KRM (Vic) Pty Ltd v Classicbet Pty Ltd [2019] NSWSC 1773 | Case summary

Supreme Court of NSW|2019-09-26|Before: Rein J

CONTRACTS - Construction - Interpretation - Classicbet/Bestbet contended that KRM had waived its right to continue receiving commissions after it had elected to take the lump sum - Held: KRM, having opted for the lump sum, was not entitled to commissions after that date, but commissions so received should be offset against the amount of the lump sum owed to it.

CONTRACTS - Construction - Interpretation - In calculating the amount of the lump sum, whether the reference in the APA to "the 12 months immediately preceding the date that the option is exercised by KRM" refers to calendar months or 365 days pro rata; in calculating the "average monthly commission", whether this should include amounts that were earnt during the 12 months (and, hence, payable) or only those amounts actually paid in the 12 months - Held: the preceding "12 months" in this context refers to calendar months, not 365 days pro rata, and "paid" in this context should be understood as "payable".

CONTRACTS - Construction - Interpretation - Classicbet/Bestbet contended that cl 6.1 of the respective share sale agreements between themselves and the Kays involved a promise by the Kays to pay Classicbet/Bestbet's liabilities before the change of control to Playup, whereas the Kays submitted that the promise was made to Playup as the buyer not to Classicbet/Bestbet - Held: the promise in cl 6.1 was made by the Kays to Playup not to Classicbet/Bestbet.

CONTRACTS - Construction and interpretation - Parol evidence rule - Prior negotiations - Where the Kays sought to rely on evidence of pre-contractual negotiations in support of their contention that it was not the parties' intention to make the third defendant liable under the APA to pay his share of the lump sum to KRM, despite the third defendant being a party to the APA - Held: the Kays could not rely on such evidence. Legislation Cited: Civil Procedure Act 2005 (NSW) Companies (New South Wales) Code Competition and Consumer Act 2010 (Cth) Corporations Act 2001 (Cth) Cases Cited: Abletone Pty Ltd v Bonview (Tas) Pty Ltd [2008] TASSC 59 Adler v ASIC [2003] NSWCA 131; (2003) 179 FLR 1 Agricultural Land Management Ltd v Jackson (No 2) [2014] WASC 102; (2014) 285 FLR 121 Andar Transport Pty Ltd v Brambles Ltd (2004) 217 CLR 424 Asden Developments Pty Ltd (in liq) v Dinoris (No 3) [2016] FCA 788; (2016) 11 BFRA 419 Bans Pty Ltd v Ling [1995] NSW ConvR 55-739; (1995) 16 ACSR 404 Bofinger v Kingsway Group Ltd (2009) 239 CLR 269 BP Australia Ltd v South Australia (1982) 31 SASR 178 Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640 Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407; (2009) 76 NSWLR 603 Green v Premier Glynrhonwy Slate Co Ltd [1928] 1 KB 561 Hawkins v Bank of China (1992) 26 NSWLR 562 Jireh International Pty Ltd v Western Exports Services Inc [2011] NSWCA 137 Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104 O'Keefe v Calwell (1949) 77 CLR 261 Playup Australia Pty Ltd v Kay [2019] NSWSC 771 R v Oakes [1959] 2 QB 350 Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596 Standard Chartered Bank of Australia Ltd v Antico (Nos 1 and 2) (1995) 38 NSWLR 290; 18 ACSR 1 Treolar Constructions Pty Ltd v McMillan [2011] NSWCA 72 Victoria v Tatts Group Ltd [2016] HCA 5; (2016) 90 ALJR 392 WIN Corporation Pty Ltd v Nine Network Australia Pty Ltd [2016] NSWCA 297; (2016) 341 ALR 467 Texts Cited: Robert P. Austin and Ian M. Ramsay, Ford, Austin and Ramsay's Principles of Corporations Law (LexisNexis Butterworths, 17th ed, 2018) Category: Principal judgment Parties: KRM (Vic) Pty Ltd (Plaintiff) Classicbet Pty Ltd (First Defendant) Bestbet.com.au Pty Ltd (Second Defendant) Ryan Kay (Third Defendant and Cross Defendant) Alex Kay (Cross Defendant) Representation: Counsel: Mr J. Clarke SC with Mr A. Harding (Plaintiff) Mr I. Pike SC with Mr E. Walker (First and Second Defendants) Mr A. McInerney SC with Mr N. Kabilafkas (Third Defendant and Cross Defendants)

Solicitors: K&L Gates (Plaintiff) Yates Beaggi Lawyers Pty Ltd (First and Second Defendants) Price & Company Solicitors (Third Defendant and Cross Defendants) File Number(s): 2018/314837 Publication restriction: Nil

