Hughes v Wong [2015] VSC 510

3 The first defendant ('Thomas') objects to specified paragraphs in both affidavits as set out in letters dated 30 June 2015 and 3 August 2015 from Thomas' solicitors to Phil's solicitors.

4 Phil's solicitors responded to the objections set out in Thomas' letter dated 30 June 2015 in a letter dated 22 July 2015.

5 The first issue that arises from Phil's letter dated 22 July 2015 concerns the application of the parol evidence rule and the second issue is the application of s 131(2) of the Evidence Act 2008.

6 The trial of this proceeding was listed for hearing on 7 September 2015. That date has now been vacated as a result of the disputes as to the admissibility of the various matters in Phil's affidavits. It is necessary to determine the objections prior to the trial so there is a clear understanding of the issues at trial.

7 The parol evidence rule operates to exclude evidence of subjective intention, including evidence as to anterior negotiations leading up to the execution of the relevant contract. In Codelfa Constructions Pty Ltd v State Rail Authority, Mason J set out the principles relating to the parol evidence rule, as follows:

The true rule is that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning. But it is not admissible to contradict the language of the contract when it has a plain meaning.[1]

8 In Byrnes v Kendle,[2] Heydon and Crennan JJ made it clear the construction of contracts 'depends on finding the meaning of the language which the parties expressed, not the subjective intentions which they may have had, but did not express'.[3] The expression of a subjective intention by one party during negotiations does not become a mutually known background fact that will become admissible on a construction issue.[4]

9 Although some uncertainty has been expressed as to the operation of the true rule and whether or not ambiguity is required before a court will receive extrinsic evidence,[5] that uncertainty has now been dispelled by the High Court in Western Export Services Inc v Jireh International Pty Ltd.[6] In that case, the High Court refused a special leave application on the basis that Codelfa remained binding authority.[7] In Jireh, Gummow, Heydon and Bell JJ said:

Acceptance of the applicant's submission, clearly would require reconsideration by this Court of what was said in Codelfa Construction Pty Ltd v State Rail Authority of NSW by Mason J, with the concurrence of Stephen J and Wilson J, to be the "true rule" as to the admission of evidence of surrounding circumstances. Until this Court embarks upon that exercise and disapproves or revises what was said in Codelfa, intermediate appellate courts are bound to follow that precedent. The same is true of primary judges, notwithstanding what may appear to have been said by intermediate appellate courts.

The position of Codelfa, as a binding authority, was made clear in the joint reasons of five Justices in Royal Botanic Gardens and Domain Trust v South Sydney City Council and it should not have been necessary to reiterate the point here.

We do not read anything said in this Court in Pacific Carriers Ltd v BNP Paribas; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd; Wilkie v Gordian Runoff Ltd and International Air Transport Association v Ansett Australia Holdings Ltd as operating inconsistently with what was said by Mason J in the passage in Codelfa to which we have referred.[8]

Section 131(2) of the Evidence Act 2008

10 The Evidence Act 2008 does not prescribe how a contract is to be construed and s 131(2) does not operate to allow in evidence that is excluded by the substantive law. This means that s 131(2) only applies after the application of the parol evidence rule as stated in Codelfa.[9]

11 Although s 131(2) was relied upon by Phil's solicitors in his letter dated 22 July 2015, Phil did not pursue this point on this application, relying solely on the substantive law as stated in Codelfa, to submit that Phil's affidavit evidence was admissible.

12 Paragraph 14 exhibits the case summary prepared on behalf of Phil and provided to the mediator. Phil asserts that no objections were raised as to the contents of the case summary at the mediation and it is relevant to the dividend question.

13 In my view, Phil's case summary represents his subjective intentions and is not admissible on the construction issue.

Valuations - Phil's first affidavit - paragraphs 17 to 19

14 Paragraph 17 refers to discussions during the mediation on three matters:

(a) how the 2006 transactions could be reversed,

(b) that the discussions proceeded on the basis that the necessary valuations would be completed in due course following the mediation as part of the performance of the SA; and

(c) that Josephine said the valuer should be one of the big four international accounting firms.

