Broadspectrum (Australia) Pty Ltd v Centauri Business Services Pty Ltd

Supreme Court of NSW|2017-03-28|Before: Gleeson JA

Solicitors: Sydney Business Lawyers (Plaintiff) Garland Hawthorn Brahe (Defendant) File Number(s): 2016/255153

Judgment

GLEESON JA: The plaintiff, Linton Developments (Qld) Pty Limited (Linton), makes application under s 459G of the Corporations Act 2001 (Cth) to set aside a statutory demand for payment dated 3 August 2016 served by the defendant, Development Finance Partners Pty Limited (DFP).
The debt to which the statutory demand relates is described as: Debt due pursuant to Tax Invoice No. 1353 dated 11 July 2016 in respect of the service fee payable under the Service Agreement entered into between the creditor and the company dated 15 April 2016 (copy attached).

Grounds of application

Linton seeks to set aside the statutory demand on the grounds that there is a genuine dispute about the existence of the debt claimed in the demand (s 459H(1)(a)) or that there is a genuine dispute that Linton has an off-setting claim against DFP in an amount at least equal to the amount of the demand (s 459H(1)(b)).

Background

The application is supported by an affidavit of Mr Peter Gribble, a director of Linton, sworn 24 August 2016. Mr Gribble explained the circumstances in which Linton came to engage DFP as finance brokers in early April 2016 in connection with the development of adjoining parcels of land at Kangaroo Point in Brisbane, owned by Linton Investments (Qld) Pty Ltd (Linton Investments). Mr Gribble said that by late December 2015, Linton had encountered difficulties obtaining development finance as potential funders were withdrawing loan offers for projects in Brisbane due, in part, to a possible oversupply in the market of apartments. Accordingly, Linton began looking for other sources of finance for the proposed development.
On or about 5 April 2016, Mr Gribble contacted Mr Gamble, the principal of DFP, and discussed the funding requirements of Linton. Mr Gribble said that Mr Gamble confirmed that DFP would be able to locate non-bank finance for the project provided there was no agreement with any other finance broker in place and that any such prior agreement with a broker had been terminated.
Thereafter, Mr Gribble dealt mainly with Mr Matthew Royal and also Mr Paraskevos of DFP. He provided information and documents as requested by DFP. Mr Gribble attended a meeting, together with Mr Young of Linton with Mr Royal on 7 April 2016. During that meeting, Mr Gribble said that Mr Royal made a number of statements to the effect that DFP can have a source of finance available within seven days, that funding would be available within a matter of days, that DFP have funders ready to go and that DFP could do this.
It is common ground that Mr Royal agreed to obtain an email confirmation from a funder by Friday, 15 April 2016 with terms disclosed and a signed letter of offer by 20 April 2016.
DFP prepared a draft financing proposal (incorporating indicative terms and conditions) and a service agreement between DFP and Linton, the terms of which were negotiated in the days prior to 15 April 2016. Mr Gribble amended the draft service agreement, signed it and sent a PDF copy to Mr Paraskevos, Mr Royal and Mr Young by email on the afternoon of 15 April 2016. By mistake, he signed on the execution page in the place where DFP was to sign. No point is taken in relation to this error. Mr Gribble's covering email included the words "Hope this meets with your agreement". Mr Gribble said that he never received back from DFP a copy of the service agreement signed by DFP.
The financing proposal was entitled "Structured Debt - Finance Proposal". Under the heading on the first page "Financing Proposal - Indicative Terms'", appeared the statement: "This financing proposal does not constitute an offer of finance from us".
The financing proposal described Linton as the borrower, guarantors as "N/A", DFP as the lead deal manager, and the Capital Partner/s as the "provider as introduced and arranged by DFP". The proposed facilities were described as an interest-only progressively drawn construction loan in a total amount of $60,041,000 comprising senior debt of $37,982,000 and mezzanine debt of $22,059,000. The terms of DFP's advisory fee were indicated. The same terms appear in cl 5 of the Service Agreement.
In view of the construction arguments which have been raised, it is convenient to set out in full certain terms of the service agreement.
Clauses 1, 5, 6, 9, 13 and 14 of the service agreement provided as follows: 1. This Service Agreement confirms that Development Finance Partners Pty Limited "DFP" has been appointed as Exclusive Agent for Linton Developments Ply Ltd "Client" to arrange a formal Letter of Offer, subject to normal Conditions Precedent in line with the terms and conditions as detailed in the above Finance Proposal, with respect to the following items: (1) Proposed Facilities (2) Proposed Conditions Precedent (3) Proposed Security (4) Costs 2. ... 5. In consideration of DFP's services, the Client is liable to DFP for the following Service Fees as outlined in the above finance proposal which include the following. Commercial Advance - Construction Facility DFP advisory fee is 1.00% including GST of the Total Senior Debt Facility Limit (this includes Stretch Senior) $379,820, including GST. The timing of payment of fees is; - $10,000 paid on acceptance of this proposal. - $50,000 is paid upon issuance of lending terms consistent with this agreement for Senior Debt. - $319,820 is paid at initial settlement; The Client undertakes the following regarding the Service Fee. If: An Offer of Finance is accepted and the initial settlement does not proceed for any reason whatsoever a fee equal to $100,000 is payable immediately. DFP advisory fee is 1.00% including GST of the Total Mezzanine Debt Facility Limit $5,220,590, including GST. The timing of payment of fees is: - SNIL paid on acceptance of this proposal. - $50,000 is paid upon issuance of lending terms consistent with this agreement for Mezzanine Debt - $170,590 is paid at initial settlement; No parachute payment is payable if lending terms are issued and accepted by the client and the settlement does not proceed. 