Supreme Court of WA|2013-08-08|Before: Edelman J

JTA LE ROUX PTY LTD as trustee for the FLR Family Trust -v- LAWSON [2013] WASC 293 (8 August 2013)

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

CITATION : JTA LE ROUX PTY LTD as trustee for the FLR Family Trust -v- LAWSON [2013] WASC 293

BETWEEN : JTA LE ROUX PTY LTD as trustee for the FLR Family Trust

KYLIE DOREEN LAWSON as trustees for the Lawson Family Trust

Contract - Construction of contract - Implication of terms - Dispute resolution express term - Whether the express words of the dispute resolution clause should be construed to exclude disputes arising in relation to events of default - Proposed implied terms not reasonable and equitable - Proposed implied terms not necessary to give business efficacy to the contract and the contract is effective without them - Proposed implied terms are not so obvious that they go without saying - Proposed implied terms are not capable of clear expression - Proposed implied terms contradict express terms of the contract

R Brooks, C Landeo, K Spier 'Trigger Happy or Gun Shy? Dissolving Common-Value Partnerships with Texas Shootouts' (2010) 41(4) Rand Journal of Economics 649, 650.

C Landeo and K Spier (2013) 'Irreconcilable differences: Judicial Resolution of Business Deadlock' University of Chicago Law Review (forthcoming).

1 The defendant trustees, the Lawsons, hold half of the shares in Lawsons Commercial Flooring. The plaintiff, JTA Le Roux, holds the other half. The parties are engaged in a dispute. The issue in this application concerns the appropriate dispute resolution mechanism.

2 This application is brought by the Lawsons. Although described as a trial of a preliminary issue, the application was really to strike out or to stay the claim by JTA Le Roux. The question is whether JTA Le Roux was required to follow the procedures in the dispute resolution clause of the Shareholders' Agreement prior to commencing litigation.

3 The Shareholders' Agreement between the parties provides for a dispute resolution mechanism which commences with a provision prohibiting a party from commencing court proceedings, other than urgent interlocutory proceedings, unless that party has complied with the clause.[1] The dispute resolution procedure requires informal discussion, then mediation, then the possibility of a Texas Shootout with reconsideration of the deadlock issue between the parties immediately beforehand. A Texas Shootout has been described as the 'optimal exit mechanism'.[2] It permits one party to name the price for selling all of that party's shares and the other party to choose whether to buy at that price or to sell at that price.

4 Even if the parties follow this dispute resolution mechanism their dispute might ultimately remain unresolved by the procedure. But the question to be decided is whether the procedure is a precondition to litigation concerning an alleged event of default. JTA Le Roux says it is not.

5 Prior to commencing litigation, JTA Le Roux refused to engage in discussion concerning all the alleged defaults. JTA Le Roux refused to mediate. And it claimed that the Texas Shootout possibility cannot be engaged.

6 JTA Le Roux's submission is that either of two alternative terms should be implied into the dispute resolution clause. JTA Le Roux says that the relevant clause should operate as if either of the two sets of words in italics were inserted.

If any dispute arises out of this Agreement_, other than a dispute in relation to a Default Notice given to a party pursuant to clause 12.2_ (Dispute) a party to this Agreement must not commence any court proceedings unless the parties to the Dispute have complied with the following paragraphs of this clause, except where the Dispute is in relation to a Default Notice pursuant to clause 12.2 (in which case clauses 13.8 to 13.12 shall not apply) or a party seeks urgent interlocutory relief.

7 Even if these italicised words can be characterised as implied terms, the effect of JTA Le Roux's proposed implied terms would carve out from the dispute resolution clause any dispute relating to numerous possible deemed events of default. Neither of the proposed implied terms is reasonable and equitable. Neither is necessary to give business efficacy to the Shareholders' Agreement. The Shareholders' Agreement is effective without them. The proposed implied terms are not so obvious that they go without saying. Neither proposed implied term is capable of clear expression. And the proposed implied terms contradict express terms of the contract.

8 For each of these reasons, the implied terms proposed by JTA Le Roux are rejected. The consequence is that its claim must be struck out.

9 In deference to the substantial written and oral submissions of the parties, and because my conclusion is that the proceedings should be struck out, I explain these conclusions in more detail below.

10 The defined terms, and defined names, in the Shareholders' Agreement are poorly chosen. The plaintiff trustee, JTA Le Roux Pty Ltd, is defined in the Shareholders Agreement as 'Francois'. Francois is Mr Le Roux's first name. The defendants, Mr Lawson and Ms Lawson, in their capacity as trustees, are defined as 'Steve'. This is Mr Lawson's first name. In order to avoid confusion I will describe the plaintiff trustee as JTA Le Roux and the defendant trustees as the Lawsons.

Sale of the business to Lawsons Commercial Flooring and later transactions

11 The background facts in this application are contained in a lengthy affidavit sworn by Mr Lawson.[3] They are also summarised in the Lawsons' submissions. Those facts are not in dispute, although many of the Lawsons' assertions and submissions flowing from those facts are disputed.[4]

12 Until mid2011, the Lawsons owned and operated a business. In late June 2011, the Lawsons entered a suite of transactions and agreements which had the following effect.

13 On 30 June 2011, the business was transferred to Lawsons Commercial Flooring Pty Ltd. That company was initially owned by the Lawsons.[5]

14 On 1 July 2011, the Lawsons entered a Share Sale Agreement between the Lawsons and LTA Le Roux.[6] In that agreement the Lawsons agreed to sell half of the issued shares in Lawsons Commercial Flooring Pty Ltd to JTA Le Roux. The Lawsons and JTA Le Roux therefore became equal shareholders in Lawsons Commercial Flooring Pty Ltd.

15 The Share Sale Agreement also required the Lawsons to ensure that a meeting of the directors of Lawsons Commercial Flooring was held at which Mr Francois Le Roux was to be appointed as a director.[7] The existing director was Mr Steven Lawson.[8]

16 On 1 July 2011, an Employment Agreement was entered between Lawsons Commercial Flooring and Mr Steven Lawson.[9] That agreement provided for the appointment of Mr Steven Lawson as the General Manager of Lawsons Commercial Flooring Pty Ltd.

