Garratt's v Thangathurai

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST

Reasons for Judgment 1 There are competing notices of motion before me by each the plaintiff and the defendant, both relating to discovery. The defendant's motion seeks the following orders: "1. The plaintiff to provide discovery sought in paragraph 1 of the defendant's solicitors request for categories of documents for discovery to the plaintiff's solicitors dated 31 August 2001. 2. Leave be given to the defendant to file and serve an amended defence in the form annexed and marked "A"." 2 Both orders are resisted, although in the case of the application for leave to amend, there is no objection in principle to the proposed amendment, rather the plaintiff requires compliance by the defendant with his alleged obligations of discovery before he is permitted to amend. 3 The plaintiff's motion for discovery was put over to 19 October 2001 while the defendant's motion proceeded to hearing on the basis that the defendant would be granted leave to amend as sought in his motion. The discovery sought by the defendant is that set out in the letter of the defendant's solicitors of 31 August 2001, namely the following: "In this respect, the word " document " includes, without limitation, correspondence, facsimiles, notes, diaries, memoranda, minutes, agendas, reports, agreements, proposals, e-mails, notes of all discussions, or other written or electronic records of any kind (including all drafts of all such documents). 1. All documents relating to the Loan & Option Agreement (" the LOA ") and Shareholders Deed, dated 10 December 1999 ( the " Documents "), including but not limited to negotiations over the terms of the Documents (in particular, rights of assignment), the plaintiff's performance of its obligations under the LOA (including requests for drawdowns and any correspondence between the parties to the Documents), and communications between the plaintiff and any of the other parties to the Documents regarding transferral of shares in I.C. & Count Technologies Limited from the defendant to the plaintiff. 2. All documents relating to the agreement dated 13 January 2001 (the "Agreement") , including but not limited to negotiations over the terms of the Agreement, communications with other parties to the Documents (including obtaining consent from these parties to execute a Deed of Novation), and communications with the defendant both prior to and subsequent to entering in to the Agreement." 4 The plaintiff's response to that facsimile was contained in its facsimile of its solicitors of 11 September 2001 which conveyed the willingness of the plaintiff to discover the documents described in par 2 of the facsimile under reply, but stating that it was unwilling to discover the documents referred to in par 1, on the basis of irrelevance. I have adopted the terminology of the requests in these reasons. 5 I think the discovery requested of the defendant by the plaintiff's solicitor's facsimile of 24 August 2001 may have some bearing on the approach to be adopted to the defendant's request for discovery by the plaintiff. The discovery requested of the defendant was as follows: "1. all documents (as defined in the Rules) recording, referring or relating to any advice (including without limitation advice from PK Wong & Advani Solicitors) received by the defendant prior to 13 January 2001 in relation to (a) the loan and option agreement;

2. all documents recording, referring or relating to any communication between the defendant (or his agent) and any of the parties to the loan and option agreement or the shareholders deed (or their agents) since 1 July 2000; 3. all documents relating to the identity and the respective holdings of the shareholders of Windermere Trading Limited and ICCT from 10 December 1999 to date." 6 In order to understand the contest raised on the defendant's notice of motion, it is necessary to gain some understanding of the issues raised in the proceedings. 7 The plaintiff's contentions include the following allegations:

(a) An agreement in writing made between the plaintiff and the defendant (the Agreement) by a letter of offer of 12 January 2001 by the defendant to the plaintiff and a letter of acceptance by the plaintiff to the defendant of 13 January 2001. The defendant was obliged under the Agreement to pay the plaintiff the equivalent amount of various advances made by the plaintiff, to or on behalf of a British Virgin Islands Company (I.C & Count Technologies Ltd (ICCT)) under a loan and option agreement (the LOA) between the plaintiff and ICCT, together with interest accrued, the sum of US$100,000, the costs incurred by the plaintiff in relation to the LOA, in addition to transferring shares to the plaintiff in ICCT held by the defendant or his nominee, representing some 2.5% of the issued capital in that corporation. Those things were to be effected by "31 March 2001 or such other earlier date as might be determined by the defendant ", referred to as the closing date.

