Gillies v Gillies

Background Facts

1. Kash is the oldest of the three siblings, having been born in May 1959. Donna was born in December 1960. Kurt was born in April 1964.
2. On 8 July 2005, Allan Archibald Galt Gillies, the father of Kash, Kurt and Donna, died. Allan left a Will dated 5 December 2003 ("the Will"). On 8 August 2006, this Court granted Probate in common form of the Will to the three siblings, as the executors appointed under the Will.
3. Clause 2 of the Will provided that in "the event of disagreement amongst my executors, the decision of the majority is to prevail". Clearly, Allan knew his children well, or he was prescient. Since his death, there have been regular disagreements between them.
4. The Will, in broad terms, and relevantly, provided for the residue of the estate, after payment of debts, funeral and testamentary expenses, and all death duties and taxes payable as a consequence of Allan's death, or in connection with the estate, to be divided into three equal parts, one part each to be held on a testamentary discretionary trust, for Donna, for Kurt, and for Kash, as "primary beneficiaries" whilst alive, and "any family entity associated with [each of them], including a family entity whose association with [her or him], arises after [their] or my death".
5. Clause 13 of the Will provided that "if the primary beneficiary of the trust survives me by more than 30 days, is willing and has capacity to act the trustee will be the primary beneficiary of that trust". It follows that each of Kurt, Kash and Donna, is respectively the trustee of the trust for his, and her, benefit, respectively.
6. At the time of Allan's death, the Inventory of Property attached to the grant of Probate, discloses that his estate included: 1. a free standing residential property, being No 8, with an estimated value of $1,550,000; 2. a 16/20 share, as tenant in common, in a small residential four apartment block, together with a garage converted to a granny flat, situated at, and known as, 179 Hastings Parade Bondi NSW ("No 179") with an estimated value of $2,000,000; the remaining 4/20 share was held by Donna; 3. all of the shares in A & W Gillies (Investments) Pty Ltd ("the Company"), which owned, as its sole asset, a residential free standing property situated at, and known as, 6 Jackaman Street Bondi NSW ("No. 6"), with an estimated value of $1,500,000; and 4. 3,500 shares in Burns Philp & Co Ltd ($3,220).
7. The current Company Extract of the Company reveals that it was registered in January 1968 as an Australian Proprietary Company Limited by Shares. The Company's name, when registered, was Beautiline Joinery Pty Limited. It changed its name to A & W Gillies (Investments) Pty Limited by special resolution passed at a meeting held on 26 October 1973, with the name change becoming effective from 15 November 1973.
8. The share structure of the Company consisted of 210 "A" Class shares, each of $1.00, and 6 Non-Cumulative 10% preference shares, each of $2.00. Prior to his death, Allan owned all of the shares.
9. On 8 July 2005, each of Kash, Kurt and Donna was appointed as a director of the Company.
10. Following the grant of Probate, the parties completed the administration of Allan's estate, resulting in each of them becoming, as trustee, the registered proprietor of a one-third share as tenants in common of No. 8; the registered proprietor of a one-third share as tenants in common of No. 179; and each of them receiving 70 "A" Class shares and 2 Non-Cumulative 10% preference shares in the Company.
11. During the further administration of Allan's estate, and then for some years thereafter, there were ongoing disputes between them about the management of the jointly owned properties, including whether they should be sold, as well as about the management, and governance, of the Company. It is not necessary to determine where the fault lies since nothing now turns on it. However, the duration, and the intensity, of their disputes have been reflected in the history of, and in, these proceedings.
12. On 19 August 2015, Kash, Kurt and Donna attended a private mediation for the purpose of resolving the disputes concerning the management and sale of the properties that were jointly owned by them. During the mediation, the mediator, Mr R Angyal SC, prepared a handwritten Agreement, which each of the parties signed the following day.
13. The solicitor acting for the Plaintiffs throughout the mediation was, and in these proceedings is, Mr R D Lawson, a solicitor at Thomson Geer. The solicitor acting for Donna throughout the mediation was, and in these proceedings is, Mr P L Harrison, of Kemp Strang. As will be read, in the event of disagreement, they were to "co-operate in good faith in resolving the disagreement".
14. The Agreement, which was expressed to be "immediately binding", although also stating that the parties intended to "replace this agreement by a more formal deed which more fully expresses their agreement but does not differ in its substantive terms", provided a framework by which Donna's interests in the jointly held real estate, and in the Company, were to be transferred to Kash and Kurt.
15. The parties agreed that their intention was that following compliance with the Agreement, Donna's financial interests would be completely separated from the financial interests of Kurt and Kash.
16. In broad terms, the principal features of the Agreement were that: 1. the parties were required to sell No. 8 and divide the net proceeds of sale equally between them; 2. Kash and Kurt were required to purchase Donna's interest in No. 179 at a price determined by a valuer; and 3. Kash and Kurt were required to purchase Donna's interest in the Company at a price determined by a valuer.