15 Paragraph 18 states that no one at the mediation objected to Josephine's proposal about the firm that should perform the valuation.

16 Paragraph 19 contains submissions based on discussions at the mediation held on 22 May and 2 June 2009, concluding with a statement as to which firm or firms should be retained for the purpose of completing the valuations.

17 Phil submits that the mediation proceeded on the basis that the valuation would be as at 2 June 2009 and what Josephine said about who should be retained as the valuer. He submits that these paragraphs show that based upon a statement by Josephine at the mediation that was not objected to by anyone present, there was agreement that the relevant valuer would be from the big four accounting firms. Phil submits that because all the relevant persons were present and no one objected or opposed Jospehine's proposal, there is ambiguity in the SA and this evidence is admissible.

18 Phil also referred to Mason J's statement in Codelfa where his Honour said:

The relevant discussions were therefore directed to the question of price. Their object was to enable Codelfa to inform itself of what was involved in the work and to cost it so as to arrive at a price for inclusion in its tender ... The consequence is that the discussions did not have the character of negotiations in the course of which the parties gradually evolved terms of a bargain ultimately embodied in written form. Had the discussions been of that kind then as we have seen recourse to them would have been prohibited for the purpose of interpreting the contract by reference to the parties actual intentions as expressed before entering into the contract. As it was the relevant discussions reflect neither the preliminary consensus that emerged into the written contract, nor statements made during the course of the negotiations indicative of the unilateral intentions of each party. Instead the evidence revealed a matter which was in the common contemplation of the parties yet was not a contractual provision actually agreed upon for the simple reason that it was a matter of common assumption.[10]

19 Phil submits that this statement by Mason J can be applied to explain how the matters he now raises are matters of common assumption for the purposes of the SA; that is, the statements regarding the identity of the valuer and timing of the valuation were made by Josephine when all relevant persons were present with no one objecting to them. This means these statements are common assumptions and are admissible for the purposes of the construction of the SA.

20 The SA provides that the value of the shares is to be agreed or determined by a valuer. The SA does not specifically address the issue of whether the shares are to be given their value at any particular time. This means that the valuation is at the time of the valuation and this has not yet occurred. The prospect that the valuation might be at some other time does not, in my view, raise any ambiguity. Ambiguity only arises when the document conveys a double or multiple meaning after ascertaining the meaning of the words used and after applying the usual cannons of construction.[11] In Burns Philp Ltd v Howard Chia Pty Priestly JA considered that words are ambiguous where they have 'two or more plausible meanings when the context of the document is taken into account in the light of any knowledge any ordinary intelligent reader of the document would bring to the meaning of it'.[12] The fact that nobody objected to what Josephine said at the mediation does not make what she said a common assumption or admissible on the construction issue.

21 Even if extrinsic evidence is admissible on the issue of the valuations, the evidence sought to be adduced by Phil is not admissible because it does not fall within the principles in Codelfa, in particular, as Mason J said :

Generally speaking facts existing when the contract was made will not be receivable as part of the surrounding circumstances as an aid to construction, unless they were known to both parties, although, as we have seen, if the facts are notorious knowledge of them will be presumed.

...

It is here that a difficulty arises with respect to the evidence of prior negotiations. Obviously the prior negotiations will tend to establish objective background facts which were known to both parties and the subject matter of the contract. To the extent to which they have this tendency they are admissible. But in so far as they consist of statements and actions of the parties which are reflective of their actual intentions and expectations they are not receivable. The point is that such statements and actions reveal the terms of the contract which the parties intended or hoped to make. They are superseded by, and merged in, the contract itself. The object of the parol evidence rule is to exclude them, the prior oral agreement of the parties being inadmissible in aid of construction, though admissible in an action for rectification.[13]

22 In my view, these paragraphs are not admissible on the construction issue. Evidence both as to the time of the valuation and the identity of the valuer is evidence of the subjective intentions of Phil and Josephine during negotiations at the mediation and they are not statements that were adopted by all in an objective way nor are they mutually agreed background facts.[14]

23 Paragraph 14 refers to Phil's reasons for the valuations to be calculated 'as at' the date of the SA.

24 These reasons represent Phil's thoughts at the time, with him using phrases such as 'was never contemplated' and 'nor would it have been possible for the parties to agree to the terms of the SA, if the valuations were to be made 'as at' some unknown later date'.

