executed by Mrs Vermunt in his office in the presence of Mr Leo Loreto, whose signature appears on the documents. Mr Loreto deposed that he heard no such conversation as Mrs Vermunt spoke of. He was not cross examined. Furthermore, Mrs Vermunt's accounts of the events surrounding the execution of these documents are quite unbelievable. She gave at least three conflicting accounts of these events, which are summarised in the defendants' written submissions. At one stage she claimed they were executed in the presence of Mr Richard Shakenovsky, solicitor, in his office. She said that Mr Shakenovsky, as well as Mr Abrams, assured her that the documents dealt only with the housing loan. She claims that the words in the release commencing "in respect of any monetary advances …" were added at her request. Mr Shakenovsky denies this evidence and was not cross examined. I reject her evidence concerning the execution of these documents and surrounding conversations. I find that Mr Shakenovsky never met her or gave her any assurances. I find that the terms on which the offer was originally made and the circumstances of the execution of the documents were as deposed to by Mr Abrams. In particular, I accept that he said that the payment of $150,000 would be made on the basis that the entitlement to benefits by way of shares and profits would be cancelled.

One of the few things going for Mrs Vermunt's case in this regard is that Mr Abrams, when she later began to demand profit cheques, temporised rather than simply denying any ongoing entitlement to such benefits. His explanation is that he feared what damage she might do the business if he was unequivocal in the face of these demands, as he was not then in a position to dispense instantly with her services. I am rather inclined to accept this explanation from him in all the circumstances. But, in any event, despite this submission having some force, it does not deflect me from the conclusion stated in the last preceding paragraph, which is conduced to by compelling considerations. 29 (5) Whether Mrs Vermunt received Mr Abrams' email of 23 April 2002. I find that she did receive that email. It was not challenged that it was sent or alleged that it was fabricated after the event. Mr Abrams and Mrs Vermunt frequently communicated by email in the office. She conceded that she continued in the office between her email request for further accommodation at 11.20 am and the sending of his reply recorded as being sent at 1.42 pm. There is no suggestion that other emails between them were not received. What distinguished this email was the inconvenience of the contents from the point of view of Mrs Vermunt's case. This rejection is made easier by the rejection of her version of the next disputed fact. 30 (6) Whether the 23 April 2002 documents were signed by Mrs Vermunt after being printed out by Mr Abrams in her presence on a printer in his office. Again I prefer Mr Abrams' evidence, corroborated as it was, that there was no printer in or in the immediate vicinity of his office at that time. Evidence to this effect, which I accept, was given by Sharna Taylor, who witnessed Mrs Vermunt's signatures. CONSTRUCTION OF RELEASE 31 This must be dealt with in the light of the foregoing findings of fact, insofar as those facts are appropriate to be taken into account in the construction exercise. One of the factors as to the extent to which such facts may be used is whether or not the release is to be regarded as ambiguous. 32 I shall repeat here the terms of the release to be construed: "In consideration for the advance of the [$49,667] Maria Papadatos and Bloss Holdings Pty Ltd expressly releases Gary Abrams, Brackley, Brackley Industries (Australia) Pty Limited & Lamajon Pty Limited from any legal claim whatsoever for any performance under any legal contract or obligation in respect of any monetary advances in force at this date including this agreement." 33 This is in curious form, one puzzle being the intent of the words "including this agreement". However, the plaintiffs allege that it is clear in its meaning, so that surrounding circumstances may not be taken into account in construing it. That clear meaning is that the only claims released are claims for any performance under legal contracts or under obligations which are, in either case, in respect of any current monetary advances. That is, the adjectival phrase "in respect of any monetary advances in force at this date" qualifies both "legal contracts" and "obligations". The defendants' case is that the terms of the guarantee are capable of bearing an alternative meaning, ie, that it should be read as meaning: "In consideration for the advance of [$49,667] Maria Papadatos and Bloss Holdings Pty Limited expressly releases Gary Abrams, Brackley, Brackley Industries (Australia) Pty Limited & Lamajon from any:

i) legal claim whatsoever for any performance under any legal contract; or

ii) obligation in respect of any monetary advances in force at this date including this agreement." 34 I must say that it is reasonably clear to me that the terms of the release are ambiguous, in that they are susceptible of more than one meaning. The doubt as to whether an adjectival phrase modifies only one or more than one of conjoined nouns is a quite common source of ambiguity and it arises here. 35 Turning to the law relating to the construction of documents, in my view, I do not need for the purposes of deciding this case to go more deeply into it than by quoting passages from two well known judgments in the High Court. The first is from the oft quoted judgment of Mason J (as his Honour then was) in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 352: "The true rule is that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning. But it is not admissible to contradict the language of the contract when it has a plain meaning. Generally speaking facts existing when the contract was made will not be receivable as part of the surrounding circumstances as an aid to construction, unless they were known to both parties, although, as we have seen, if the facts are notorious knowledge of them will be presumed.