Judgment

These proceedings relate to an agreement between KRM (Vic) Pty Ltd ("KRM") on the one hand and Classicbet Pty Ltd ("Classicbet"), Bestbet.com.au Pty Ltd ("Bestbet") and Mr Ryan Kay ("Ryan") on the other. The agreement, described as an Affiliate Program Agreement ("APA"), was entered into in June 2017 but with a commencement date of 22 May 2017. Essentially, KRM was to receive commissions for introducing sports gamblers to Classicbet and Bestbet.
Mr J. Clarke SC appears with Mr A. Harding for KRM. Mr I. Pike SC appears with Mr E. Walker for Classicbet and Bestbet, and Mr A. McInerney SC with Mr N. Kabilafkas for Ryan and Ryan's father, Mr Alexander Kay ("Alex"). Alex was not a party to the APA but he was the sole director and shareholder of Classicbet.
At the close of the case I received detailed written submissions from Mr Clarke and Mr Harding, the Plaintiff's Closing Submissions ("PCS"), and from Mr McInerney and Mr Kabilafkas, the Kays' Closing Submissions ("KCS"). Following receipt of the PCS and KCS, and after oral submissions from Mr Clarke, Mr Pike and Mr McInerney, I gave leave to Mr Pike to provide written submissions in reply to Mr McInerney's submissions and for Mr McInerney to respond to those written submissions. I received Mr Pike's written submissions dated 4 October 2019, Classicbet's Closing Submissions in Reply ("CCSR") and Mr McInerney's further submissions dated 11 October 2019, Kays' Closing Submissions in Reply ("KCSR").
KRM's claim under the APA is based on: 1. The fact that Ryan sold all of his shares in Bestbet to Fantasy Sports Pty Ltd which later changed its name to PlayUp Australia Pty Ltd ("Playup") by a Share Sale and Purchase Agreement ("Bestbet SPA") entered into on 23 March 2018. On the same date, Alex sold all of his shares in Classicbet to Playup pursuant to a Share Sale and Purchase Agreement ("Classicbet SPA"). Ryan was the sole shareholder and also sole director and secretary of Bestbet, and Alex was the sole shareholder, director and secretary of Classicbet. There is no material difference for present purposes between the terms of the Bestbet SPA and the Classicbet SPA. 2. Clause 16.1 of the APA is in the following terms: "1. In this clause 16.1, "X" means the greater of:- (a) 5 times, and (b) (i) if clause 16.1.2 applies, then the multiple used by the Third Party to determine the price of the shares purchased by, or issued to, the Third Party or as the Third Party directs: (ii) if clause 16.1.5 applies, then the multiple used by the Third Party to determine the price of all or part of the Business purchased by the Third Party and/or nominee of the Third Party. 2. If, there is a Change of Control of Classicbet Pty Ltd or Bestbet.com.au Pty Ltd (or both) due to either or both:- (a) the purchase of issued shares in either of them by a third party (being a person or entity who as at the date of this Agreement is not a shareholder of Classicbet Pty Ltd and Bestbet.com.au Pty Ltd) ("Third Party"), other than for reconstruction or amalgamation as referred to in the definition of "Change of Control" in clause 1;. (b) the issue of further shares in either Classicbet Pty Ltd and Bestbet.com.au Pty Ltd then Affiliate has the option to either continue with this Agreement or have Classicbet "buy out the tail" as set out in this clause 16.1. 3. The option referred to in clause 16.1.2 shall be exercised as follows:- (a) Classicbet must give written notice to Affiliate ("Classicbet Notice") of the Change of Control or proposed Change of Control in Classicbet Pty Ltd and/or Bestbet.com.au Pty Ltd; (b) Within 14 days of the receipt by the Affiliate of the Classicbet Notice, the Affiliate may give written notice to Classicbet ("Affiliate Notice") that:- (i) Affiliate wishes Classicbet to pay to Affiliate the lump sum payment referred to and calculated in accordance with Clause 16.1.4; or (ii) Affiliate wishes to continue with this Agreement. If the Affiliate does not give written notice to Classicbet in response to the Classicbet Notice, then Affiliate shall be deemed to have exercised its option to be paid the lump sum referred to and calculated in accordance with clause 16.1.4. 4. If Affiliate exercises its option to be paid the lump sum payment or if the option to be paid the lump sum payment is deemed to be exercised in accordance with Clause 16.1.3(b) then Classicbet must, within 20 business days of such exercise, pay to the Affiliate a lump sum payment equal to X times the greater of: (a) an amount equal to 12 times the average monthly Commission paid by Classicbet to the Affiliate in the period of 24 months immediately preceding the date that the option by the Affiliate is exercised (or if the option is exercised by the Affiliate before the Agreement has been in force for a period of less than 24 months, then an amount equal to 12 times the average monthly Commission paid by Classicbet to Affiliate during such period); or (b) an amount equal to 12 times the average monthly Commission paid by Classicbet to the Affiliate during the 12 months immediately preceding the date that the option is exercised by the Affiliate." 1. "Classicbet" is defined in cl 1 of the APA as follows: ""Classicbet" means, collectively and individually, as the case may be, Classicbet Pty Ltd ACN 167 422 406, Ryan Kay and Bestbet.com.au Pty Ltd ACN 607 108 645." 1. Classicbet by its solicitors K&L Gates ("Gates") sent a letter dated 12 October 2018 to KRM by its solicitors Yates Beaggi ("Yates") notifying KRM of the change in control of Classicbet and Bestbet consequent upon the completion of the Classicbet SPA and the Bestbet SPA. 2. KRM by a letter from Gates of 15 October 2018 gave notice of its election to take the lump sum referred to in cl 16.1.3: CB A4:996 (CB stands for Court Book and A4:996 refers to the Court Book volume and page number). I shall refer to this as "the Gates Letter". The Gates Letter notified Classicbet, Bestbet and Ryan that KRM required Classicbet, Bestbet and Ryan to pay the lump sum "referred to and calculated in accordance with" cl 16.1.4 of the APA. 3. The lump sum, which KRM claims is $3.4 million calculated in accordance with cl 16.1.4, was not paid to KRM within the 20 day period specified in cl 16.1.4, and remains unpaid. 4. All three of Classicbet, Bestbet and Ryan are jointly and severally liable for payment of the lump sum.
The parties agree that: 1. There was a change in control of Classicbet and Bestbet on 7 June 2018. 2. Classicbet and Bestbet were required to give KRM notice of that change in control.
The Kays do not dispute that Classicbet and Bestbet gave notice to KRM by the letter of Yates of 12 October 2018 or that KRM by the Gates letter of 15 October 2018 opted for the lump sum payment.
Classicbet and Bestbet contend that several emails sent by Ryan on behalf of Classicbet were notifications of a proposed change of control with the consequence that, given the absence of a response from KRM, the deeming provision in cl 16.1.3 took effect. Although it appeared that Classicbet and Bestbet accepted by their Statement of Real Issues that the 12 October Yates letter did amount to notice pursuant to cl 16.1.3 if the earlier emails did not constitute notice (see paragraph 2), Mr Pike seemed to resile from that position in final submissions.
The areas of dispute between KRM and Classicbet/Bestbet are: 1. Whether the only notice given by Classicbet/Bestbet and/or Ryan under the APA was a notice given by Yates on 12 October 2018 ("the KRM Notice") or whether emails of 11 April 2018, 26 April 2018 and 8 June 2018 should be viewed as notices of a proposed change in control. 2. If any of the emails of 11 April, 26 April or 8 June did constitute a notice under clause 16.1 of the APA, whether by virtue of the deeming provision in cl 16.1.3 the lump sum payment calculation in cl 16.1.4 of the APA should be based on the absence of any response to the emails of 11 April, 26 April or 8 June. 3. Whether from the date of election to take the lump sum (whether 14 days after 11 April 2018, 26 April 2018, 8 June 2018 or from 15 October 2018) the right to commission payments was to cease, as Classicbet/Bestbet contend, or whether the right to commissions ends only when the lump sum payment is made. 4. How the lump sum under cl 16.1.4 is to be calculated, i.e.: 1. Is the period to be used 12 calendar months or 365 days pro rata? 2. Does "paid" mean actually paid in the relevant period or payable as required by the terms of the APA (see T304.25). 1. Whether Classicbet and Bestbet are entitled to recover commissions already paid to KRM from the date determined as the date at which the lump sum is payable.
The main dispute between KRM and Ryan is whether Ryan was obliged to pay the lump sum to KRM in addition to Classicbet and/or Bestbet. Classicbet and Bestbet support KRM's contentions on this point. An argument that the KRM Notice was defective was abandoned: T369.48. A third dispute related to the issue of the negative commissions, which affected whether an amount of $113,000 for September 2018 should be paid to KRM or not. The Kays claimed that although KRM had only agreed to allow negative commissions to be transferred for the first three months of the APA, the Kays contended that KRM had agreed to allow the September negative commissions to be transferred.
Bestbet and Classicbet, now under the control of Playup as a result of the Classicbet SPA and Bestbet SPA, have brought a Cross Claim against the Kays to recover any amount for which they, or one of them, is liable to KRM. That claim is brought on several bases: 1. That by cl 6.1 of the respective SPAs, each of the Kays promised to: "satisfy and discharge in the proper time all liabilities of the Company and the Business incurred or accrued before and on the Completion Date…" 1. Classicbet and Bestbet claim that the liability to KRM under cl 16.1 is a liability that was incurred before the Completion Date, and that the Kays were required to satisfy that liability before or on the Completion Date. 2. That if, contrary to Bestbet and Classicbet's contentions, the emails of 11 April and 26 April 2018 were not notices to KRM under the APA, the Kays failed to give notice in accordance with the APA and that that failure constitutes a favouring by them of their interest over that of Classicbet and Bestbet and, hence, a breach of their obligations as directors of Classicbet (Alex) and Bestbet (Ryan). Classicbet and Bestbet claim that they are entitled to recover from the Kays loss caused by Alex and Ryan's breach of duty as director of their respective company, the loss asserted being the amount that Classicbet and Bestbet are required to pay KRM.
In support of its case against all Defendants, KRM relies on the Affidavits of Mr Jack Di Natale (12 December 2018 and 17 May 2019). Classicbet and Bestbet rely on the Affidavits of Mr Daniel Simic (15 April 2019, 21 August 2019 and 10 September 2019) and Mr Prashant Arora (22 August 2019). Alex has filed a number of Affidavits (27 March 2019, 28 June 2019 and 20 August 2019). Ryan has filed Affidavits of 28 March 2019, 26 June 2019 and 21 August 2019.
Ryan had a significant role in the Classicbet business and, at least after entry into the APA, the same staff acted on behalf of Classicbet and Bestbet.
The fact that KRM has given notice to Classicbet and Bestbet (and Ryan) of its claim to the lump sum has led to other litigation but not involving KRM. Playup has sued Ryan alleging a breach of warranty given under the SPAs ("the warranty proceedings"). In other proceedings Playup has sought a declaration in relation to the operation of cl 4.3 of the Bestbet SPA. The latter proceedings were heard by Stevenson J who delivered judgment on 25 June 2019: Playup Australia Pty Ltd v Kay [2019] NSWSC 771. An appeal from that decision was heard in September and judgment is awaited. The warranty proceedings have not yet been allocated a hearing date. Classicbet and Bestbet sought by a motion heard on the first day of the hearing of this case to join the warranty proceedings with these, but KRM and the Kays resisted that application and it was refused.
One matter which was ventilated before Stevenson J and, I was informed, in the Court of Appeal, is whether the Completion Date in the SPAs was 22 May 2018 or 7 June 2018. In Playup Australia, Stevenson J held that the Bestbet SPA was completed on 7 June 2018 (a finding with which all parties in these proceedings concur). His Honour also held that the Completion Date was varied in writing from 22 May 2018, as per cl 1 of the SPAs, to 7 June 2018. This is not a matter agreed by the Kays but Mr Pike made it clear that neither of his arguments here depend on a conclusion that the Completion Date was varied, and Mr Clarke made it clear that he has no interest in that issue since his case is that KRM received a notice dated 12 October 2018 and responded by notice electing to determine the APA and obtain the lump sum on 15 October 2018.