17 On 1 July 2011, a Shareholders' Agreement was also entered by the Lawsons, JTA Le Roux, Mr Steve Lawson, Mr Francois Le Roux and Lawsons Commercial Flooring.[10] The Shareholders' Agreement created various rights and obligations.

18 The sale price for the sale of the Lawson's business to Lawsons Commercial Flooring was $4.8 million.

19 The structure of the sale involved a loan agreement by which Lawsons Commercial Flooring agreed to repay a notional loan of $4.8 million from the Lawsons.[11] This agreement was deemed to commence on 30 June 2011.

20 The purchase price of $2.4 million for JTA Le Roux's half share was structured in the following way. JTA Le Roux lent $2.4 million to Lawsons Commercial Flooring and at the same time it was granted half the shares in that company. This 'FL Long Term Loan Agreement' was a 10year facility.[12] It was drawn down by Lawsons Commercial Flooring on 1 July 2011 and 1 August 2011.[13] The drawdowns were to repay $2.4 million of the notional loan to the Lawsons.[14]

21 At settlement of the transaction Lawsons Commercial Flooring therefore owed $2.4 million to each of JTA Le Roux and the Lawsons.[15]

22 In addition, each of JTA Le Roux and the Lawsons provided short term loan facilities to Lawsons Commercial Flooring. These agreements are described as the JTA Le Roux Short Term Loan Agreement and the Lawsons Short Term Loan Agreement. Each agreement permits draw down of up to $1 million.[16] Each agreement was executed on 1 July 2011. Each facility was drawn down by $250,000.

23 An analysis of the dispute must begin with the FL Long Term Loan Agreement.[17] The FL Long Term Loan Agreement was guaranteed by the Lawsons to a maximum of $1.2 million.[18] The guarantor provision in the FL Long Term Loan Agreement required the Lawsons to grant JTA Le Roux a mortgage over their property at Halls Head which was to be registered on the terms and conditions in the 'Mortgage Agreement'.[19] That provision is as follows:

(a) As a separate and additional obligation under this deed the Guarantor, as a legal and beneficial owner of the Property, agrees to grant the Lender a mortgage over all freehold interests in the Property or any other property as security for its obligations under this clause.

(b) The Lender may register a mortgage against the Property on the terms and conditions contained in the Mortgage Agreement.

24 The term 'Mortgage Agreement' is not defined. But a mortgage form and mortgage document are attached as sch 2 to the FL Long Term Loan Agreement. It is common ground that there are errors in those documents arising from inconsistencies with the terms of the FL Long Term Loan Agreement.

25 JTA Le Roux says that between July 2011 and March 2012 it repeatedly requested the Lawsons to arrange to provide a duplicate certificate of title for the Hall's Head property to enable JTA Le Roux to register its mortgage over that property.[20] It says that the Lawsons failed to provide the duplicate certificate of title.

26 On 26 October 2012, JTA Le Roux issued the Lawsons with a loan default notice under the FL Long Term Loan Agreement. JTA Le Roux required the Lawsons to provide 'a copy of the certificate of title to enable registration of the mortgage and also payment of JTA Le Roux's reasonable legal costs of $990. JTA Le Roux gave notice that the Lawsons were required to remedy these defaults within 14 days, failing which it asserted various rights including that 'the whole of the balance of the Amount Owing under the Agreement, and all other money due under the Agreement shall become immediately due and payable' by Lawsons Commercial Flooring to JTA Le Roux.[21]

27 On 9 November 2012, the Lawsons wrote to JTA Le Roux disputing the basis upon which JTA Le Roux purported to issue the loan default notice.[22] The Lawsons said that there was no clause in the FL Long Term Loan Agreement which required them to produce a copy of the certificate of title. The Lawsons also said that JTA Le Roux's loan default notice purported to rely upon cl 11 of the FL Long Term Loan Agreement but did not specify which of the numerous events of default was relied upon.

28 On 13 November 2012, JTA Le Roux replied and referred to cl 11.1 in more detail.[23] JTA Le Roux implicitly, but not expressly, relied on matters contained within cl 11.1(l). That clause provides that an Event of Default occurs when

An event occurs which has, or is likely to have (or a series of events occur which, together, have, or are likely to have), a Material Adverse Effect.

29 The term 'Material Adverse Effect' is defined in cl 1.1 as meaning

(a) The Borrower's [Lawsons Commercial Flooring's] ability to comply with its obligations under any Transaction Document;

(b) the value of the property secured by a Security; or

(c) the Lender's [JTA Le Roux's] rights under a Transaction document; or

(d) the business or financial condition of the Borrower [Lawsons Commercial Flooring]

30 JTA Le Roux said that a material adverse effect was the failure of the Lawsons to provide a copy of the certificate of title for registration. JTA Le Roux said that the failure had prevented it from registering the mortgage and prejudiced its ability to enforce the mortgage if required to do so.

31 The Lawsons dispute these claims. The Lawsons make the following four submissions.[24]

(i) Clause 5.3 of the mortgage document, which is sch 2 to the FL Long Term Loan Agreement,[25] contains the full extent of the Lawsons' obligations in relation to this matter. That provision is entitled 'Further Assurance to Mortgagee' and it provides as follows:

The Mortgagor (and any person having or claiming any estate interest or right or making any claim or demand in or with respect to any part of the Land otherwise than by virtue of a notified encumbrance) shall at the request of the Mortgagee at the cost of the Mortgagor and afterwards at the cost of the person or persons requiring the same execute every such deed instrument or assurance and do every such thing or further or more effectually securing the rights or interests of the Mortgagee to the Land or any part thereof pursuant to this instrument as shall by the Mortgagee be reasonably required.

(ii) JTA Le Roux has no right under the provisions of the mortgage document to retain the custody and possession of the certificate of title to the Halls Head property. The Lawsons submit that cl 5.4 of the mortgage document makes that right to custody and possession subject to the rights of any mortgage which is a prior encumbrance. And there is a prior encumbrance to the National Australia Bank.

(iii) The Lawsons provided consent for the issue of a duplicate certificate of title by signing a panel on the mortgage which reads 'by signing this panel ... the registered proprietor request[s] that the issue ... of the duplicate certificate of title of the land above described'. On the same page of the mortgage the Lawsons signed another panel which says 'the lodging party of this document is authorised by the abovenamed registered proprietor to instruct issuing details for the duplicate(s) of title'.