17. The Agreement also provided that within 7 days of execution of the more formal Deed, the parties would: 1. Appoint a real estate agent for the sale of No. 8: Clause 3. 2. Appoint a solicitor to act upon the sale of No. 8: Clause 5. 3. Select a valuer for the purpose of valuing No. 6, and also for No. 179: (Clauses 7 and 9). 4. In the event that the parties could not agree on the appointment of the solicitor and the valuer, each would be selected by the President of the respective professional association: Clauses 3, 5, 7, and 9. 5. The parties would undertake any repairs and maintenance of No. 8 recommended by the selected agent: Clause 4. 6. The parties would sell No. 8 "immediately" by public auction and divide the net proceeds equally between them: (Clause 2). 7. Within 7 days of Kash and Kurt receiving the proceeds of sale from No. 8, they were to purchase Donna's shares in the Company as well as her interest in No. 179 "at valuation": (Clauses 6 and 8). 8. Donna was not to bear any liability for land tax with respect to No. 179 or No. 6 which fell due after 31 December 2015, provided that she did not unreasonably cause the settlement of the sale of No. 8 to be delayed beyond 24 December 2015: Clause 15.
18. On 28 August 2015, the Plaintiffs' solicitor forwarded, by email, to Donna's solicitor, a draft of the Deed of Settlement and Release.
19. The Plaintiffs' solicitor did not receive any response, in writing, to that draft Deed. Donna gave evidence, in cross-examination, which I accept, that shortly after receipt of the draft Deed, her solicitor was told that a revised draft would be provided, so that it was unnecessary to respond to the first draft of the Deed (T16.20 - T16.33).
20. On 14 September 2015, the Plaintiffs' solicitor forwarded a further amended draft Deed to Donna's solicitor incorporating some changes, which included the addition of the Company as a party, and to make clearer Donna's obligations to co-operate in the Company's purchase of her shares. (The covering email from the Plaintiffs' solicitor refers to a "recent telephone conversation regarding this matter" which seems to corroborate Donna's evidence that this draft superseded the draft sent by the solicitor on 28 August 2015.)
21. On 20 September 2015, Donna went on an overseas holiday returning to Australia in mid-October 2015. Apparently, whilst at the airport, prior to her departure from Australia, she provided "limited instructions" to her solicitor to respond to the draft Deed. (The instructions were likely to have been partly oral and partly in writing.)
22. On 21 September 2015, Donna's solicitor provided a response, by email, with the draft Deed, with amendments marked up, on the basis that Donna had given instructions, via email exchange, in relation to it. (The email exchange between Donna and her solicitors was not produced.)
23. In the draft Deed provided by Donna's solicitor, which was sent "in order to keep this matter moving, on the basis that it has not been seen by Donna and that, therefore may not accurately or fully reflect our instructions". Relevantly to the remaining dispute, a clause was inserted relating to an exemption for land tax for No. 8. As well, Donna's solicitor made the purchase by the Company of Donna's shares, an alternative to Kash and Kurt purchasing her shares, but conditional upon them bearing the costs of that purchase.
24. On 1 October 2015, the Plaintiffs' solicitor sent a further draft deed to the defendant's solicitor, wherein Donna's proposed amendment concerning land tax for No. 8 was excluded, but wherein, "reluctantly", the Plaintiffs paying the costs of the Company buy back was included.
25. On 12 November 2015, Donna's solicitor sent a further draft of the Deed to the Plaintiffs' solicitor. She refused to include the clause in the previous draft of the Deed provided by her solicitor regarding the sale of her shares to the Company, despite the Plaintiffs' agreement to pay the costs of any Company buy back. She accepted that "in relation to land tax…it was agreed at the mediation that, subject to the exclusion relating to the delay in the sale of [No. 8], all land tax payable for the year commencing 1 January 2016 would be the responsibility of your clients. The omission of [No. 8] from the Handwritten Agreement was a mistake."
26. On 24 November 2015, there was an exchange of without prejudice emails between the solicitors for the parties.
27. On 3 December 2015, the Plaintiffs' solicitor sent a further draft Deed, in the form that was executed, subsequently, by the parties. The form of this draft Deed was, in substance, identical to the Agreement. However, it was not until 15 February 2016 that the Deed was signed, and exchanged.
28. Although a significant amount of evidence was given, in writing, and in cross-examination, about the exchange of draft documents, in view of the issue regarding unreasonable delay not being pursued, it is now unnecessary to deal with the complaints made regarding the failure to have the contemplated Deed signed within a particular period of time.
29. Because there is no longer any dispute, it is also unnecessary to identify the steps taken in appointing the real estate agent, the valuer and the solicitor to act on the sale, other than to note that the real estate agent was appointed in May 2016; the valuer was nominated, but the retainer was not paid until 8 August 2016; and the solicitor was retained in about October 2016.