Credit of Witnesses

The areas of disputed fact between the witnesses were quite limited. Neither Mr Pike nor Mr McInerney put any submissions suggesting that I should not believe Mr Di Natale, KRM's only witness. Mr McInerney did not assert that I should find Mr Simic or Mr Arora unreliable. Alex was not cross examined (there was very little left of his Affidavits after objections were made by the other parties). Mr Pike submitted that Ryan, who was cross examined, was not a reliable witness, and Mr McInerney submitted that the Court should not accept Ryan's evidence in preference to Mr Di Natalie's in relation to the September Commissions.
The factual disputes were: 1. Did KRM agree to waive its entitlement to the September commissions of $113,000? This was asserted by the Kays not Classicbet and Bestbet. 2. Did Ryan provide a signed copy of the APA to Mr Simic? 3. Did Ryan inform Playup of the fact that the APA permitted KRM to terminate the APA by reason of the sale of shares in Bestbet and Classicbet? 4. Did Ryan inform Playup of the fact that KRM were pressing Classicbet to issue a notice of proposed change of control and then a notice of change of control? 5. Did Ryan not send notice of a proposed change in control to KRM because he thought that this would preclude him and his father from having to meet their obligations under cl 16.1? 6. When did Ryan learn that the NT Racing Commission had approved the deal on 17 May 2018?
The first issue was abandoned by Ryan in the course of submissions. Ryan had asserted that the negative commissions issue between KRM and Classicbet was resolved: see paragraphs 37 and 38 of Ryan's Affidavit of 28 March 2019. Mr Di Natale had denied that it was, and his evidence was supported by the email correspondence which Ryan did not include in his Affidavit: see CB A3:502, 504, 533, 534, 535, 539-541, 542 and 545, particularly CB 539, to which there was no response by Ryan or anyone else on behalf of Classicbet. As I have noted, the Kays abandoned this argument in final submissions but the evidence is relevant to Ryan's credit. There were, in addition, several other matters that were also relevant: 1. Ryan had said in his Affidavit of 28 Mach 2019 (paragraph 18) that the amendment of the APA whereby he became a party was undertaken without prior discussion, but he omitted from his Affidavit an email of 26 July 2017 (CB A3:430) in which he was notified of the proposed change. He said in cross-examination he must have missed that email, but even then he would only agree that his Affidavit was "possibly" wrong: T224.1-42. 2. Ryan's failure to tell Mr Di Natale that the NT Racing Commission approval had come through, notwithstanding the fact that he had previously given the absence of approval as the reason notice of proposed change of control could not be given, and his inadequate explanation for this failure (T267.45 - T268.50) in the context of an admission that he knew that KRM was increasingly pressing for notice in late May and early June 2018: T315.10. 3. The absence in his emails to Playup in the period before 7 June 2018 of any reference to KRM's clear and expressed interest in receiving a notice from Classicbet. 4. His assertion that he had told Mr Simic of the KRM pressure for a notice by telling Mr Luke Coward about it (Mr Coward being at the time an employee of Classicbet not Playup), but Ryan did not mention that issue in his emails to Playup at the time: T265.15 - T266.6. 5. His assertion that not all issues remaining between Playup and the Kays (involving about $180,000) were ventilated in the correspondence in the week before completion on 7 June 2018, which assertion Ryan made to justify his claim that he thought the SPAs might not complete. 6. His vagueness as to when he found out about the NT Racing Commission's approval.
All of these matters leave me disinclined to accept Ryan's evidence in preference to that of Mr Simic and of Mr Di Natale. In cross examination Mr Di Natale admitted to misconduct some 25 years ago that might well have impacted on his credit in other circumstances, but he was not shown to be untruthful on any matter on which he gave evidence in these proceedings. I find that Ryan's (and Alex's) failure to give a notice of proposed change was most likely motivated by a desire to ensure that the exercise of the option would occur after completion of the sale to Playup, but for reasons which shall become apparent I do not think that that conclusion is determinative of the outcome of the case.
In relation to whether a signed copy of the APA was provided by Ryan to Playup, I think that Ryan, on the balance of probabilities, did not do so because Ryan had to ask Mr Di Natale for a signed copy of the APA (see CB A4:711), and that was after a copy of the APA had been forwarded to Playup. I do not, however, see this conclusion as having any bearing on the issues to be determined in the present case.

The Emails of 11 April 2018 and 26 April 2018

The email of 11 April 2018, sent by Ryan on behalf of Classicbet, was a response to an email of Mr Di Natale of 11 April 2018: "Hi Ryan, Hope all is well. We haven't received your written notice yet regarding the sale, have you sent it? Thanks. Regards, Jack Di Natale" and was in the following terms: "Hi Jack, Sorry for the delay, I have been waiting for the approval from NT authorities. It should come through Friday. Are you available to meet Friday? The crown or somewhere that suits you better? Kind regards, Ryan"
The email of 26 April 2018 was sent in response to an email of Mr Di Natale of 22 April 2018 which had asked: "When can we expect to receive the written notice of the share sale as set out below, we were fine to receive it at the proposed dinner last week but with that not occurring can you please arrange to have it forwarded to us (on behalf of (KRM (Vic) Pty Ltd) ASAP." and was in the following terms: "Hi Jack, The transaction has yet to be approved by NT regulators. I will let you know progress. Did you want to pencil in lunch or dinner next Wednesday? Kind regards, Ryan"
Mr Pike made it clear that Bestbet and Classicbet do not assert that the emails of 11 and 26 April 2018 constitute notice of a change of control. Rather, what they say is that the emails amount to written notice to KRM that there was to be a proposed change of control. The email of 8 June 2018 from Ryan to KRM is also relied on by Classicbet and Bestbet.
I do not accept that the April emails constitute a notification of proposed change in control because: 1. They do not state that there is a proposed change in control. 2. They do not purport to be a notice given of a proposed change in control under the APA or at all. 3. The emails of 11 and 26 April 2018 are responses to a specific request for notice and they implicitly assert that there is a reason why notice cannot be given, i.e. "transaction has yet to be approved by NT regulators" (see CB A4:774), and they do not advise of the identity of the purchaser, the sale price or the multiple used (a matter relevant to calculation of the lump sum amount due under cl 16.1.4).

The email of 8 June 2018

Classicbet and Bestbet contend that the email of 8 June 2018 was a notice of change of control. Playup acquired control of Classicbet and Bestbet on the date that it acquired the shares (i.e. 7 June 2018) not on the date it agreed to acquire the shares, and Alex and Ryan "ceased" to have control of the entity on the day they transferred the shares in Classicbet and Bestbet to Playup, i.e. 7 June 2018.
The email of 8 June 2018: 1. Was sent by Ryan who had ceased to be a director of Bestbet or to have any role in Bestbet or Classicbet. 2. Does not purport to be a notice under the APA. 3. It does not expressly state that the shares have been sold to anyone and the only name mentioned is that of Mr Simic not Playup (or Fantasy Sports Pty Ltd). 4. It expressly states: "Undoubtedly Classicbet will give you notice in due course as per the Agreement", which makes it clear that it was not intended to be a notice by Classicbet.
In my view, the 8 June email sent by Ryan does not constitute notice given by Classicbet or Bestbet in accordance with the APA.

The Letter of 12 October 2018

As I have noted, there is some question as to whether it was open to Classicbet and Bestbet to challenge the letter as a notice under cl 16.1 of the APA. I am inclined to think it was not properly articulated as a ground (see Classicbet and Bestbet's Statement of Real Issues, which appears to accept that one of the documents referred to constitutes a notice under cl 16.1), but I shall nevertheless deal with this point.
The letter is sent in answer to a demand from KRM through Gates on 10 October 2018 that Classicbet and Bestbet provide written notice in accordance with cl 16.1.3 of the APA: see CB A4:976. It states: "Dear Mr Webster CLASSICBET PTY LTD & ANOR -V- KRM(VIC) PTY LTD We refer to your letter dated 10 October 2018 and confirm we act for Playup Australia Pty Ltd (PlayUp), now the sole shareholder of Classicbet Pty Ltd (ClassicBet) and Bestbet.com.au (BestBet). We note on or about 23 March 2018, PlayUp entered into a Share Sale and Purchase Agreement (Agreements) for the purchase of all shares in ClassicBet and BestBet from Ryan Kay. The purchase price for the shares in BestBet was $1,600,000 and $4,350,000 for shares in ClassicBet. The Agreements completed on 22 May 2018. So as to allow PlayUp to off-set any liability incurred by it on behalf of ClassicBet and BestBet prior to completion, the Agreement allowed for part of the purchase price to be paid by way of instalments over a period of 24 months. As and when the right to off-set arose, the relevant amount could be off-set against the instalment payments. With regards to BestBet, due to circumstances not relevant to this issue, the balance of the instalments, in the sum of $520,050.44, was paid to Ryan Kay yesterday. As such, PlayUp is no longer in a position to off-set any liability incurred by it on behalf of BestBet prior to completion from the purchase price for the shares in BestBet. With regards to ClassicBet, PlayUp asserts that the sum of $1,227,053.60 remains outstanding as at today's date, taking into account adjustments and offsets to date. If adjustments and offset are not included, the sum of $1,800,000 remains outstanding. Noting the provision of the information above, and so as to enable PlayUp to take steps to protect its own interests, would please advise the quantum of any claim you intend to make against BestBet, ClassicBet and Ryan Kay and advise what steps your client intends to take to recover this amount. We look forward to your urgent response. Yours faithfully YATES BEAGGI LAWYERS" There are also some follow up emails by which Gates sought, and was provided with, further information concerning the sale to Playup: see Exhibit B.
The letter of 12 October 2018 advises of the sale of all shares in Bestbet and Classicbet to Playup. It specifies the price paid for those shares. It specifies that the SPAs were completed on 22 May 2018. It clearly indicates that Classicbet and Bestbet expect that KRM may wish to claim against Bestbet, Classicbet and Ryan as a result of the provision of the information above. In response to a further email of Gates to Yates, information was provided making clear that a multiple was not in fact used in calculating the purchase price payable under the Classicbet SPA and Bestbet SPA: see Exhibit G. The letter does not expressly state that it is a notice given pursuant to cl 16.1, but in my view by reason of: 1. The contents of the letter and email; and 2. The context in which the letter was sent - i.e. a demand by KRM that notice be given under the APA, the letter and email sent by Yates constituted notice to KRM under the agreement.
That it was intended to be a notice is confirmed by the fact that there was no challenge by Classicbet or Bestbet to the treatment by KRM of it in its letter of 15 October 2018 as a notice entitling KRM to exercise its rights under cl 16.1 of the APA.