(iv) Although unregistered, the mortgage has effect as a deed (cl 2.2). JTA Le Roux has caveated this interest and protected its rights. There is no material adverse effect on the rights of JTA Le Roux.

32 On 15 November 2012, JTA Le Roux issued the Lawsons with a Notice of Default under the Shareholders' Agreement, alleging a failure to comply with the notice of default under the FL Long Term Loan Agreement. This was said to amount to an event of default under cl 12(1)(d) of the Shareholders' Agreement.[26]

33 Also on 15 November 2012, JTA Le Roux, relying upon the purported event of default under the Shareholders' Agreement, purported to exercise a put option relying on cl 12.2(b) and cl 12.4 of the Shareholders' Agreement.[27] JTA Le Roux says that the Lawsons were bound to pay to JTA Le Roux approximately $7.3 million for JTA Le Roux's shares in Lawsons Commercial Flooring.[28]

34 The Lawsons did not settle this purported transaction.[29]

35 The Lawsons attempted to resolve the dispute in accordance with cl 13 of the Shareholders' Agreement. When JTA Le Roux's solicitors responded to an offer for a meeting they refused to discuss with the Lawsons matters relating to those listed in a notice of dispute.[30] Then the Lawsons attempted to appoint a mediator. JTA Le Roux's solicitors wrote to the mediator denying the existence of a dispute and refusing to consent to the appointment of the mediator.[31] JTA Le Roux refused to enter a mediation agreement.[32]

36 On 15 January 2013, JTA Le Roux commenced proceedings against the Lawsons in this Court seeking specific performance of the purported duty of the Lawsons to proceed to settlement under the Shareholders' Agreement. JTA Le Roux also seeks damages for breach, or repudiation, of the FL Long Term Loan Agreement and damages for breach, or repudiation, of the Shareholders' Agreement.[33]

37 The Lawsons dispute the claims by JTA Le Roux for the reasons expressed above. The Lawsons also assert that the solicitors for JTA Le Roux should not continue to act for JTA Le Roux in circumstances in which the solicitors had acted for both parties in the preparation of the transaction documents.[34]

38 As to whether the solicitors for JTA Le Roux should disqualify themselves from acting for JTA Le Roux, no application was made by the solicitors for the Lawsons for disqualification. At this stage in the proceedings it is not necessary to consider this issue in any detail.

39 It has been said that 'it could only be in a rare and very special case'[35] in which a solicitor who had acted for both parties would be permitted to act against one of the former clients 'whether or not any real question of the use of confidential information could arise'.[36]

40 It is not necessary to consider the basis, extent, or operation of this restriction. However, in their initial response to the allegation of conflict of interest, the solicitors for JTA Le Roux did not expressly deny that they also acted for the Lawsons in preparation of transaction documents, merely asserting that they 'acted for Mr Le Roux, with Mr Lawson appointing an agent for the purpose of negotiating the terms ...'[37] In later correspondence they explained, cryptically, that 'invoices were sent to the party or parties who had agreed to bear the cost of the relevant agreement/s'.[38]

41 Although the issues currently before me were ventilated as objective questions of construction and implication, serious issues of potential conflict could have arisen if the Lawsons had a reasonable basis for asserting that the solicitors had acted for them in preparation of the transaction documents and if JTA Le Roux had sought to agitate a claim for rectification. But the solicitor for JTA Le Roux clearly asserted at the hearing of this strike out and stay application that his firm had not acted for the Lawsons in the preparation of the transaction documents. And no claim for rectification was advanced.

The event of default (cl 12) and dispute resolution (cl 13) clauses in the Shareholders' Agreement

42 JTA Le Roux did not follow the dispute resolution process in cl 13 of Shareholders' Agreement. Instead, it commenced an action for specific performance of its purported cl 12 put option and for damages.[39]

43 The central clauses of the Shareholders' Agreement with which this application is concerned are cl 12 and cl 13. Those clauses are set out in full in Annexures 1 and 2 to these reasons. The following discussion illustrates the central features of those clauses.

44 Clause 12.1 has the effect of 'deeming' JTA Le Roux or the Lawsons to be in default in certain circumstances. The clause provides for five events of default.

45 One of the deemed events of default involves disposing of shares in the company other than in accordance with the Shareholders' Agreement. Another involves a party being declared insane or mentally incompetent. Another two deemed events of default are events which apply only in the case of the Lawsons. These concern the dismissal of Mr Lawson or the termination of Mr Lawson's Employment Agreement.

46 JTA Le Roux relies on a deemed event of default under the FL Long Term Loan Agreement. As explained above, a dispute exists between JTA Le Roux and the Lawsons concerning whether such a default has occurred and whether the Notice of Default has been validly issued.

47 In the case of a deemed event of default by the Lawsons, JTA Le Roux can issue a default notice to the Lawsons under cl 12.2 which sets out the default. Clause 12.2 then provides that the Lawsons grant a call option for JTA Le Roux to purchase all of the Lawsons' shares and also a put option to require the Lawsons to buy all of JTA Le Roux's shares.

48 Each of the call option and the put option must be exercised within 60 days of the default notice.[40] The settlement date for the share sale or share purchase is 30 days after the exercise of the option unless otherwise agreed.

49 The price at which the Lawsons are required to sell their shares, in the case of the put option, or buy the JTA Le Roux shares, in the case of a call option, is to be determined in accordance with sch 5 of the Shareholders' Agreement. That schedule provides for a formula as follows:

51 P is defined as the adjusted net profit of Lawsons Commercial Flooring before tax averaged over three years or other period as agreed to in writing by the Parties calculated by reference to Lawsons Commercial Flooring's annual financial reports by an independent accountant nominated by the Parties or, if the Parties are unable to agree within 14 days, an accountant nominated by the President of the Institute of Accountants Australia.