30. On 19 November 2016, No. 8 was sold at auction for $3,620,000. The sale of the property was completed on 20 February 2017 and there was, then, distribution of his, and her, share of the net proceeds of sale to Kurt, Kash and Donna, respectively.
31. There was no evidence, from a valuer, as to the length of time it would take to prepare a real estate valuation. However, during the hearing, the parties, by their, or her, solicitor, agreed that a reasonable time for a valuer to conduct a valuation was three weeks: T63.36 - T63.38.

The Deed

1. Leaving aside the preparation and execution of a "more formal Deed which more fully expresses their agreement" but which did not "differ in its substantive terms", the Agreement and the Deed contain the same terms. I shall refer to the terms of the Deed.
2. The Deed, firstly stated that within 7 days of execution of the Deed, the parties would take the following steps by unanimous agreement: 1. appoint a real estate agent for the sale of No. 8; 2. appoint a solicitor to act on the sale of No. 8 Jackaman Street and 3. select a valuer for the purpose of valuing No. 6 and No. 179.
3. In the event that the parties could not agree on the appointment of the valuer, or the solicitor, each would be selected by the President of his, or her, respective professional association.
4. The parties would undertake any repairs and maintenance of No. 8 that was recommended by the selected real estate agent appointed to sell No. 8.
5. The parties would sell No. 8 "immediately" by public auction and share the net proceeds equally between them. (The parties, at the hearing agreed that it was not possible to sell No. 8 "immediately", since an agent and a solicitor had to be appointed. They agreed that "immediately" meant "immediately after the appointment of the agent and the solicitor: T50.15 - T50.21)
6. It is next necessary to set out, verbatim, Clauses 6 to 15, inclusive, of the Deed since it is these Clauses that relate to the remaining issues in dispute between the parties: "6 Within 7 days of their receipt of their shares of the net proceeds of sale of No. 8, Kurt Gillies and Kash Gillies will purchase Donna Gillies' one-third share of No. 6 Jackaman Street Bondi (No. 6) by way of company purchase of her shares in A & W Gillies (Investments) Pty Ltd at valuation of No. 6 Jackaman Street Bondi. 7 The valuer of No. 6 is to be appointed by unanimous agreement of the parties within 7 days of the execution of this Deed, failing which the valuer will be appointed by the President of the Real Estate Institute of New South Wales. 8 Within 7 days of their receipt of their shares of the net proceeds of sale of No. 8, Kurt Gillies and Kash Gillies will purchase Donna Gillies' one-third share of 179 Hastings Parade, Bondi (179 Hastings Parade) at valuation. 9. The valuer of 179 Hastings Parade will be appointed in the manner and using the procedures set out in clause 7 of this Deed. 10. The valuer of No. 6 and 179 Hastings Parade will be instructed that the purpose of the valuations is for the purchase by two co-owners of the interest of a third owner. In addition, the valuer of 179 Hastings Parade will be instructed that Kurt and Kash Gillies believe that Council has not approved the conversion of the garage into a residential unit, and all other contact with the valuer will be limited to Peter Harrison, Robert Lawson or Bondi Realty. 11. Pending its sale, 179 Hastings Parade will be managed by Bondi Realty and the parties will follow the recommendation of Bondi Realty regarding maintenance, repairs, preparation for rental and marketing and rents and rental receipts net of expenses will be split equally between the parties. 12. Upon purchase of Donna Gillies' shares in accordance with clause 6, the accrued profits in A & W Gillies (Investments) Pty Ltd to that date will be paid to the parties in equal one-third shares by way of dividend and Donna Gillies will remain a director of that company until payment of her dividends. 13. Within 7 days of their receipt of their shares of the net proceedings of sale of No. 8, Kurt Gillies and Kash Gillies together and separately will pay Donna Gillies the total of $150,000.00 in full and final satisfaction of her rights as a shareholder in A & W Gillies (Investments) Pty Ltd and all parties will mutually release each other from all claims in relation to No. 6, No. 8, 179 Hastings Parade and A & W Gillies (Investments) Pty Ltd apart from the promises in this Deed. 14. Each party must take all steps, execute all documents and do everything reasonably required by the other parties to give effect to the transactions contemplated by this Deed, and in the event of any disagreement, Peter Harrison and Robert Lawson will co-operate in good faith in resolving the disagreement. 15. The parties agree that Donna Gillies will not bear any liability for land tax with respect to 179 Hastings Parade or No. 6 Jackaman Street falling due after 31 December 2015, provided she does not unreasonably cause settlement of the sale of No 8 Jackaman Street to be delayed beyond 24 December 2015."

Principles of Construction

1. Since there is no material difference between the Agreement and the Deed, it is unnecessary to read the documents together and consider any variations. Clearly, however, the antecedent Agreement is part of the context of the later Deed.