6. The Client irrevocably authorizes and directs the Client's solicitor to deduct from the Loan Amount at settlement of the loan, the Service Fee, less any portion of the Service Fee already paid to DFP and pay this amount directly to DFP. … 9. Where we deliver an Indicative Letter of Offer or Final Letter of Offer where the key terms (LCR, LVR, Interest Rate, Facility Term and any presale or preleasing requirements) are substantially in line with this Mandate (ie. variance is 10% or less), you acknowledge we have performed in terms of this Mandate. … 13. This Service Agreement is valid for thirty (30) days, subject to the email verification of an Expression of Interest (EOI) from a Capital Partner by close of business Tuesday the 19'" of April 2016; and a written Indicative Term Sheet from a Capital Partner by close of business Tuesday the 26th of April 2016. If these timelines are not met then either party can cancel the Service Agreement providing two (2) days' notice; (unless an extension is agreed by email from both parties). 14. This clause is an overarching clause and takes precedence over any inconsistent terms, provision or clause in this document. Notwithstanding any other term, provision or clause in this document, if this Offer of Finance is accepted and: (a) the initial settlement of the Senior Debt Facility does not proceed for any reason whatsoever, the maximum liability to the Client is $160,000.00. Any payment made pursuant to or in connection with (his Offer of Finance is to be credited towards the fee of $160,000.00; (b) the initial settlement of the Mezzanine Debt Facility does not proceed for any reason whatsoever, no fee is payable by the Client. For the avoidance of doubt, any amount paid pursuant to or in connection with the Mezzanine Debt Facility is to be refunded to the Client or (if applicable) credited toward the amount payable in paragraph (a).
On 19 April 2016, Linton paid $10,000 by bank transfer to DFP in respect of the first fee specified in cl 5 of the Service Agreement.
It is not in dispute that DFP did not provide to Linton either an expression of interest from a financier by 19 April 2016 or an Indicative Terms Sheet by 26 April 2016, as contemplated by cl 13 of the service agreement.
Mr Gribble said that by around mid-May 2016 he had lost patience with DFP and was on the verge of stopping talking to them when a meeting was arranged with a person who it was said had access to non-bank, family office-type funds. A meeting was held but nothing eventuated. There were some further discussions between Mr Gribble and representatives of DFP.
Ultimately, on 6 June 2016, Mr Gribble received a letter from the Bank of China dated 2 June 2016. That letter set out the indicative terms of a construction term loan facility of $44,730,000. The letter was expressed to be: "an outline for discussion purposes only. Please understand that we have neither sought nor obtained the internal credit approval, which the bank requires as a condition to any for formal undertaking".
The facility amount referred to in the letter was qualified by a term that the total facility amount cannot exceed 70 percent of the total development costs or 57.5 percent of the "as if complete" valuation, whichever is the lower. By contrast, the proposed "on completion loan to value ratio" in the financing proposal prepared by DFP was 78 percent. Linton emphasised that the completion loan to value ratio in the Bank of China letter of 50 percent or less exceeds the maximum 10 percent permitted variance referred to in cl 9 of the service agreement. That was not disputed by DFP, but was said to be irrelevant because Mr Gribble accepted the Bank of China letter by signing on the last page under the words "We, the Borrower, hereby agree and accept that terms and conditions outlined above".
On 4 July 2016, Bank of China informed Mr Gribble that they could not proceed with making an offer of finance on the project. It is sufficient to observe that, among other things, Bank of China required guarantors and Mr Gribble and his wife were unwilling to provide the requested guarantees in respect of any financing facility. Counsel for Linton emphasised that there was not any requirement for guarantors in the financing proposal earlier prepared by DFP.
As indicated, on 19 April 2016 Linton paid DFP $10,000. Mr Gribble says this payment was made because DFP had indicated that funding could be sourced. In late June 2016, Linton also paid DFP a further amount of $55,000 (inclusive of GST) being the amount referred to in cl 5 of the service agreement payable "upon issue of lending terms consistent with this agreement for senior debt". Mr Gribble said that he did not approve this second payment because following his discussions with Bank of China on 20 June 2016 he had real concerns that an offer of finance would be forthcoming from Bank of China. It seems, however, that there was some delay in Mr Gribble's direction to Mr Young not to pay this amount and the amount had been paid when Mr Gribble asked Mr Young not to pay this amount.
Subsequently, on 7 July 2016, Mr Gribble sent an email to Mr Royal of DFP requesting any arrangement between Linton and DFP cease and that DFP return the payment Linton made to DFP in error of $55,000.

