de L'Isle v Knight

Sargent v ASL Developments Ltd (1974) 131 CLR 634; [1974] HCA 40 Sarina v Fairfax Media Publications Pty Ltd [2018] FCAFC 190 Schwartz v Hadid [2013] NSWCA 89 Simic v New South Wales Land and Housing Corporation (2016) 260 CLR 85; [2016] HCA 47 The Movie Network Channels Pty Ltd v Optus Vision Pty Ltd [2010] NSWCA 111 Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165; [2004] HCA 52 United States Surgical Corporation v Hospital Products International Pty Ltd [1982] 2 NSWLR 766 Victoria v Tatts Group Ltd [2016] HCA 5; (2016) 90 ALJR 392 Wardley Australia Limited v The State of Western Australia (1992) 175 CLR 514; [1992] HCA 55 Watson v Foxman (1995) 49 NSWLR 315 Waugh Hotel Management Pty Ltd v Marrickville Council [2009] NSWCA 390 Wonall Pty Ltd v Clarence Property Corporation Ltd (2003) 58 NSWLR 23; [2003] NSWSC 497 Texts Cited: V Dixon, Goode on Payment Obligations in Commercial and Financial Transactions (4th ed, 2020, Sweet & Maxwell) Category: Principal judgment Parties: Diane Briere de L'Isle (Plaintiff) Adrian Ronald Knight (Defendant) Representation: Counsel: Mr A J Macauley (Plaintiff) Mr D A Hughes (Defendant)

Solicitors: Barringer Leather Lawyers (Plaintiff) Saville Partners (Defendant) File Number(s): 2020/177439

Judgment

1. GLEESON J: The plaintiff, Ms Diane Briere de L'Isle (Ms de L'Isle), seeks to recover from the defendant, Mr Adrian Knight, the sum of £500,000 together with interest thereon pursuant to a deed of loan dated 17 March 2010. Mr Knight's sole defence is that the debt was discharged or released by an accord and satisfaction in January 2019.

Facts

1. Ms de L'Isle is the wife of Mr Henry Engelhardt; they married in 1982. Mr Engelhardt is the founder and former CEO of Admiral Group plc, a Welsh motor insurance company. He met Mr Knight at an insurance conference in the 1990s in the United Kingdom. Around late 2008/early 2009, Mr Engelhardt, Ms de L'Isle and their family travelled to Australia and New Zealand. They visited Mr Knight and his family on several occasions and a close friendship developed between Mr Engelhardt and Mr Knight.
2. In November 2009, Mr Knight sent an email to Mr Engelhardt attaching a PowerPoint presentation detailing investment opportunities Mr Knight was pursuing in the agri-tech and early stage life science areas. He subsequently discussed the presentation at a meeting with Mr Engelhardt and an associate.
3. On 17 February 2010, Mr Engelhardt replied to an email from Mr Knight providing an update on a proposed New Zealand investment fund. Mr Engelhardt said, "[w]e're in, just let us know exactly what we're in, what we need to sign and when/where you need the money". Mr Knight's proposal to establish a fund in New Zealand did not proceed.
4. In early 2010, Mr Knight discussed with Mr Engelhardt another possible investment, this time in the United States. He also discussed borrowing money from Mr Engelhardt. There is a dispute concerning the purpose of this proposed loan and its relevance in this proceeding. These matters are addressed below.
5. Mr Engelhardt informed Ms de L'Isle that Mr Knight had asked for a loan of between AUD$750,000 to AUD$1.5 million, and she said: "I am happy to do that if you are". She left it to her husband to arrange the details.
6. Ms de L'Isle and Mr Knight entered into a deed of loan dated 17 March 2010.
7. Recital A to the deed of loan recorded: The Lender has, at the request of the Borrower agreed to lend moneys to the Borrower in accordance with and subject to the terms of this Deed.
8. The deed provided for a loan of £500,000 and a repayment date of 17 March 2020. At maturity, the loan was repayable along with interest calculated and compounded at the rate of 5 per cent per annum.
9. On 24 March 2010, Ms de L'Isle advanced £500,000 to Mr Knight. At the direction of Mr Knight, the money was paid into a bank account in Hong Kong with a customer name "Customer Asset Company", which was Mr Knight's business account in Hong Kong.

