Flynn v PPK Mining Equipment Pty Ltd

HEADNOTE [This headnote is not to be read as part of the judgment] The appellants entered into a Share Purchase Agreement ("SPA") with the respondents on 15 October 2014, pursuant to which the first and second appellants ("Mr Flynn" and "Flynfam" respectively) sold their shares in Exlec Pty Ltd ("Exlec") and Exlec Holdings Pty Ltd ("Exlec Holdings") to the first respondent ("PPK Mining"). Part of the consideration for the sale was the issue of shares in the second respondent ("PPK Group"). Under the SPA, the issue of shares was to take place in two tranches, the second of which was subject to the satisfaction of conditions referred to as the "Second Performance Conditions". The Second Performance Conditions were varied on 6 May 2015. As varied, satisfaction of the Second Performance Conditions depended upon the revenue of the Business, a defined term in the SPA, being greater than $1,000,000 in the twelve month period ending on the day immediately preceding the second anniversary of completion of the SPA, referred to as the relevant period. In assessing satisfaction of the Second Performance Conditions, the respondents were required to prepare a Net Profit After Tax ("NPAT") Statement in accordance with cl 9.1 of the SPA. After variation of the SPA, that obligation was to prepare a statement of revenue, not NPAT. The respondents issued an NPAT Statement (revised from the first NPAT Statement issued) calculating total revenue at $762,056. The appellants sought relief including a declaration that the Second Performance Conditions (as varied) were satisfied such that the appellants were entitled to be issued 3,441,039 shares in PPK Group. Damages, equitable compensation and specific performance were sought in the alternative. The primary judge found that the Second Performance Conditions were varied but dismissed the appellants' claim on the basis that the appellants had not satisfied the Second Performance Conditions. The appellants appeal against this conclusion. The primary judge also found that the respondents were in breach of cl 9.1 of the SPA as they had prepared NPAT Statements which erroneously assessed satisfaction of the Second Performance Conditions on the basis of NPAT rather than revenue. By notice of contention, the respondents challenge this conclusion and challenge some of the primary judge's findings on the issue of whether the appellants satisfied the Second Performance Conditions. The overarching issue on appeal was whether the primary judge erred in finding that the Second Performance Conditions (as varied) had not been satisfied. The appellants contend that revenue from each of the following should have been included in the calculation for this purpose: (i) the construction of enclosures, referred to as FLP-1 Enclosures, to be used to remedy a problem identified with Coaltram vehicles produced by a company within the PPK Group. The issue here was whether revenue to the Business, for the purpose of determining whether the Second Performance Conditions were satisfied, should include a sum reflecting a transfer price for the supply of the FLP-1 Enclosures by Exlec irrespective of whether PPK Group expected to make a financial gain from the supply ("FLP-1 Claim"); (ii) a job for Premron Pty Ltd. The issue here was whether the job was cancelled during the relevant period such that Exlec was entitled, for this purpose, to account for the full amount of a 40% deposit in respect of this job as revenue ("Premron Claim"); and (iii) work done pursuant to Certificates of Recognition at PPK Mining's Port Kembla and Tomago workshops. The issue here was whether all work done pursuant to Certificates of Recognition at these sites should be included in the calculation of revenue for this purpose on the basis that electrical overhaul work performed pursuant to Certificates of Recognition was an activity falling within the ambit of the Business as defined in the SPA ("Certificates of Recognition Claim"). The primary issue raised by the notice of contention was whether the primary judge erred in finding that the respondents were in breach of cl 9.1 of the SPA (as varied). The Court (Stern JA, Leeming and Mitchelmore JJA agreeing) allowing the appeal, held: As to issue (1) By Stern JA (Leeming and Mitchelmore JJA agreeing): (1) The primary judge erred in finding that the Second Performance Conditions had not been satisfied: [136], [143]. (2) The commercial context within which the SPA was entered was one in which it was expected that a significant component of the work that Exlec would perform after its purchase by PPK Group would be by way of supplies to other divisions within PPK Group. In those circumstances it would be objectively inferred that the parties intended that revenue to Exlec from such work would be recognised and reflected in the revenue of the Business for the purpose of determining whether the Second Performance Conditions were satisfied: [107], [118]. The SPA required that the revenue of the Business, for this purpose, be calculated as if Exlec were a standalone entity and not a division within PPK Group: [112]. On that approach, revenue from the supply of FLP-1 Enclosures from Exlec to PPK Group should have been calculated using a transfer price for the supply and included in the revenue of the Business for this purpose: [132]-[134]. On appeal, subject to the question of whether any revenue should be recognised for these supplies, the transfer price and the amount of the FLP-1 Claim was agreed: [101], [126], [135]. (3) The evidence does not support the conclusion that the Premron job was cancelled. The Premron Claim should be rejected: [139]. By Stern JA (Leeming and Mitchelmore JJA not deciding): (4) The electrical overhaul work carried out by Exlec at the Port Kembla and Tomago workshops is an activity within the ambit of the Business. Revenue from that activity during the relevant period should be included in the calculation of revenue of the Business for the purposes of determining whether the Second Performance Conditions are satisfied: [140]-[142]. On appeal, the amount of the Certificates of Recognition Claim was agreed: [101]. As to issue (2) By Stern JA (Leeming and Mitchelmore JJA agreeing): (5) The NPAT Statements provided by the respondents were premised upon the determinant for satisfaction of the Second Performance Conditions being NPAT rather than revenue. Having regard to this, and construing cl 9.1 in its contractual context, including cl 9.4, the NPAT Statements do not comply with cl 9.1: [150]-[153]. It follows that the notice of contention is dismissed [166].

JUDGMENT

1. LEEMING AND MITCHELMORE JJA: We agree with the orders proposed by Stern JA. We also agree with her Honour's reasons, save that we would prefer not to express a view on the Certificates of Recognition claim, on which, as Stern JA points out, nothing turns in light of the success of the FLP-1 Claim.
2. STERN JA: The appellants' claims arise out of a Share Purchase Agreement which they and the respondents entered into on 15 October 2014 ("SPA") with completion occurring on 16 October 2014. Pursuant to the SPA the first and second appellants (Daniel Flynn and Flynfam Pty Ltd as trustee for the Flynn Family Trust ("Flynfam")) sold their shares in Exlec Pty Ltd ("Exlec") and Exlec Holdings Pty Ltd ("Exlec Holdings") respectively to the first respondent, PPK Mining Equipment Pty Ltd ("PPK Mining").
3. Part of the consideration for the sale of Flynfam's shares in Exlec Holdings was the issue of shares in the second respondent PPK Group Limited ("PPK Group"), a publicly listed company. The issue of shares in PPK Group was to take place in two tranches, the second of which was subject to the satisfaction of certain conditions set out in Schedule 2 to the SPA, defined in the SPA as the "Second Performance Conditions". For convenience, I refer to the second tranche of shares to be issued following satisfaction of the Second Performance Conditions as the "Second Performance Shares". The Second Performance Shares were sometimes referred to by the parties as the "earnout".
4. The Second Performance Conditions were varied on 6 May 2015. There is no longer any dispute that this variation occurred. Critically, after this variation, to satisfy the Second Performance Conditions the appellants were required to meet a target of $1,000,000 for the revenue of "the Business", a defined term in the SPA, discussed further below. What was "revenue" and what was encompassed within "the Business" for this purpose were both matters of contention in the appeal.
5. The appellants commenced proceedings in January 2019, seeking relief including declarations that, in effect, the Second Performance Conditions were varied and, as varied, were satisfied with the consequence that the appellants were entitled to be issued 3,441,039 shares in PPK Group. This was the number of shares in PPK Group that the appellants claimed that they would have received had the Second Performance Shares been issued, as the appellants contended they should have been, in October 2016. Damages, equitable compensation and specific performance were sought in the alternative. The appellants contended that the value of the Second Performance Shares, together with unpaid dividends on those shares, was between $4.4 and $6.4 million. The respondents denied that the appellants were entitled to the relief claimed.
6. The primary judge found that the Second Performance Conditions were varied as claimed by the appellants and that the respondents were in breach of the SPA in one respect (discussed further below) but dismissed the appellants' claim on the basis that the appellants had not satisfied the Second Performance Conditions (as varied). The primary judge ordered that the appellants pay 80% of the respondents' costs.
7. The crux of the dispute between the parties on appeal was twofold. First, whether, as the appellants allege, the primary judge erred in finding that the Second Performance Conditions (as varied) had not been satisfied. This is primarily a question of the proper construction of the SPA, as varied, in the commercial context in which it was intended to operate. Specifically, the appellants contend that revenue from each of the following jobs should have been included as revenue of the Business for this purpose: 1. construction by Exlec of flame proof boxes ("FLP-1 Enclosures") for the purpose of PPK Group devising a solution to problems that had arisen in relation to Coaltram vehicles for which PPK Group was responsible ("FLP-1 Solution"), having purchased the Coaltram business. The key issue was whether the Business earned revenue for this job, for the purpose of the Second Performance Conditions, irrespective of whether PPK Group expected to, or did itself, make a financial gain from these components ("FLP-1 Claim"); 2. a job for Premron Pty Ltd ("Premron") in respect of which a deposit of 40% had been paid but which the appellants contended had been cancelled within the relevant period for determining whether Exlec had satisfied the Second Performance Conditions ("Premron Claim"). The key issue in relation to the Premron Claim was whether this job had been cancelled, as opposed to put on hold, during the relevant period such that the 40% deposit should have been accounted for in full as revenue of the Business; and 3. work done pursuant to Certificates of Recognition (being a form of permission to undertake certain manufacturing and overhaul work) at PPK Mining's Port Kembla and Tomago workshops. In this regard, the issue was whether revenue from such work was revenue of the Business for the purpose of determining whether the Second Performance Conditions were satisfied ("Certificates of Recognition Claim"). This involved 17 jobs at the Port Kembla workshop and ten jobs at the Tomago workshop.
8. The second overarching dispute on appeal was whether, as alleged by the respondents in their notice of contention ("NOC"), the primary judge erred in finding that the respondents were in breach of the SPA (as varied) because the statement that they provided to the appellants as part of the process of determining whether the appellants had satisfied the Second Performance Conditions erroneously focussed upon net profit after tax ("NPAT") rather than revenue, and as to the consequences of any such breach.
9. For the reasons set out below, the appeal should be allowed.