The Amendment Application

On the first day of the hearing Ryan sought to amend his Commercial List Response (headed Third Defendant's Further Amended Commercial List Response) which I have subsequently marked as "MFI 4". An Affidavit of 23 September 2019 of Mr Anthony Price, Ryan's solicitor, and of Ryan dated 18 September 2019 were relied on in support of the application.
Mr Clarke on behalf of KRM objected to the filing of that document for reasons which I shall outline and I refused to allow the amendment. Formal reasons were not sought at the time. During argument concerning the amendment there was very little said about the addition of a claim (in paragraph 15 of MFI 4) that the notice given by KRM was defective because: 1. It was given by KRM's solicitors, and the APA as a matter of construction did not permit that; and 2. KRM's solicitors did not have authority to issue the notice.
After the morning tea adjournment that same day, I indicated that I would be inclined to allow the amendment in paragraph 15, including both (1) and (2), provided Mr Clarke was able to deal with (2). I directed Mr McInerney to bring in the engrossed version of the List Response with paragraph 15 as proposed. On the next day Mr McInerney handed up not the engrossed version as directed but a newly amended List Response which has been marked as "MIF 5". I rejected that amended List Response following objection by Mr Clarke to its filing. Mr McInerney indicated at the time of rejection of the amendment that formal reasons were not required but subsequently he requested that I provide reasons for rejection of both MFI 4 and MFI 5 as part of this judgment, which I now do.
The amendments in MFI 4 (apart from those in paragraph 15 concerning the issue of the notice of 12 October 2018) are found in paragraph 16, and assert: 1. That Ryan did not operate any betting business on his own account and received no benefit from the APA. 2. KRM never referred any customers to Bestbet so Bestbet "derived no financial benefit during the course of the APA". 3. KRM continued to take the benefit of the APA by receiving commissions during and after the completion of the Classicbet SPA and the issue of the notice of 12 October 2018. 4. That KRM thereby exercised the option to continue the APA or otherwise affirmed the continuance of the APA. 5. That KRM is estopped from asserting that it exercised the lump sum option (by reason of waiver and approbation/reprobation). 6. That KRM was not entitled to receive the benefit of commissions and also require the Defendants to buy out the tail. 7. That although KRM was aware of the change in control it continued to receive commissions from Classicbet and, hence, waived its entitlement to issue its notice or rely on any deemed exercise of the option.
Mr Clarke resisted the amendments on the followings grounds: 1. It was advanced on the morning of a hearing that had been fixed in May this year. 2. It raised issues of some complexity, i.e. election waiver and approbation/reprobation. 3. It raised issues that would very likely require evidence from KRM. 4. That issues (1) and (2) would require investigation of how Classicbet and Bestbet conducted their business, which would include discovery of documents by Classicbet and Bestbet. 5. That issues (1) and (2) seemed to rely on post contractual conduct as an aid to interpretation of a contractual claim. 6. That the only explanation given as to why their amendments were only now being pursued so late was that the Kays did not know that Classicbet had continued to report affiliate client figures to KRM from October 2018 until June 2019, and only learnt of this from subpoenaed material produced in September 2019, but there is evidence that the Kays have been on notice since May 2019 that Classicbet was paying commissions to KRM: see CB A1:158, paragraph 68. 7. The proposed amendments followed two earlier iterations served in the previous week, including other claims now abandoned, such as s 8 of the Australian Consumer Law (sch 2 of the Competition and Consumer Act 2010 (Cth)), penalty and sham.
As Mr Clarke pointed out, the issue of commissions was raised by Classicbet and Bestbet (under the control of Playup), the contention being that since KRM had elected to take the lump sum (in April or May on their case, or in October on KRM's case) KRM was not entitled to commissions after the date of election. Classicbet and Bestbet had never contended that KRM lost the right to elect between 7 June and 15 October because it had continued to invoice for commissions notified or that anything it had done after election undermined or displaced its right to the lump sum. The argument advanced by Ryan contradicts that advanced by Classicbet and Bestbet since they seek return of commissions based on the fact that KRM had elected to take the lump sum, and they do not assert that KRM was precluded from exercising its right to the lump sum or that it lost the right to maintain its entitlement after it exercised the right.
In any event, Mr Clarke referred to paragraphs 49-51 of Mr Di Natale's second Affidavit (CB A2:181, and for the exhibit see CB A4:1036) and paragraph 68 of his first Affidavit (see CB A2:158). He also pointed out that there was no evidence from the Kays that they did not know that invoices were being paid by Classicbet in and after October 2018. Ryan's focus on what was produced under subpoena in September does not cure that deficiency.
I accepted Mr Clarke's submissions that he should not have to respond to a case that was being put against him for the first time on the weekend which involved issues of complexity that would or might require him to call evidence to rebut the contentions that he had not come prepared to meet, particularly when the factual basis for the contentions had been known to the Kays or their legal advisors at least since May 2019. Section 58 of the Civil Procedure Act 2005 (NSW) (the "Civil Procedure Act") requires the Court in determining whether to allow an amendment (for example) to take into account the dictates of justice, which requires consideration of the matters in ss 56 and 57 of the Act. I regard as significant: 1. The lateness of the application to amend; 2. The absence of any explanation by the Kays or their lawyers for the failure to raise these matters earlier and to apply for amendment in advance of the hearing; 3. The unfairness in expecting Counsel for KRM to have interrupted his presentation of his case to consider the ramifications of what is proposed, including not only the complex issue of estoppel, but also of waiver and approbation/reprobation, and to interview witnesses should that be required.
By MFI 5, the Kays sought to ventilate, at least in part, the same matters that had been refused on the Monday. This focused on what was contained in paragraphs 66-68 of Mr Di Natale's Affidavit of 12 December 2018 and asserted that KRM had exercised the option to continue with the APA or, alternatively, had waived its right to receive a notice and payment under cl 16.1. This was similar in part to what had been in MFI 4 and, not only that, but clearly based on an affidavit served by KRM long ago, and leave was refused on the same basis.