2. Whilst the parties to the Deed were clearly family members, this is not a case in which their familial relationship played any part in the discussions between them, or in the preparation of the Agreement, and then the Deed. It is quite obvious that Kurt and Kash were, on the one hand, and Donna was, on the other, treating their negotiations, the Agreement, and then the Deed, in a commercial manner, and they were negotiating at arms-length. They were independently legally represented and the lawyer on each side was taking instructions upon the basis that their, and her, interests, respectively, were to be properly protected. The length of the mediation (15 hours) and the toing and froing concerning the terms of the Deed, and what needed to be done following the execution of the Deed, amply demonstrate that this was a commercial transaction and that the Deed was a commercial contract.
3. In the circumstances, I am satisfied that the principles of interpretation that apply in determining the meaning of the terms of a commercial contract are relevant, and applicable, to the interpretation of the Deed. Neither counsel suggested that this was an incorrect view and indeed the submissions of each referred to these principles.
4. Shorn of detail, it is necessary to ask what a reasonable businessperson would have understood the terms of the contract to mean at the time that the contract was entered into, rather than by reference to the subjectively stated intentions of the parties to the contract. It has been said that, in a practical sense, the reasonable businessperson must 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: Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd [2017] HCA 12, at [16].
5. Consideration will be given to the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose, or objects, to be secured by the contract: Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37, at 116, [47], in the context of the whole of the contract and against the background of the knowledge which the parties to the contract can be taken to have had at the time of its execution.
6. The Court should take a common sense approach to contract interpretation, striving to give the contract an interpretation that avoids absurdity and in which all the parts of the contract are given effect and operate harmoniously together: Gollin & Co Ltd v Karenlee Nominees Pty Ltd (1983) 153 CLR 455, at [46]. In other words, the court is entitled to approach the task of construction on the basis that the parties intended to produce a commercial result and one which makes commercial sense. This requires that the construction placed upon the terms is consistent with the commercial object of the contract.
7. This approach should be adopted even if the terms of the agreement have been recorded informally or inadequately.
8. In International Air Transport Association v Ansett Australia Holdings Ltd (Subject to Deed of Company Arrangement) (2008) 234 CLR 151; [2008] HCA 3, at [8], Gleeson CJ explained that there may be cases: "… in which the Court's general understanding of background and purpose is supplemented by specific information as to the genesis of the transaction. The Agreement has a history; and that history is part of the context in which the contract takes it meaning." (Citations omitted)
9. Counsel referred to Electricity Generation Corp v Woodside Energy Ltd; Woodside Energy Ltd v Electricity Generation Corp (2014) 251 CLR 640; [2014] HCA 7 at 656; [35] in which the plurality (French CJ, Hayne, Crennan and Kiefel JJ) wrote: "…this court has reaffirmed the objective approach to be adopted in determining the rights and liabilities of parties to a contract. The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean. That approach is not unfamiliar. As reaffirmed, it will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract. Appreciation of the commercial purpose or objects is facilitated by an understanding "of the genesis of the transaction, the background, the context [and] the market in which the parties are operating". As Arden LJ observed in Re Golden Key Ltd, unless a contrary intention is indicated, a court is entitled to approach the task of giving a commercial contract a businesslike interpretation on the assumption "that the parties … intended to produce a commercial result". A commercial contract is to be construed so as to avoid it "making commercial nonsense or working commercial inconvenience"." (Omitting citations and footnotes)
10. More recently, the UK Supreme Court, in Wood v Capita Insurance Services Ltd [2017] 2 WLR 1095; [2017] UKSC 24, at [10] - [13], wrote: "The court's task is to ascertain the objective meaning of the language which the parties have chosen to express their agreement. It has long been accepted that this is not a literalist exercise focused solely on a parsing of the wording of the particular clause but that the court must consider the contract as a whole and, depending on the nature, formality and quality of drafting of the contract, give more or less weight to elements of the wider context in reaching its view as to that objective meaning. In Prenn v Simmonds [1971] 1 WLR 1381 (1383H-1385D) and in Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989 (997), Lord Wilberforce affirmed the potential relevance to the task of interpreting the parties' contract of the factual background known to the parties at or before the date of the contract, excluding evidence of the prior negotiations. When in his celebrated judgment in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 Lord Hoffmann (pp 912-913) reformulated the principles of contractual interpretation, some saw his second principle, which allowed consideration of the whole relevant factual background available to the parties at the time of the contract, as signalling a break with the past. But Lord Bingham, in an extra-judicial writing, "A new thing under the sun? The interpretation of contracts and the ICS decision" Edin LR Vol 12, 374-390, persuasively demonstrated that the idea of the court putting itself in the shoes of the contracting parties had a long pedigree. Lord Clarke elegantly summarised the approach to construction in Rainy Sky at para 21f. In Arnold all of the judgments confirmed the approach in Rainy Sky (Lord Neuberger paras 13-14; Lord Hodge para 76; and Lord Carnwath para 108). Interpretation is, as Lord Clarke stated in Rainy Sky (para 21), a unitary exercise; where there are rival meanings, the court can give