Background to the Share Purchase Agreement

1. Up until the execution of the SPA there were three Exlec companies, Exlec, Exlec Trading Pty Ltd ("Exlec Trading") and Exlec Holdings. Exlec was not a reporting entity within the meaning of the Corporations Act 2001 (Cth).
2. Since at least 2010, Exlec Trading held a Certificate of Recognition, issued in 2014 as ANZEx SF 14.1050 to repair and overhaul explosion protected electrical plant at the Exlec workshop at Tomago. This certified that Exlec's Tomago facility had met the necessary assessment and recognition requirements for "Ex 'd'" protection for: "Distribution and control box; Control & monitoring enclosures: Motor control centres; Substations; Isolators; Circuit breakers; Junction boxes; Lighting Enclosures lighting isolation/power supply boxes AC/DC Motors/Generators; Cable Reelers".
3. Mr Phillips, Electrical Supervisor for PPK Mining, gave evidence that "Ex" referred to "explosion proof electrical equipment" and "d" meant flameproof. His evidence was that all workshops or facilities that overhaul Ex 'd' electrical equipment must be licensed to do so.
4. Exlec Trading had also been granted a certificate certifying that Exlec Trading operated a management system that complied with the requirements of AS/NZS ISO 9001:2008 ("ISO 9001:2008 Certificate"). The ISO 9001:2008 Certificate was issued on 4 July 2013. It was site-specific. It covered: "Design, manufacture, repair and overhaul of hazardous area electrical equipment."
5. In August 2013 Exlec went into administration. A Deed of Company Arrangement was entered into and was wholly effectuated by August 2014.
6. PPK Group is a publicly listed company. From 2013 it sought to expand its mining services and mining equipment businesses by acquiring other companies. By early 2014 PPK Group had acquired the Coaltram mining equipment business. By mid-2014 PPK Group had also acquired MONEx Electronic Engine Management System ("EMS") technology which was an integral part of the manufacture of the Coaltram vehicles. PPK Group also acquired workshops in Tomago and Port Kembla which had the ability to provide mechanical overhaul services for Coaltram vehicles but neither workshop had the necessary Certificates of Recognition to provide electrical overhaul services. Such services were thus subcontracted out.
7. On 19 September 2014 Mr Levison, PPK Group's Chairman, sent an email to Mr Wowk (consultant at HWL Ebsworth, solicitors for PPK Group) copied to Mr Molloy (described in Mr Levison's affidavit as the "founder of PPK and largest shareholder") and Mr Barker (at that time Chief Financial Officer of PPK Group). The email refers to Dale McNamara, then a director of PPK Group. Mr Levison wrote that: "…in summary, Exlec have a range of current and future products that are highly complementary to us and (to quote Dale) 'if PPK doesn't buy this then I will' … If we all agree a green light on this: then likely we'd be assuming circa $1M of debts, and I'd be recommending some form of future grant of stock subject to an earnout (realistically it will make $250K to $400K EBIT so think circa $1M in earnout due in 2-3 years)."
8. On the same day Binding Heads of Agreement between Mr and Mrs Flynn and PPK Mining and PPK Group were signed. These provided for PPK Mining to lend $150,000 to Exlec Group in exchange for Exlec Group securing the loan against assets including its intellectual property rights, drawings and Certificates of Conformity and Mr and Mrs Flynn allowing PPK Group to undertake a due diligence exercise on the Exlec Group.
9. In an email from Mr Levison to Mr Barker dated 24 September 2014 Mr Levison wrote: "Perhaps most importantly Dale has convinced me Exlec will add real margin and profitability to PPKME and allow us to buy another small Biz which together would dominate a market segment, excluding any profit Exlec might make. Accordingly easiest way to do deal is to value Assets at circa $1.5m being say…$500k to sort his O/S liabilities and $1m ($500k in 12 months and $500k 24 months) all stock…".
10. An email sent on 25 September 2014 within PPK Group summarised the Exlec Group's Certificates of Conformity and identified various "scenarios" as to which company would hold the Certificates of Conformity after the purchase of the Exlec Group. At that time 15 Certificates of Conformity were listed as belonging to the Exlec Group. The Certificates of Conformity relate to particular electrical apparatus and are limited to manufacture at particular, identified locations. They require that the products are manufactured in accordance with certified drawings, and the drawings are identified in the Certificate.
11. On or about 28 September 2014 a term sheet was signed by Mr Flynn and Mrs Flynn on behalf of Flynfam and by Mr Levison for PPK Mining and PPK Group. This included an early iteration of what became the Second Performance Conditions: "If the net profit after tax from the sale of Exlec products for the 12 months ending on the day immediately before the second anniversary of the Completion Date (Exlec Group NPAT) exceeds $250,000, the performance conditions will have been met."
12. Following this, on 30 September 2014 Mr Levison reported to his fellow directors: "Whilst this might look like a small transaction it brings significant "certified" underground technology to PPKME. It also bring [sic] PPKME full electrical certification for underground equipment which is a skill set we have previously had to contract in. In time we believe what we have bought will generate significant profits and will revolutionise a particular area of underground coal mining making us the market leader in coal shuttle equipment an[d] technology. … Immediately there will be benefits to PPKME as we can now use our own internal supplier (Exlec) for a range of products. The founder of the business Daniel Flynn is also a super smart 30 something who will be a great addition to the team."
13. In a "draft" due diligence report provided to Mr Barker on 30 September 2014 the principal activity of the Exlec Group was described as: "the design, manufacture and overhaul of hazardous area electrical equipment in the mining industry."
14. On 8 October 2014 Certificate of Recognition ANZEx SF 14.1050 was reissued to Exlec rather than, as had previously been the case, to Exlec Trading. That reflects one of the action items in a PPK timeline to completion: "All documentation for 'licence to operate' transferred to Exlec P/L". There were also steps taken to transfer all Certificates of Conformity from Exlec Trading to Exlec, to terminate the licence of Intellectual Property from Exlec to Exlec Trading and to update the ISO 9001:2008 Certificate. Exlec Trading was to be placed in liquidation once the SPA was completed.
15. On 12 October 2014 an internal email within the PPK Group set out the current status of "licenses to manufacture". These were listed as "Certificates of conformity, ISO 9001 and Registered service facility". As regards this last item it was recorded that the transfer from Exlec Trading to Exlec was pending and the implication was said to be "cannot undertake overhaul of ex…electrical work (currently no such…on books, so practical commercial in…minimal unless timing drags out)" (text missing on document in evidence).
16. The signed SPA was sent by Mr Flynn to Mr Barker (copying Mr Levison) on 13 October 2014.
17. On 13 October 2014 Mr Levison wrote by way of "update prior to signing contract" that "[t]he technology we are getting is immense and will significantly add to PPKME capabilities."
18. Around the same time as the SPA was entered into, Mr Flynn signed an employment contract which identified his "Position Description" as being to: "1. Integrate the Exlec business into the PPK mining equipment business as a key asset of PPK Mining Equipment Pty Ltd. 2. Develop the synergies between the Coaltram LHD product and Exlec components, eg lights, alternators, cameras and other components. 3. Develop and promote Exlec component manufacture to OEM's and the general mining industry. 4. Assist in the develop[ment] of the PPK Mining Equipment service facilities to be: (a) market ready to quote electrical services; (b) support certified work and continuous miner rebuilds. …".
19. Prior to entering the SPA there were steps taken to transfer Exlec's Certificate of Recognition ANZEx SF 14.1050 to PPK Mining's premises at 13B Old Punt Road, Tomago, where Exlec was to be relocated after its purchase by PPK Group. The reissued ANZEx SF 14.1050 was in fact granted to Exlec on 30 October 2014.

The Share Purchase Agreement

1. The SPA is dated 15 October 2014 and completion occurred on 16 October 2014.
2. Pursuant to cl 3 of the SPA PPK Mining purchased Mr Flynn's shares in Exlec and Flynfam's shares in Exlec Holdings.
3. A number of conditions precedent to completion were set out in cl 2.1. These included: "(e) Manufacturing Licences: the re-issue by the relevant certification body of each Manufacturing Licence in the name of Exlec as the specified holder of the Manufacturing Licence in the place of Trading".
4. Manufacturing Licences were defined in cl 1.1 as: "the material necessary authorisations, licences and permits required to conduct the Business as currently carried on by Exlec and as carried on by Trading prior to Transfer Completion, including the Manufacturing Licences listed in Schedule 4."
5. The Manufacturing Licences listed in Schedule 4 comprised Certificate of Recognition ANZEx SF 14.1050 and the ISO 9001:2008 Certificate.
6. The Business was defined in cl 1.1 as: "the business of manufacturing and selling mining equipment and parts primarily for use in the underground coal mining sector carried on by Exlec immediately before Completion."
7. The purchase price for the shares in Exlec was $200,000 paid on completion to Mr Flynn or at his direction: cll 4.1 and 6.3(b). Clause 4.2 provided that the purchase price for the shares in Exlec Holdings was: "the aggregate of the First Performance Shares (if any) and the Second Performance Shares (if any), which subject to the satisfaction of the First Performance Conditions and the Second Performance Conditions respectively must be issued in accordance with clause 7."
8. Subject to the satisfaction of the First Performance Conditions, the First Performance Shares were to be issued on the first anniversary of the Completion Date, being 16 October 2015: cl 7.1. The First Performance Conditions were set out in Part A of Schedule 2: "(a) The integration of the Business into the business carried on by the Buyer to the satisfaction of the Buyer (acting reasonably) not later than 12 months after Completion, including: (i) the transfer or re-issue of all the Certificates of Conformity and the Manufacturing Licences to the Buyer (or its nominee); (ii) the integration of all products manufactured and sold by the Exlec Group as at Completion into the Buyer's supply chain; and (iii) if requested by the Buyer, the relocation of the Business from the Leased Premises to the premises located at 13B Old Punt Road, Tomago, New South Wales occupied by the Buyer or such other premises as may be nominated by the Buyer; and (b) Daniel does not cease to be an employee…".
9. Subject to satisfaction of the Second Performance Conditions, pursuant to cl 7.2 the Second Performance Shares were to be issued "not later than 3 Business Days after the date on which the NPAT Statement is accepted by Flynfam or taken to be accepted under clause 9.3(b) or, if applicable, finally determined under clause 9.4." The Second Performance Shares were to be the "number of PPK Shares which is equal to $500,000 divided by the VWAP Price at an issue price equal to the VWAP Price per PPK Share (rounded up to the nearest whole number)".
10. The Second Performance Conditions, set out in Part B of Schedule 2 were: "(a) The Business NPAT as specified in the NPAT Statement as accepted by Flynfam or taken to be accepted under clause 9.3(b) or, if applicable, finally determined under clause 9.4 being greater than $250,000; and (b) Daniel does not cease to be an employee…".
11. The Business NPAT was defined in cl 1.1 to mean the net profit after tax of the Business for the 12 month period ending on the day immediately before the second anniversary of the Completion Date "calculated in accordance with the Accounting Standards after making the Agreed Adjustments."
12. Accounting Standards were defined in cl 1.1 as: "(a) the applicable accounting standards under the Corporations Act and mandatory professional reporting requirements; and (b) To the extent that the standards and requirements referred to in paragraph (a) do not apply or do not clearly govern any particular aspect of the preparation of the financial statements, generally accepted accounting principles, policies and practices in Australia for an entity similar to the relevant Group Company."
13. Clauses 9.1-9.4 set out how the Business NPAT was to be prepared: "9.1 Preparation of NPAT Statement Not later than 10 Business Days after the second anniversary of the Completion Date, the Buyer must prepare and give to Flynfam a statement setting out the Business NPAT for the 12 month period ending on the day immediately before the second anniversary of the Completion Date including details of each adjustment (if any) made in accordance with the Agreed Adjustments (NPAT Statement). 9.2 Access PPK must procure that all reasonable, non-disruptive access to the business and accounting records, working papers and any other relevant documents of the Buyer, PPK and any other Related Body Corporate of PPK (including the Exlec Group) is given to Flynfam and its accountants and, if applicable, the Independent Accountant for the purpose of reviewing the NPAT Statement during normal business hours and on reasonable prior notice to the Buyer. 9.3 Review of NPAT Statement (a) If Flynfam disputes the NPAT Statement it must provide the Buyer with a written notice (Dispute Notice): (i) within 20 Business Days after the date on which it is given the NPAT Statement in accordance with clause 9.1 (Final Objection Date); (ii) setting out: (A) reasonable details of each matter in dispute; and (B) the reasons why each matter is disputed, in which case the dispute will be determined in accordance with clause 9.4. (b) If Flynfam does not dispute the NPAT Statement by the Final Objection Date Flynfam will be taken to have accepted the NPAT Statement as submitted by the Buyer and the amount of the Exlec Business NPAT specified in it. 9.4 Dispute Resolution Procedure (a) Within 10 Business Days after Flynfam gives the Buyer a Dispute Notice, the Buyer must give Flynfam a response in writing on the disputed matters (Response). (b) If the dispute has not been resolved within 10 Business Days after the Buyer gives the Response to Flynfam, the dispute must promptly be submitted for determination to the Independent Accountant to determine the matter or matters in dispute. … (e) The Independent Accountant must act as an expert and not as an arbitrator and his written determination will be final and binding on the parties in the absence of manifest error and the NPAT Statement will be deemed to be amended accordingly and will be taken to comprise the final NPAT Statement."
14. On completion, Mr Flynn ceased to be a director of Exlec and Exlec Holdings. Exlec changed its name to PPK Exlec and later to PPK Electrics. They remained as corporate subsidiaries of PPK Group but were referred to as "divisions" of PPK Group. Exlec relocated to PPK Mining's premises in Tomago. A liquidator was appointed to Exlec Trading. Mr Flynn's role became "Manager - PPK Exlec Pty Ltd".
15. Having regard to the terms of cl 9.1 of the SPA and the central relevance of the Second Performance Conditions in this appeal, in this judgment I will refer to the 12 month period 16 October 2015 to 15 October 2016 as the relevant period.