Issues

1. Mr Knight's defence of accord and satisfaction relies upon cl 1 of the Termination Agreement, which relevantly provides that the transfer by Two Oceans to Ms de L'Isle of certain property in the form of shares in SIG was to be: … in full and final satisfaction of all rights, claims or interests [Ms de L'Isle] may have in respect of the Joint Venture and all payment obligations which any of 4 Futures, Adrian, Two Oceans, SIG and any subsidiary of SIG (or any person not party to this Agreement and associated with any of the foregoing) may have to [Ms de L'Isle] and/or to any person not party to this Agreement and associated with [Ms de L'Isle].
2. No attention was given by the parties in submissions to whether cl 1 is properly characterised as an accord and satisfaction or an accord executory. The distinction is explained by Dixon J in McDermott v Black (1940) 63 CLR 161 at 183-185; [1940] HCA 4: The essence of accord and satisfaction is the acceptance by the plaintiff of something in place of his cause of action. What he takes is a matter depending on his own consent or agreement. It may be a promise or contract or it may be the act or thing promised. But, whatever it is, until it is provided and accepted the cause of action remains alive and unimpaired. The accord is the agreement or consent to accept the satisfaction. Until the satisfaction is given the accord remains executory and cannot bar the claim. The distinction between an accord executory and an accord and satisfaction remains as valid and as important as ever. An accord executory neither extinguishes the old cause of action nor affords a new one. … The distinction depends on what exactly is agreed to be taken in place of the existing cause of action or claim. An executory promise or series of promises given in consideration of the abandonment of the claim may be accepted in substitution or satisfaction of the existing liability. Or, on the other hand, promises may be given by the party liable that he will satisfy the claim by doing an act, making over a thing or paying an ascertained sum of money and the other party may agree to accept, not the promise, but the act, thing or money in satisfaction of his claim. If the agreement is to accept the promise in satisfaction, the discharge of the liability is immediate; if the performance, then there is no discharge unless and until the promise is performed. (Emphasis added.) …

Purpose of the £500,000 loan

1. There is one factual dispute to be addressed. This concerns the purpose of the loan. Mr Knight objected to the admission of Mr Engelhardt's evidence on this topic on two grounds: (a) Mr Engelhardt was not a party to the deed of loan, and (b) communications with Mr Knight cannot bear on the construction of the deed of loan or the Termination Agreement. The evidence was admitted over objection for two reasons.
2. First, evidence of Mr Engelhardt's communications with Mr Knight in early 2010 concerning the purpose of the loan is admissible as part of the background to the Termination Agreement insofar as it is evidence of facts mutually known to both parties: Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337; [1982] HCA 24 at [352] (Mason J).
3. Second, Mr Engelhardt was Ms de L'Isle's authorised agent in negotiating the loan to Mr Knight. So much was ultimately acknowledged by Mr Knight in closing submissions. All knowledge obtained by Mr Engelhardt as agent in the course of his duties is to be imputed to the principal, Ms de L'Isle, irrespective of whether it was communicated to the principal: Sargent v ASL Developments Ltd (1974) 131 CLR 634 at 658-659; [1974] HCA 40; Ford Excavations Pty Ltd v Do Carmo [1981] 2 NSWLR 253 at 266-267. The agency relationship is to be inferred from the conduct of the parties in relation to the deed of loan; Ms de L'Isle told Mr Engelhardt that she was happy to make the loan requested by Mr Knight if Mr Engelhardt was, and she left it to her husband to arrange the details. Ms de L'Isle was also copied in on Mr Engelhardt's email to Mr Knight of 10 March 2010 stating the amount of the loan and that Ms de L'Isle would be the lender: see [41] below.
4. The conflicting evidence concerning the purpose of the loan is as follows.
5. Mr Engelhardt deposed that Mr Knight asked him during a telephone conversation in early 2010 to borrow money to avoid having to sell a property in a depressed market (at [7]): Knight: I own a property in Melbourne but, given the crash [of 2009] and subsequent world-wide recession, this property is now undervalued and it's not a good time for me to sell. I really need to borrow some money while I wait for the property market to improve. Engelhardt: How much did you need? Knight: Between AU$750,000 to AU$1.5m. Engelhardt: I will speak with Diane but I'm sure we will be able to help you.

Reference to the personal loan after March 2010

1. The next important background fact is that Mr Engelhardt and Mr Knight both referred to the personal loan in their email communications in August 2012, June 2013, May 2014 and October 2017.