52 ROI is defined as a return on investment percentage (expressed as a decimal) of 33.33%.

53 TS is defined as the total number of shares in Lawsons Commercial Flooring.

54 LA is defined as the total amounts outstanding under the Long Term Loan Agreements.

55 There are also various conditions which apply to the formula including

(i) a minimum value of P for the first two years from the completion date of the Shareholders' Agreement;

(ii) adjustments which the accountant can make; and

(iii) a power for the accountant to have regard to Lawsons Commercial Flooring figures for the current year.

56 There was no evidence, nor any submission, that this formula was designed as anything other than a commercial valuation of the shares to be purchased or sold.

57 Clause 13 creates a fourfold dispute resolution mechanism before court proceedings can be commenced in relation to 'any dispute' arising out of the Shareholders' Agreement, other than cases of urgent interlocutory relief. This case was not one in which urgent interlocutory relief was sought.

58 The following is a brief and outline summary of the four step dispute resolution mechanism.

59 First, a party claiming that a dispute has arisen must notify each other party to the Shareholders' Agreement giving details in writing of the dispute.

60 Secondly, the parties to the dispute must use their best efforts to resolve the dispute within 14 days after the notice of dispute is given.

61 Thirdly, if the dispute is not resolved in those 14 days the parties must mediate the dispute.

62 Fourthly, if the dispute is still unresolved 60 days after the appointment of a mediator then any shareholder (described as the offeror) may offer to sell all of the offeror's shares to the other shareholder for a nominated price and on nominated terms and conditions. If such an offer is made, the other shareholder (offeree) must either (i) accept the offer or (ii) issue a counternotice requiring the offeror to purchase all the offeree's shares on the same terms and conditions within 14 days of the date of receipt of the counternotice. This process is commonly known as a Texas Shootout.

63 There is also provision for reconsideration by 'the receiving parties and the Directors nominated by the Receiving parties' to reconsider their position on the issue causing the deadlock upon receipt of a notice from the offeror.

64 If there is a default on the acquisition of shares then cl 13 provides for a compulsory winding up.

65 The Texas Shootout might not resolve the dispute. In particular, it will not resolve the dispute if neither party makes an offer to the other to purchase all of the other's shares. In such a case the parties dispute will not have been resolved under cl 13.

Construction of cl 13 of the Shareholders' Agreement

66 An anterior question which must be considered before the issue of implication of terms is the proper construction of cl 13.1 of the Shareholders' Agreement. For clarity, I repeat that clause below:

If any dispute arises out of this Agreement (Dispute) a party to this Agreement must not commence any court proceedings unless the parties to the Dispute have complied with the following paragraphs of this clause, except where a party seeks urgent interlocutory relief.

(i) that the words 'any dispute' mean 'a dispute not already provided for elsewhere in the Agreement'; and

(ii) that the phrase 'following paragraphs of this clause [cl 13]' mean 'pars 13.2 to 13.7' and not '13.2 to 13.13'.

68 In oral submissions, counsel for JTA Le Roux retreated somewhat from these submissions concerning construction. But they were not clearly abandoned. I set out below eight reasons why I do not accept these two submissions.

69 First, each of these constructions suggested by JTA Le Roux makes linguistic nonsense of the words of cl 13.

70 The words 'any dispute arising out of this Agreement' do not linguistically mean 'any dispute other than those provided for'. The words 'any dispute [arising] out of this Agreement' are not confined in any way.

71 It also makes no linguistic sense to construe the words 'the following paragraphs of this clause' to mean only some of the following paragraphs of the clause.

72 Secondly, dispute resolution clauses should not be construed narrowly or read down in the way that JTA Le Roux submits. As Gleeson CJ explained, parties are unlikely to have intended that 'different disputes should be resolved before different tribunals, or that the appropriate tribunal should be determined by fine shades of difference in the legal character of individual issues, or by the ingenuity of lawyers in developing points of argument'.[41] Or, as Allsop J (with whom Finn and Finkelstein JJ agreed) cogently expressed the point with the citation of many authorities,[42] there is a sensible commercial presumption that 'the parties did not intend the inconvenience of having possible disputes from their transaction being heard in two places'.[43] This liberal approach to dispute resolution clauses applies equally to domestic and international dispute resolution clauses.[44]

73 This approach is particularly relevant to the Shareholders' Agreement. It is unlikely that a reasonable person in the position of the parties would consider that the agreement contemplated an express regime to resolve disputes outside the courtroom but excluding those disputes concerning deemed events of default.

74 Thirdly, the liberal approach to construction of dispute resolution clauses as a whole also applies to the particular phrases in such clauses. The narrow approach proposed by JTA Le Roux to the construction of the words 'any dispute' is inconsistent with this interpretative approach to dispute resolution clauses. Expressions such as 'arising out of this Agreement' in dispute resolution clauses are treated as expressions of wide meaning.[45] They are 'not to be narrowly construed'.[46] The same must be true of the words 'any dispute'.

75 These interpretative principles are not a judicially imposed policy favouring one type of construction. They are not immutable. But they reflect a commercial reality which is the common background of dispute resolution clauses.

76 Fourthly, cl 13.1 is concerned with a particular resolution in relation to disputes. No other clause of the Shareholders' Agreement makes any reference to dispute resolution. The particular regime established by cl 13.1 should not be construed as being excluded by an implication that might somehow exist 'elsewhere in the Agreement'.

77 Fifthly, the constructions urged by JTA Le Roux would create real difficulty in circumstances in which a hybrid dispute emerged between the parties which concerned both an event of default and another issue arising under the Shareholders' Agreement. How would concurrent dispute resolution regimes operate in that case? Would the answer depend upon whether the court delivered judgment in relation to the dispute before the particular mediation regime was satisfied under cl 13? Further, since the Shareholders' Agreement was drafted by lawyers who must be aware that court ordered mediations are common, would a hybrid dispute simply be referred by the court for a cl 13 mediation?

78 These difficulties and uncertainties increase the uncommercial nature of the construction urged by JTA Le Roux. It is well established that commercial contracts are to be construed in a commercially sensible way,[47] although consistently with the language of the contract.[48]

79 Sixthly, if the phrase 'the following paragraphs of this clause [cl 13]' means 'pars 13.2 to 13.7' and not '13.2 to 13.13', pars 13.8 through to 13.13 would be redundant. The suggested construction by JTA Le Roux would have the effect of bifurcating cl 13 and excluding any sensible operation of the second part of the dispute resolution for a 'still unresolved dispute'.