Conversations at the time of the APA

Another matter with which I need to deal before considering the remaining issues is the question of the admissibility of evidence of conversations of Ryan with Mr Di Natale, which Ryan sought to rely on in support of his case. I allowed the evidence to be advanced over the opposition of Mr Clarke, but on the basis that I would deal with admissibility in these reasons.
The sole question to which the conversations are said to relate is the construction of the APA and, in particular, the definition in cl 1 and its application in cl 16.1 of the APA. That is, Ryan says that the clause should not be construed as being applicable to him (and Bestbet).
Ryan seeks to rely on the conversations as evidence that establishes facts known to both himself and KRM and, hence, relevant to construction. Mr Clarke submits that the evidence of negotiations amounts to a breach of the parol evidence rule.
An attempt to rely on what was said in negotiations as part of the matrix of facts was firmly rejected by the High Court in Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596 by Mason J (as his Honour then was), with whom Barwick CJ concurred, at 606: "The respondent also sought to rely on the oral testimony given by officers of the appellant and the respondent as to what was said and done during the course of negotiations leading up to the making of the contract, with a view to demonstrating that the parties had "commercial" leases in mind. This was said to be evidence of surrounding circumstances to which recourse could be had in interpreting the contract. In truth the evidence is not evidence of surrounding circumstances; it is evidence of the antecedent oral negotiations and expectations of the parties and as such it cannot be used for the purpose of construing the words of a written contract intended by the parties to comprehensively record the terms of the agreement which they have made. As Lord Wilberforce said in Prenn v. Simmonds: "... evidence of negotiations, or of the parties' intentions ... ought not to be received, and evidence should be restricted to evidence of the factual background known to the parties at or before the date of the contract, including evidence of the 'genesis' and objectively the 'aim' of the transaction. As to the circumstances, and the object of the parties, there is no controversy in the present case. The agreement itself, on its face, almost supplies enough, without the necessity to supplement it by outside evidence."" (Emphasis added and footnotes omitted)
The words in the passage above seemed to me to describe what Ryan was seeking to do here and that the evidence should not be admitted. The KCS contended, however, that more recent authority of the Court of Appeal in WIN Corporation Pty Ltd v Nine Network Australia Pty Ltd [2016] NSWCA 297; (2016) 341 ALR 467 establishes that evidence of negotiations can be led and reliance was placed on [56]-[57]: "[56] As a preliminary, however, there is a need to consider the extent to which evidence concerning the course of dealings and negotiations between the parties before the making of their contact may properly be taken into account in determining the commercial purpose and objects. [57] Evidence of prior negotiations is admissible to the extent that it establishes objective facts known to both parties and the subject matter of the contract. Conversely, evidence reflecting the subjective intentions of the parties is, in accordance with long-standing authority, necessarily inadmissible for the purpose of determining the meaning of the contract (unless it demonstrates knowledge of surrounding circumstances). In recent times, the High Court has revisited the distinction between impermissible recourse to the parties' subjective intentions and expectations and permissible regard to objective matters known to the parties. In Victoria v Tatts Group Ltd [2016] HCA 5; (2016) 90 ALJR 392 at [51], the Court unanimously approved the formulation of principle advanced by three members of the Court (French CJ, Nettle and Gordon JJ) in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37 (at [46]-[51]) that, as a general principle of construction, the rights and liabilities of parties under a contractual provision fall to be determined by objective consideration of its text, context and purpose. The relevant enquiry is to be conducted on the footing of what a "reasonable businessperson" would have apprehended the terms to mean in light of the particular language used by the parties, the circumstances addressed by the contract and its commercial purpose. Although the Court was of the view that this process would not uncommonly be possible without reference to evidence of surrounding circumstances, it acknowledged that regard could be had to such evidence if, for example, it assisted in establishing the objective facts known to the parties and thereby elucidated with greater precision the commercial purpose or subject matter of the contract." (Footnotes omitted)
I do not regard the Court of Appeal in WIN as departing from anything said in Secured Income. No High Court case has departed from Secured Income or said it was incorrect. Victoria v Tatts Group Ltd [2016] HCA 5; (2016) 90 ALJR 392, on which the KCS rely, whilst being authority that context and purpose are important matters in construing a contract (see particularly [51] and [63], following Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104 at [46]-[51]), does not deal with the point.
Paragraphs 18 and 22 of Ryan's Affidavit of 27 March 2019 (CB A2:237 and 238) contain assertions by Ryan as to what was said to him by Mr Di Natale (which Mr Di Natale denies saying). There is no dispute that Ryan was the licence holder for Bestbet. That Classicbet and Bestbet were conducting online bookmaking business through two separate websites was clearly known because the definition of "Classicbet website" in the APA makes that clear. That Alex was not a party to the APA is not in dispute. None of these matters (identified in paragraph 37 of the KCS) affect the construction of the clause - what remains in the two conversations infringes the parol evidence rule and, on the authority of Secured Income, is not admissible. If I am in error on this approach I would prefer the evidence of Mr Di Natale to that of Ryan for the reasons indicated earlier in these reasons.

Is Ryan liable for the lump sum amount required to be paid to KRM by cl 16.1.4?

KRM (and Classicbet and Bestbet) contend that Ryan is liable because of the definition of "Classicbet" in cl 1. Ryan contends that the words "as the case may be" in the definition lead to the conclusion that Ryan was not intended to be liable to meet the liability imposed by cl 16.1.4. The argument is, additionally, that: 1. "As the case may be" emphasises that there will be circumstances under the contract where Ryan or Bestbet will not be liable but Classicbet will be. 2. Ryan and Bestbet did not in fact conduct any betting with KRM introduced clients - none of the commissions sought by KRM related to betting conducted by Bestbet or Ryan. 3. Ryan was the licensee through which Bestbet could conduct online betting and this was a fact known to KRM. 4. The clause should be construed contra proferentem, i.e. against KRM, because Ryan is in effect a surety and guarantees should be construed strictly: Andar Transport Pty Ltd v Brambles Ltd (2004) 217 CLR 424 at [17]-[23], and Bofinger v Kingsway Group Ltd (2009) 239 CLR 269 at [53].
Mr Clarke submits that: 1. The phrase "collectively and individually liable, as the case may be" is akin to "jointly and severally liable, as the case may be". The use of these words does not relieve any of the three parties from obligations for performance under the APA but, rather, indicates that there may be obligations which each would have individually, such as providing net cash statements. 2. The construction of the clause should not be undertaken with reference to how the parties conducted themselves under the contract: Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407; (2009) 76 NSWLR 603. The argument whether Bestbet and Mr Kay received any commissions is irrelevant. 3. Clause 16.1 specifically distinguishes between Classicbet and Bestbet on the one hand and "Classicbet", as defined, on the other. It enables, for example, KRM to elect to terminate the APA even if it is only one of Classicbet and Bestbet that is the subject of a change of control. "Classicbet is used on many occasions in the contract but in two provisions a distinction is drawn: Ryan is specifically mentioned in cl 1 in the definition of "Licence", and the definition of "Classicbet Website" includes both Classicbet and Bestbet. 4. There is nothing surprising in Ryan being liable for the amount that Classicbet and Bestbet were required to pay under cl 16.1.4. 5. Ryan is not a surety for the obligations of Classicbet and Bestbet.
I accept Mr Clarke's submissions at 48-(5) above. It does not assist Ryan to establish that he is individually liable to pay the lump sum as opposed to collectively liable with Bestbet and Classicbet. If Classicbet or Bestbet had paid the lump sum then Ryan would not have had to pay any further amount to KRM (although there may then have been an issue of contribution as between Classicbet/Bestbet and Ryan).
Metcash establishes that post-contractual conduct cannot be relied on as an aid to construction of the contract: see [10]-[11] and [13] per Allsop P, [58] per Giles JA, [314], [318], [322]-[324] and [327] per Campbell JA.
In my view, because cl 16.1 permitted KRM to terminate the APA whether or not control had changed in Bestbet if it had changed in Classicbet (and vice versa), the distinction used between "Classicbet" and Classicbet and Bestbet in the same clause, and the fact that the clause is dealing with an option to bring the APA to an end with a consequential requirement for money to be paid to it, cl 16.1, properly construed, makes all of Classicbet, Bestbet and Ryan jointly and severally liable to pay the lump sum if KRM elects to terminate. Ryan was the owner of Bestbet and was later to receive $1.6 million in the sale of Bestbet to Playup - it does not seem to me to be surprising that he would be liable to pay his share of the lump sum whether or not he had conducted a betting business in his own name for KRM introduced clients. KRM had no control over how Classicbet, Bestbet or Ryan dealt with referrals. On the 'contra proferentem issue' there is no evidence as to who prepared the APA or this particular provision, and nor do I think there is any ambiguity in the clause, but even assuming that KRM was responsible for the wording, I do not think the true effect of the clause is to make Ryan a surety - rather, he was to be jointly liable for a payment due to be made to KRM. In any event, cl 2(m) of the APA provides: "No provision of this Agreement will be construed adversely to a party solely on the ground that the party was responsible for the preparation of this agreement or that provision…"

Are the Kays liable pursuant to cl 6.1 of the SPAs?