weight to the implications of rival constructions by reaching a view as to which construction is more consistent with business common sense. But, in striking a balance between the indications given by the language and the implications of the competing constructions the court must consider the quality of drafting of the clause (Rainy Sky para 26, citing Mance LJ in Gan Insurance Co Ltd v Tai Ping Insurance Co Ltd (No 2) [2001] 2 All ER (Comm) 299 paras 13 and 16); and it must also be alive to the possibility that one side may have agreed to something which with hindsight did not serve his interest: Arnold (paras 20 and 77). Similarly, the court must not lose sight of the possibility that a provision may be a negotiated compromise or that the negotiators were not able to agree more precise terms. This unitary exercise involves an iterative process by which each suggested interpretation is checked against the provisions of the contract and its commercial consequences are investigated: Arnold para 77 citing In re Sigma Finance Corpn [2010] 1 All ER 571, para 10 per Lord Mance. To my mind once one has read the language in dispute and the relevant parts of the contract that provide its context, it does not matter whether the more detailed analysis commences with the factual background and the implications of rival constructions or a close examination of the relevant language in the contract, so long as the court balances the indications given by each. Textualism and contextualism are not conflicting paradigms in a battle for exclusive occupation of the field of contractual interpretation. Rather, the lawyer and the judge, when interpreting any contract, can use them as tools to ascertain the objective meaning of the language which the parties have chosen to express their agreement. The extent to which each tool will assist the court in its task will vary according to the circumstances of the particular agreement or agreements. Some agreements may be successfully interpreted principally by textual analysis, for example because of their sophistication and complexity and because they have been negotiated and prepared with the assistance of skilled professionals. The correct interpretation of other contracts may be achieved by a greater emphasis on the factual matrix, for example because of their informality, brevity or the absence of skilled professional assistance. But negotiators of complex formal contracts may often not achieve a logical and coherent text because of, for example, the conflicting aims of the parties, failures of communication, differing drafting practices, or deadlines which require the parties to compromise in order to reach agreement. There may often therefore be provisions in a detailed professionally drawn contract which lack clarity and the lawyer or judge in interpreting such provisions may be particularly helped by considering the factual matrix and the purpose of similar provisions in contracts of the same type. The iterative process, of which Lord Mance spoke in Sigma Finance Corpn (above), assists the lawyer or judge to ascertain the objective meaning of disputed provisions."

The Submissions

1. Kurt and Kash contended that the correct date for valuation of No. 179 and No. 6 was as soon as reasonably possible after the appointment of the valuer. In the events that happened, they submitted that the correct date for the valuations is 11 August 2016. They submitted that such a construction "reflects a common sense approach reflecting the objective intention of the parties and gives the contract a construction in which all the parts of the contract are given effect and operate harmoniously together by reference to the genesis, aim and background of the transaction".
2. In the alternative, during submissions, counsel for Kurt and Kash submitted that the date of each valuation should be 7 days after Kurt and Kash received the net proceeds of sale of No. 8, that is, on 27 February 2017: T63.25.
3. Donna contended that the date of the valuations referred to in Clauses 6 and 8 of the Deed should be the respective dates of transfer of the shares and her interest in No. 179, neither of which transfers had yet been effected. She submitted that that her shares and her interest in No. 179 would then be transferred at a price as close as possible to the market value at the time of transfer. Such an interpretation, it was submitted, shared the risk equally between the parties, of the real estate market rising, or falling, in the time between signing the Agreement and the date of the transfer.
4. In the alternative, Donna contended that the valuation date should be 7 days after Kurt and Kash received the net proceeds of sale of No. 8, that is, on 27 February 2017.
5. At the hearing, counsel for Donna sought interest, as pre-judgement interest, calculated from 27 February 2017, until the date of payment by the Plaintiffs to her of the purchase price for her shares and for her interest in No. 179: T63.34 - T63.35.
6. (Although very little was said about Donna's claim for interest, it seems to me that the proceedings by Donna are proceedings for the recovery of money (including any debt or damages or the value of any goods). It follows that the Court may include interest in the amount for which judgment is given, the interest to be calculated at such rate as the court thinks fit for the whole or any part of the period from the time the cause of action arose until the time the judgment takes effect: s 100 Civil Procedure Act 2005 (NSW).)
7. The Plaintiffs contended that on the proper construction of the Deed, "accrued profits" meant "the Company's undistributed rental receipts net of expenses, namely those net rental receipts which have not up to the relevant date been expended as capital improvements on 6 Jackaman Street, nor distributed as dividends to the parties. Practically, this means money in the Company's bank account or money held by the Company's property agent but not yet paid to the Company".
8. In paragraph 5 of the amended Summons, they sought a declaration to the following effect: "A declaration that on the proper construction of clause 12 of the Agreement and the Deed, the term "accrued profits" in clause 12 of the Agreement and the Deed means the money in the bank account of the Company, being the undistributed rental receipts for 6 Jackaman Street net of expenses, and any rental receipts for 6 Jackaman Street net of expenses held by the agent but yet to be paid into the Company's bank account."