80 Counsel for JTA Le Roux submitted that cl 13.8 and following had a different sphere of operation in the Shareholders' Agreement from cl 13.1 to 13.7. JTA Le Roux relied upon the mandatory words of cl 13.1 to 13.7 where each clause uses the word 'must' compared with the discretionary words of cl 13.8 ('may offer in writing') and 13.9 ('may reconsider their position'). There is little substance in this point. The use of 'may' in 13.8 simply reflects the nature of the Texas Shootout dispute resolution mechanism chosen by the parties. Neither party is compelled in this dispute resolution procedure to make an offer. Further, cl 13.1 and cl 13.13 both refer to 'this clause' in its entirety.

81 Seventhly, a dispute about the application of cl 12 which has occurred in this case is not a dispute 'already provided for in the Agreement'. Clause 12 says nothing about disputes. And, as I explain below at [86] - [89], there are potentially numerous examples where cl 12 could be invoked without any dispute. Hence, even if the construction proposed by JTA Le Roux were adopted, it would not assist its case because a cl 12 'dispute' is not 'already provided for' in the Shareholders' Agreement.

82 Eighthly, the Shareholders' Agreement is, on its face, a legally drafted agreement. It bears the name of the solicitors representing JTA Le Roux. The same solicitors drafted the Employment Agreement between Mr Lawson and Lawsons Commercial Flooring. The latter agreement has a clause (cl 27.1) which is identical to cl 13.1. But there was no suggestion, nor could there be, that the identical, legally drafted clause in a related transaction document, could be construed as JTA Le Roux suggest. The two identical clauses, prepared by the same lawyers, in relation to the same transaction are unlikely to have substantially different meaning.

83 A central plank of the submissions by JTA Le Roux was that cl 12 and cl 13 'are mutually exclusive',[49] or that if the dispute resolution provision in cl 13.8 applied to a cl 12 dispute then it would render 'cl 12 completely inutile'[50] or 'patently unreasonable'.[51] It is necessary to explain why these submissions are incorrect.

84 First, cl 13 only applies in the case of disputes. A deemed event of default could occur under cl 12.1 without the necessity of a dispute. In such a case, cl 12 would not be excluded by cl 13 and would have a useful function.

85 Putting to one side the clause with which this dispute is concerned, cl 12.1(d), a reasonable person in the position of the parties would expect that there could be many events in relation to the other subclauses of cl 12.1 which give rise to no dispute.

86 One example is where, under cl 12.1(a) a shareholder purports to dispose of shares other than in accordance with the Shareholders' Agreement under cl 8. A situation could arise in which a documented attempt to dispose of shares other than as permitted by cl 8.2 is beyond dispute.

87 A further example is cl 12.1(b) where one party is declared insane or otherwise mentally incompetent. Such a formal declaration might not be expected to be a matter of dispute.

88 A third example might be under cl 12.1(c) where a dismissal takes place under cl 18 or cl 19 of the Employment Agreement. Those clauses involve an abandonment of employment and serious misconduct. It is not hard to imagine examples where such a dismissal would not be a matter of dispute.

89 A fourth example is cl 12.1(e) where the Employment Agreement is terminated 'for any reason' during the Term of the Agreement without unanimous approval of the Shareholders. Again, it is not hard to imagine situations in which it is indisputable that the Employment Agreement is terminated without unanimous approval of the shareholders.

90 Secondly, the Texas Shootout provisions in cl 13.8 and following might never be utilised. In order for the Texas Shootout to take place there needs to be an offer in writing made by one shareholder to the other. But cl 13.8 provides only that one shareholder may make this offer by notice in writing. If no offer is made then there will be no resolution of the dispute.

91 It was common ground at the hearing of this application that if no offer were made which could trigger a Texas Shootout the parties would not have 'complied' with the paragraphs of cl 13 and court proceedings could not be commenced. Counsel for the Lawsons submitted that the effect of cl 13 was to preclude court proceedings other than in relation to breach of cl 13 itself.

92 I do not need finally to decide this point because the other factors discussed in these reasons are sufficient to reject the construction and implication sought by JTA Le Roux. But I explain below why I do not accept this assumption of the parties.

93 One reason is that cl 13.1 expressly contemplates the possibility of court proceedings if the dispute resolution is not successful. It is not, in terms, an express code, and its application is not confined to court proceedings in relation to cl 13 only. In other words, cl 13.1 speaks of court proceedings not being commenced unless the following procedure is followed. It does not say that no court proceedings can be commenced even if the procedure does not result in resolution of the dispute .

94 Another reason for doubting that court proceedings in relation to other clauses in the Shareholders' Agreement are excluded is because cl 13.8 is not expressed in mandatory terms. A party may make an offer. It is not required to do so. The effect of treating cl 13.1 as the exclusive dispute resolution mechanism would be that a dispute could continue indefinitely. The absence of a time by which an offer should be made does not mean that the power to make an offer continued indefinitely. Where a party is given a contractual duty or power to perform an act it is a common implication that the act will be performed within a reasonable time.[52]

95 Although it is not necessary to express a concluded view, the effect of such a conclusion would be that contrary to the parties' assumption a party asserting a put or call option under cl 12 could commence court proceedings to enforce an option which it had purported to exercise, although the exercise of that put or call option had been disputed by the other party. Clause 12 would not be prevented from operation. But the party would first be required to exhaust the dispute resolution mechanism in cl 13.

'Deemed default' under cl 12 need not involve fault by the party who is so deemed

96 The submissions of JTA Le Roux were replete with references to the party not in default as the 'innocent' party[53] and the party in deemed default as the 'defaulting party'.[54] As counsel properly accepted in oral submissions, these expressions are not entirely accurate.

97 First, cl 12 speaks of a party being 'deemed to be in default for the purposes of this Agreement' (emphasis added). The use of the expression 'event of default' operates as a deeming device which gives rise to the subsequent provisions concerning a default notice, a call option and a put option.