Clause 6.1 of the SPAs is in the following terms: "Debts and liabilities 6.1 The Seller agrees to satisfy and discharge in the proper time all liabilities of the Company and the Business incurred or accrued before and on the Completion Date and agrees to indemnify, and to keep indemnified, the Buyer with respect to all claims in relation to those pre-Completion Date liabilities."
Classicbet and Bestbet claim that cl 6.1 of the SPAs imposed an obligation on the Kays to pay the lump sum due under the APA to KRM, because the obligation to pay that sum had been incurred when Classicbet and Bestbet entered into the APA. Obviously, at the time of entry into the APA no lump sum was then payable, and it would only become payable if there was a change of control of Classicbet and/or Bestbet (or arguably a proposed change of control) and if KRM decided to terminate the APA. Classicbet and Bestbet eschewed an argument that by their entry into the SPA they incurred a liability to KRM (see T343.23-44), but they maintained that by Classicbet's entry into the APA it did incur a liability to KRM. To support this claim, Mr Pike called in aid a line of authority concerning s 588G of the Corporations Act 2001 (Cth) ("the Corporations Act") and its analogues, the most authoritative of which cases is Hawkins v Bank of China (1992) 26 NSWLR 562 at 567G - 572F per Gleeson CJ, 576E per Kirby P and 578E per Sheller JA.
The Kays dispute that cl 6.1 has any application on two distinct grounds: 1. The clause should not be read as a promise to Classicbet (and Bestbet) but rather as one only to Playup. 2. "Incurred" should not be read by reference to how it is to be treated for the purposes of s 588G of the Corporations Act, but must be read in the context of the SPAs and the interpretation advanced by Classicbet and Bestbet does not fit.
I shall deal with the second point first.
In Hawkins the Court was concerned with a guarantee given to a bank by a company of two other companies forming part of a corporate group. Within a few weeks of the guarantee being given, the companies went into liquidation. The directors who had caused the guarantor to give the guarantee were held liable by the trial judge under s 556 of the Companies (New South Wales) Code, a precursor to s 588G of the Corporations Act. The Court of Appeal upheld the trial judge's conclusion that for the purpose of s 556 a company incurred a debt by entering into the guarantee even if, as at that date, the bank could not have called on the guarantee. Both Gleeson CJ and Kirby P (with whom Sheller JA agreed) referred to the statutory framework and held that "incurred a debt" included a contingent debt. Gleeson CJ said at [568]: "Guarantees are sometimes executed in advance of any principal debt coming into existence. A person may execute a guarantee in favour of a bank in a case in which the bank has not yet made an advance to its customer. In such circumstances it is not normally said that the guarantor, upon the execution of the guarantee, incurs a debt. Nor would it normally, and apart from some special context, be said that a person who gives a guarantee in respect of a debt incurred by another thereupon himself incurs a debt, at least if the principal debtor is apparently solvent and not in default. Equally, however, on any use of language, in the events that have occurred in a case such as the present, there ultimately comes a time when the guarantor would be said to be indebted to the creditor. In the present case, a guarantee was executed, the principal debtors became insolvent and went into default, and demand was made by the creditor under the guarantee. In those circumstances it seems difficult to deny that at some stage Equiticorp incurred a debt to the Bank." (Emphasis added) His Honour also noted that at [572]: "The words 'incurs' and 'debt' are not words of precise and inflexible denotation. Where they appear in s 556 they are to be applied in a practical and common sense fashion, consistent with the context and with the statutory purposes."
Standard Chartered Bank of Australia Ltd v Antico (Nos 1 and 2) (1995) 38 NSWLR 290; 18 ACSR 1, a case involving overdraft facilities, is also relied on by Classicbet and Bestbet. Hodgson J (as his Honour then was) held at 314B-C that: "a company incurs a debt when, by its choice, it does or omits something which, as a matter of substance and commercial reality, renders it liable for a debt for which it otherwise would not have been liable." His Honour did, however, express agreement with the decision in Bans Pty Ltd v Ling [1995] NSW ConvR 55-739; (1995) 16 ACSR 404 that liability for interest on unpaid rent was not incurred until the failure to pay rent gave rise to the liability, i.e. it was not simply entry into the lease that led to the incurring of that debt. Antico, like Hawkins, is a s 556 case. Hodgson J's statement of principle relates to "debts" and the question here is whether, as at the date of entry into the APA (because that is how Classicbet and Bestbet frame their argument), a debt to KRM was incurred.
I do not think decisions of what "incurred" means for the purposes of s 556 or its analogues are authoritative in the context of a commercial agreement particularly in the light of Gleeson CJ's comment in Hawkins on what the word would normally convey. "Accrued", it was suggested, is an accounting term and no separate argument was advanced in respect of it. I do not think in the present context it suggests a different conclusion than that reached on "incurred".
The words "incurred or accrued" must be seen in the context of the requirement in the SPAs that the Seller (i.e. Ryan or Alex) agrees to satisfy and discharge in the proper time all liabilities of the Company that have been incurred or accrued. As was pointed out in O'Keefe v Calwell (1949) 77 CLR 261, 295-296 per Williams J, "liable" ordinarily means actually liable not potentially liable. As at the date of entry into the APA, the conditions for exercise of the option did not exist and, as a matter of substance and reality, Classicbet and Bestbet were not thereby rendered liable for a debt. Even as at the Completion Date (i.e. 22 May 2018), or even as at 7 June 2018, no liability capable of being satisfied or discharged existed because KRM had not received a notice and had not elected to take the lump sum or been deemed to have done so pursuant to cl 16.1.3. I do not think that any liability to pay the lump sum was incurred until KRM had exercised its right to elect or the deeming provision took effect. I therefore conclude that as at the Completion Date or the date of completion, no debt had been incurred or accrued.
It follows that the Kays are not liable by reason of cl 6.1 of the SPAs to discharge the liability of Classicbet and Bestbet to KRM.
I shall deal now with the argument referred to in 54. Clause 6.1 is set out at [52] above and I set out below other relevant clauses of the SPAs, namely 6.3, 6.7, 6.8, 6.11 and 7.3: "Outstanding Liabilities on Completion 6.3 On Completion, the Seller must ensure that all money accrued up to the Completion Date, but not paid, in respect to liabilities (including but not limited to payments to creditors; client funds balance, statutory liabilities, GST, PAYG, payroll tax) will be adjusted on the Completion Date. Employee entitlements and Leave liability 6.7 Without limiting any other provision of this agreement, the Seller will ensure that, by Completion, the Company will have settled all outstanding liability for employee entitlements, unpaid wages, salary, remuneration, superannuation contributions; Compensation and benefits; redundancy for termination payments and all other outstanding employee entitlements of any nature (if any) by either direct payment to the particular Employee on or before Completion or by adjustment to the Completion Amount. 6.8 Employee entitlements will be allowed for as follows: 6.8.1 100% of leave entitlements calculated in accordance with the relevant rate, including loading where paid by the Seller. 6.8.2 Pro-rata long service leave entitlements calculated in accordance with the relevant rate for employees with over five (5) years' service. 6.8.3 Pro-rata entitlements to wages and superannuation for the period between their last payment date and the Date of Completion. The Seller indemnifies the Buyer in respect to all liabilities incurred by the Buyer or the Company with respect to any unpaid Superannuation, entitlements or other claims made by any former employee or Employee or action taken by a Government Agency in connection with any employee of the Company in respect to the period before the Completion Date. Adjustment 6.11 It is agreed, that if the money for any liabilities of the Company and the Business and the Player Funds (and any other matter contemplated under this agreement) are not in the Company's bank account on Completion, the amount attributed to such matters will be adjusted on Completion, from the Completion Amount. Indemnity by Seller 7.3 Subject to Completion, the Seller indemnifies the Buyer in respect of all damages, costs, losses and liabilities whatsoever suffered or incurred by the Buyer after Completion as a consequence of: 7.3.1 The breach of any of the Seller Warranties; 7.3.2 Failure by the Seller to discharge all debts due and payable by the Company, which were incurred prior to Completion; 7.3.3 The Seller failing to transfer any domain name that the Company has an interest in, that is not currently registered in the name of the Company, to the Company."
Mr Pike and Mr McInerney agree that cl 6.1 contains two promises on behalf of the Kays ("the first promise" and "the second promise"), but they differ as to what exactly the first promise entails and to whom it is made. The first promise by the Kays is to "discharge and satisfy in the proper time the liabilities of the Company" and the second is to indemnify "the Buyer" (i.e. Playup) against claims that may arise as a result of the Kays' failure to discharge and satisfy the Company's liabilities in the proper time (noting that the Seller provides a further indemnity in cl 7.3 which overlaps somewhat with the indemnity in cl 6.1).
Mr McInerney in the KCS argues that the first promise in cl 6.1 is made to Playup not to the Company: KCS paragraph 93. Mr Pike, on the other hand, contends in the CCSR that the first promise is made to the Company (i.e. Classicbet and Bestbet), as indicated by the way the first promise is worded - the Kays' promise is to "satisfy and discharge…the liabilities of the Company" rather than to "cause the Company to discharge its liabilities": CCSR paragraph 5(a). Mr Pike submits that Classicbet and Bestbet should be able to sue on the first promise as they are each a party to their respective SPA and the promise is to their benefit: CCSR paragraph 4(a). In this way, Mr Pike submits that cl 6.1 provides, by the first promise, a cause of action to Classicbet and Bestbet and, by the second promise, a cause of action to Playup (i.e. the indemnity): CCSR paragraph 4(a), (d). Mr Pike contends that this interpretation makes commercial sense, as Playup is protected by the indemnity and thus is not itself in need of the first promise (or so he seems to imply): CCSR paragraph 4(a).
Mr McInerney submits (at KCS 106) that the fact that any undischarged liabilities of Classicbet are to be deducted on Completion by way of the "adjustment" mechanism in cl 6.11 (between Playup as Buyer and Alex/Ryan as Sellers) indicates that the first promise in cl 6.1 is made to Playup not to Classicbet. I accept this submission. Clause 6.1 is a single sentence and, although it contains two distinct promises (the second of which, Mr Pike and Mr McInerney agree, is made to Playup), it does not read as though they were made to two different parties. Whilst the first promise in cl 6.1 is not explicitly phrased in terms of "the Seller will ensure that the Company satisfies and discharges its liabilities", the context indicates that cl 6.1 is intended to operate in such a manner. I cannot accept that the first promise in cl 6.1 should be understood as a promise by the Kays to Classicbet and Bestbet to personally pay Classicbet and Bestbet's pre-Completion Date liabilities out of their own pockets without recourse to Company resources. Such an interpretation is inconsistent with the arrangements countenanced in the other sections quoted at [61] above, such as 6.7 (in relation to the Company's outstanding liabilities to employees, which the clause expressly provides are to be paid out of Company resources), and the adjustment clause in 6.11, which envisages the money for any outstanding liabilities needing to be "in the Company's bank account" on Completion.
When cl 6.11 is construed together with cls 6.3, 6.7, 6.8 and 7.3, the context makes it clear that the first promise in 6.1 is part of a multilayered promise by the Kays to Playup rather than to the Company, designed to shield Playup from pre-Completion Date liabilities. The first layer is a promise to Playup as the Buyer that the Seller will discharge the Company's pre-Completion Date liabilities, the second layer being the promise to permit offset of any undischarged liabilities through the adjustment mechanism in cl 6.11, and the third layer being the indemnity. Contrary to the suggestion in Mr Pike's submissions that Playup is adequately protected by the indemnity, in my view all three layers of protection make commercial sense for Playup as they each shield Playup from loss in slightly different ways. The first promise to Playup contractually requires the Kays to take action to ensure the Company's existing liabilities are paid before the Completion Date. The adjustment mechanism provides a practical means of enforcing that obligation in the event that the Kays fail to discharge the promise to Playup, but the adjustment is not in itself a complete shield because the pre-Completion Date liabilities could potentially amount to more than the contract price, which is why the indemnity is commercially necessary as a further layer of protection.