Variation to the Share Purchase Agreement

1. The primary judge found that after the SPA was entered into a problem arose as to how Exlec billed other divisions within PPK Group (being other subsidiaries of PPK Group) for work it did for those divisions. This work was described within PPK Group as "internal work". The perceived problem was that notwithstanding that PPK was in the depths of the coal recession, Mr Flynn wanted to "charge a 'fully marked up price' for Exlec's products in internal sales." The primary judge found that Mr Giles, General Manager of PPK Mining, had told Mr Barker that he considered that Exlec was charging a price on internal sales that meant that it would make "massive margins on internal sales when compared with the smaller margins Exlec could make on external sales." The primary judge found that Mr Flynn's concern in this regard was "as to how internal costs would affect his earnout".
2. This situation led Mr Barker to send an email to Mr Flynn on 10 April 2015 (copied to Mr Levison, Mr Giles and Mr Beddow, then Chief Financial Officer of PPK Group) stating that: "With reference to the earnout clause within the contract for the purchase of Exlec, have discussed this with Robin and Greg and here is what we propose. Firstly, PPK's policy is that internally the profit is made at the end point of sale. Thus we don't have a heap of profit centres along the way escalating the final price, and out price ourselves in the market. All divisions (and in this example Exlec is a division) internally transfer materials and labour at cost against the particular project, so they recover all costs. Secondly, PPK is committed to Exlec making the targets and hence you receiving the earnout. Our policy/systems obviously above don't track earnouts. So - what we'll do is track the profitability of Exlec via 1. The results in the general ledger, plus 2. An offline spreadsheet that apportions the profit on internal jobs".
3. Mr Barker then explained: "How do we apportion the profit? Worked example. We sell a CT [Coaltram] for $1M. Total costs (internally charged labour + materials) are $700K so margin is about $300K. Of the $700K in costs, the Exlec component was $140K or 20% So Exlec's share of the profit is 20% x $300K = $60K".
4. Mr Barker proposed offline spreadsheets to "track this" and that these should be agreed to monthly including by Mr Flynn. If the parties could not agree, this should be escalated to Mr Levison. Mr Barker concluded that: "What could go wrong? Actual hours/time/cost charged to a job varies versus what was proposed when we quoted the job. Hence Exlec is hurt by or benefits from efficiencies in other departments (as well as their own). We'll handle this if it happens - but my expectation at this time is that when we quote the job (sale or maintenance) we have an expected margin based on the various costs. If actuals vary significantly from proposed then we'll review and determine a fair outcome. Daniel - please email back confirming you're in agreement. Otherwise - give me a call to discuss."
5. As the primary judge found, there was no response to this email from Mr Flynn and none of Mr Barker's proposed spreadsheets were ever prepared. On 22 April 2015 Mr Barker proposed internally that the Exlec earnout be changed to revenue earned. He then added: "b) So assume 20% gross margin on sales - we target sales of $1,250K. c) I am going to propose that we weight 80% of the earnout on this sales target of $1,250K, and 20% on the NPAT $250K."
6. On 6 May 2015, by exchange of emails following a discussion between Mr Barker and Mr Flynn, Mr Flynn's role was changed to Head of Innovation of PPK Group Ltd and it was agreed that: "Your earnout (year 2) we will change to a revenue target. The current earnout hurdle is NPAT $250,000. Would look to change this to revenue of $1,000,000.00."
7. Mr Flynn replied almost immediately that this was "[a]ll good."
8. The primary judge recorded Mr Flynn's evidence as to this as follows: "Mr Flynn was agreeable to both the new role and the proposed change to the earnout target. They did not specifically discuss how revenue would be calculated. Mr Flynn said he would not have agreed to take the position of Head of Innovation unless the earnout requirement was changed to revenue as he could not leave satisfaction of the Second Performance Conditions in the hands of someone else running the business to ensure that a sufficient profit margin was met."
9. In Mr Barker's affidavit, he said that the two men had not had any specific discussion at the time about how the revenue amount would be calculated.
10. The primary judge found that the agreement to vary the SPA conferred benefits on both parties. Given that Exlec was a "loss making division" of PPK Group the variation conferred benefits on the appellants. The benefit to the respondents was that they were "able to move Mr Flynn from a role in which it appear[ed] that he was causing difficulties to a role outside of Exlec, leaving PPK to run Exlec's business unimpeded." Her Honour found that the SPA was varied such that subparagraph (a) of Part B of Schedule 2 provided (emphasis in original): "The Business revenue NPAT as specified in the NPAT Statement as accepted by Flynfam or taken to be accepted under clause 9.3(b) or, if applicable, finally determined under clause 9.4 being greater than $250,000 $1,000,000…".
11. Her Honour recorded that the appellants had, in their closing submissions, set out a range of consequential amendments to the SPA, generally replacing "NPAT" wherever it appeared, with "revenue". Her Honour further recorded that she understood that the respondents did not dispute those consequential amendments. However, her Honour held that the Court should assume that the parties intended to produce a commercial result. On that basis her Honour found that it was not strictly necessary to make each consequential amendment posited by the appellants. Her Honour made the following declaration, which was order 1 made on 2 December 2022: "Declare that the Share Purchase Agreement was varied on 6 May 2015 such that the requirement under sub paragraph (a) of Part B of Schedule 2 that Business NPAT was greater than $250,000 was replaced with a requirement that the Business revenue was greater than $1,000,000."
12. For convenience, when referring to the SPA as varied in this judgment, I will use the term Business Revenue in place of the term "Business NPAT" in the SPA.

The Jobs Leading to the Disputes as to the Revenue of the Business

FLP-1 Enclosures

1. The first area of dispute as to the revenue of the Business relates to the work Exlec did in constructing FLP-1 Enclosures which was for the use of PPK Group in proposing what was known as the FLP-1 Solution.
2. As set out above, one of the businesses that PPK Group had purchased by early 2014 was the Coaltram mining equipment business which included the manufacture, service and support of Coaltram underground transport utility vehicles. In March 2015 problems occurred with these vehicles leading to the Department of Trade & Investment (Mine Safety) issuing a Prohibition Notice to each mine using a Coaltram vehicle requiring that it be parked up until proven safe to operate. At the time there were 90 Coaltram vehicles operating in New South Wales and Queensland. The primary judge found that this was a matter of serious concern to PPK Group's board and urgent action was needed.
3. The FLP-1 Solution was proposed as a solution to this problem. This required an FLP-1 Enclosure, being a flameproof enclosure to house a second throttle sensor which would intervene to shut down the engine and stop unplanned movement. Mr Schweizer, by then Engineering Manager at PPK Group, gave evidence that it was never proposed to charge the clients for the FLP-1 Solution. Mr Schweizer expected that PPK Group would have to bear the cost of making the FLP-1 Enclosures and fixing it on all Coaltram vehicles.
4. Mr Schweizer selected an Exlec flameproof enclosure to save costs by manufacturing the enclosure in-house. His evidence was that if PPK had to go to market to buy something similar to the FLP-1 Enclosures, it could have cost $30,000 to $40,000 per enclosure which, in his opinion, would have made PPK's Coaltram business uncommercial. He asked Mr Partridge, who worked within Exlec, to plan for 100 units as that was the number of Coaltram vehicles in the field. The request was then reduced first to 85, then to 50, and ultimately 41 FLP-1 Enclosures were produced by Exlec. The primary judge found that Exlec's costs for labour and materials for each FLP-1 Enclosure were $6,253.82.
5. A "Delivery Docket" dated 15 September 2016 on PPK Group letterhead was signed as "Despatched by" Mr Clarke, who was employed as a draftsman at Exlec. Whilst there is a signature on the Delivery Docket against the words "Received by", there was no evidence as to the identity or position of the person who had signed as "Receiving" the items. The items to which the Delivery Docket related were: "20 HA110-FLP1, Ex d Auxiliary Enclosure. *SB05084 closed at 41 units. Excess units to be booked to applicable jobs."
6. The document recorded that the items were "Despatched to: PPK Store." There is no evidence as to whether or not the items physically moved from one of the PPK Mining warehouses to another. PPK Store is not a separate division of PPK Group. The "SB" prefix on the job number denotes "Stock Build" and this refers to items that are manufactured by a PPK division and then physically stored at one of the PPK Group premises until required and utilised by one of the PPK divisions. The primary judge found that 41 FLP-1 Enclosures were "despatched to 'PPK Store'".
7. Eighteen of the FLP-1 Enclosures were used to manufacture the FLP-1 upgrade kit that was ultimately installed in Coaltram vehicles. During the relevant period six of the FLP-1 Enclosures were sold recovering total revenue of $85,020. These were sold through divisions of PPK Group other than Exlec. Revenue from the sale of those six enclosures was included within the respondents' calculation of the revenue of the Business of Exlec for the purpose of determining whether Exlec had satisfied the Second Performance Conditions. No other revenue was included in that statement on account of the 41 FLP-1 Enclosures. The appellants contend on appeal that this was a supply from Exlec to PPK Group and as such Exlec was entitled to account on the basis that it earned revenue for this work at an appropriate transfer price. As set out below, if this Court accepted that Exlec was correct in this contention, the parties were agreed as to the appropriate transfer price for this work.