25 These statements express Phil's subjective intentions as well making submissions about the SA and are not admissible on the construction issue.

Dividends - Phil's first affidavit - paragraphs 20 to 26; Phil's Second Affidavit - Paragraphs 5 to 13

26 Paragraph 20 of Phil's first affidavit asserts that the discussion and agreements reached at the mediation were predicated on the fact that the shares in Teamhing (HK) Limited and Winsberg Development Limited (the 'Hong Kong companies') were owned by the deceased, Phil and Thomas prior to the 2006 transactions and that Phil and Thomas each had a 20 per cent interest gifted to them pursuant to their father's will. Phil asserts that his mother also held the shares on trust for Phil and Thomas.

27 Paragraph 21 asserts that as part of the reversal of the 2006 transactions, Thomas was required to pay to the Australian companies the shortfall between the $12.7 million and the moneys paid into Court and Thomas was required to pay interest on the shortfall.

28 For the purposes of this issue, it is assumed that paragraphs 20 and 21 of Phil's first affidavit are to be read to mean that these matters were discussed at the mediation.

29 Paragraph 22 refers to and exhibits orders made in the proceeding on 29 March 2007.

30 Paragraph 23 states what the mediator told those present at the mediation about what Thomas told the mediator. Phil then states that Thomas made a proposal at the mediation about the Hong Kong companies distributing $22.5 million in cash and concludes that he (Phil) would be entitled to receive a dividend of $4.4 million from the distribution.

31 Paragraph 24 states that Thomas' dividend proposal was agreed at the mediation and the dividends were declared at the mediation.

32 Paragraph 25 asserts that Phil is entitled to receive a dividend as a shareholder in the Hong Kong companies.

33 Paragraph 26 states that in order to resolve the disputes between the parties and as part of the transactions to be completed in performing the SA, Phil is entitled to and should be paid a dividend of $4.4 million from the Hong Kong companies.

34 Paragraphs 5 to 13 of Phil's second affidavit sets out details of various shareholdings in various companies prior to transactions occurring in February 2006. These paragraphs also include assertions purportedly made in 1999 and 2003, that certain shares were held on trust by his mother as at December 2004 and that, in October 2005, his mother would give a certain shareholding to each of Thomas and Phil in a particular company that she had held on trust for them since 1999.

35 Phil submits that clause 18 of the SA is ambiguous because if refers to an arrangement for Thomas to fund the outcome of the SA and this was done by reference to his ownership of shares in a number of companies. Phil submits that because he has the same ownership of shares as Thomas in the companies, he should receive the same amount as Thomas by way of a dividend of $4.4 million. He seeks a declaration concerning his entitlement to this dividend and an order for payment of that amount.

36 Phil refers to the provisions of clause 18C and 18D of the SA and then clause 18G which provide that Thomas is to receive 38 per cent of $22.5 million, being the amounts referred to in clauses 18C and 18D. Phil submits the reference to Thomas' 38 per cent shareholding which was used to calculate the amount in clause 18G is also a reference to dividends. He submits that the payments to his mother and Thomas are dividends because they hold a percentage of shares that entitle them to receive the amounts referred to in clauses 18C and 18D. Phil also refers to clauses 6, 7, 9, 11 and 13 of the SA referring to him being a shareholder in certain companies, the relevance of which mean that he is entitled to the payment of a dividend equal to those received by his mother and Thomas in percentage terms. Phil submits that because the SA does not provide for this, there has been an omission in that there is no reference to the payment of the corresponding dividend to him.