The asserted dispute

Linton asserts that there is a genuine dispute about the debt claimed by DFP for three reasons. First that upon proper construction of cl 13 of the service agreement the agreement came to an end in mid-May 2016 by effluxion of time. Second that the parachute payment of $100,000 in cl 5 of the Service Agreement is void and unenforceable as a penalty. Third, and in the alternative to the contention that cl 5 is void, that the preconditions in cl 5 to the obligation to pay the $100,000 parachute payment were not satisfied by the Bank of China letter because that offer did not answer the description of an "Offer of Finance" in cl 5 in the sense of an offer legally binding on acceptance, or that the offer was not consistent with the lending terms for senior debt in the service agreement.
DFP contends that none of the construction arguments or the penalty argument raise a plausible contention worthy of investigation. DFP also submitted that the Court may, and should decide in the present case, between competing contentions on a matter of construction of a contract as "the point is a short and straightforward one", referring to the remarks by Barrett AJA in Broadspectrum (Australia) Pty Ltd v Centauri Business Services Pty Ltd [2016] NSWSC 1045 at [22].
Linton also asserts that there is a genuine dispute that it has an offsetting claim against DFP at least in excess of $100,000 being a claim for damages for misleading and deceptive conduct arising out of the 7 April 2016 alleged misrepresentations by Mr Royal of DFP.
DFP contends that this asserted claim is spurious and misconceived, but at best it would be assessed at no more than $65,000, being the amounts actually paid by Linton to DFP.
It is common ground that Linton need only establish that one of these grounds is a plausible contention deserving of investigation to justify setting aside the statutory demand.