Premron CHS System

1. The second area of dispute as to revenue to be included as revenue of the Business for the purpose of the Second Performance Conditions related to work which Exlec performed during the relevant period on the Premron job.
2. On 9 December 2015, Exlec issued a quotation to Premron for the supply and installation of an underground coal mine compliant Premron CHS electrical system. The payment terms were that: "Progress payment structure of 40% deposit on placement of order, 40% on delivery with the remaining 20% due on completion of commissioning. All transactions are strictly in line with our standard trading terms and conditions"
3. Exlec's standard trading terms and conditions were not in evidence.
4. An invoice was then issued by Exlec on 28 January 2016 for the 40% "on award" in the sum of $254,552.96, exclusive of GST. That sum was paid. By email to Mr Flynn dated 31 March 2016 Mr Whelan of Premron requested Exlec to put an immediate hold on "all orders of components...against Premron Order…& incur no further costs to said order, up to the monies paid to date". By email of 7 April 2016 Mr Whelan sent a further email to Mr Flynn stating: "Copy of Order PO M55792-008, officially on Hold from 30/03/16."
5. The evidence of Ms Wilson, Group Financial Controller for PPK, was that this job was originally put on hold but was later discussed at length and "was actually requoted at a later date, and so the original job was cancelled and a new job was commenced in about 2018." She said that upon the new job commencing, the remainder of the amount of the deposit would have had to be brought from work in progress to revenue. This accorded with the fact that PPK prepared its accounts on an accruals basis. Thus, an amount paid up front was not brought to revenue until either a predetermined stage of the project was reached or some other event satisfied the accounts department that the revenue had been earned.
6. Whilst one inference from the evidence of Ms Wilson is that the job was not in fact "cancelled" until 2018, there was no evidence as to the date of cancellation. There was also no evidence as to whether or not the deposit was non-refundable.
7. $179,807.84 on account of the Premron job was included within the respondents' calculation of the revenue of the Business of Exlec for the purpose of determining whether Exlec had satisfied the Second Performance Conditions. This reflected the actual work done prior to the job being put on hold but did not reflect the whole amount of the deposit paid. The appellants contend that the proper inference to draw is that the job was cancelled in the relevant period and they were therefore entitled to account for the full amount of the deposit as revenue.

Accreditation of PPK Mining Workshops

1. The third area of dispute in the appeal as to what ought to have been included as revenue of the Business for the purpose of the Second Performance Conditions related to work done at PPK Mining's Tomago and Port Kembla workshops which was permitted by Certificates of Recognition either held by Exlec, or the grant of which was assisted by the fact that Exlec held ANZEx SF 14.1050 and ISO 9001:2008.
2. As set out above, one of the First Performance Conditions was that, as part of the integration of the "Business" into the business carried on by PPK Group, ANZEx SF 14.1050 and the ISO 9001:2008 Certificate should be transferred or re-issued to PPK Mining or its nominee. Given that the First Performance Shares were issued, I would infer that the re-issue of ANZEx SF 14.1050 to Exlec at the address of PPK Mining's workshop in Tomago on 12 March 2015 was considered to be a transfer of that Certificate of Recognition to the nominee of PPK Mining for this purpose.
3. As regards the re-issue of ANZEx SF 14.1050, SAI Global, the certification body, confirmed on 12 December 2014 that: "SAI Global received [a declaration] from Ashleigh Campbell - Exlec HR/QA Manager - via e-mail on 20th October, 2014 that the change of address from 13B School Drive, Tomago NSW 2322 to 13B Old Punt Road, Tomago NSW 2322 doesn't impact Exlec's operations, Procedures/Processes, Practices, Test Tools, Resources and Responsible Person(s). Thus, EXLEC DECLARATION was satisfactory."
4. By reason of this transfer, PPK Mining's workshop in Tomago became licensed to overhaul Ex 'd' electrical vehicles. The ambit of authorisation was also increased in that certificate to include Ex 'e' and Ex 'i' equipment, being explosion proof increased safety equipment and explosion proof intrinsically safe equipment, respectively. On 3 July 2015, ANZEx SF 14.1050 was further expanded to include Ex 'm' certification, covering explosion proof encapsulated equipment.
5. The primary judge found that prior to the acquisition of Exlec, PPK Mining had had plans to obtain a Certificate of Recognition for its Port Kembla workshop.
6. To this end, on 3 December 2014 Ashleigh Campbell, by then employed by PPK Mining, sent an email to SAI Global including the following: "What we are now looking to do is implement Exlec's current certified system down at PPK's Port Kembla facility so we can operate a branch out of there in addition to Tomago. We just need to know if this would require an audit, or if we could do what we did recently when Exlec moved from 13B School Drive Tomago to 13B Old Punt Road Tomago (certification was transferred without an audit)?"
7. SAI Global indicated that an audit was required. However, at Ms Campbell's request SAI Global agreed that only a limited audit would be required if the Port Kembla site were added to Exlec's existing ISO 9001:2008 Certificate. Ms Campbell then prepared the application forms, Mr Flynn signed them because he "had the Service Facility Licence in Tomago", and the audit was conducted in February 2015. Ms Campbell, Mr McLean and Mr Partridge (the latter two being PPK employees) attended the audit and Mr Flynn also attended on one day of the audit. On 12 March 2015, Certificate of Recognition ANZEx SF 15.1054 was issued to Exlec for the Port Kembla workshop with Mr McLean and Mr Ornelas from PPK nominated as the Responsible Persons for the purposes of the licence. The scope of recognition was Ex 'd'.
8. The primary judge found that PPK was able to accelerate the accreditation of the Port Kembla workshop by using Exlec's existing accreditation but that: "All the jobs were certified by Mr McLean and Mr Ornelas as the "Responsible Persons" under the licence. All the jobs were for existing customers of PPK Mining Equipment, for which Exlec had never previously performed work. Labour was provided by PPK Mining Equipment's staff at Port Kembla, not Exlec's employees. Some Exlec parts were used in the jobs, the revenue from which is already included in the NPAT Statement."
9. The appellants contend that all work done pursuant to the Certificates of Recognition at PPK Mining's Tomago and Port Kembla workshops was work which fell within the ambit of the Business, as defined in the SPA irrespective of whether the work was actually performed by Exlec. Thus, the appellants contend, revenue for all such work should have been included as revenue of the Business for the purpose of the Second Performance Conditions.

NPAT Statement

1. Under cl 9.1 of the SPA a statement setting out the Business NPAT for the relevant period was to be given to Flynfam not later than ten days after the second anniversary of the Completion Date, that is by no later than 26 October 2016. This was defined in the SPA as the "NPAT Statement".
2. By email dated 10 November 2016 Mr Beddow, then Chief Financial Officer of PPK Group, sent an attachment entitled "Exlec Business NPAT Statement to Oct16.xlsx" to Mr Flynn. The subject of the email was "NPAT Statement". I will refer to this document as the NPAT Statement. The first page of the NPAT Statement, headed Background Information, stated that: "The purpose of this document is to prepare the NPAT Statement (together with supporting information) as required by and in accordance with the Share Purchase Agreement (SPA) in relation to Exlec Pty Ltd and Exlec Holdings Pty Ltd."
3. What were described in the NPAT Statement as "Relevant extracts of the SPA" were then set out. These were all extracts of the SPA in its unamended form. Thus, the Second Performance Conditions were described as including a requirement that "Business NPAT" exceed $250,000 and the full definition of Business NPAT was included. This is readily explicable, as at that time the respondents' position was that the SPA had not been varied in May 2016.
4. The NPAT Statement then set out, in table form, line items for a range of matters including "TOTAL REVENUE" at $924,505. The final entry was for "PROFIT/(LOSS) AFTER TAX" and showed a loss of $541,779. The underlying jobs which had been taken into account were then itemised. The spreadsheet was divided into external and internal jobs. It did not include the FLP-1 jobs. It included the Premron job, but not by reference to the full amount of the 40% deposit paid. It included only those jobs carried out at the PPK Mining Tomago workshop pursuant to Certificate of Recognition ANZEx SF 15.1050 that were actually carried out by Exlec. It did not include any jobs carried out at the PPK Mining Port Kembla workshop pursuant to ANZEx SF 15.1054.
5. On 15 November 2016 Mr Flynn sent an email to Mr Beddow informing him: "We have reviewed the NPAT and we do not accept it. Please see attached the following points to be addressed: 1. The second performance share was varied from $250K NPAT to revenue of $1M. … 3. ALL hours & materials for internal work must be calculated at market rate for the purposes of revenue figures. 4. Exlec jobs seems to be missing a lot of revenue for example … NEX00216 shows $179K but invoiced at $231K [being the Premron job]. There are many more in this area."
6. By email dated 29 November 2016 Mr Beddow replied to Mr Flynn's email attaching a further document, entitled "Exlec Business NPAT Statement to Oct16 - sent 29.11.16.xlsx". I will refer to this as the Revised NPAT Statement. In the covering email Mr Beddow stated: "I am instructed by the PPK Board of Directors that PPK disputes that the Second Performance Condition…has been varied as contended by you." Mr Beddow then set out how the NPAT Statement had been calculated for internal work: "a) In the first instance, all internal divisions receive a cost recovery only for the goods and services they provide and retain proportional rights to the asset created (eg work in progress asset or stock item) b) Revenue and profit on sale is recognised amongst the internal divisions when the final sale to the external customer is made c) Percentage share for the allocation of profit is made with respect to share of costs."
7. Mr Beddow refuted the claim that there was missing Exlec job revenue. He also explained that jobs involving hydraulic business, which were included in the first NPAT Statement, had been excluded from the Revised NPAT Statement as this business was only established after Exlec came under PPK ownership.
8. The background information section of the Revised NPAT Statement was identical to that of the NPAT Statement. The format was also identical. The line item for "Total Revenue" had been reduced to $762,056.
9. Mr Flynn resigned the following day, referring to "the recent events surrounding my earnout". Some of the subsequent events are mentioned below, when dealing with the NOC. It suffices to note that proceedings were commenced in January 2019, without reference to an accountant pursuant to cl 9.4.