August 2012

1. The August 2012 reference to the personal loan was in the context of a suggestion by Mr Engelhardt that Mr Knight repay the loan early in order for Ms de L'Isle to invest that amount in the joint venture. On 1 August 2012, Mr Engelhardt sent an email to Mr Knight which said: Sorry if my next para seems a bit abrupt because it's not something we've discussed much, but what's happening with your property situation? As I recall, this was why you wanted the personal loan a couple years ago. I'm not pressing, but if you were able to repay this then I could add it to the above amount (it must be within shouting distance of US$1m). (Emphasis added.)
2. Mr Knight replied by email to Mr Engelhardt on 5 August 2012 outlining his proposal in relation to an "additional 5M" guideline but did not respond on the topic of the "personal loan".
3. On 6 August 2012, Mr Engelhardt sent an email to Mr Knight indicating that he would provide another USD$5 million and said: … As for the personal loan, I was thinking it was a short-term bridging loan due to a temporarily poor property market. After reading your email I also took [a] look at the paperwork from a couple of years ago and saw that we set it up for ten years, and we're still a long [sic] ways away from that. So all is good on that, we are in no hurry for the funds. (Emphasis added.)

June 2013

1. The June 2013 reference to the personal loan was in the context of Ms de L'Isle investing a further USD$2.5 million in the joint venture. Mr Engelhardt said in an email to Mr Knight dated 10 June 2013: "With the loan this takes us near $14m, right? I think that's our limit."
2. Mr Knight responded to Mr Engelhardt on 11 June 2013 stating that the proposed additional investment would bring the investment funds into Two Oceans to USD$12.5 million "and then on top of that there is the GBP 500,000 (from memory) personal Loan". The email continued with Mr Knight querying how Mr Engelhardt calculated the USD$14 million and, after referring to his recollection of the waterfall provisions in the joint venture agreement with respect to return of profits, the email noted: "The individual loan referred to above is in addition to this".

May 2014

1. The May 2014 reference to the personal loan was in the context of a suggestion by Mr Engelhardt in an email to Mr Knight of 19 May 2014 that Mr Knight sell his Melbourne property and, instead of repaying the personal loan, put the money into Somark.

October 2017

1. The October 2017 reference to the personal loan was in the context of Mr Knight advising that he had a AUD$1.9million mortgage against his house and that he had an additional property near Forster with a AUD$1,000,000 valuation and no mortgage. Mr Engelhardt replied to Mr Knight on 9 October 2017: Question: does the A$1.9 mortgage include the money already owed to Diane on the house? (Emphasis added.)
2. Mr Knight replied to Mr Engelhardt on 10 October 2017 by email: No the loan with Diane would be separate to this. The holiday home is worth approx. $1M and has no mortgage. (Emphasis added.) …
3. Mr Engelhardt responded to Mr Knight on 10 October 2017: I'm surprised that you didn't include the money already owed to Diane in your calculation of the equity that remains on your homes. … (Emphasis added.)
4. Mr Knight replied to Mr Engelhardt on 12 October 2017: Sorry Henry I was certainly not ignoring the amount owed to Diane and indeed I raised it at the outset. I was just trying to make sure you understood how much equity was available to cover that and stand as guarantee on this. … (Emphasis added.)
5. The significance of these communications is that they demonstrate that the personal loan was a known liability of Mr Knight at the time of the Termination Agreement.

The Termination Agreement

1. The four parties to the Termination Agreement are: Ms de L'Isle (referred to as the "Investor"), Mr Knight (referred to as "Adrian"), 4 Futures and Two Oceans.
2. The first part of the agreement entitled "Background and Interpretation" contains a statement in the nature of a recital and a term about definitions contained in the Schedule to the agreement. The recital records: The Investor and 4 Futures have agreed to the termination of the Joint Venture on the terms set out in this Agreement.
3. The defined terms which appear in the Schedule relevantly include:

• Additional SIG Interest, means the amount of shares to be transferred to the Investor such that she would come to hold 30% of the shares in SIG;
• Guarantee Release, means deeds releasing any guarantees given by the Investor (and/or any related party as the Investor may require) as security for the Thomson Debt and/or the Rohrsheim Debt. (This is a reference to Mr Engelhardt's personal guarantees of debts owed by SGL);
• Investor's SIG Interest, means that part of the shares held by Two Oceans (the manager of the Joint Venture) in SIG as bare trustee for Ms De L'Isle (pursuant to a declaration of trust in 2015): see [16] above;
• Investor's SIG Liabilities, means debts owed to the Investor by SIG and the convertible notes held by the Investor in relation to SIG. (It is common ground that the convertible notes were issued by SGL, not SIG);
• Joint Venture, means the unincorporated joint venture in which the Investor and 4 Futures are engaged, which joint venture is managed by Two Oceans;
• Mortgage Security, means any interest, security or pledge over property owned by Mr Knight at Tallwoods Village, Hallidays Point or elsewhere in Australia; and
• Zeakal Interest, means all shares in Zeakal owned by Two Oceans.