9. They submitted that such a construction reflected a common sense approach, demonstrated the objective intention of the parties, and gave the Deed a construction which avoided absurdity. In addition, it gave all the parts of the Deed effect and operated harmoniously together by reference to the genesis, aim and background of the transaction.
10. In addition, counsel submitted, at T42.47 - T42.48 and T43.11 - T43.14: "….that bank account plus any other moneys that may be payable from the agent to the company are, in essence, the profits… as a matter of reality with this company where its only revenue is the rental receipts and its expenses are expenses relating to the property, and the collection of those rental receipts".
11. Donna contended that "accrued profits" meant profits that have accrued or accumulated over time; in other words, profits that had been retained, or kept, by the Company, and not yet paid as dividends. Those profits were described in the Company balance sheet as "retained earnings".
12. The Company's balance sheet showed no capital reserves, so all of the profits were transferred into retained earnings. As at 30 June 2016, the Company's Balance Sheet showed retained earnings in the amount of $114,050. Each of the Plaintiffs and Donna would be entitled to about $38,000.
13. Donna also pointed to what was said to be an important feature of Clause 12, namely the requirement that the accrued profits of the Company were to be paid by way of dividends. The Company was only permitted to pay dividends out of the profits of the Company: Article 120 of the Articles of Association. Given that requirement, it made sense to equate accrued profits with retained earnings. Furthermore, an interpretation of the Deed that required the Company to pay dividends out of an amount that did not equate to profits, risked the Company acting outside its Articles of Association.

What is the correct date for the valuations referred to in Clauses 6 and 8 of the Deed?

1. It seems to me that the parties contemplated three different, but continuous, time periods, for steps to occur, which steps, when completed, would result in severing, once and for all, their financial inter-relationship created by the co-ownership of property. It was the termination of the financial inter-relationship of Kurt and Kash on the one hand, and Donna on the other, that was the principal object of the agreement reached, and to be reflected by, the Agreement and the Deed.
2. The first time period was to commence by reference to the execution of the Deed, that is to say, within 7 days of the execution of the Deed. What needed to be done during this period related to the appointment of a real estate agent, a real estate valuer, and a solicitor, the former and the latter of whom would act upon the sale of No. 8. The real estate agent and the solicitor would need to be appointed in order for the sale of No. 8 to take place "immediately". The valuer needed to be appointed within the first period, also, so that, when required, he could value No. 6 and No. 179.
3. In the event that agreement could not be reached within the period of 7 days of execution of the Deed, then each of the valuer and the solicitor was to be appointed by the President of his, or her, respective professional association.
4. Whilst no period of time was provided for the appointment by the President of his, or her, respective professional association, in the event that agreement had not been reached, one would have thought that the appointment would be within a reasonable time after agreement could not be reached. (Nothing turns on whether this part of the construction of the Deed is correct since agreement was reached on the appointment of each.)
5. Clauses 2, 3, 5, 7, and 9 of the Deed specifically deal with the first period of time for things that needed to be done that would eventually lead to severing, once and for all, the parties' financial inter-relationship created by the co-ownership of property.
6. The second period of time contemplated by the Deed, related to the actual sale of No. 8. Although Clause 2 of the Deed referred to No. 8 being required to be sold "immediately", it is clear that the parties could not have meant the word, as used in the Deed, to mean "at once" or "instantly". It is to be remembered that the parties contemplated that maintenance, repairs, preparation for sale, and marketing, of No. 8, would be required. The agent for sale was to provide recommendations in this regard: Clause 4 of the Deed.
7. The more likely meaning of the word "immediately", in the context of the whole Deed, was "without delay".
8. The third period of time for things to be done which would result in severing, once and for all, the financial inter-relationship created by the co-ownership of property, was following the sale of No. 8. Upon exchange of contracts for sale, Kurt and Kash would know what they were to receive as their share of the net proceeds of sale of No. 8. This period continued to the date when they actually received their share, and was to end 7 days thereafter. It was within 7 days of their receipt of their share of the net proceeds of sale that they were to purchase Donna's one-third share of No. 6, by way of company purchase of her shares in the Company "at valuation of No. 6", as well as her one-third share of No. 179 "at valuation", also to pay her $150,000 in full and final satisfaction of her rights as a shareholder in the Company, and then all parties were to mutually release each other from all claims in relation to No. 6, No. 8, 179 Hastings Parade and the Company apart from the promises in this Deed.
9. In addition, it was during the 7 day period following the receipt of their share of the net proceeds of sale that the accrued profits in the Company to the date of the purchase, would be paid to the parties in equal one-third shares by way of dividend. Donna remained as director of that company until payment of her dividends had occurred.
10. Clauses 6, 8, 12 and 13 of the Deed specifically deal with the third period of time to which reference has been made.