The Primary Judgment

1. As set out above, the primary judge found that the appellants had not satisfied the Second Performance Conditions as varied because the revenue of the Business, as defined in the SPA, was $762,056, as calculated by the respondents in the Revised NPAT Statement. The primary judge rejected each of the FLP-1 Claim, the Premron Claim and the Certificates of Recognition Claim. Having regard to the issues on appeal it is only necessary to set out her Honour's reasoning as to key elements of these claims in summary form.

The FLP-1 Claim

1. As to the FLP-1 Claim, the primary judge accepted the appellants' contention that, for the purpose of calculating Business NPAT under the SPA (which after the variation of the SPA, referred to the revenue of the Business), the relevant accounting standards were those applicable to Exlec rather than those applicable to PPK Group. This was because the definition of Business NPAT in the SPA focusses attention on the business carried out by Exlec, not on the business carried out by PPK Group. As there were no accounting standards under the Corporations Act that applied to Exlec, revenue of the Business was to be calculated in accordance with generally accepted accounting principles. The primary judge found that for the purpose of determining the issues before the Court, there was no relevant difference between the accounting standard AASB 118, which was applied by PPK Group, and generally accepted accounting principles applicable to Exlec.
2. The primary judge rejected the opinion of Ms Delbridge, the expert account instructed by the appellants, that revenue from all 41 FLP-1 Enclosures manufactured by Exlec should have been recognised as revenue of Exlec. Rather, her Honour accepted the opinion of Mr Jackson, the expert accountant instructed by the respondents, that revenue should be allowed for the six FLP-1 Enclosures which were sold, but that, as regards these, allowance should be made only for the cost of manufacturing the enclosures and not for any component of profit. This was because the FLP-1 Solution was never intended to, and did not, generate revenue for PPK Group. According to both generally accepted accounting principles and AASB 118, revenue is recognised when it is probable that future economic benefits will flow to the entity and those benefits can be measured reliably.
3. There is nothing in her Honour's judgment to suggest that her Honour's conclusions derived in any way from her assessment of the credibility or reliability of either expert, or from the demeanour of the experts giving evidence. Rather, her Honour's preference for the opinion of Mr Jackson as to the FLP-1 Claim was clearly based upon the substance of his evidence.

The Premron Claim

1. The primary judge rejected the Premron Claim for the simple reason that the evidence established that the Premron job had been put on hold and not cancelled during the relevant period for calculating revenue for the purpose of determining whether the appellants had satisfied the Second Performance Conditions. Her Honour found that it accorded with generally accepted accounting principles for revenue for an ongoing job, or a job which has been put on hold, to be recognised on a percentage completed basis. Thus, the appellants' claim that Exlec was entitled to the full 40% deposit as revenue failed.

The Certificates of Recognition Claim

1. The primary judge accepted that PPK Mining was able to accelerate the accreditation of the Port Kembla workshop by using Exlec's existing accreditation. Her Honour also found that each of the 17 jobs undertaken at the Port Kembla workshop which were the subject of the Certificates of Recognition Claim "included some overhaul of flameproof electrical equipment (as well as other work) which could not have been performed without the Certificate of Recognition ANZEx SF 15.1054 obtained for the Port Kembla workshop."
2. Her Honour found, however, that that did not have the consequence of "retrospectively enlarging the Business carried on by Exlec immediately before Completion." Her Honour found that the revenue of the Business, for the purpose of determining whether the appellants had satisfied the Second Performance Conditions, did not include "the business carried on by PPK Mining Equipment in Port Kembla after completion" (emphasis in original). Further, her Honour found that calculation of the revenue of the Business, for this purpose, did not depend upon a process of "'tracing' how the assets acquired by PPK Mining under the SPA, including 'Manufacturing Licences' were later deployed". Thus, the primary judge rejected the Certificates of Recognition Claim as regards the Port Kembla jobs.
3. The primary judge also rejected the Certificates of Recognition Claim as regards jobs performed at the Tomago workshop. This was because, under the SPA, "the revenue of Exlec's business was derived from the sale of manufactured goods or the contribution of its employees to jobs completed, either for Exlec or other divisions of the PPK Group." Whilst the relevant jobs could not have been performed without ANZEx SF 14.1050, as the appellants' claims were in respect of labour and materials supplied by other divisions of PPK Group (it being common ground that revenue had been included to the extent that it related to labour and materials of Exlec), the primary judge held that those claims should be rejected.

Breach of contract and the consequences of breach

1. The primary judge found that neither the NPAT Statement nor the Revised NPAT Statement complied with the requirements of the SPA "as the statements assessed satisfaction of the condition on the basis of NPAT rather than revenue." The respondents thus breached cl 9.1 of the SPA.
2. Her Honour held that this breach, namely the respondents' preparation of both NPAT Statements on the basis that satisfaction of the Second Performance Conditions depended upon NPAT rather than revenue, had the consequence that the dispute resolution procedure in cl 9.4 of the SPA had not commenced because the respondents had not provided the starting point for that process, being an NPAT Statement that complied with the SPA. Further, the dispute resolution procedure could not be completed in accordance with the SPA. It was not part of the role of the Independent Accountant to be appointed under cl 9.4 of the SPA to determine a factual or legal dispute under the SPA. In this regard, her Honour found that the dispute which had arisen as to whether the SPA had been varied was not a dispute that fell within cl 9.4.
3. The primary judge also rejected the respondents' contention that the Court was confined to the issues raised by the appellants in their Dispute Notice in determining whether the revenue of the Business exceeded $1,000,000. Her Honour held that the Court was not standing in the shoes of the Independent Accountant to be appointed under cl 9.4 of the SPA in this regard.
4. Finally, the primary judge also rejected the respondents' contention that, even if the SPA had been varied, the trigger for the issue of the Second Performance Shares had not arisen because cl 7.2 provided that they were to be issued "not later than 3 Business Days after the date on which the NPAT Statement is accepted by Flynfam or taken to be accepted under clause 9.3(b) or, if applicable, finally determined under clause 9.4", and none of these events had occurred.

Determination of the Grounds of Appeal

1. Given the way in which the parties presented their submissions, both written and oral, it is convenient to deal with the grounds of appeal by reference to the three substantive claims advanced by the appellants, being the FLP-1 Claim, the Premron Claim and the Certificates of Recognition Claim, and the appellants' overarching contention that the Second Performance Conditions were satisfied, rather than by reference to the individual grounds as drafted.

Common ground on appeal

1. A number of matters are not in contention on appeal. 1. There is no dispute that the sum of $762,056, being the revenue set out in the NPAT Statement issued on 29 November 2016, is the "agreed starting point" for the calculation of revenue for the purposes of determining whether the Second Performance Conditions were satisfied. 2. The parties helpfully agreed the revenue attributable to each of the three main factual areas of contention as set out below: 1. FLP-1 Claim $304, 610 2. Premron Claim $51,579 3. Internal Jobs $12,709 4. Certificate of Recognition Claims Port Kembla $201,950 Tomago $56,896 1. Implicit in these agreed figures is an agreement between the parties that if an internal transfer price is to be recognised for the FLP-1 Claim and for the Certificates of Recognition Claim, that is the basis upon which it should be calculated. In light of this agreement, I will proceed on that basis. 2. It is also now agreed that, prior to its acquisition by PPK Mining, Exlec's business included repair and overhaul of electrical mining equipment. 3. It is clear that Mr Flynn remained employed by PPK Group beyond the second anniversary of completion of the SPA. That element of the Second Performance Conditions was thus satisfied. It is only subparagraph (a) of the Second Performance Conditions that is in dispute between the parties.

Relevant principles

1. The principles that govern the construction of a written commercial contract are uncontroversial. As set out by Kiefel, Bell and Gordon JJ in Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd (2017) 261 CLR 544 at [16]; [2017] HCA 12, citing Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640 at [35]; [2014] HCA 7, and recently applied in Laundy Hotels (Quarry) Pty Ltd v Dyco Hotels Pty Ltd [2023] HCA 6 at [27]; (2023) 97 ALJR 194: "It is well established that the terms of a commercial contract are to be understood objectively, by what a reasonable businessperson would have understood them to mean, rather than by reference to the subjectively stated intentions of the parties to the contract. In a practical sense, this requires that the reasonable businessperson be placed in the position of the parties. It is from that perspective that the court considers the circumstances surrounding the contract and the commercial purpose and objects to be achieved by it."
2. For the purpose of construction, regard may be had to the surrounding circumstances known to both parties, and to the purpose and object of the transaction: Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 at [22]; [2004] HCA 35 (per Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ).
3. In this case, the Court must construe the SPA as informally varied. This necessarily means that the language of the SPA as drafted must be considered having regard to the fact that in May 2015, the parties agreed that satisfaction of the Second Performance Conditions was not based upon NPAT but upon the revenue of the Business being greater than $1,000,000 in the relevant period. It is not simply a matter of construing a written agreement.