Decision

It is necessary to first say something about the approach to the existence of a genuine dispute where a question of construction of documents is involved. What follows draws on my reasons in In the matter of Litigation Insurance Pty Ltd [2017] NSWSC 334 at [28] - [31].
In Drillsearch Energy Ltd v Carling Capital Partners Pty Ltd [2009] NSWSC 1192 at [45], Barrett J explained the proper approach to the existence of a genuine dispute where the issue in contention is one of construction: [45] … A dispute as to the existence of a debt that is the product of a dispute about construction is not removed from s 459H(1)(a) just because the issue in contention is one of construction. While it has been said that "a short point of law or the construction of documents or agreed facts" may, unlike a disputed question of fact, be determined upon a s 459G application (see Delnorth Pty Ltd v State Bank of New South Wales (1995) 17 ACSR 379 at 384), it does not follow that the court is compelled to make such a determination. In the case of a legal argument, determination might be appropriate if it were, in the words of McLelland CJ in Eq in Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785, a "patently feeble legal argument". [46] I consider it appropriate to adopt in this case the approach I outlined in Wellnora Pty Ltd v Fiorentino [2008] NSWSC 483; (2008) 66 ACSR 229 at [50]: "Where the basis for the alleged dispute is a legal argument or question of construction which is not 'patently feeble' and does not involve a 'short point of law' and there are clearly arguable alternatives as to the correct outcome, the court should not, upon the s 459G application, attempt to reach a definitive resolution. The reasons are stated in the joint judgment of Brooking JA and Charles JA in Spacorp Australia Pty Ltd v Myer Stores Ltd (2001) 19 ACLC 1270; [2001] VSCA 89 at [4]: '[4] We think, if we may say so, that, except in a case in which it is as plain as a pikestaff that there is no debt (where bluntness may be in the interests of both sides), Judges should, in general at all events, in dealing, whether at first instance or on appeal, with the question of genuine dispute, be at pains to perform the admittedly delicate task of disposing of that question without expressing a view on what we have called the ultimate question. For otherwise, on an application which resembles if it is not in law an interlocutory one, things may be said which embarrass the judge before whom the ultimate question comes.'"
His Honour returned to this issue in Broadspectrum (Australia) Pty Ltd v Centauri Business Services Pty Ltd at [22], summarising the approach reflected in the subsequent authorities as follows: [22] In cases of this kind the court will not decide between competing contentions on a matter of construction of an instrument unless the point is a short and straightforward point. The notion that the court may, as it were, descend into the arena to that limited extent probably first emerged in Delnorth Pty Limited v State Bank of New South Wales (1995) 17 ACSR 379 but, as the Court of Appeal emphasised in Infratel Networks Pty Limited v Gundry's Telco and Rigging Pty Limited [2012] NSWCA 365; 297 ALR 372, that is not the course that should ordinarily be taken. In fact, the Court of Appeal there endorsed the observation of Sackville J in Trecomax Pty Limited v Prentice [2004] FCA 1057; 50 ACSR 314, that s 459G proceedings are not ordinarily the occasion for the court to construe the contract where there are competing views about its meaning.
Recently the Court of Appeal in Ligon 158 Pty Ltd v Huber [2016] NSWCA 330, (Barrett AJA, McColl and Meagher JJA agreeing) emphasised the restraint that a court should exercise in considering the ultimate question of the indebtedness of a company served with a statutory demand, referring to the remarks of Brooking and Charles JJA in Spacorp Australia Pty Ltd v Myer Stores Ltd (2001) 19 ACLC 1270; [2001] VSCA 89 at [3] - [4]. The passage of their Honours' reasons at [4] had been earlier referred to by Barrett J in Drillsearch (see [29] above).
The important points to be derived from the authorities are as follows. First, the court dealing with a s 459G application is not compelled to determine questions of construction of documents. Second, s 459G proceedings are not ordinarily the occasion for the court to construe a contract where there are competing views about its meaning. Third, cases in which it will be appropriate for the court to entertain a construction argument on a s 459G application are likely to be few in number. Fourth, the court's state of mind concerning the existence of a genuine dispute may range from a clear conviction that the debt does not exist to an opinion that the genuine dispute hurdle has only just been cleared.

Clause 13

The service agreement appears to contemplate a three-stage process. First, the obtaining of an expression of interest from a proposed financier. Next, the obtaining of a written Indicative Term Sheet from a proposed financier. Finally, the obtaining of a final letter of offer from a proposed financier.
On Linton's preferred construction, cl 13 confers a right on either party to terminate the agreement upon two days' notice before the expiry of 30 days from the date of entry into the agreement if either of the first two steps is not satisfied by the times specified. Absent an agreed extension of the time for obtaining an expression of interest, or an Indicative Term Sheet, Linton contends that the agreement comes to an end 30 days after it was entered into on 15 April 2016, that is, it ended on or about 15 May 2016. That is not a surprising let alone uncommercial result, it is submitted, where Linton had appointed DFP as its exclusive agent to secure an offer of finance (which was binding upon acceptance) and the service agreement contemplated a very short timeframe for that to occur (30 days), failing which Linton would be free to look elsewhere for finance.
In support of this construction, Linton points to the use of different language in the service agreement - on the one hand the references to a "formal Letter of Offer" in cl 1 and a "Final Letter of Offer" in cl 9 were said to reflect DFP's performance obligation under the agreement, compared to the anterior steps before the 30 day term of the agreement of an "Expression of Interest" and "Indicative Term Sheet" in cl 13 (the latter expression also seemingly used interchangeably with "Indicative Letter of Offer" in cl 9).
DFP submitted that the construction advanced by Linton is not seriously arguable. On its preferred construction, the phrase "is valid for thirty (30) days" in the opening words of cl 13 is said to be the minimum term of the service agreement in the sense that, after 30 days, either party could elect to bring the agreement to an end if the timelines identified in the first sentence were not met. DFP submitted that such construction was consistent with a reading of the entire agreement, its context and commercial purpose.
DFP characterised Linton's construction as leading to the absurd and unbusinesslike result that, in the event either timeline was not met, the agreement would be robbed of validity and would cease to have effect automatically upon the expiry of 30 days, without either party exercising an express right of cancellation in the second sentence of cl 13. DFP submitted that such an uncommercial interpretation produced such capricious results that it must be rejected on accepted principles of construction.