98 Secondly, there are examples where cl 12 might apply independently of any real fault or blame to be attributed to the party deemed to be in default. One example is cl 12(1)(b) which involves a declaration of insanity or mental incompetence. Another example is cl 12(1)(d) which is the clause under which it is alleged that default occurred in this case and which concerns a default under the FL Long Term Loan Agreement. As explained above:

(i) a default under the FL Long Term Loan Agreement can arise when an event occurs which has a material adverse effect; and

(ii) a material adverse effect is defined to include an event which has a material adverse effect on the value of the property secured by a Security.

99 Therefore, a severe downturn in the property market might amount to a default under the FL Long Term Loan Agreement.

100 Another example is cl 12.1(e) which is concerned with termination of Mr Lawson's Employment Agreement 'for any reason' without unanimous approval of the shareholders. This clause is not confined to termination of Mr Lawson's employment for cause. On one view, it would apply if Lawsons Commercial Flooring terminated Mr Lawson's employment, with notice, 'for any reason' under cl 16.2 of the Employment Agreement.[55] It would also apply if Mr Lawson properly terminated his Employment Agreement for a serious breach or renunciation by Lawsons Commercial Flooring.

101 The two alternative implied terms which JTA Le Roux submits should be implied into the Shareholders' Agreement concern cl 13.1. They are set out in italics below:

If any dispute arises out of this Agreement_, other than a dispute in relation to a Default Notice given to a party pursuant to clause 12.2_ (Dispute) a party to this Agreement must not commence any court proceedings unless the parties to the Dispute have complied with the following paragraphs of this clause, except where the Dispute is in relation to a Default Notice pursuant to clause 12.2 (in which case clauses 13.8 to 13.12 shall not apply) or a party seeks urgent interlocutory relief.

Five reasons why JTA Le Roux's proposed implied terms must be rejected

102 It is common ground that before a term could be implied into the Shareholders' Agreement, the following five requirements must be satisfied.[56] The term

(ii) must be necessary to give business efficacy to the contract so that no term will be implied if the contract is effective without it;

(iii) must be so obvious that 'it goes without saying';

(v) must not contradict any express terms of the contract.

103 In this case, the terms proposed by JTA Le Roux fail each and every one of these requirements for an implied term.

(i) The implied terms are not reasonable and equitable

104 First, the unreasonableness of the implied terms suggested by JTA Le Roux arises for all the reasons explained above in relation to the construction of cl 13.

105 Many of the reasons explained above concerning why the construction of JTA Le Roux should not be accepted apply with equal or greater force to the implication of terms. Further, a court will be slow to imply a term in a comprehensive contract which has been legally drafted: 'the more detailed and comprehensive the contract the less ground there is for supposing that the parties have failed to address their minds to the question at issue'.[57] This is particularly the case where

(i) the same clause as 13.1 is used in another related transaction document, and

(ii) another part of cl 13 expressly contemplates an exclusion of cl 12.

106 Secondly, the unreasonableness of the first implied term is also illustrated by the inconsistency that those implied terms would create with other transaction documents.

107 The Employment Agreement between Mr Lawson and Lawsons Commercial Flooring has dispute resolution clause in cl 27 which is identical to cl 13 of the Shareholders' Agreement, apart from the Texas Shootout provisions.[58] The Texas Shootout provisions could not be included in the Employment Agreement since neither party is a shareholder.

108 The inconsistency arises because if the proposed terms were implied then the effect would be that a dispute concerning termination of the Employment Agreement would require Mr Lawson and Lawsons Commercial Flooring to follow the dispute resolution procedures involving 'best efforts' and mediation. But the same parties would not be required to follow the identical process in relation to whether that termination constituted an Event of Default under the Shareholders' Agreement.

109 Thirdly, another reason why the implied terms are not reasonable is that they might not sensibly be able to be confined to cl 12.2. The implied terms could also have the effect of excluding disputes concerning other provisions of the Shareholders' Agreement from the dispute resolution mechanism.

110 One example where the exclusion of dispute resolution in relation a dispute about c 12.2 might extend to exclude other disputes is in relation to a dispute about a cl 12.1(a) Event of Default. That subclause includes a situation in which a shareholder purports to dispose of its shares other than in accordance with the Agreement. A shareholder could dispute the issue of a default notice under 12.2 in circumstances in which the disputed event of default was whether there has been a breach of cl 8.1 (Restriction on Diposal). The disputed event of default could be whether there has been a breach of cl 8.2 (Permitted Disposal). An implied term which excluded disputes about cl 12.2 from the cl 13 dispute resolution mechanism might also exclude from dispute resolution any dispute about cl 8.1 or cl 8.2 if a default notice were issued for those defaults.

111 In oral submissions, counsel for JTA Le Roux suggested that the dispute resolution clause would apply to cl 8 in this instance but not to cl 12. If this were the case then further confusion would arise. Could the cl 8 dispute be litigated if it were only incidental to cl 12? If so, would the parties be preventing from seeking any orders directly in relation to cl 8 (such as a declaration) but permitted to seek orders relating to cl 12 where the event of default arises from cl 8?

112 Another potential example where the exclusion of dispute resolution in relation to a dispute about cl 12.2 would extend to exclude other disputes in the Shareholders' Agreement is a dispute about an Event of Default under cl 12.1(d). Clause 12.1(d) involves a question of whether the cl 6.4 conditions in the FL Long Term Loan Agreement have been infringed.

(ii) The implied terms are not necessary to give business efficacy to the contract

113 For the reasons already explained above in relation to the construction of cl 13, the Shareholders' Agreement has business efficacy without the implied term. For completeness, I should indicate why I reject each of JTA Le Roux's submissions to the contrary.

114 JTA Le Roux says that without the implied terms the rights of an 'innocent party' under cl 12 following an event of default would be frustrated by the defaulting party merely indicating that it did not agree that there had been a default.[59] In other words, a shareholder might manufacture a fake dispute in order to engage the dispute resolution provisions in cl 13 as antecedent to the enforcement of a put or call option under cl 12.

115 The simple answer to this submission by JTA Le Roux is that it is not appropriate to engage in exercises of construction by references to far-fetched examples which are not likely to be in the contemplation of a reasonable person in the position of the parties who is construing the contractual words used.