1. Clause 1 provided that Two Oceans would transfer to Ms De L'Isle the Zeakal Interest, the Investor's SIG Interest and the Additional SIG Interest. It is necessary to set out its terms in full: Two Oceans shall transfer to the Investor the Zeakal Interest, the Investor's SIG Interest and the Additional SIG Interest to a total of a 30% interest in SIG for the Investor, and the transfer to the Investor of the Additional SIG Interest shall be in full and final satisfaction of all rights, claims or interests the Investor may have in respect of the Joint Venture and all payment obligations which any of 4 Futures, Adrian, Two Oceans, SIG and any subsidiary of SIG (or any person not party to this Agreement and associated with any of the foregoing) may have to the Investor and/or to any person not party to this Agreement and associated with the Investor. (Emphasis added.)

Ms de L'Isle

1. Ms de L'Isle says that cl 1 of the Termination Agreement is circumscribed in its operative effect to "rights, claims or interests" pertaining to "the Joint Venture" and all payment obligations of, relevantly, Mr Knight to Ms de L'Isle relating thereto. As such, cl 1 has no bearing on the loan, which was unrelated to the joint venture.
2. In support of this construction, Ms de L'Isle submitted that: 1. the genesis of the Termination Agreement was Mr Engelhardt's refusal to advance any further money to the joint venture or directly to the investment ventures the joint venture had been pursuing, such as SIG and SGL, as recorded in the 11 July 2018 email (see [20] above); 2. the loan was "not on the radar"; none of the communications preceding the execution of the Termination Agreement referred to the loan; 3. the single recital to the Termination Agreement makes clear that the agreement is concerned with the termination of the joint venture; 4. whilst cl 1 operates as an accord and satisfaction in respect of all payment obligations owing to Ms de L'Isle, its character is akin to a general release and the general words of a release should be restrained by the particular occasion. Reference was made to Grant v John Grant & Sons Pty Ltd (1954) 91 CLR 112; [1954] HCA 23; 5. the only sensible and available contextual meaning of the word "all" in the expression "all payment obligations" is that deriving from the document itself, being that the "payment obligations" must have some connection with the joint venture; 6. this construction coheres with the objectively known circumstances in which the Termination Agreement was executed; the objective purpose of the Termination Agreement was to finalise the affairs of the joint venture and any associated commercial relationships attending the ventures in which the joint venture had invested; 7. the background circumstances reinforce that cl 1 was not intended to extinguish Mr Knight's liability to repay the personal loan; and 8. the loan is unrelated and unconnected to the joint venture or any of its associated activities, such as Ms de L'Isle's direct investments or advances to SIG and SGL, being joint venture investments.

Mr Knight

1. Mr Knight says that the language of cl 1 of the Termination Agreement extends expressly beyond obligations connected with the joint venture and that, in addition to the text, the context and background to the Termination Agreement made clear that the parties were dealing with, and bringing to an end, obligations owed to and by entities both connected and unconnected with the joint venture.
2. In support of this construction, Mr Knight submitted that: 1. the word "and" in the critical expression in cl 1 creates two limbs of the release: the first directed at the joint venture, and the second extending beyond the joint venture because SIG, its subsidiaries, and Mr Knight, as well as "any person not party to this Agreement and associated with any of the foregoing", were not parties to the joint venture; 2. given that the language of the first limb of cl 1 was sufficient to give effect to the recital in the Termination Agreement, the second limb of cl 1 is broader than the recital; 3. the objectively known facts derived from the negotiations preceding the Termination Agreement, to the extent that they are admissible for the purpose of construction, are of minimal relevance; 4. the most important contextual factor is the parties' mutual knowledge that Mr Knight owed exactly two payment obligations to Ms de L'Isle; the loan and the guarantee that Mr Knight gave in respect of Convertible Note 6, which came to be described as a "mortgage", and was separately discharged by cl 3. Both payment obligations were significant in amount and a reasonable person in the position of the parties would not read "payment obligations" as including only the guarantee given by Mr Knight but not the loan; 5. the background to the Termination Agreement makes clear that the parties were dealing with, and bringing to an end, obligations owed by and to entities both connected and unconnected with the joint venture; and 6. the aim of the Termination Agreement was to bring to an end the known relationships between Ms de L'Isle and Mr Knight and his companies, which principally included the joint venture, but to the knowledge of all parties, included a number of other obligations the subject of investments or advances made by Ms de L'Isle outside of the joint venture from about 2015.