(b) Under the Agreement the amount payable by the defendant as at 31 March 2001 was approximately US$1,570,270. Accordingly, the plaintiff sought payment of that sum and an order that the shares of the defendant In ICCT be transferred to the plaintiff. By the proposed amended defence the defendant admitted the Agreement as constituted by the letter of offer and acceptance, but contended that there were implied terms and conditions precedent to its operation, namely: (i) any assignment by the plaintiff of its rights under the LOA and under another document, referred to as the shareholders deed, was permitted by the terms of those agreements.

(ii) that the Agreement would only come into effect if all the other parties to the LOA and the shareholders deed consented to it; and

(iii) that the Agreement would only come into effect if all parties to the LOA and shareholders deed agreed to enter into a deed of novation. 8 It was alleged that certain parties to the LOA and the shareholders deed did not so consent and have not agreed to a novation of those agreements. It was further alleged that the Agreement had been frustrated by reason of the failure of the "common objective" of the parties through the failure of certain parties to consent to the assignment and enter into the novation referred to above. The common objective was not elaborated upon. 9 A further alternative defence was raised on the basis of a common mistake of parties in entering the Agreement, the mistake being identified as an understanding that parties to the LOA and shareholders deed would consent to the assignment and execute a novation of the agreements. 10 An alternative defence was that, on the proper construction of cl 14.2 of the LOA the plaintiff was not entitled to assign its rights to the defendant and that parties to the LOA had not agreed to waive restrictions on the plaintiff's entitlement to assign, with the consequence that the plaintiff was incapable of assigning its rights to the defendant. 11 It was further alleged that there had been a total failure of consideration arising out of the fact that (i) on the true construction of clauses 9.3 and 9.4 of the shareholders deed the defendant was not entitled to assign shares to the plaintiff; and (ii) on the true construction of clause 22.1 of the shareholders deed the plaintiff was not entitled to assign its rights under the shareholders deed to the defendant without the consent of other parties to that deed: that having been withheld. 12 At the risk of distorting the submissions of counsel for the plaintiff, his central proposition is that documents relating to the LOA and the shareholders deed, including negotiations in relation to those agreements are irrelevant. 13 The defence, so far as it relies upon implication of terms, centres upon the Agreement only, as does the allegation of frustration and the allegation of common mistake. So far as defences are founded upon the terms of the LOA or the shareholders deed, those defences raise discrete questions of construction of specific clauses of those agreements. The issues so raised do not give rise to the widespread form of discovery sought in par 1 of the plaintiff's requested discovery. 14 I think the principal features of the letter of offer are as follows:

(a) It is an irrevocable offer to acquire from the plaintiff all of its " rights, title and interests, and [to] assume all of [its] obligations and liabilities" under the LOA and the shareholders deed.

(c) The offer was to constitute a binding agreement upon acceptance.

(d) The defendant accepted all of the plaintiff's funding obligations under the LOA (e) The defendant indemnified the plaintiff against any liability arising out of any failure of the defendant to honour his obligations arising under or in respect of the LOA or the shareholders deed (f) The plaintiff consented to the defendant providing such funds as were reasonably required by ICCT in accordance with the LOA

(g) By 31 March 2001, at the latest, the defendant was to pay the amounts earlier referred to in these reasons and transfer his shares in ICCT

(h) Simultaneously with payment of those monies and the transfer of those shares, the plaintiff was to " assign to or novate in favour of [the defendant]all of the plaintiff's] rights … under the [LOA ]" which had not already enured in favour of the defendant. (i) Until 31 March 2001, at the latest, the plaintiff would exercise its rights under the LOA and the shareholders deed as directed by the defendant in a way which was not prejudicial to the plaintiff's interests in the business operations of ICCT.