37 Phil agrees that he does not seek rectification of the SA but submits that a term should be implied in the SA to the effect that dividends are to be paid to all shareholders of these companies as that term would give business efficacy to the SA in the context that it is a final agreement between the parties.[15]

38 Paragraphs 20 to 26 of Phil's first affidavit and paragraphs 5 to 13 of Phil's second affidavit seek to support a claim by Phil's that he is entitled to a dividend. Paragraph 20 contains Phil's subjective understanding of how the SA was reached at the mediation, based on his assertion that the shareholdings were not in dispute at the mediation. Paragraph 21 contains Phil's subjective view of the clause 18C of the SA with the addition of terms that are not included in the SA. Paragraph 22 does not add anything to the construction summons. Paragraph 23 does not contain anything relevant to the interpretation of the SA. Paragraph 24 refers to matters that are not relevant to any issue in dispute in relation to clause 18G of the SA. The SA does not contain any term about dividends being the basis for clause 18G. Any negotiations that took place at the mediation on this issue have been subsumed in clause 18G. The SA does not contain any term concerning an entitlement by Phil to a dividend. There is no ambiguity in the SA relating to a dividend being paid to Phil. Any issue raised by Phil on the question of a dividend is not a matter concerning the construction of the SA. The evidence contained in these paragraphs is irrelevant to the construction of the SA and they are not admissible on the question of the construction of the SA.

Stamp Duty - Phil's first affidavit - paragraphs 27 and 28

39 Paragraph 27 states that during the mediation there was considerable discussion as to which party would pay the stamp duty payable as a result of the 2006 transactions or the reversal of those transactions pursuant to the SA. Phil submits that the issue of stamp duty is ambiguous because clause 17 of the SA refers to stamp duty being borne but the clause does not address when it will be paid. Phil says that no one disagreed with Lawrence's suggestion and the SA should be performed on that basis. Phil submits that stamp duty will be paid when the other transactions which are part of the SA are made and that is consistent with the language of the SA being a final agreement to resolve all disputes. Phil submits this evidence clarifies this issue by reference to the objective circumstances being a statement made at the mediation with everybody relevant present and no one objecting to it which, he submits, constitutes concurrence as to when the stamp duty would be paid.

40 What Phil asserts in paragraph 27 is different to what is stated in clause 17 of the SA. Clause 17 provides that stamp duty and all costs incidental to the abovementioned share transfers will be apportioned between the parties on a 30/70 basis, with Thomas bearing 30 per cent of the costs and his mother bearing 70 per cent of the costs. It then states that for the avoidance of doubt, any stamp duty or other costs incidental to the transfer of shares to others, being Tan and Tao, will not be borne by his mother in any part.

41 In my view, clause 17 of the SA is clear and unambiguous about the persons who are responsible for the payment of stamp duty. Discussion during the mediation and concern as to which party would pay the stamp duty payable as a result of the reversal of the 2006 transactions and submissions made as a result of those discussions represent Phil's subjective views and are not admissible.

42 Paragraph 28 states that to ensure that Thomas paid the stamp duty, Lawrence suggested that the stamp duty payable by Thomas should be set off against the final payment that Thomas was to receive under the SA.

43 The SA does not contain any term about a set off and there is no ambiguity in the SA. It is not admissible on the construction issue. Even if there was some ambiguity in the SA, it is not admissible because the paragraph attempts to introduce evidence of the subjective intentions of the parties in the negotiations at the mediation.

Reversal of Transactions - Phil's first affidavit - paragraphs 29 and 30

44 Paragraph 29 states that at the mediation, Thomas agreed to reverse each individual transaction. Phil says that all the siblings were present at the discussions and agreement and no one disagreed or opposed the course of action.

45 Paragraph 30 states that at the mediation, the phrase 'status quo' was used to describe the position before the 2006 transactions and Phil says the status quo was to be achieved by reversing the 2006 transactions and their effect.