116 The unreality of this submission can also be seen by testing how it might operate if a shareholder did attempt to manufacture an unreal dispute. If such a circumstance occurred the other shareholder might deny the existence of a dispute and commence legal proceedings. Those representing the party to the fake dispute would owe a duty to the court not to plead manifestly false or unreasonable manufactured claims.

117 A second reason why the 'fake manufactured dispute' argument of JTA Le Roux does not assist its construction is because such a dispute might not be treated as a dispute for the purposes of cl 13. It is possible that cl 13 might be interpreted as meaning 'any genuine dispute' or to mean that the dispute must be one which is in good faith. Such an interpretation might be consistent with the requirement in cl 13.2 that the parties use their 'best efforts' to resolve the dispute. How would it be possible to use 'best efforts' to resolve a fake, manufactured dispute? Nevertheless, it is not necessary to decide this question of interpretation which has some affinity with the question of implication of terms requiring parties to act in good faith. On that point, the High Court of Australia has not ruled conclusively,[60] and, as Buss JA has observed, the authorities in intermediate appellate courts are not entirely harmonious.[61]

118 A third reason why the 'fake manufactured dispute' argument of JTA Le Roux does not assist its construction is because the same argument could be made in relation to cl 12. In other words, if JTA Le Roux were correct, then a shareholder in dispute about any matter under the Shareholders' Agreement could avoid the dispute resolution provisions of cl 13 simply by alleging an event of default under cl 12. Then cl 13 would be excluded.

119 A fourth reason why the 'fake manufactured dispute' argument of JTA Le Roux does not assist its construction is because it assumes that the party who would otherwise be subject to a cl 12 put option intended to invoke the Texas Shootout provisions of cl 13.8. But this might lead to a highly undesirable outcome for that party. Suppose the Lawsons were the party who engineered a fake dispute in order to cause the operation of the Texas Shootout provisions. If JTA Le Roux did not make an offer, then the Lawsons could only avoid selling their shares at the cl 12 put option price by

(i) making an offer to purchase the shares of JTA Le Roux at a price higher than the cl 12 put option price; and

(ii) hoping that the offer is not accepted so that the Lawsons would then sell their shares at the price higher than the cl 12 put option price. This would obviously be a considerable gamble which could result in the Lawsons being forced to buy shares at a price higher than true value.

120 Another submission by JTA Le Roux was that the Lawsons have industry background, knowledge and experience which JTA Le Roux does not. Hence, it was submitted, the absence of a price formula in cl 13 acts as a detriment.

121 There was no evidence concerning the relative industry background, knowledge and experience of Mr Le Roux compared with Mr Lawson. Nor was there any evidence about their relative business experience.

122 Even if there had been such evidence, it is unclear why counsel asserted that the Texas Shootout would cause detriment to the party with less information. There was no evidence, nor any submissions, concerning the empirical studies about the behaviour of an informed offeror and the incentive upon that offeror truthfully to reveal his or her information.[62]

123 Next, JTA Le Roux submitted that there would be an 'inequity' if one party were compelled to purchase the shares of the other at a much higher price. JTA Le Roux said that this inequitable situation could occur if the Lawsons knew that JTA Le Roux was not likely to accept a put offer for pragmatic reasons and the Lawsons then made an unrealistically low offer, using the rejection of that offer as the opportunity to exercise a call option.

124 No submission was made concerning what these 'pragmatic reasons' for refusing an unrealistically low offer price for the sale of the offeror's shares. There was no evidence that JTA Le Roux was actually in such a 'pragmatic' position. Nor was there any evidence that the Lawsons had any knowledge of such a possibility. Nor was there any evidence that such a possibility would reasonably have been foreseen by persons in the position of the parties at the time of the Shareholders' Agreement. Nor was there any evidence concerning available finance or finance expected to be available if a Texas Shootout occurred. Nor was there any evidence concerning a possibility of assignment of rights to third parties following a purchase. The entirety of this submission was assertion.

125 JTA Le Roux then submitted that a shareholder (assume the Lawsons to be that party for the example) could 'deliberately trigger the winding up provision at subclause 13.12 by offering its shares to the innocent party at an unrealistically high price and then refusing to honour a counter offer put by the innocent party'.[63] But this assumes that such deliberate conduct would not give rise to any other action against a party such as the Lawsons. At the least, such an assumption is questionable.

(iii) The implied terms are not so obvious that it goes without saying

126 There are four reasons why the proposed implied terms are not so obvious that they go without saying.

127 First, as explained above, the implied terms are contrary to the commercial imperatives of dispute resolution clauses generally, contrary to a commercial operation of a dispute resolution clause, and (in the case of the first implied term) inconsistent with the regime agreed in the Employment Agreement.

128 Secondly, the Shareholders' Agreement is a legally drafted document in which the parties have carefully set out a detailed regime for dispute resolution. It would be remarkable if they omitted to agree upon a substantial exclusion from that clause. In contrast with rectification, the implications suggested by JTA Le Roux require that substantial departure from the express terms of the Shareholders' Agreement be 'presumed'. In the words of Mason J (with whom Stephen and Wilson JJ agreed on this point) in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales:[64]

The implication of a term is to be compared, and at the same time contrasted, with rectification of the contract. In each case the problem is caused by a deficiency in the expression of the consensual agreement. A term which should have been included is omitted. The difference is that with rectification the term which has been omitted and which should have been included was actually agreed upon; with implication the term is one which it is presumed that the parties would have agreed upon had they turned their minds to it - it is not a term that they have actually agreed upon.

129 Thirdly, the reasons below concerning the lack of clear expression of the proposed implied terms is a further reason why those terms are not so obvious that they go without saying.

130 Fourthly, the express reference to cl 12 in cl 13.12(b) is a further reason why the implied terms are not so obvious that they go without saying. The express consideration of cl 12, and its express exclusion in the limited circumstance of cl 13.12(b), militates against an implication that cl 13 was intended by the parties elsewhere to impliedly exclude the operation of cl 12.

(iv) The implied terms are not capable of clear expression

131 There are three reasons why the proposed implied terms are not capable of clear expression.

132 First, the existence of alternative proposed implied terms militates against the submission that the implied term is capable of clear expression. The alternatives have different effect. For instance, the second proposed implied term in italics above would oblige the parties in dispute concerning cl 12 to use best efforts to resolve the dispute, and to mediate, prior to commencing court proceedings. The first proposed implied term would not.