Relevant principles

1. The principles governing the construction of commercial contracts such as the present were not in dispute. An objective approach is to be adopted in determining the rights and liabilities of parties to a contract. The contract is to be construed by what a reasonable businessperson would understand it to mean. That requires consideration of the language used by the parties, the surrounding circumstances known to them, and the commercial purpose or objects to be secured by the contract: Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7 at [35]; see also Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37 at [46]-[52]; Victoria v Tatts Group Ltd [2016] HCA 5; (2016) 90 ALJR 392 at [51]; Simic v New South Wales Land and Housing Corporation (2016) 260 CLR 85; [2016] HCA 47 at [18] and [78].
2. Regard can be had to the surrounding circumstances objectively known to the parties: Codelfa at 352 (Mason J). However, care must be exercised in considering evidence of negotiations between the parties. Evidence of negotiations is inadmissible for the purpose of construction insofar as it is no more than evidence of what the individual parties were subjectively trying to do when they negotiated the language of their agreement. Negotiations may be considered only to the extent that they identify mutually known facts which form part of the background to the transaction: Codelfa at 354. As Heydon and Crennan JJ said in Byrnes v Kendle (2011) 243 CLR 253; [2011] HCA 26 at [98]: … evidence of pre-contractual negotiations between the parties is inadmissible for the purpose of drawing inferences about what the contract meant unless it demonstrates knowledge of "surrounding circumstances". (Citation omitted.)
3. Lord Wilberforce explained the rationale for excluding the parties' subjective intentions in Prenn v Simmonds [1971] 1 WLR 1381 at 1385: Far more, and indeed totally, dangerous is it to admit evidence of one party's objective - even if this is known to the other party. However strongly pursued this may be, the other party may only be willing to give it partial recognition, and in a world of give and take, men often have to be satisfied with less than they want. So, again, it would be a matter of speculation how far the common intention was that the particular objective should be realised. …

Reasoning

1. It is common ground that there are two limbs to the discharge given by Ms de L'Isle in cl 1 in consideration of the transfer of the Additional SIG Interest; this is indicated by the conjunction "and" in cl 1 of the Termination Agreement.

First limb of cl 1

1. The first limb concerns "all rights, claims or interests the Investor may have in respect of the Joint Venture".
2. The phrase "in respect of" is a relational term: Waugh Hotel Management Pty Ltd v Marrickville Council [2009] NSWCA 390 at [51], referring to Wonall Pty Ltd v Clarence Property Corporation Ltd (2003) 58 NSWLR 23; [2003] NSWSC 497 at [41]-[43]. The phrase indicates a connection or relation between the two subjects to which the words refer, the "rights, claims or interests" of Ms de L'Isle and the joint venture. The connection or relation between the two subjects to which the words refer is a broad one. It is generally not desirable to go further than is necessary to determine their application in a particular case or class of case: R v Khazaal (2012) 246 CLR 601; [2012] HCA 26 at [30] (French CJ), speaking in the context of statutory construction. The same may be said in the case of construction of a contract.
3. In this case, it is enough to say that the "rights, claims or interests" which Ms de L'Isle may have "in respect of the Joint Venture" include those rights, claims or interests arising under the 2011 JV Agreement. That includes the right to the distribution of capital and return of profits (cl 2.1), the interest in the joint venture assets held by Two Oceans "as nominee and bare trustee for the joint venture Parties" (cl 3), and any claims that Ms de L'Isle may have in respect of the joint venture, such as for mismanagement of the joint venture (cl 12) or a claim for warranty or indemnification (cl 14).
4. In addition, the first limb extends to any rights or claims Ms de L'Isle may have against the other joint venture party, 4 Futures, in respect of the joint venture, even if not arising under the 2011 JV Agreement.

Second limb of cl 1

1. The second limb concerns "all payment obligations which any of 4 Futures, [Mr Knight], Two Oceans, SIG and any subsidiary of SIG (or any person not party to this Agreement and associated with any of the foregoing) may have to the Investor and/or to any person not party to this Agreement and associated with the Investor".
2. The subject matter of the second limb is directed to a different class of obligation than the catch-all class of "all rights, claims or interests" in the first limb; specifically, the second limb is directed to "payment obligations" which any of 4 Futures, Mr Knight, Two Oceans, SIG and any subsidiary of SIG (and any associated non-parties) may have to Ms de L'Isle. The scope of the "payment obligations" extends beyond the joint venture, given that Mr Knight, SIG and any subsidiary of SIG (as well as any associated non-parties) are not parties to the joint venture. The second limb does not require the payment obligations to have some sort of connection with the joint venture and its termination.
3. Payment obligations can be either existing or contingent. As stated in Goode on Payment Obligations in Commercial and Financial Transactions (4th ed, 2020, Sweet & Maxwell) at [2-37]: An existing payment obligation is one to which the debtor is committed, even if it has not yet matured. A contingent obligation is one which may or may not have to be performed, being dependent on the occurrence of a future uncertain event. An example is a guarantee, which creates an obligation that is purely contingent so long as the debtor has not made default. Similarly, from the creditor's viewpoint an existing right to payment is one which is definite, even if maturing in the future, whereas a contingent claim is one which may or may not materialise.
4. The second limb contemplates both existing and contingent payment obligations, given the use of the words "may have". Both the loan and the guarantee answer the description of a "payment obligation" which Mr Knight "may have" to Ms de L'Isle.
5. The loan was an existing payment obligation being one to which Mr Knight was committed, even though it had not yet matured; the loan was due for payment on 17 March 2020.
6. The guarantee in respect of Convertible Note 6 was a contingent obligation; the payment obligation was contingent because it only became effective on the occurrence of a particular event that may never occur: Hawkins v Bank of China (1992) 26 NSWLR 562 at 572 (Gleeson CJ) and 578 (Sheller JA), a case involving a guarantee; Wardley Australia Limited v The State of Western Australia (1992) 175 CLR 514 at 532; [1992] HCA 55, a case involving an indemnity.