The breach of director's duties

Classicbet and Bestbet contend that any liability that they have to KRM as a result of the exercise of the option for a lump sum in cl 16.1 of the APA has arisen because of the failure of Alex and Ryan to give a notice of proposed change of control to KRM. This argument is predicated on three foundations: 1. That, contrary to the argument of Classicbet and Bestbet advanced against KRM, the emails of 11 April and 26 April 2018 did not constitute written notice to KRM of the proposed change. 2. That cl 6.1 does not require the Kays to meet the liability of the lump sum payment because no liability to KRM by Classicbet or Bestbet was incurred before 15 October 2018 (i.e. it assumes that the argument of Classicbet and Bestbet based on cl 6.1 has failed and that its argument based on prior notice has failed). 3. That cl 16.1 required Classicbet and Bestbet to give notice to KRM of the proposed change in control. 4. That the reason that Ryan (and Alex) did not give the notice of proposed change in control to KRM was because they understood that if they gave notice to KRM, KRM would or might exercise its right to a lump sum prior to 22 May 2018, and that if KRM did so they would have to meet that liability by virtue of cl 6.1 of the SPAs. They were thus, it is said, in breach of their duties and favoured their own interests over that of Classicbet and Bestbet.
The Kays contend that Classicbet and Bestbet's argument should be rejected and for the following reasons: 1. Clause 6.1 would not have required the Kays to pay any money to Classicbet or Bestbet had KRM opted for the lump sum before the Date of Completion (whether it be 22 May 2018 or 7 June 2018). This is the construction issue that I have dealt with earlier. 2. There is no evidence that KRM would have exercised its option for the lump sum at any time before May 2018 - it cannot be inferred that it would have done so in late April or early May because it did so in mid-October, and particularly where no evidence was led or sought from KRM concerning the reasons for its decision in October and what it would have done in May. 3. There is no evidence that it was in the interests of Classicbet (and Bestbet) to give notice of a proposed change of control in April or May rather than in October. 4. A notice of proposed change of control was not mandatory and even if it was it could not have been acted on by KRM. The Kays contend that, properly construed, the lump sum could not have been sought as a response to a notice of proposed change of control - the option given by cl 16.1.2 was predicated on a change of control. Proposed change is not mentioned in cl 16.1.2. 5. There is no evidence that the "buying out the tail" was not advantageous to Classicbet in that, although it had to pay money pursuant to cl 16.1 of the APA, it obtained the benefit of clients in respect of which in the future it would not need to pay commissions.
Mr McInerney pointed to the rather curious feature of the Classicbet/Bestbet case on breach of duty alleged against Ryan and Alex, which is that KRM has not brought any claim against Classicbet, Bestbet or Ryan based on the alleged breach and the debt to KRM that would arise if a notice of proposed change of control had been issued by Classicbet and could have been acted upon by KRM whenever the notice was issued. It is Classicbet that seeks to assert that it was in breach of the APA by failing to issue a notice of proposed change of control, despite KRM not making that assertion. There is the added dimension that Classicbet (and Bestbet) have run this case against KRM on the basis that it did give notice by the April emails, yet they claim against Ryan and Alex on the basis that they deliberately did not give notice. Since KRM puts no case against Classicbet that it breached cl 16.1 by not giving a notice of proposed change it is Classicbet that seeks to establish a breach by itself in order to found a claim against the Kays. If the Court finds Classicbet liable for breach it will be because Classicbet has itself persuaded the Court that it was in breach, not because KRM makes that assertion.
I will deal first with the question of whether failure to give a notice of proposed change in control was a breach of cl 16.1 of the APA, i.e. whether such a notice was mandatory.
There is an obvious tension between cl 16.1.2 and 16.1.3 because cl 16.1.2 makes change of control the trigger for potential exercise of the option and not proposed change of control, yet cl 16.1.3(a) uses the word "must" in stating what is to be provided.
Mr McInerney submitted that the effect of cl 16.1 is that two notices are required - notice of the proposed change in control and notice of the actual change in control once it has occurred. It was, he submitted, only on receipt of the latter that KRM could exercise the option.
Mr Pike contended that a notice had to be given when a change of control was proposed, at least once a contract was signed, even if the completion of the contract was conditional on certain events occurring. If that construction is correct it would mean that Classicbet and Bestbet would have to give notice of a proposed change in control that might not actually occur, with the possibility that KRM will terminate the APA within 14 days of receipt of the notice (or be deemed to have done so).
I think there is force in Mr McInerney's submission that cl 16.1.2 makes change in control, i.e. actual change in control, the reason for exercise of the option, but I see it as problematic that the contract could require a notice to be given which could not be acted upon.
Mr Pike in the CCSR contended that the construction propounded by the Kays required the word "or" in cl 16.1.3 of the APA to be read as "and" and he drew attention to authorities which support the proposition that substitution of this kind is only permitted when it is necessary to avoid absurd consequences: Jireh International Pty Ltd v Western Exports Services Inc [2011] NSWCA 137 at [55] and [63]-[64]; R v Oakes [1959] 2 QB 350, 356; Abletone Pty Ltd v Bonview (Tas) Pty Ltd [2008] TASSC 59 at [22]; Green v Premier Glynrhonwy Slate Co Ltd [1928] 1 KB 561, 568 and BP Australia Ltd v South Australia (1982) 31 SASR 178, 191.
The construction which I favour does not require "or" to be read as "and".
I have reached the conclusion, and not without hesitation, that cl 16.1.3 should be read as requiring Classicbet and Bestbet to give either notice of proposed change or notice of actual change at their option. KRM can act on either and take up the option in cl 16.1.3 if it wishes (or be deemed to have exercised the option if it does not reply within 14 days). If there has been a change of control and no notice of proposed change has been given Classicbet and Bestbet must give notice, but if there is a proposed change of control they can, but are not required to, do so.
If I am wrong interpreting the clause in this way, then I accept the contentions of Mr Clarke and Mr McInerney that the option can only be exercised on receipt of a notice of actual change of control and that could not occur until 7 June 2019 or afterwards.
On the approach indicated at [76] above it follows that the Kays did not cause Classicbet and Bestbet to breach the APA by not sending a notice of proposed change of control. Since this part of the Cross Claim is predicated on breach by Classicbet and Bestbet of the APA, it must fail. Although strictly not necessary to do so, I will comment on other issues that arose in relation to this claim. In considering these other issues I will assume, contrary to what I have concluded, that notice of proposed change of control was required to be given by Classicbet and Bestbet, and could have been acted on by KRM.
On this alternative approach, it is necessary to consider whether Classicbet and Bestbet have established: 1. That the Kays breached their duty to Classicbet and Bestbet by not issuing a notice of proposed change of control to KRM in April. 2. That Classicbet and Bestbet have suffered loss or damage because of the Kays' failure to ensure that notice of proposed change of control was sent to KRM in April 2018.
It needs to be recognised that the SPAs were conditional on approval of the NT Racing Commission (see cl 3.1 of the SPAs) and the approval was not obtained until 17 May 2018, and Ryan was not informed of that until 18 May at the earliest and possibly not before 22 May 2019.
Classicbet and Bestbet's contentions seem to proceed on the assumption that notice of proposed change had to be given prior to the approval of the NT Racing Commission being given. I am not persuaded that a notice of proposed change was required to be given until any matter that was a condition precedent to the completion of the SPAs had been met, and until Ryan and Alex were informed that it had been. The evidence establishes that the Kays' solicitors were informed of approval having been given by Playup's solicitor on 18 May 2018, and I think that Classicbet and Bestbet would need to have been given a reasonable period within which to give notice to KRM. 18 May 2018 was a Friday and 22 May was a Tuesday. The Completion Date specified in the SPAs was two business days after Playup received regulatory approval, which was 22 May 2018. Classicbet and Bestbet before me have not sought to contend that the Completion Date in the contract was altered from 22 May 2018 to the date that completion in fact took place: see T350.49 - T351.2. I therefore accept Mr McInerney's submission that the Court should not conclude that the contractual Completion Date was altered. It follows that even if Classicbet and Bestbet were required to give a notice of proposed change of control it would not have been received and, a fortiori, could not have been acted upon prior to 22 May 2018.
The next issue is what loss is claimed to flow from the fact that a notice was sent in October 2018 and not March or April 2018. Classicbet and Bestbet claim that the loss which flows is that, had notice been given in March or April 2018, KRM would have responded to that notice by exercising its option for the lump sum and that, under the SPAs, Ryan and Alex would have been required to meet that liability, and Classicbet and Bestbet would, in the event, not have to bear any of the lump sum.
The Classicbet submissions contain the assumption that it can be inferred that KRM would in April, on receipt of a notice of proposed change of control, have responded to it in the same way that it did in October. No evidence was led by Classicbet to support that conclusion and there are some matters which undermine that inference. The first is that KRM through Mr Di Natale expressed concern over the failure of Classicbet to provide a notice by June: see CB A4:887. The second is that as at April there had not been commissions earnt for the previous 12 months, rather only for 9 months. Third, the question of whether Mr Simic was made aware by Ryan of the terms of the APA became an issue of which Mr Di Natale became aware and which he raised with Mr Simic in June 2018: paragraph 39, CB A2:151, and see CB A4:890.
I should note that there was a dispute as to who bore the onus of establishing what KRM would have done had the notice of proposed change been sent. The Kays drew attention to the fact that no questions were asked by Mr Pike of Mr Di Natale (the only witness called by KRM) relating to this topic, and the owner of KRM, Mr Kevin McCrohan, was not called by Classicbet and Bestbet or subpoenaed to give evidence. On the issue of onus it is the Plaintiff that must establish that the damage suffered by the corporation has "resulted from" the Defendant's contravention of the relevant statutory provisions in order for compensation to be payable under s 1317H of the Corporations Act: see Robert P. Austin and Ian M. Ramsay, Ford, Austin and Ramsay's Principles of Corporations Law (LexisNexis Butterworths, 17th ed, 2018) at 3.400.12, Agricultural Land Management Ltd v Jackson (No 2) [2014] WASC 102; (2014) 285 FLR 121 at [394], Adler v ASIC [2003] NSWCA 131; (2003) 179 FLR 1 at [709] per Giles JA, and Asden Developments Pty Ltd (in liq) v Dinoris (No 3) [2016] FCA 788; (2016) 11 BFRA 419 at [149]-[152]. Mr Pike submitted that I should infer that KRM would have done in March or April what it did in October but, as I have noted, I do not think there is sufficient evidence to support that inference.
I am not satisfied on the balance of probabilities that KRM, had it received notice of a proposed change of control in April 2018, would, at that time, have opted for the lump sum. It follows that even if the Kays were in breach of their duties to Classicbet and Bestbet, and ought to have caused Classicbet and or Bestbet to issue a notice of proposed change of control before 22 May 2018, they have not established that Classicbet and Bestbet have suffered any loss.
In relation to 67, whilst it is true that no evidence has been led by Classicbet and Bestbet that establishes what the difference would be between the lump sum and the non-payable commissions extrapolated for the future, Classicbet and Bestbet's argument does not require any such assessment because they contend that Ryan and Alex were required to pay the amount due for the lump sum irrespective of whether Classicbet and Bestbet benefited from the exercise of the option. There remains the point, however, that on the construction of cl 6.1 of the SPAs that I have accepted, cl 6.1 did not confer a benefit on Classicbet and Bestbet but, rather, on Playup.