The meaning of Business Revenue in the SPA

1. Each of the FLP-1 Claim, the Premron Claim and the Certificates of Recognition Claim turn on the meaning of Business Revenue in the SPA as varied. That, in turn, falls to be determined by reference to the language of the SPA, as varied, construed having regard to the object and purpose of both the SPA and the determination of Business Revenue within the SPA, and having regard to the commercial context known to both parties. In this regard, there are a number of matters which support the conclusion that revenue from internal sales of the Business to entities within the PPK Group should be calculated by reference to a transfer price for the purpose of determining the Business Revenue in the SPA.
2. First, it should be inferred from the internal emails within PPK Group prior to the SPA that from PPK Group's perspective, a significant benefit of the SPA was that it would bring to PPK Mining "full electrical certification for underground equipment which is a skill set we have previously had to contract in", as set out in the email of 30 September 2014 from Mr Levison to his fellow directors. This reflects the fact, as found by the primary judge, that prior to its acquisition of Exlec, PPK Mining had had to subcontract out electrical overhaul services for the Coaltram business which it had acquired in early 2014. Mr Levison added in this email that "[I]mmediately there will be benefits to PPK [Mining] as we can now use our own internal supplier (Exlec) for a range of products." It would readily be inferred that the appellants, who agreed to the "transfer" of the Certificate of Recognition ANZEx SF 14.1050 and ISO 9001:2008 Certificate as one of the First Performance Conditions, were aware of this. That was part of the object and purpose of the SPA.
3. Second, the commercial context within which the SPA was entered into was one in which it was expected by both parties that a significant component of the work that Exlec would perform after its purchase by PPK would be by way of supplies to other divisions within PPK Group, including PPK Mining. That is another important object of the SPA. It would be objectively inferred in those circumstances that the parties intended that revenue to Exlec from such work would be recognised and reflected in the revenue of the Business for the purpose of determining whether the Second Performance Conditions were satisfied.
4. Third, the link between the issue of the Second Performance Shares and the integration of Exlec into PPK Group is also apparent from consideration of the Performance Conditions as a whole. The First Performance Conditions required that a series of somewhat mechanical steps be taken within 12 months of completion under the SPA. Thus, the Certificates of Conformity and the Manufacturing Licences, including ANZEx SF14.1050 and ISO 9001:2008, were required to be transferred to PPK Mining or its nominee, Exlec's products had to be integrated into PPK Mining's supply chain, and the business of Exlec had to be relocated to PPK Mining's Tomago workshop, or such other premises as may be nominated by PPK Mining. This provides some support for a conclusion that the intention of the parties, objectively construed, was for the Second Performance Conditions to provide some cross-check to ensure that the integration of Exlec into PPK Group had been reflected in the Business making an effective contribution to the PPK Group business as a whole, including in PPK Mining's supply chain.
5. Fourth, it should also be inferred from the First Performance Conditions that the parties intended that by the time that the Second Performance Conditions had to be satisfied, the Business would be effectively integrated into PPK Group. As a result, PPK Mining would have had the benefit of ANZEx SF 14.1050 and ISO 9001:2008 and Exlec would have been supplying products both to other divisions within PPK Group and to customers of PPK Mining, as part of PPK Mining's "supply chain". That strongly suggests that the parties intended that revenue from such supplies would be fairly reflected in the revenue of the Business as set out in the Business NPAT Statement to be prepared to determine whether Exlec had satisfied the Second Performance Conditions. Having regard to the First Performance Conditions, it is highly unlikely that the parties are to be taken to have intended satisfaction of the Second Performance Conditions to turn upon the ability of Exlec to maintain its own separate business, selling to its own separate customers.
6. Fifth, by the time the SPA was varied in May 2015, a live issue had arisen between the parties as to how profit for internal jobs was to be calculated in internal management accounts prepared for the purpose of determining whether or not Exlec satisfied the Second Performance Conditions. The email sent by Mr Barker to Mr Flynn (copying Mr Levison, Mr Giles and Mr Beddow) on 10 April 2015 reflected the knowledge of both parties that this was the case. It is crystal clear from that email that by the time that the SPA was varied in May 2015, it was common ground between the parties that, for the purpose of determining whether the appellants satisfied the Second Performance Conditions, some form of internal transfer price as between Exlec and PPK Group had to be determined. There was, however, no agreement as to how that internal transfer price was to be calculated.
7. The significance of this is that, by the time the SPA was varied in May 2015, the common position of the parties was that some profit on supplies from Exlec to other divisions within PPK Group (which I will describe in this judgment as "internal sales") had to be recognised for the purpose of determining whether Exlec satisfied the Second Performance Conditions. It was thus common ground that some method of fixing a transfer price as between the Business and PPK Group had to be adopted, and that the profit or revenue of the Business for internal sales would involve use of a transfer price which went beyond simply a reflection of the labour and materials. As Mr Barker set out in the 10 April 2015 email, PPK Group's internal accounting procedures at that time recognised materials and labour at cost against particular projects but did not recognise profits on internal transfers. It was thus necessary for PPK Group to develop a new system to allocate such profits to Exlec for the purpose of calculating the "earnout". Mr Barker then suggested one potential methodology, and there is nothing to suggest that this was agreed to by Mr Flynn, nor to suggest that any attempt was ever made to implement it. There is nothing in the email to suggest that the parties had turned their mind to a situation where PPK Group did not expect to, and did not, profit from a particular project.
8. In this commercial context, it would be objectively inferred that the parties intended that, for the purpose of calculating Business Revenue, revenue for internal sales had to be calculated on the artificial assumption that there was a supply from one corporate division, being the Business, to another division, being PPK Group or a division within PPK Group. In this regard, Business Revenue meant something other than an internal allocation of revenue within PPK Group and necessitated the fiction that the Business and PPK Group were standalone entities and not part of a single corporate group.
9. Sixth, the variation to the SPA in May 2015 was agreed at the same time that Mr Flynn was moved to a new role in PPK Group, and thus ceased to have any control over Exlec. In that circumstance, it would be objectively unlikely that the parties would have intended that Exlec's satisfaction of the Second Performance Conditions would depend upon the balance of its sales as between internal and external sales. That in turn suggests that the objective intention of the parties at the time of the variation was that a transfer price for internal jobs would be reflected in the revenue of the Business for the purpose of determining whether Exlec had satisfied the Second Performance Conditions.
10. Seventh, it is in this context that Business, as defined in the SPA, has to be construed. As set out above, Business in the SPA is defined to mean "the business of manufacturing and selling mining equipment and parts primarily for use in the underground coal mining sector carried on by Exlec immediately before Completion." The respondents accepted during the hearing of the appeal that this includes the overhaul of mining equipment. It was also accepted by the respondents during the hearing of the appeal that Business was defined in the SPA by reference to activities rather than by reference to particular customers. It follows that to come within the definition of Business, the activities of manufacturing and selling mining equipment (including, as set out above, the overhaul of such equipment) as carried out must have the same character as the activities that Exlec carried out prior to its acquisition by PPK Mining.
11. The respondents submitted that the Business, as defined in the SPA, was limited to activities carried out by Exlec at Tomago, as that was where the Exlec workshop was located prior to the SPA. I would reject any such limitation. As one of the First Performance Conditions was that Exlec would be required to relocate the Business from its previous premises to PPK Mining's location in Tomago or to "such other premises as may be nominated by" PPK Mining, it is, in my judgment, apparent that the definition of the Business was not to be limited to any particular geographic location. That is also consistent with the "Agreed Adjustments", as set out in Schedule 3 of the SPA, including "re-location or other expenses incurred in connection with the integration or relocation of the Business" being excluded when calculating Business NPAT. Nor is there anything in the definition of the Business that indicates that the Business was to be limited to any particular geographic location.
12. The respondents' contention, in ground 7 of the NOC, that the Business excludes activities carried out for customers of PPK Mining (or PPK Group), as such activities were not part of the business of Exlec prior to acquisition, should also be rejected. There is nothing in the definition which would limit Business to the particular customer base that Exlec had prior to its acquisition by PPK Mining. It would be inherently unlikely that the parties would have intended any such limitation given the emphasis in the First Performance Conditions upon integration of the Business into the business carried on by PPK Mining and the requirement in the First Performance Conditions that Exlec relocate its business potentially, if requested, to a location other than the PPK Mining premises in Tomago.
13. The significance of this analysis is threefold. First, it is apparent that the Business included the manufacture, sale and overhaul of mining equipment, or components, which would then be supplied to PPK Mining or other divisions within PPK Group. In such circumstances, it would be inferred that the parties intended that the revenue of the Business would include revenue to Exlec for such supplies calculated on the basis of a transfer price. Second, there is nothing in the definition of the Business in the SPA that requires that those activities be physically carried out by Exlec. Given that Exlec remained a separate corporate entity after its acquisition by PPK Mining, if it had been the parties' intention that satisfaction of the Second Performance Conditions depended upon the revenue of Exlec, they would have said so. Third, the Business was not defined in the SPA as a single organisational entity. Rather, it was defined by reference to an amalgam of activities. To speak of NPAT or revenue of the Business was thus a highly artificial construct, far removed from the conventional task of determining NPAT or revenue of a corporation or other defined organisational entity.
14. All of these matters necessarily inform the meaning of "Business Revenue" in the SPA. Having regard to the analysis set out above, that must include revenue from both external and internal sales of the Business, defined to comprise activities of the same character as those carried out by Exlec immediately prior to entering the SPA. It also follows from the analysis set out above that that should be calculated on the basis of a transfer price being determined for the supplies from the Business to entities within PPK Group on the fiction that these were supplies from the Business to a standalone entity.
15. The SPA requires that Business Revenue be calculated in accordance with the Accounting Standards, defined in cl 1.1 of the SPA, after making the Agreed Adjustments. In this regard, the only issue arising in these proceedings relates to the calculation of revenue from internal sales of the Business.
16. There is no suggestion in the evidence that there was any accounting standard under the Corporations Act that applied to determine the revenue of the combined activities that it was accepted comprised the Business as defined in the SPA. Nor was it suggested that there were any such accounting standards that applied to determine the revenue of Exlec as a standalone entity. I would reject the respondents' contention, advanced in ground 6 of the NOC, that paragraph (a) of the definition of Accounting Standards required that Business Revenue be determined by applying the accounting standards applicable to PPK Group under the Corporations Act. Paragraph (a) of that definition, as set out above, provides that Accounting Standards means (in the first instance) "the applicable accounting standards under the Corporations Act and mandatory professional reporting requirements". The word "applicable" directs attention to the accounting task that was required to be undertaken. That task is the determination of Business Revenue. So much is clear from the definition of Business NPAT (which must be adapted to take account of the variation in May 2015), which directs that Business Revenue is to be calculated in accordance with the Accounting Standards (thereby bringing in the definition of Accounting Standards). Those definitions tell against the respondents' contention that Business Revenue should be determined by applying the accounting standards applicable to PPK Group under the Corporations Act.
17. As there are no applicable accounting standards under the Corporations Act that govern the relevant task, paragraph (b) of the definition of Accounting Standards in the SPA requires that Business Revenue be calculated in accordance with generally accepted accounting principles, policies and practices for an entity "similar to the relevant Group Company", being Exlec (Group Company is defined in the SPA as either Exlec or Exlec Holdings).
18. For the purpose of calculating Business Revenue deriving specifically from internal sales from the Business to entities within PPK Group, the relevant generally accepted accounting principles, policies and practices were those to calculate a transfer price for such supplies. However, as the appropriate transfer price to be applied to the FLP-1 Claim and the Certificates of Recognition Claim are agreed, there is no need to consider those principles, policies or practices in order to resolve the issues on appeal.