It is here that a difficulty arises with respect to the evidence of prior negotiations. Obviously the prior negotiations will tend to establish objective background facts which were known to both parties and the subject matter of the contract. To the extent to which they have this tendency they are admissible. But in so far as they consist of statements and actions of the parties which are reflective of their actual intentions and expectations they are not receivable. The point is that such statements and actions reveal the terms of the contract which the parties intended or hoped to make. They are superseded by, and merged in, the contract itself. The object of the parol evidence rule is to exclude them, the prior oral agreement of the parties being inadmissible in aid of construction, though admissible in an action for rectification.

Consequently when the issue is which of two or more possible meanings is to be given to a contractual provision we look, not to the actual intentions, aspirations or expectations of the parties before or at the time of the contract, except in so far as they are expressed in the contract, but to the objective framework of facts within which the contract came into existence, and to the parties' presumed intention in this setting." 36 The second is from the joint judgment of the Court in Toll (FGCT) Pty Limited v Alphapharm Pty Limited (2004) 219 CLR 165 at [40]: "This Court, in Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451, has recently reaffirmed the principle of objectivity by which the rights and liabilities of the parties to a contract are determined. It is not the subjective beliefs or understandings of the parties about their rights and liabilities that govern their contractual relations. What matters is what each party by words and conduct would have led a reasonable person in the position of the other party to believe. References to the common intention of the parties to a contract are to be understood as referring to what a reasonable person would understand by the language in which the parties have expressed their agreement. The meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood them to mean. That, normally, requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction. Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 at 461 - 462 [22]." 37 To any extent that ambiguity in the release is a necessary precondition to taking into account in construing it any of the evidence set out above, it is clear that I view the release as ambiguous in the requisite sense. Once the facts found as set out above are taken into account in the construction of the release, the conclusion must be that the release should be read as contended for by the defendants, ie, that the legal contracts released include the contractual promises concerning shares and profits in favour of Bloss Holdings. Particularly significant is my acceptance that Mr Abrams stated to Mrs Vermunt before the release documents were executed that the payment of $150,000 was to be in lieu of those promises and her proceeding with the transaction without demurring from that proposition. Those facts are relevantly significant, not to prove the subjective intentions of either party, but to identify "the subject matter of the contract" or "the purpose and object of the transaction". 38 The release therefore operated to discharge Brackley's obligation to procure a transfer of shares to and in the interim to pay a share of profits to Bloss Holdings. 39 There were some rather desultory submissions as to the application in the circumstances of the special rule relating to the construction of releases. This "rule is to the effect that the general words of a release will, in an appropriate case, be read down to conform to the contemplation of the parties at the time the release was executed": Qantas Airways Ltd v Gubbins (1992) 28 NSWLR 26 at 29 per Gleeson CJ and Handley JA. See also London & South Western Railway Co v Blackmore (1870) LR 4 HL 610 at 623 per Lord Westbury; Grant v John Grant & Sons Proprietary Limited (1954) 91 CLR 112 at 123 - 124 per Dixon CJ, Fullagar, Kitto and Taylor JJ. It has been suggested that the special rule as to releases is no longer necessary, as the question will now be determined by the general rule as to the construction of contracts as stated in Toll supra: see Bank of Credit and Commerce International SA v Ali [2002] 1 AC 251 at [26] per Lord Nicholls. There is a useful discussion of the up to date incidence of the release rule by Bergin J in Amaca Pty Ltd formerly known as James Hardie & Coy Pty Ltd v CSR Ltd [2001] NSWSC 324 at [63] - [78]. Certainly her Honour in that case determined the ambit of the release through the ordinary contractual rule: at [97]. I need say only that, having reached the conclusion that I have by the route indicated in [37] above, I need not further consider the question of the application of any rule applying peculiarly to releases in this case. 40 The foregoing must mean the failure of the plaintiffs' claims in these proceedings and the cross claim falls to the ground.

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