133 Secondly, the first proposed implied term is expressed only in relation to cl 12.2. But what about the remainder of cl 12? On one view, the parties in this case have no dispute about cl 12.2. The dispute concerns whether an event of default has occurred under cl 12.1. Clause 12.2 concerns the issue of a default notice and the grant of put and call options if an event of default has occurred. It does not appear that there is any dispute about this clause other than whether a precondition to its operation is the exhaustion of cl 13. But, at least on one view, that is a dispute about the operation of cl 13.

134 Thirdly, how would the proposed implied terms deal with situations where a dispute concerns both a Default Notice under cl 12.2 and the meaning or operation of some other clause in the Shareholders' Agreement? Would the dispute resolution provisions apply or not? Would it depend upon whether one aspect of the dispute is more dominant than another? What would happen if the dispute concerning the Default Notice were resolved but the other dispute remained? Would the operation of cl 13 then be resuscitated?

(v) The implied terms contradict an express term of the contract

135 As I have explained above, the proper construction of cl 13 has the perhaps unsurprising effect that the words 'any dispute' mean 'any dispute'. They do not mean 'a dispute not already provided for elsewhere in the Agreement'. The words 'the following paragraphs of this clause' in cl 13.1 mean all of the following paragraphs of the clause (pars 13.2 to 13.13). They do not mean pars 13.2 to 13.7 only.

136 The effect of this construction means that the implied terms proposed by JTA Le Roux would contradict this construction.

137 Counsel for JTA Le Roux suggested that the proposed implied terms modify the meaning of cl 13.1 but do not contradict it. I do not accept this submission. The proposed 'implied terms' are not, in fact, terms at all. They are alterations to, and contradictions of, the proper construction of cl 13.1. The proposed implied terms are inconsistent with cl 13.1 as properly construed and cannot stand with it.[65]

138 A comparison can be given with the decision in Maybury v Atlantic Union Oil Co Ltd.[66] In that case, a clause in an agreement had the effect of giving the plaintiff company a discretion to 'determine any hour and any time at which [radio] broadcasts shall be made'.[67] A joint judgment of Dixon CJ, Fullagar and Taylor JJ in the High Court of Australia held that an alleged collateral agreement would be inconsistent, and could not stand with the main agreement because the alleged collateral agreement 'would limit that discretion by preventing the plaintiff company from appointing a broadcast for any time which would be in opposition to [sic] a session conducted on any other broadcasting station by Bob Dyer'.[68]

139 It was not in dispute that the claims for specific performance and damages in relation to the alleged event of default under cl 12 of the Shareholders' Agreement infect the whole of JTA Le Roux's statement of claim. The bringing of those claims without compliance with the dispute resolution provisions of cl 13 was in breach of the Shareholders' Agreement.

140 A legal proceeding can be stayed due to the failure of a party to comply with contractually agreed dispute resolution procedures.[69] Although the discretion whether to grant a stay is broad, a stay will not be granted if[70]

it would be unjust to deprive the plaintiff of the right to have his claim determined judicially or, to put it slightly differentially, if the justice of the case is against staying the proceeding. The party opposing the stay must persuade the court that there is good ground for the exercise of the discretion to allow the action to proceed and so preclude the contractual mode of dispute resolution. The onus is a heavy one. The court should not lightly conclude that the agreed mechanism is inappropriate.

141 I do not consider that the agreed mechanism is inappropriate. Nevertheless, the appropriate order at this stage is only that JTA Le Roux's claim be struck out rather than permanently stayed. This order is appropriate for two reasons.

142 First, as counsel for the Lawsons properly conceded, it may be possible for JTA Le Roux's statement of claim to be amended so that it pleaded only matters relating to disputes under agreements other than the Shareholders' Agreement. It may be that such a pleading would not be a pleading of a dispute arising out of the Shareholders' Agreement. That is a matter which would need to be decided on the face of an amended pleading or, at least, after submissions on the point.

143 Secondly, as I have explained, it is possible that the dispute resolution mechanism in cl 13 will not resolve the dispute. For instance, if the matter does not resolve after mediation and if neither party makes an offer to the other under cl 13.8 then it is possible that JTA Le Roux could then litigate the dispute concerning its purported entitlement to a put option. It was common ground that no limitation issue would arise in relation to subsequent litigation.

144 In those circumstances, the appropriate order in this case is to strike out JTA Le Roux's claim.

Annexure 1: Clause 12 of the Shareholders' Agreement

A Shareholder will be deemed to be in default under this Agreement if:

(a) that Shareholder Disposes or purports to Dispose all or any of its Shares in the Company except in accordance with this Agreement;

(b) that party is declared insane or otherwise mentally incompetent;

(d) in the case of Steve, where there is a default under the FL Long Term Loan Agreement; or

(e) in the case of Steve, if the Employment Agreement is terminated for any reason during the Term of the Agreement unless that termination is unanimously approved by all the Shareholders.

If a Shareholder is in default of its obligations under this Agreement as described in cl 12.1 (the Defaulting Party) then any other Shareholder may give a notice in writing setting out the default (Default Notice) to the Defaulting Party and the Defaulting Party (Grantor) grants:

(a) a call option in relation to the Defaulting Party's Shares to the nonDefaulting Shareholder (Grantee) to purchase all of the Grantor's Shares exercisable in accordance with cl 12.3; and

(b) a put option in relation to the nonDefaulting Party's Shares pursuant to which the nonDefaulting Shareholder (Grantee) can require the Grantor to purchase all of the Grantee's Shares exercisable in accordance with cl 12.4.

(a) The Grantee may exercise its option pursuant to cl 12.2(a) by serving on the Grantor written notice of its intention to purchase within 60 days of the date of the Default Notice all of the Grantor's Shares.

(b) If the Grantee has exercised its option pursuant to this clause:

JTA LE ROUX PTY LTD as trustee for the FLR Family Trust -v- LAWSON [2013] WASC 293 (8 August 2013)

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Judgment (307 paragraphs)

JTA LE ROUX PTY LTD as trustee for the FLR Family Trust -v- LAWSON [2013] WASC 293 (8 August 2013)

Cases Cited (16)