The FLP-1 Claim

1. Resolution of this claim depends first upon the factual question of the significance to be given to the Delivery Docket on PPK Group letterhead, signed as being despatched by Mr Clarke who was the draftsman for Exlec at the time and received by some unknown person, and despatched to "PPK Store". The respondents submit that this Delivery Docket is equally consistent with both delivery from Exlec to PPK Group and a mere physical relocation within the warehouse and that there is insufficient evidence to conclude that there was anything amounting to a supply or delivery of the FLP-1 Enclosures by Exlec in the circumstances.
2. In my judgment, the inference that should be drawn from the Delivery Docket is that, by 15 September 2016, all of the 41 FLP-1 Enclosures were delivered, or supplied, by Exlec to PPK Group to be stored somewhere referred to as "PPK Store". There is no good reason why a Delivery Docket should be filled out if the enclosures were to remain in the custody or control of Exlec. Further, the fact that the Delivery Docket is on PPK Group letterhead suggests that it reflected a process by which the items were transferred from a division within PPK Group, here Exlec, to PPK Group itself. Some form of delivery, or handing over, is also consistent with Ms Wilson's evidence that, of the 41 FLP-1 Enclosures, some were then used on different jobs, at least some were used in a different division within PPK Group, and some ultimately, in 2018, were written off "by PPK" (meaning PPK Group). Ms Wilson's evidence was also that six of these FLP-1 Enclosures were sold through "a different division". That suggests that after delivery, the onwards use or disposal of the items was a matter for PPK Group rather than Exlec. In this regard, it is of no consequence that the items may not have been physically moved from one PPK workshop to another.
3. The issue then arises whether, upon supply or delivery from Exlec to PPK Group (or an entity within PPK Group), revenue of the Business should, as the appellants contend, have been recognised for all 41 FLP-1 Enclosures for the purpose of determining whether the Second Performance Conditions were satisfied, irrespective of the fact that PPK Group did not expect to, and did not, make any profit from the FLP-1 Solution. The respondents submit that generally accepted accounting principles provide that revenue is only recognised where there is an expectation of economic return to the entity. As there was no expectation of economic return from supply of the FLP-1 Solution by PPK Mining to customers, no revenue should be recognised by the Business in respect of its supply of the enclosures.
4. As set out above, there is no dispute that if a transfer price is to be recognised for internal sales, then the proper method of calculating that transfer price is to recognise the revenue on the basis of cost plus a 16.4% margin.
5. Ms Delbridge and Mr Jackson were in agreement that AASB 118 did not apply to the situation where there is a supply to an internal customer. In that situation, Ms Delbridge's opinion was that there ought to be an allowance for internal revenue: WITNESS DELBRIDGE: "Yes, because it was still an economic endeavour in terms of PPK maintaining its position in the marketplace and its future sale or maintenance or whatever it was in relation to the Coaltram, so it's still, if there had of been no economic benefit to the rectification of the plant movement issue, they wouldn't have bothered." FAULKNER: "Yes." WITNESS DELBRIDGE: "So they've done this for a reason and that was to maintain the economic position of the group." FAULKNER: "Yes." WITNESS DELBRIDGE: "So they've asked this division to do something for them to maintain their economic position and sure, it is differentiated from the terms of AASB 118 because there's no[t] an external customer." FAULKNER: "Yes." WITNESS DELBRIDGE: "That's why we fell into the transfer pricing situation."
6. Ms Delbridge later added: WITNESS DELBRIDGE: "And that doesn't change the task that was asked of the division, which was, the value of which was able to be determined. The fact that we might give them away is really not an issue in terms of the calculation of the revenue in this discrete period on the basis of the work that was performed by the division."
7. Mr Jackson approached his analysis from quite a different perspective. As he explained during his oral evidence: WOOD: "If the evidence in this case was that all 41 of those items were physically delivered to PPK Mining Equipment, that would change the outcome, wouldn't it?" WITNESS JACKSON: "No, it wouldn't. Because my calculation of revenue was based on the sale to an end customer, not an internal transfer."
8. It is apparent from this exchange that Mr Jackson approached the question of whether revenue to the Business should be recognised in respect of the FLP-1 Enclosures by reference to the ultimate question whether there was a sale to an "end customer" as opposed to identifying this as a question of finding a fair transfer price as between the Business and PPK Group for an internal sale. When asked to consider the question on the assumption that the FLP-1 Enclosures had been supplied by Exlec to a different company, and were retained as inventory of that separate company, his response was: WITNESS JACKSON: "It's a sale to a third party entity. There would be an invoice raised and revenue recognised…If you've made a sale, you would recognise the revenue, yes. You'd create a receivable and then you collect the cash when the invoice is actually paid."
9. Mr Jackson was then asked whether the criteria in AASB 118 for revenue from the sale of goods were met based upon an assumption that all of the FLP-1 Enclosures were physically delivered from Exlec to PPK Mining and PPK Mining was a separate company from Exlec. On those assumptions, Mr Jackson's opinion was that the relevant criteria were met because "there's an external sale." Mr Jackson's opinion was, however, that if the FLP-1 Enclosures remained as inventory of Exlec then no revenue should be recognised. This was because revenue would not be recognised where "[A]ll you're doing is simply building inventory or spare parts for use in the future."
10. There was thus no dispute between the experts that if Exlec had supplied or despatched the 41 FLP-1 Enclosures to PPK Group (or to another entity within PPK Group), then that would satisfy the criteria for a sale, on a hypothetical assumption that these were two separate corporate entities. In my judgment, in order to calculate Business Revenue that is precisely the assumption that had to be made. That reflects what I have found to be the proper construction of the SPA; more particularly, that the calculation of Business Revenue had to be carried out on the artificial assumption that there was a supply from the Business as a standalone entity, to another standalone entity, being PPK Group or a division within PPK Group. Indeed, by the time of the variation to the SPA in May 2015, the parties both assumed that the calculation of Business Revenue had to involve recognition of a transfer price for internal sales, and that that involved something different from simply accounting for the costs of labour and materials within PPK Group. That is clear from the 10 April 2015 email set out above. What the parties had not then agreed was how that transfer price would be calculated.
11. In these circumstances, Mr Jackson's conclusion, which flowed from the factual premise that there was no sale or supply from the Business to another entity, does not stand against revenue from the FLP-1 Enclosures being included as Business Revenue for the purpose of determining whether the Second Performance Conditions were satisfied. Whilst it may be correct, as would flow from Mr Jackson's analysis, that PPK Group ought not itself to have recognised revenue unless the FLP-1 Enclosures were sold, that did not prevent Business Revenue including revenue calculated by using a transfer price for the supply by the Business to an entity within, or to, PPK Group.
12. That conclusion is also consistent with the focus in the definition of Accounting Standards upon the generally accepted accounting principles, policies and practices in Australia "for an entity similar to" Exlec or Exlec Holdings. The question of revenue is to be determined by reference to Exlec as a standalone entity, rather than by reference to the position of PPK Group.
13. Once that step is taken, it is simply a matter of determining a fair transfer price for the FLP-1 Enclosures, and the parties have reached agreement as to that. It follows that the appellants should succeed on their grounds of appeal raising the FLP-1 Claim.
14. Given the agreed figures, this in turn means that the appellants should succeed on their overarching contention on appeal that the primary judge erred in finding that the Second Performance Conditions had not been satisfied.
15. Given this conclusion, I propose to deal only briefly with the appellants' remaining claims.

The Premron Claim

1. As to the Premron Claim, the appellants contend that additional revenue from the Premron job should have been included in Business Revenue for the purpose of determining whether the Second Performance Conditions were satisfied. The appellants contend that the primary judge erred in finding that the Premron job was put on hold, rather than cancelled, during the relevant period. The consequence of the job being cancelled, the appellants contend, is that the whole of a deposit of 40% paid by the customer for this job should have formed the basis of the calculation of the revenue of the Business.
2. The difficulty with the appellants' contention is that the evidence strongly supports the conclusion that the customer had put the Premron job on hold, and that the job was not cancelled during the relevant period. Thus, the key factual premise upon which the Premron claim depends should be resolved against the appellants. In these circumstances, the appellants' grounds of appeal relating to the Premron Claim should be dismissed.

The Certificates of Recognition Claim

1. Resolution of the Certificates of Recognition Claim turns upon the ambit of the Business, as defined in the SPA. As set out above, the Business means the activities carried on by Exlec immediately prior to its acquisition by PPK Mining and such activities fall within the definition of Business even if carried out at a location other than Tomago or for customers from a different geographic location.
2. There is no longer any dispute that those activities included repair and overhaul of electric mining equipment. It is also apparent that, prior to the acquisition of Exlec, PPK Mining was not able to carry out electric overhaul activities at either its Tomago or Port Kembla premises. It had to subcontract such activities and that was one of the benefits key executives in PPK Group had identified as arising from the acquisition of Exlec.
3. Given that electrical overhaul work comprises an activity carried out by Exlec prior to its acquisition by PPK Mining, and that PPK Mining was not itself carrying out that activity, that activity falls within the ambit of the Business, as defined in the SPA. Revenue from that activity during the relevant period should be included in any calculation of Business Revenue for the purposes of determining whether the Second Performance Conditions are satisfied.

The appellants satisfied the Second Performance Conditions

1. As set out above, it flows from my conclusion as to the FLP-1 Claim that the appellants satisfied the Second Performance Conditions. The same conclusion would have flowed from my conclusion as to the Certificates of Recognition Claim.
2. The appeal should therefore be allowed, save as regards the Premron Claim.