11. Clearly, the parties contemplated that there would be a lapse of time between the sale of No. 8 and the purchase of Donna's interest in the Company and in No. 179. In this regard, the parties contemplated that maintenance, repairs, preparation for rental, and marketing, of No. 179, would be required. "Bondi Realty" was to provide those recommendations and the parties were required to follow those recommendations: Clause 11 of the Deed.
12. Bearing in mind the conduct of Kurt and Kash on the one hand, and Donna, on the other, it is highly unlikely that their intention was that one side, or the other, would obtain any commercial benefit arising from the time that passed between the commencement of the first, and the conclusion of the third, period, which I have identified.
13. Although at the hearing, I tentatively considered that, perhaps, the date 7 days after the Plaintiffs received their share of the proceeds of sale of No. 8 may be the date of the valuation, on reflection, Kurt and Kash did not have to wait for 7 days after they received their share. The Deed provided that the purchase was to be "within 7 days of their receipt of their shares of the net proceeds of sale of No. 8" (Clause 6). Accordingly, limiting the date of valuation to that date does not make commercial sense.
14. Having regard to the whole of the Deed, considering the commercial purpose and commercial context, I think that the view which makes the most commercial sense, and which would be consistent with the parties' intentions, is that the date of the valuation of each property, by the chosen valuer, was to be the date on which Kurt and Kash received "their shares of the net proceeds of sale of No. 8". It was within 7 days thereafter, that they were to purchase Donna's interests at that "valuation".
15. Immediately, upon exchange of the contracts for the sale of No. 8, the parties' lawyers would have been able to instruct the valuer to commence the preparation of the valuations, so that each valuation would be available at, or about, the time of completion of the sale. It is likely that completion of the sale would be more than 3 weeks after the exchange of the contracts. (As the parties agreed, a reasonable time for a valuer to conduct a valuation was three weeks.)
16. No doubt, at the time of the appointment of the valuer, or at least well before the exchange of contracts for the sale of No. 8, he or she would have been instructed on the matters in Clause 10 of the Deed.
17. I do not accept the submission that choosing the date that Kurt and Kash received their shares of the net proceeds of sale, as the date for the valuation, would likely lead them to experience any practical difficulties in relation to obtaining finance. In particular, I do not accept the Plaintiffs' submission that "[A]s a matter of common experience, parties require a definite purchase price before they are able to arrange their affairs to complete purchases. This is in fact the case with the plaintiffs…".
18. I have come to this view because it seems clear that once the contracts for the sale of No. 8 were exchanged, the parties, and their lawyers, would have known the sale price, and, therefore, then, would have been able to estimate the share of each of the parties. They would also have known, or would have been reasonably able to predict, the likely date of settlement of the sale, at which time, Kurt and Kash would receive their shares of the net proceeds of sale of No. 8. Then, within 7 days thereafter, they were required to purchase Donna's interest.
19. I am comforted in my conclusion regarding their knowledge, and the parties' ability to identify the likely, if not the actual, date of completion, because Kash gave evidence, in his affidavit affirmed 2 December 2016, at [8], that "contracts for sale of [No. 8] have now been exchanged and a date for settlement…has been set". Kash was not cross-examined.
20. It also beggars belief to suggest that Kurt and Kash did not have any idea of the value of each of the properties that were to be valued by the agreed valuer. Indeed, counsel for Kurt and Kash eschewed such a submission: T63.00 - T63.04.
21. Of course, the valuations were not prepared because Kurt and Kash, on the one hand, and Donna on the other, could not agree upon the date of the valuation. Each was endeavouring to achieve what they, and she, respectively, considered to be the best time for the valuations to be done.
22. In view of the fact that Kurt and Kash (by way of company purchase) would purchase Donna's shares in the Company, or directly, in relation to No. 179, and would have had to pay the value of Donna's interest in the shares in the Company and in No. 179, by 27 February 2017, interest on the amount that should have then been paid to Donna for the purchase of her interest, calculated at Supreme Court rates, should be paid to her until fully paid. To require interest to be paid from that date will avoid the injustice, if any, that flows if the value of the properties has increased after 20 February 2017.
23. That is not an unjust result from Kurt's and Kash's point of view since they have received their shares of net proceeds of No. 8 on 20 February 2017 and have retained, or otherwise had the benefit of, their shares of the proceeds of sale since that time.
24. It seems likely, bearing in mind the terms of the Deed, that they were going to use their shares of the net proceeds of No. 8 to purchase, or assist in the purchase of Donna's interest.
25. In the events that have happened, and in the light of the decision of the Court, the valuer can be instructed to carry out the two valuations, with the value of No. 6 and No. 179 to be determined as at 20 February 2017, that being the date when Kurt and Kash received their share of the proceeds of sale of No. 8. Kurt and Kash will then be required to pay Donna for her interest within 7 days of the valuation being concluded.