(j) In the event that ICCT proposed to issue shares, the defendant would use his best endeavours to procure that he would gain the right to additional shares in ICCT.

(k) Mutual restrictions on press releases were acknowledged

(l) The defendant was to have the right to assign his interest to a nominee. 15 Clause 4 was in the following terms:

"4. Without prejudice to the rights of GRT and obligations of TT under the Agreement, after acceptance the parties must, by 31 January 2001, negotiate in good faith and execute a deed of novation or other instrument giving effect to the terms of the Agreement. In this regard, TT must procure that the parties to the Documents also become parties to and execute the deed of novation or other instrument and release GRT from all existing and future obligations and liabilities under the Documents."

"GRT" was a reference to the plaintiff and "TT" to the defendant. 16 Of the Agreement, the following preliminary observations may be made, namely:

(a) the letter of offer was irrevocable and a binding agreement was constituted upon acceptance. From acceptance the obligations as outlined above fell into place.

(b) The provisions of clause 4 are not without ambiguity in that the subject matter of the " deed of novation or other instrument giving effect to the terms of the agreement " was not identified. It is significant that it was the obligation of the defendant to procure that the parties to the Documents became parties to the contemplated deed of novation and release the plaintiff from its future obligations under the LOA and the shareholders deed. 17 I think there is an argument open to the defendant to the effect that it was assumed by both the plaintiff and the defendant that any necessary consent of the parties to the Documents for the implementation of the Agreement would be forthcoming. Presumably, on that platform the defendant seeks to establish the implication of terms, the common objective, the total failure of consideration and the case of common mistake in the defences which I have outlined. 18 There are, I think, significant difficulties in the defendant's case. However, I am obliged to treat the discovery issue in the context of the issues so raised in the defence. 19 Having regard to the breadth of the categories of documents sought to be discovered by the defendant, there is some little justification in submissions of counsel for the plaintiff that the defendant's application is one frequently and familiarly described as a fishing expedition. The affidavit of Steven Mark Lurie, sworn 21 September 2001, in support of the defendant's application does nothing to assuage an impression that fishing is part of the defendant's exercise: not that I regard that as fatal to the defendant's application. 20 Before examining the legitimacy of the extent of discovery sought by the defendant, I think it is necessary to have a look at the Documents, each dated 10 December 1999. 21 The plaintiff and the defendant are parties to the shareholders deed, as is ICCT. There are five other parties to it, whose identities I think are irrelevant, notwithstanding a family relationship between the defendant and one of those parties. 22 Five of the parties, including the defendant, but not the plaintiff, are shareholders in ICCT. In the case of the defendant, he is shown as holding 1,500,000 ordinary shares, as compared with holdings of the other four shareholding parties of 2,250,000 shares. A party known as Secret Agent Technologies Inc (SAT) is described as a wholly owned subsidiary of ICCT and one which conducts "the USA Business". The plaintiff is identified in the shareholders deed as a lender to ICCT on the terms of the LOA and is a holder of an option to subscribe for shares in ICCT in accordance with the LOA. 23 In the shareholders deed it was proposed that the monies advanced by the plaintiff would be used by way of loan to SAT as ICCT's board determined. Three of the parties, none of them being the plaintiff or the defendant, are executive directors of SAT. 24 Clauses 9.3, 9.4 and 22.1 of the shareholders deed are clauses upon which the defendant seeks to build part of his case by way of defence. 25 Trying to understand the nature of the United States business by reference to the shareholders deed is not a particularly rewarding task: 26 The definition of USA business is as follows: " USA Business means the sale, marketing, distribution, manufacturing and development of the Product and New Products including the exploitation of data generated by the Product and New Products in the Territory under the Licence Agreement" 27 If one leaves that definition in optimistic search for a definition of product and new products then disappointment awaits. Product is defined to mean: "… the interactive multimedia point of purchase device known as Agent 13 and all Advancements including the New Product known as Agent 23." 28 It is a definition which deters one from going to the definition of new product. The deed was to come into effect on execution of it. Under cl 5.1 it was provided that in addition to the existing executive directors the defendant and one Jaginder Singh Pasricha, would become directors of the "[ICCT] Group". At the same time the plaintiff was entitled under the same clause to appoint a director to the board of ICCT and SAT with provision to increase that presence, once shares were acquired by it under the LOA. 29 Clause 9.3 is to be found amongst a collection of provisions dealing with the restrictions on transfer of shares. The defendant, by clause 9.3, was free to transfer his shares as he saw fit to two other parties to the shareholders deed. They do not include the plaintiff. That right was limited up to the time of the exercise of option and acquisition of shares in ICCT by the plaintiff under the LOA. 30 Clause 9.4 provided, subject to the restrictions of the kind referred to in clause 9.3, as follows: "… no Shareholder may sell, assign, transfer, pledge, offer as security or otherwise create an Encumbrance or dispose of the whole or any portion of or any right, title or interest whatsoever in Shares, except by a transfer of shares in accordance with this Clause or Clause 9.5". 31 Those provisions gave a pre-emptive right of purchase to other shareholders. Clause 18.5 provided for the event of default by the plaintiff which could see it ceasing to be a party to the shareholders deed and ceasing to enjoy any benefits under it. The deed was expressed to terminate upon listing of ICCT. 32 Clause 22 was in the following terms: " 22 ASSIGNMENT