The Notice of Contention

1. My reasoning in relation to grounds 6 and 7 of the NOC is set out above.
2. By grounds 1 to 5 of the NOC, the respondents contend that the primary judge erred in finding that they breached the SPA on 31 October 2016 and that, by reason of that breach, the dispute resolution procedure in the SPA could not be completed. The respondents contend that the NPAT Statements both included a line item setting out the revenue of the Business during the relevant period. Thus, they contend, both NPAT Statements complied with the requirements of cl 9.1 of the SPA. The SPA did not require anything more.
3. The respondents submit that the consequence of them succeeding on this issue is that the dispute resolution procedure in cl 9.4 of the SPA would and should operate. This in turn would have two key consequences. First, that the matters that the appellants could properly raise on appeal would be limited to those which they in fact raised in the Dispute Notice they sent to the respondents in 2016. Second, that this Court would be effectively standing in the shoes of the Independent Accountant who would have been appointed pursuant to the dispute resolution procedure in cl 9.4 of the SPA.
4. The significant consequence of this, the respondents contend, is that even if the appellants were to succeed in establishing that the Second Performance Conditions were satisfied, they would only be entitled to $500,000 worth of shares in PPK Group as at the date on which this Court makes orders. By contrast, on the primary judge's findings as to breach and the consequences of breach, the appellants would be entitled to $500,000 worth of shares in PPK Group calculated by reference to the VWAP of PPK shares as at around November 2016 when they would have been issued, if there had not been any breach of the SPA. Given that the shares in PPK Group have increased very significantly in value, this issue has significant financial consequences.
5. The key premise of these grounds is that the primary judge erred in finding that PPK Group breached cl 9.1 of the SPA because the NPAT Statement and Revised NPAT Statement assessed satisfaction of the Second Performance Conditions on the basis of NPAT rather than revenue. Resolution of these grounds turns on the proper construction of each of cl 9.1 of the SPA and of the NPAT Statements.
6. Clause 9.1 has only one contractual purpose. That is as a step in determining whether or not the Second Performance Conditions have been met. As provided in Schedule 2 of the SPA as varied, the NPAT Statement had to specify Business Revenue and do so in a way which could either be accepted under cl 9.3(b) or could form the basis of final determination under cl 9.4 of the SPA. That meant that the contractual purpose of the NPAT Statement was to provide a document that was effective as a first step in the process set out in cll 9.1-9.4 of the SPA. To that end the SPA required a statement setting out Business Revenue. That requires more than that the statement include a line item for revenue. It requires that construed as a whole, the document should be a statement based upon the correct contractual premise, which was that the relevant determinant of satisfaction of the Second Performance Conditions was Business Revenue not Business NPAT. Nothing short of that would meet the requirements of the SPA.
7. The importance of the NPAT Statement being on the correct contractual premise is readily apparent when the operation of cll 9.1-9.4 is considered. Under cl 9.3 any dispute by Flynfam has to be raised by providing a Dispute Notice. If raised, cl 9.3 provides that "the dispute will be determined in accordance with cl 9.4." Clause 9.4 provides that if not resolved by agreement, then the dispute must promptly be submitted for determination by an Independent Accountant. Where, as here, the NPAT Statement is based on the wrong premise, being NPAT rather than revenue, that is not a matter that can properly be resolved by an Independent Accountant. It is a matter of law turning on the proper construction of the SPA. It would be commercially unworkable, in those circumstances, for an NPAT Statement based upon an entirely false premise to be regarded as an NPAT Statement which complied with cl 9.1 of the SPA.
8. Turning to the NPAT Statements provided by the respondents to the appellants, these were both clearly premised upon the relevant determinant for satisfaction of the Second Performance Conditions being NPAT rather than revenue. That is clear from the first page of the NPAT Statements, both of which clearly set out the requirements of the SPA in their unamended form, described in the NPAT Statement as the "relevant extracts of the SPA". Thus, they set out that the Second Performance Conditions required that the Business NPAT exceed $250,000. There is no mention in the NPAT Statement of the SPA being varied in May 2015. Both NPAT Statements included a starting figure described as "Total Revenue" and then calculated NPAT. That was the final line of the calculations in each of the NPAT Statements. It was clear that the aim of the calculation set out was to determine, by way of conclusion or total, Business NPAT. Both were also described as Business NPAT Statements, with no suggestion that they were aimed at setting out Business Revenue. They did not comply with cl 9.1.
9. Further, the NPAT Statements were not capable of forming the starting point for dispute resolution under cl 9.4, as they had an erroneous contractual premise. The Independent Accountant would not have been qualified to determine the dispute as to the contractual premise, and objectively the parties would not be taken to have intended that such a dispute could properly fall within cl 9.4 of the SPA.
10. It is of no significance that the appellants did not themselves contend initially that the NPAT Statements were not NPAT Statements within the meaning of the SPA. Whether or not the NPAT Statements complied with cl 9.1 is a matter of construction and I have set out my reasoning in this regard at [150]-[153] above. In any event, in the Dispute Notice the appellants rightly identified their first reason for not accepting the "NPAT" was because the "second performance share was varied from $250K NPAT to revenue of $1M." In that way the appellants identified the key matter which precludes the NPAT Statement satisfying the requirements of the SPA.
11. Finally, contrary to the respondents' submission, the conduct of the parties in the period after the first NPAT Statement was provided does not support a conclusion that, objectively, the parties should be taken to have intended that documents in the form of the NPAT Statements would suffice for compliance with cl 9.1 of the SPA. No such inference can properly be drawn from the failure of the appellants to identify, in terms, that the NPAT Statements were not NPAT Statements as required by the SPA by reason of their fundamental premise being that the SPA was not varied in May 2015.
12. The overarching premise of the appellants' complaints upon receipt of the NPAT Statements was twofold. First, that they were premised upon NPAT, not revenue, being the determinant of whether the Second Performance Conditions were satisfied. Second, that they were erroneous because they did not use the correct methodology to reflect work done on internal jobs and they omitted a number of jobs. These matters were raised by the appellants in the Dispute Notice on 15 November 2016. On 5 January 2017, solicitors acting for the appellants advised HWL Ebsworth (who they erroneously believed were then acting for the respondents) that the appellants maintained their objection to the NPAT Statement and that the NPAT Statement remained in dispute. By letter dated 31 January 2017 the appellants' solicitors wrote to Mr Beddow of PPK Group that "the relevant financial statement ought to be a 'revenue statement' rather than calculated on NPAT during the relevant period. Such financial statement should reflect gross revenue (i.e. gross turnover) of the Exlec business". Specific complaints were also included in this letter as to income not accounted for. They asked that a further updated statement be prepared, failing which they noted that clause 9.4 set out the dispute resolution procedure to be followed.
13. In response, by letter dated 17 February 2017 the respondents denied that the SPA had been amended. They contended further that: "The primary matter in dispute, and the first issue to be determined, is whether the NPA earnout provision has been amended as you allege. This is not an issue or dispute to which the dispute resolution terms in clause 9 of the Share Purchase Agreement apply."
14. That latter contention was repeated by solicitors instructed by the respondents in a letter dated 6 December 2017 to Mr Flynn, when they stated: "Your position is inconsistent with your reliance on the dispute resolution procedure contained in the Share Purchase Agreement for the NPAT Statement. This dispute resolution procedure does not provide a procedure for disputing a disagreement in respect of the methodology employed."
15. The respondents submit that the parties' respective positions, in the period after provision of the NPAT Statements, suggested an inference that reasonable entities in the position of the parties, at the time when the SPA was entered into or varied, should be taken to have intended that a document in the form of either of the NPAT Statements would suffice to comply with the requirements of cl 9.1 of the SPA. The respondents contend that such a conclusion flows from the fact that Mr Flynn did not expressly claim that either of the NPAT Statements was not capable of satisfying cl 9.1 of the SPA because of its focus upon NPAT rather than revenue. I would reject that contention. First, the correspondence set out above does not support the submission. Second, this would impermissibly involve the use of post-contractual conduct to construe the SPA.
16. In these circumstances, ground 1 of the NOC must be dismissed.
17. Grounds 2-4 of the NOC are premised upon there being a Dispute Notice within the meaning of cl 9.3 of the SPA. Without a compliant NPAT Statement there can be no Dispute Notice falling within cl 9.3. Nor can there be dispute resolution as provided in cl 9.4. Grounds 2-4 must therefore also be dismissed.
18. Further, the appellants included in the Dispute Notice a complaint that "All hours & materials for internal work must be calculated at market rate for the purpose of revenue figures." Contrary to the respondents' submission, that description comprehended the FLP-1 Claim and the Certificates of Recognition Claim. There is no reason to read that general complaint as limited only to the items of internal work that the respondents had in fact included in the NPAT Statement (which it was common ground did not include the jobs that made up the FLP-1 Claim nor the whole of the work that was comprised in the Certificates of Recognition Claim). The Premron Claim was expressly identified as item four.
19. In ground 5 of the NOC the respondents' contend that the primary judge: "erred in finding that, if the Second Performance Conditions were satisfied, the time for the PPK Group to issue the Second Performance Shares under clause 7.2 of the SPA was 31 October 2016 rather than 10 business days after the final determination by the Court."
20. That contention is premised upon the Court effectively standing in the shoes of the Independent Accountant for the purposes of dispute resolution under cl 9.4 of the SPA, and upon the judgment and orders of the Court being construed to be a final determination of the NPAT Statement within the meaning of cl 7.2 which provides that the Second Performance Shares must be issued: "not later than 3 Business Days after the date on which the NPAT Statement is accepted by Flynfam or taken to be accepted under clause 9.3(b) or, if applicable, finally determined under clause 9.4."
21. I would reject this contention. As set out above, this Court is not standing in the shoes of the Independent Accountant appointed under cl 9.4. It is not finally determining the NPAT Statement under cl 9.4 of the SPA.
22. For these reasons, I would dismiss all grounds in the NOC.

Conclusion

1. It follows that the appeal should be allowed.
2. The parties were agreed that if the appellants succeeded in their overarching ground that the Second Performance Conditions were satisfied, the preferable course is for the matter to be remitted to the primary judge to determine what relief should follow. That should, however, be on the basis that the Business Revenue, as defined in the SPA (as varied), for the relevant period exceeded $1,000,000 by the second anniversary of completion of the SPA. Thus, had the respondents provided an NPAT Statement that complied with cl 9.1 of the SPA, it would have had the consequence that Flynfam would have been entitled to the Second Performance Shares.
3. The respondents should pay the appellants' costs of the appeal. The costs discretion at first instance will have to be re-exercised. If either side wishes this Court to do so, then that will occur, on the basis of an exchange of short written submissions, alternatively the issue of costs at first instance can be part of the remitter.
4. In those circumstances, the following orders should be made: 1. The appeal is allowed. 2. The notice of contention is dismissed. 3. Orders 2 and 3 of the orders of the Supreme Court on 2 December 2022 are set aside. 4. The issue of damages or other relief, and subject to order 6 below, the issue of costs at first instance, is remitted to the primary judge for determination. 5. The respondents pay the appellants' costs of the appeal. 6. If either side wishes this Court to determine costs at first instance, then the appellants file and serve written submissions, limited to two pages, within seven days of these orders, as to whether and to what extent they are entitled to the costs of the hearing before the primary judge, and the respondents file and serve responsive submissions, again limited to two pages, within fourteen days of these orders, as to the costs of the hearing before the primary judge.

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: 30 August 2023