46 Phil submits that the moneys that were withdrawn by Thomas after the 2006 transactions should be repaid through the same entities as they were withdrawn so as to prevent any tax ramifications. Clause 18C of the SA refers to moneys being released to the companies but it does not does not refer to whether the moneys need to be repaid through the various entities as they were paid out. Phil submits the evidence in paragraphs 29 and 30 is to assist with the question of whether that was to be on the basis of the fact that the money was to be paid back through the various companies or paid directly, with the evidence supporting the conclusion that the money was to be paid back through each of the entities which would reduce the tax ramifications. He submits that Thomas agreed to this, that all relevant parties were present and no one opposed this.

47 In my view, paragraphs 29 and 30 are Phil's views about what Thomas agreed to do rather than what the SA contains: it does not contain any terms about the reversal of the 2006 transactions. The two paragraphs are not admissible as they seek to include a further term in to the SA by reference to the subjective intentions of the parties in the negotiations at the mediation.

Financial Position of the Companies - Phil's first affidavit - paragraph 31

48 In paragraph 31, Phil asserts that before the ownership of certain companies were transferred, he should be permitted to access the books of account and other financial information of those companies beforehand.

49 The SA is the agreement resolving disputes between the parties as a result of the various companies referred to in the SA being under the control of Thomas and persons associated with him. Clauses 2 and 3 of the SA refers to restoring shareholdings and directorships of the Hong Kong and Australian companies. They do not state how that is to be achieved or the specific procedure to be followed; it simply uses the word 'restore'. Clause 4 talks of the previous directors resigning from the companies. Clauses 5 to 16 contain the specifics as to the restoration to the shareholders. These clauses reflect the fact that what has been the case since the impugned transactions in early 2006 is to be changed as a result of the SA.

50 The SA does not contain a term as to any due diligence. Paragraph 31 contains submissions about a term not included in the SA. In my view, paragraph 31 is not admissible as it contains Phil's subjective intentions and submissions about a term not contained in the SA.

51 As a result of these reasons, Phil's affidavits should be amended by the deletion of the inadmissible paragraphs.

52 I will hear the parties as to the further steps to be taken in the proceeding, including the provision of written submissions and any further affidavits to be filed.

53 I will also hear the parties as to costs. Subject to any further submissions on costs, my view is that the costs of and incidental to the admissibility of the evidence should be paid by Phil.

[1] [1982] HCA 24; (1982) 149 CLR 337, 352 ('Codelfa').

[2] (2011) 243 CLR 253; [2011] HCA 26.

[4] BP Australia v Nyran Pty Ltd [2003] FCA 520 [45]-[46] (Nicholson J); Northbuild Constructions Pty Ltd v Capital Finance Aust Ltd. [2006] QSC 81 [51] (Muir J).

[5] Grocon Constructors (Victoria) Pty Ltd v APN DF2 Project 2 Pty Ltd [2015] VSCA 190 (23 July 2015) [85]. Santamaria, Kyrou and McLeish JJA noted in a footnote that there is ongoing uncertainty as to the operation of the true rule, and reference is made to some of the latest appellate court decisions on the issue. See also J D Heydon, Cross on Evidence (LexisNexis Butterworths, 10th ed, 2015) 1432 [39145], 1453 [39240].

[6] (2011) 86 ALJR 1; [2011] HCA 45 ('Jireh').

[9] Owens v Lofthouse [2007] FCA 1968 [62] (Weinberg J). See also Evidence Act 2008, s 9(1).

[10] [1982] HCA 24; (1982) 149 CLR 337 at 352, 354.

[11] Kim Lewinson and David Hughes, Interpretation of Contracts in Australia (Thompson Reuters (Professional) Australia, 2012) 346.

[12] (1987) 8 NSWLR 642 657.

[13] [1982] HCA 24; (1982) 149 CLR 337 at 352, 352.

[14] BP Australia v Nyran Pty Ltd [2003] FCA 520 [45]-[46] (Nicholson J); Northbuild Constructions Pty Ltd v Capital Finance Aust Ltd. [2006] QSC 81 [51] (Muir J).

[15] BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266.