The calculations of the amount due to KRM

Classicbet and Bestbet do not dispute that KRM is entitled to be paid the sum calculated in accordance with cl 16.1.4, but there are two main issues in respect of the amount claimed by KRM.
KRM claims that the sum which it is entitled to is $3,296.974, i.e. an average monthly commission of $54,949 multiplied by 12 for the 12 months specified in cl 16.1.4(b) and then by five, being the relevant multiple. Using the same multiples but a lower average monthly commission of $40,391, Classicbet and Bestbet arrive at a figure of $2,423,505.70.
There is an Amended Schedule of Invoices and Payments (Exhibit H) which lists all of the invoice details, the commission periods to which they relate and when the invoices were paid. Those details are not in dispute but there are a number of reasons for the difference between the $54,949 figure and the $40,391 figure, namely: 1. KRM has used as the figures for commission the months October 2017 to September 2018 rather than the period 15 October 2017 to 15 October 2018, i.e. it has looked at 12 months of commissions using 12 whole months. 2. KRM has used not what was actually paid in that 12 months but what was invoiced in the 12 months and paid whenever it was paid. So if an invoice was rendered in September 2018 and paid in November 2018 it is treated as part of the calculation. 3. It has treated as paid an amount of $113,000, an amount which should have been paid in September 2018 but which was not paid. This sum was deducted from payment due by Classicbet because it was a negative commission and Classicbet, through Ryan, claimed that it should be deducted. KRM's position was that negative commissions could only be deducted within the first three months of operation of the APA. That three month period had expired by September 2018. This was conceded by the Kays in closing submissions (T370.1-4) and it is no longer an issue.
In respect of the first issue at 89 above, in my view, the reference to "the 12 months immediately preceding the date that the option is exercised by KRM" and the "average monthly commission" requires consideration of the months October 2017 to September 2018 inclusive - the requirement is not to take the 365 days prior to exercise of the option.
I turn to the question of what is meant by "average monthly commission paid by Classicbet". Classicbet (and Bestbet) maintain that it is only if commissions were paid in the previous 12 months that they should be taken into account. KRM contends that the phrase should be taken to mean "paid or ought to have been paid in compliance with the terms of the contract".
There are three possible ways of construing the words "paid by Classicbet": 1. What was actually paid to KRM in the preceding 12 months by way of commissions. 2. What ought to have been paid in accordance with the contract within the previous 12 months: see cl 7.3 of the APA. 3. What was payable (whenever paid) as a result of commissions earnt within the preceding 12 months.
Classicbet and Bestbet assert that the first interpretation ought to be adopted. That is what the words used literally mean. The problem with this interpretation is that if Classicbet, in breach of its contractual obligations, paid no commissions to KRM then KRM would receive nothing under cl 16.1.4. That does not make commercial sense, a matter of relevance in construing a commercial contract: see Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640 at [35] and Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104 at [51].
89 and (3) are quite similar - one focuses on the payments being paid and the other on commissions earnt by KRM. As it happens, there is no dispute that commissions earnt by KRM were in fact paid. In my view "paid" in the context of cl 16.1.4 should be construed as "payable". This construction effectively treats the formula as focusing on commissions earnt in the previous 12 month period. In Treolar Constructions Pty Ltd v McMillan [2011] NSWCA 72 at [21]-[24] the Court of Appeal held that for the purpose of that contract, "paid" meant "invoiced" and offers an illustration of an approach which I think is appropriate here.
There is a further issue in relation to commissions claimed by KRM after the exercise of the option under cl 16.1 of the APA. Classicbet paid a significant amount of commissions to KRM (either $508,584 on KRM's figures or $525,091 on Classicbet's calculations). KRM has taken the position that it was entitled to commissions until Classicbet paid what was due under cl 16.1.4. I accept Classicbet's argument that, having opted for the lump sum, KRM is not entitled to commissions, but it is not necessary to venture into the question of whether the payments were made by Classicbet under a mistake and should be returned, because Classicbet did not pay the lump sum due to KRM pursuant to cl 16.1.4 and it was, and remains, owing. The appropriate way of dealing with this is to treat the payments made by Classicbet as part payment of the lump sum due. Interest on the lump sum due should be calculated in accordance with s 100 of the Civil Procedure Act, but allowing for the payments made by Classicbet to KRM.
As I have indicated previously, KRM is entitled to payment of the $113,000 and to have that included in the formula for cl 16.1.4.

Conclusion

It follows that Classicbet, Bestbet and Ryan are all jointly and severally liable for the amount to which KRM is entitled under cl 16.1.4. That amount will need to be calculated having regard to the method of calculation which I have determined in earlier paragraphs of this judgment. The Cross Claims of Classicbet and Bestbet against the Kays should be dismissed.
I will allow the parties time to formulate the orders reflecting the conclusions in these reasons and I will hear the parties on the issue of costs.

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: 18 December 2019

Companies (New South Wales) Code Competition and Consumer Act 2010(Cth)

KRM (Vic) Pty Ltd v Classicbet Pty Ltd

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