The contextual meaning of "all" payment obligations

1. Ms de L'Isle says that the word "all" in the expression "all payment obligations" cannot be read literally as meaning absolutely everything. That is correct insofar as it goes. The words must be read in context. Ms de L'Isle says that the word "all" is confined contextually to those payment obligations "of and concerning the joint venture and its termination". A major difficulty with this submission is that the subject matter of the second limb of cl 1 is directed to a different class of obligation than in the first limb: see [85] above.
2. Another major difficulty with this submission is the generality and expansiveness of the language of the first limb of cl 1: it refers to "all rights, claims or interests … in respect of the Joint Venture" (emphasis added). Neither party contended that the word "all" in the first limb should not be given its natural and ordinary meaning. In the first limb, "all" is qualified by the reference to the subject matter being "in respect of the Joint Venture".
3. The second limb of cl 1 also employs general and expansive language, referring to "all payment obligations" (emphasis added). The expression "payment obligations" is qualified by reference only to those obligations owed by 4 Futures, Mr Knight, Two Oceans, SIG or any subsidiary of SIG (or any associated non-parties) to Ms de L'Isle (or any associated non-parties). Ms de L'Isle's construction seeks to imply the express qualification contained in the first limb ("in respect of the Joint Venture") into the second limb. As explained below, there is no warrant in the genesis, background or purpose of the agreement, including the recital, to read down the word "all" by confining the payment obligations to only those of and concerning the joint venture and its termination.

Genesis of the agreement

1. It is not in dispute that the genesis of the Termination Agreement was the decision by Mr Engelhardt and Ms de L'Isle in July 2018 not to invest any further money in the joint venture or the investments the joint venture had been pursuing, such as SIG and SGL. Nevertheless, it does not follow that the operative provisions of the agreement are to be read as Ms de L'Isle submitted.

Surrounding circumstances

1. Turning to the surrounding circumstances, the circumstances mutually known to Ms de L'Isle and Mr Knight when entering the Termination Agreement were: 1. Ms de L'Isle, 4 Futures and Two Oceans had entered into a joint venture which Ms De L'Isle had invested a total of USD$14,260,000; 2. Ms de L'Isle had also invested monies directly in her own name, and not in the name of the joint venture, by loans to SIG in December 2015 and April 2016 totalling USD$810,000, and three convertible notes issued by SGL for AUD$1,000,000 in October 2017, USD$1,000,000 in January 2018 and AUD$250,000 in June 2018; 3. in May 2018, Mr Engelhardt had separately from the joint venture given two personal guarantees of up to AUD$240,000 for loans totalling AUD$300,000 to SGL; 4. in July 2018, Mr Engelhardt, on behalf of Ms de L'Isle, had indicated to Mr Knight an unwillingness to invest any more monies in the joint venture or directly in underlying assets of the joint venture; and 5. Mr Knight had two known payment obligations to Ms de L'Isle which were both significant: (a) the £500,000 personal loan due for repayment together with interest on 17 March 2020, and (b) the personal guarantee given to Ms de L'Isle in respect of Convertible Note 6 for AUD$1,000,000.
2. There are two difficulties with Ms de L'Isle's submission that the loan was not "on the radar". First, it relies upon the absence of reference to the loan in the pre-contractual negotiations, but the content of those negotiations is not determinative of the construction of the agreement. Second, one of the surrounding circumstances mutually known to the parties was that the loan was a known payment obligation of Mr Knight to Ms de L'Isle.
3. Both parties referred to statements in Bank of Credit and Commerce International SA v Ali [2002] 1 AC 251, including statements by Lord Hoffman, who dissented on the facts, at [64]-[65], where Lord Hoffman distinguished between a literal meaning and a contextual meaning, the latter being the correct approach.
4. Counsel for Ms de L'Isle also referred to the statement in BCCI v Ali by Lord Bingham (Lord Browne-Wilkinson agreeing) at [10]: … that, in the absence of clear language, the court will be very slow to infer that a party intended to surrender rights and claims of which he was unaware and could not have been aware. … and submitted that there is no such clear language here. I do not agree.