26. Following judgment, interest is to continue to be paid by Kurt and Kash until the date of payment. Theoretically, at least, interest would need to be paid by them to Donna for about one month after judgment. I have calculated this time period because of the agreement that the valuer will require about 3 weeks to carry out the valuation.

What is the meaning of the term "accrued profits" in Clause 12 of the Deed?

1. There is no definition of "accrued profits" in the Deed. Nor is there any definition of that term in either the Memorandum, or the Articles of Association, of the Company.
2. There is, however, in Article 120, a reference to "dividends" and that "No dividend shall be payable except out of the profits of the Company…". Article 121 gives power to the directors, "before recommending any dividend [to] set aside out of the profits of the Company such sums as they think proper as a reserve fund". Article 126(b) refers to "any moneys, investments or other assets forming part of the undivided profits of the Company standing to the credit of the reserve fund, or in the hands of the Company and available for dividend".
3. The word "profits" has been described as essentially a business term, denoting the amount of gain made during a certain period: McFarlane v Commissioner of Taxation (1986) 13 FCR 356 at 361; [1986] FCA 266.
4. In QBE Insurance Group Ltd v Australian Securities Commission (1992) 38 FCR 270, Lockhart J, at 283, wrote: "Once the company's 'profit' has been determined by reference to the prescribed format for the profit and loss account, it is open to the company to deal with that 'profit' in any one or more of the following ways: ● by declaring dividends; ● by transferring the whole or part of the profit to a capital reserve; ● by retention of profits."
5. In Wambo Coal Pty Ltd v Sumiseki Materials Co Ltd (2014) 88 NSWLR 689; [2014] NSWCA 326, at [65], Barrett JA (with whom Bathurst CJ and Beazley P agreed) referred to what Lockhart J had written and added, at [66] and [71]: "It is by being dealt with in one or more of those ways that the profit for the period comes to be included as part of shareholders' funds recorded in the balance sheet, consisting of share capital, reserves and retained profits. The profit transferred may be reflected there wholly as an addition to the retained earnings as they existed at the start of the financial period, with any dividend for the period also recorded so that retained earnings at balance date are those at the start of the period plus profit for the period minus the dividend. There may also be other adjustments. … There is no need, in this case, to go further into the rules about how profits are computed. The important point is that profits represent the result of a comparison, made in accordance with legal rules, of the financial position at the end of a given period with the financial position at its beginning, a calculation, in money terms, of the extent of the improvement or deterioration (after the making of provisions that are either required or judged prudent) and the carrying of the result of the comparison to the equity section of the balance sheet in order that the benefit or detriment, as it affects the financial position of the proprietors, may be recognised. Where there is a profit for the period, it is at the point of the carrying of that profit to shareholders funds in the balance sheet that decisions are made as to whether the profit should be allocated to a reserve, applied against accumulated losses, reflected in a new and separate profit appropriation reserve or simply recognised as an accretion to retained earnings."
6. (The High Court refused special leave to appeal from the decision of the Court of Appeal upon the basis that the construction of the article in issue by the Court of Appeal, was unattended by sufficient doubt to warrant the grant of special leave: Wambo Coal Pty Ltd v Sumiseki Materials Co Ltd [2015] HCATrans 56.)
7. In Ibbotson v Elam LR 1 Eq 188, Lord Romilly MR wrote: "The whole of the profits must be considered as accruing at the time when under the articles they were to be ascertained and divided..."
8. In the present case, the Company's balance sheet shows no capital reserves, so, it would appear that all of the profits of the Company were transferred into retained earnings. The Company's balance sheet at 30 June 2016 shows retained earnings in the amount of $114,050.
9. It seems to me that the rents and rental receipts, net of expenses, to which the Company, in respect of No. 6 was entitled, would have had to be paid to the Company. It would have been income that the Company derived. Whether it was "profit" would be determined by the Company, by reference to the prescribed format for the profit and loss account, and if it was determined to be profit, then the Company would determine how to deal with it.
10. In my view, the meaning of "accrued profits" advanced by the Plaintiffs should not be accepted. It fails to consider the use of the additional words "by way of dividend" and that Donna would remain a director of the Company "until payment of her dividends".
11. In addition, it also fails to differentiate the terms of Clause 11 and Clause 12. Clause 11 speaks not about profit but rather about "rents and rental receipts net of expenses". Clause 12 speaks of "accrued profits" and "dividends".
12. On the question of costs, neither party has had complete success. Furthermore, each side has strived to achieve the most beneficial commercial result rather than adopting a practical and sensible approach to the solution of their disputes. In my view, there should be no order as to costs of either party, to the intent that they, and she, should bear their, or her, own costs, respectively of the proceedings.
13. I direct the parties to deliver, within 7 days, to my Chambers, in hard and soft copy, agreed orders that reflect the conclusions reached in these reasons. I shall stand the matter over to a convenient date just in case there is further dispute between them about the terms of the orders. In this regard, I remind the parties and their legal representatives of the terms of Clause 14 of the Deed.

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: 11 May 2017