22.1 The rights and benefits under this Deed are personal to the parties hereto and may not be assigned at law or in equity without the prior written consent of the other parties hereto. 22.2 This Deed shall be binding upon and enure for to the benefit of each party and their successors and permitted assigns." 33 It is not clear whether the plaintiff had acquired shares in ICCT prior to the Agreement. In any event I think it is clear that the purported transfer of shares of the defendant in ICCT to the plaintiff could not be effected without adhering to the provisions of clause 9 of the shareholders deed relating to transfer of shares. 34 Similarly, the assignment by the plaintiff to the defendant contemplated in the Agreement could not be effective in law unless compliance with clause 22 of the shareholders deed was observed. Both plaintiff and defendant must be taken to have been aware of that operation of the deed in relation to the transfer of shares and the assignment of rights. I think that must be implicit in the obligation cast upon the defendant under the Agreement to "procure that the parties to the [shareholders deed and LOA] also become parties to and execute the deed of novation or other instrument and release [the plaintiff] from all existing and future obligations and liabilities [thereunder]". The defendant was not a party to the LOA, which was between ICCT, the plaintiff, SAT and the executive directors of SAT. The LOA was conditional upon the execution of the shareholders deed and two other documents referred to as the Licence Agreement and the Employment Agreements which were not in evidence before me. 35 In the recitals to the LOA, the plaintiff agreed to advance funds to SAT, whose capital, except for two shares, was held by ICCT. The LOA includes terms which reflect the plaintiff as the financial backer of ICCT for the purpose of developing the business of SAT with option rights to buy shares in ICCT and with an escape provision in the form of a "Share Buy-Back Option". There were the usual provisions for the submitting of financial management and budgetary documents to the plaintiff by SAT. In stipulated circumstances, it was open to the plaintiff to take management control of ICCT and of SAT. 36 Under clause 4.1, in consideration of the provision of the loan to ICCT, the plaintiff obtained a share option and the number of shares to be issued was in accordance with a formula based upon the total amount advanced under the LOA. 37 Clause 4.2 provided that the option could only be exercised within fourteen days of completion of the consolidated accounts of ICCT for the half year ended 30 June 2001 "or earlier as [the plaintiff] may determine". Under cl 14.2 the plaintiff had the following right of assignment: "14.2 The Lender may at any time, in its absolute discretion assign its rights under this agreement or nominate any subsidiary (the "Subsidiary" ) as the Lender, thus having the rights and obligations of the Lender under this Agreement, subject to the Lender providing a guarantee and indemnity to the Borrower in respect of the obligations of the Subsidiary under this Agreement in the form set out in Annexure 2." 38 It is arguable, as contended on behalf of the defendant, that upon the proper construction of that clause the absolute discretion to assign was limited to a subsidiary of the plaintiff. On the face of the proposed defence which relies upon implied terms, frustration, a failure of common objective, a total failure of consideration, there is obvious scope for discovery of documents outside of the Agreement and the Documents. 39 However I am satisfied that the breadth of the surrounding circumstances is more limited than is reflected in par 1 of the requested discovery. The relevant facts are the common mistake or underlying strata that:

(a) the parties to the LOA would give an effective consent to the assignment of the plaintiff's rights under that agreement to a non-subsidiary of the plaintiff, and

(b) the shareholders, as defined in the shareholders deed, would waive their pre-emptive right, consent to the sale of the defendant's shares in ICCT to the plaintiff and to the assignment of rights under that deed. 40 In my view, the defendant gained little benefit from his reliance upon so much of the defence that seeks to raise an implied term, given that the particulars in aid of the alleged implied terms are limited to an implication "… as a matter of business efficacy and by reason of the conditional nature of the Plaintiff's entitlement to assign its rights pursuant to the Loan and Option Agreement [and shareholders deed]". 41 As I understand that allegation, the defendant would be limited to establishing the underlying business objective of the agreement by way of extrinsic evidence in aid of construction. 42 So far as the defence relies upon the refusal of the shareholders to give effective consent to the transfer of the defendant's shares to the plaintiff, or to the assignment of rights under the shareholders deed, or the refusal of the parties to the LOA to give effective consent to the assignment of the plaintiff's rights under that agreement to the defendant, documents in the possession of the plaintiff relating to that withholding of consents would be discoverable, assuming there to be an issue in respect of either of those matters. 43 Further, I think documents in the possession of the plaintiff relating to the understanding of the parties to the Agreement of the willingness of the parties to the shareholders deed and the LOA, respectively, to give the requisite consent to (a) the transfer of the defendant's shares in ICCT to the plaintiff, or to the assignment of the plaintiff's rights under the shareholders deed, and (b) the assignment of the plaintiff's interest in the LOA to the defendant, are relevant. Without evidence of the period of negotiation leading up to the Agreement, I think the time should be limited to the period 1 July 2000 to 1 February 2001, in the case of those categories. 44 Accordingly, I direct the plaintiff to give discovery

(1) as agreed in terms of par 2 of the defendant's solicitor's letter to the plaintiff's solicitor of 31 August 2001,

(a) the refusal of the shareholders in ICCT to waive their rights in relation to the transfer of the defendant's shares in ICCT to the plaintiff, or the refusal of the parties to the shareholders deed to give effective consent to the assignment of interests under that deed in terms of the Agreement;

(b) the refusal of the parties to the LOA to give effective consent to the assignment of the plaintiff's interest under the LOA to the defendant, in terms of the Agreement; in each case, limited to the period 1 July 2000 to date of commencement of these proceedings.

(3) All documents recording or relating to the understanding of the plaintiff or the defendant as to:

(a) the willingness of the shareholders under the shareholders deed to give effective consent to the transfer of the defendant's shares in ICCT to the plaintiff, or the willingness of the parties to that deed to give effective consent to the assignment of interests under that deed in terms of the Agreement; and

(b) the willingness of the parties to the LOA to give effective consent to the assignment of the plaintiff's interest under the LOA to the defendant in terms of the Agreement; in each case in respect of the period from 1 July 2000 to 1 February 2001. 45 In relation to costs, the costs of the application will be costs in the cause.

Last Modified: 11/28/2001 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.