Should the general words of cl 1 be read down?

1. Ms de L'Isle's says that the general words of the discharge in the second limb of cl 1 are to be read down because the loan was not specifically in the contemplation of the parties when they entered the Termination Agreement.
2. Ms de L'Isle called in aid authorities that apply in appropriate circumstances to read down the general terms of a release. In Grant, Dixon CJ, Fullagar, Kitto and Taylor JJ referred to two principles of construction and an equitable principle: (a) that general words of a release can be read down by reference to the particular occasion, which might be indicated in a recital (at 123), (b) that general words of a release can be read down by reference to what was specifically in contemplation of the parties (at 123), and (c) that a general release should be construed by the knowledge and intent of the parties (at 124-125). As to the equitable principle, McLelland J said in United States Surgical Corporation v Hospital Products International Pty Ltd [1982] 2 NSWLR 766 at 818D-E, that a substantially similar principle operates at common law.
3. In Sarina v Fairfax Media Publications Pty Ltd [2018] FCAFC 190 at [20], the Full Court of the Federal Court observed: … Dixon CJ, Fullagar, Kitto and Taylor JJ explained (Grant 91 CLR 112 at 124 and 131) that the common law principle was that a written instrument expressed in general terms (be it a deed or statute) had to be construed having regard to the circumstances to which the instrument must have intended to apply. This in substance accords with the modern principles applicable to the construction of contracts and deeds. before referring to the well-known statements concerning the objective approach to construction of contracts in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165; [2004] HCA 52 at [40]; and also Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 240 CLR 45; [2002] HCA 5 at [10].

The loan was a known obligation

1. In this case, there is no room for the equitable principle referred to in Grant since the loan had not been forgotten: see [98] above. Ms de L'Isle did not contend that it would be unconscientious of Mr Knight to rely upon the wide and general words of the second limb of cl 1 by examining each party's actual knowledge and intention at the time of entering into the agreement: cf Grant at 124-125.

The recital

1. As to the recital, the proper approach to recitals is explained in Schwartz v Hadid [2013] NSWCA 89, where Meagher JA said at [80], referring to the analysis of Campbell JA in Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603; [2009] NSWCA 407 at [379]-[380]: As Campbell JA observes in Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407; 76 NSWLR 603 at [379]-[380], although there is a common and longstanding practice of including recitals in an agreement, those recitals can be of various kinds including "statements of the factual background to the transaction, statements of the intention or object of the parties in entering the transaction, or statements that the parties (or one or other of them) have agreed to do or will do certain acts". Because that is so and because the task of a court is to interpret the particular document in dispute, statements that recitals should always be treated in some particular way when construing an agreement must "be treated with caution, and as subject to the context in which they were uttered".
2. Subsequently, in Lachlan v HP Mercantile Pty Ltd (2015) 89 NSWLR 198; [2015] NSWCA 130, the Court of Appeal (Bathurst CJ, Beazley P and McColl JA) said at [52]-[53]: [52] A recital is part of a deed or agreement, usually set out as a statement or series of statements prior to the operative part of the deed or agreement. It can serve a variety of functions, including providing the factual background to the transaction and stating the parties' intentions or object in entering into the transaction: Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407; 76 NSWLR 603. In that case, Campbell JA, in a detailed review of the authorities, examined the manner in which recitals may be used for the purposes of the construction of the deed or agreement in which they appeared. [53] As his Honour pointed out, at [380], although not part of the operative provisions of the deed or agreement, a recital may be used as an aid to construction. There is well-established authority that a recital can be used to construe a provision of a deed or agreement that is ambiguous. Relevantly for present purposes, his Honour further observed, at 380, that recent authorities supported the proposition: [380(4)] … that recitals can provide a means of proving background facts that are themselves legitimate aids to construction. They can be at the least an admission by the party to the deed of the truth of the matter stated, under the general law concerning evidence. (Citations omitted.)