Clause 5

Clause 5 provides that the parachute payment of $100,000 is only payable where "an Offer of Finance is accepted and the initial settlement does not proceed for any reason whatsoever …"
The parties are in dispute as to whether the expression "Offer of Finance" in cl 5 is limited to an offer which is legally binding upon acceptance (Linton's preferred construction) or is to be given a wider meaning that it does not require an offer capable of acceptance so as to give rise to a legally binding offer (DFP's preferred construction). On DFP's preferred construction a non-binding offer of finance on indicative terms only, such as the Bank of China letter, answers the description of an "Offer of Finance" in c l5.
Linton points to the words "is accepted" as qualifying and explaining the reference to an "Offer of Finance" in cl 5, and the following words "the initial settlement" as also supporting its preferred construction that an "Offer of Finance" is to be read as an offer that is legally binding upon acceptance. It is common ground that the Bank of China letter set out only indicative terms of an offer of finance, subject to internal credit approval by the Bank of China, and was not a legally binding commitment.
There is ambiguity and imprecision in cl 5 as to the meaning of "Offer of Finance".
The construction of a contract requires consideration of the significance of the language used by the parties, the surrounding circumstances known to the parties and the commercial purposes and objects to be secured by the contract: Electricity General Corporation t/as Verve Energy Limited v Woodside Energy Ltd; Woodside Energy Ltd v Electricity Generation Corporation t/as Verve Energy Limited (2014) 251 CLR 640; [2014] HCA 7 at [35].
Evidence of surrounding circumstances known to the parties might inform the construction question. Counsel for DFP seemed to accept that was so, at least in relation to cl 5. That concession is consistent with the principles stated by the High Court in Electricity General Corporation t/as Verve Energy Limited v Woodside Energy Ltd; Woodside Energy Ltd v Electricity Generation Corporation t/as Verve Energy Limited at [35] and Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37 at [46]-[50].
Nevertheless, DFP submitted that the question of construction is simple and straightforward and that the relevant background material preceding entry into the contract is in evidence; it was said that the "court has before it the full picture". That submission highlights the difficulty in the present case. It is not the function of the court on a s459G application to evaluate the background material preceding the entry into the contract to determine what is admissible and how that material might inform the construction question. What is significant for present purposes is that Linton has demonstrated the rational possibility that such material might properly inform the construction question.
Plainly, cll 5 and 13 both give rise to a constructional choice. On the face of the service agreement each of the possible constructions is at least fairly arguable. As to DFP's submissions based on absurdity and an unbusinesslike result, what is business common sense, as objectively ascertained, may be a matter "upon which minds may differ and in respect of which an imputed consensus is impossible": Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181; [2001] HCA 70 at [43] (Gleeson CJ).
For the reasons given in the authorities mentioned above, it is inappropriate to express a view as to whether one construction is to be preferred over the other. It is sufficient to say, adopting the words of McLelland CJ in Eq in Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785, that I do not consider the Linton's preferred construction of cll 5 and 13 to be a "patently feeble argument". That there is a dispute about the correct construction of the service agreement means that there is also a dispute about the existence of the debt that would exist if DFP's preferred construction were correct, but would not exist if Linton's preferred construction was correct.
In view of the above conclusion, it is not necessary to address the other grounds relied upon by Linton to dispute the statutory demand.

Orders

I make the following orders: 1. Order that the statutory demand dated 3 August 2016 served on the plaintiff by the defendant be set aside. 2. Order that the defendant pay the plaintiff's costs of the proceedings.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 03 April 2017

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