The purpose or object of the agreement

1. The difficulty with Ms de L'Isle's submission that the common objective of the Termination Agreement was limited to the dissolution of the joint venture and associated relationships, is that it is based on statements of the parties' intentions in email communications as to what they were attempting to achieve, starting with Mr Engelhardt's email to Mr Knight of 11 July 2018: "I would like to get something back, but I accept that there will be sizeable losses": see [20] above. Statements of the parties' subjective intentions are not relevant on a question of construction.
2. Ms de L'Isle also pointed to the negotiations between Mr Engelhardt and Mr Knight recorded in five email communications between 25 November 2018 and 6 December 2018 (Exhibit A, pp 221-223), as establishing that the mutually agreed objectives of the Termination Agreement were to accomplish six matters: (a) the transfer to Ms de L'Isle of Two Oceans' shareholding in Zeakal; (b) the transfer to Ms de L'Isle of a 30 per cent shareholding in SIG; (c) the extinguishment of all debts owed by Two Oceans, SIG and SGL to Ms de L'Isle, whether owed by way of convertible note or loan; (d) the extinguishment of the guarantees that Mr Engelhardt had given in favour of SGL in respect of monies borrowed by that entity from Mr Rohrsheim and Mr Thomson; (e) the releases of any mortgage given by Mr Knight in favour of Ms de L'Isle arising from Mr Knight's guarantee to Ms de L'Isle for the AUD$1 million advanced to SGL pursuant to Convertible Note 6; and (f) otherwise to dissolve the joint venture, with Mr Knight (and his associated entities) to own what assets remained in the joint venture.
3. The major difficulty with this submission, as counsel for Mr Knight correctly submitted, is that those email communications identify negotiation - back and forth - and the assertion of subjective positions. It is wrong in principle to draw conclusions about "mutually agreed" objectives from these negotiations. The common objectives of the Termination Agreement are best identified by the agreement itself.
4. A further difficulty is that the submission ignored what was specifically in the contemplation of the parties, as reflected in the terms of cl 1, relevantly, the extinguishment of all payment obligations owed by, among others, Mr Knight to Ms de L'Isle. Plainly, the extinguishment of all known payment obligations was a mutual objective of the parties.

Conclusion

1. The loan, like the guarantee, was a known payment obligation of Mr Knight; both were significant. That the loan was not expressly mentioned in the pre-contractual negotiations is not determinative of the common objectives sought to be accomplished by the agreement. These are best identified in the agreement itself, relevantly, cl 1 which contains two limbs, directed to the discharge of different subject matter. The first limb concerns the discharge of all "rights, claims or interests" in respect of the joint venture, whereas the second limb concerns the discharge of all "payment obligations". The scope of the second limb extends beyond the joint venture, given that Mr Knight, SIG and any subsidiary of SIG (as well as any associated non-parties) are not parties to the joint venture.
2. The word "all" in both limbs of cl 1, should be given its natural and ordinary meaning as general and expansive language. In the second limb of cl 1, "all" includes the known payment obligations of Mr Knight to Ms de L'Isle, being the loan and the guarantee. Both obligations of Mr Knight were personal obligations; both arose outside the joint venture - the loan arose prior to the joint venture, whilst the guarantee arose after Ms de L'Isle determined in 2015 not to invest any further money in the joint venture. The temporal distinction between these two obligations is not a relevant point of distinction for the scope of the discharge in cl 1. Nor is the fact that the purpose of the loan was personal and not part of Ms de L'Isle's investment in the joint venture, a relevant point of distinction.
3. Nor is the genesis of the Termination Agreement, being the decision of Mr Engelhardt and Ms de L'Isle not to invest any further money in the joint venture or the investments the joint venture had been pursuing, a reason to read down the word "all" in the second limb of cl 1 as limited to payment obligations of, or concerning, the joint venture and its termination. That is a constrained meaning. It gains no support from the recital which says nothing of the agreement, the intention or object of Ms de L'Isle and Mr Knight in relation to the second limb of cl 1. Nor is there anything in the surrounding circumstances that indicates that the parties intended that the loan, which was a known payment obligation, was outside the scope of the discharge intended by cl 1.
4. In my view, on the proper construction of the Termination Agreement, the loan answers the description of a "payment obligation" in cl 1 which was discharged by the accord executory when Two Oceans performed its obligations under the agreement. That satisfaction occurred no later than the date of the agreement when Two Oceans transferred the Additional SIG Interest to Ms de L'Isle. It follows that Mr Knight has established the defence of accord and satisfaction to Ms de L'Isle's claim. There is no reason why costs should not follow the event: Uniform Civil Procedure Rules 2005 (NSW), r 42.1.

Orders

1. The Court makes the following orders: 1. Statement of claim filed 15 June 2020 be dismissed. 2. Plaintiff to pay the defendant'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: 05 July 2021