Martech International Pty Ltd v Energy World Corporation Limited

Federal Court of Australia (Full Court)|2007-03-21|Before: Carter J, Gyles JJ

REASONS FOR JUDGMENT THE COURT: 1 This is an appeal from the judgment in Martech International Pty Ltd v Energy World Corporation Limited [2006] FCA 1004. The principal question turns upon the effect of one phrase in one clause of an agreement to provide management services. The clause, with the relevant phrase emphasised, is as follows: '8. Termination 8.1 The Company may (subject to clause 8.3 hereof) by notice in writing to the Manager terminate summarily the engagement of the Manager under this Agreement if:- 8.1.1 in the reasonable opinion of the Company the Manager is not carrying out the Specified Services in a manner satisfactory to the Company; 8.1.2 the services of the said Fletcher Maurice Brand are not provided for any consecutive period of three (3) months or his services are not available for any cumulative period of Four (4) months in any period of 12 months. 8.1.3 in the reasonable opinion of the Company the Manager has committed or is preparing to commit a serious or persistent breach of any of the provisions of this Agreement; 8.1.4 the Manager, goes into liquidation or receivership or suspends payment or compounds with or assigns its estate for the benefit of its creditors; and 8.1.5 the Manager or employee is convicted of a criminal offence carrying imprisonment as a possible penalty. 8.2 Subject to clause 8.3 hereof, the Manager may be [sic] notice in writing to the Company terminate summarily this Agreement if the Company suspends payment or compounds with or assigns the Company's estate for the benefit of the Company's creditors. 8.3 The Company or the Manager can only terminate this Agreement if all of the following provisions are complied with:- 8.3.1 the Company or the Manager is in breach of their respective obligations hereunder for a continuous period of thirty (30) days; 8.3.2 the Company or the Manager serves a written notice on the other demanding rectification of the breach within thirty (30) days of the date of service of such notice; and 8.3.3 the Company or the Manager (as the case may be) does not rectify the said breach within thirty (30) days of service of the notice provided for in the sub-clause 8.3.2. 8.4 Upon termination of this Agreement for whatever reason the Manager shall deliver to the Company or its authorised representative all records, accounts and other documents and property of the Company. 8.5 In the event of the Manager wishing to terminate its services hereunder the Manager may do so upon first giving to the Company three (3) months written notice of its intention so to do. 8.6 In the event that this Agreement is terminated for any other reason other than as stated in clauses 8.1.1, 8.1.3, 8.1.4, 8.1.5 and 8.5 hereof … or the Term (as extended or renewed) is not renewed the Company shall pay to the Manager the Fee for a further period of twenty (20) months together with one (1) month for every complete year that this agreement operates calculated from the 1st July 1999 to the date of termination or expiration.' (Emphasis added) 2 The agreement was made on 28 May 1999 between the respondent Energy World Corporation Limited (Energy World) (then named Energy Equity Corporation Limited), on the one hand, and Martech International Pty Ltd (Martech), the appellant, on the other (the Agreement). The recitals were as follows: 'A. The Company carries on the business of providing alternative energy packages utilising gas as the energy source and establishing energy activities. B. In order to assist in the administration, management and financial control of the business of the Company and the marketing of the Company's products and services the Company has requested the Manager to provide the Specified Services which the Manager is agreeable to do for the consideration and upon and subject to the covenants and conditions as hereinafter set out.' 3 The substance of the Agreement was that Martech would provide the full time services of Fletcher Maurice Brand to provide the services of Managing Director of Energy World for a four year term commencing on 1 July 1999 and thereafter renewable by mutual agreement. The fee was $500 000 per annum plus various other benefits indexed annually. 4 Energy World was incorporated in March 1985 and developed a substantial business relating to natural gas and power. It was listed on the Australian Stock Exchange in December 1989. Brand was a shareholder from incorporation and was its Managing Director from inception. His services as Managing Director were provided under consecutive agreements entered into between Martech and Energy World. 5 On 13 March 2000 Martech and Energy World executed a deed of variation of the Agreement, the effect of which was to delete cl 3.2 and the reference to it in cl 8.6. Clause 3.2 was in the following terms: 'If: (a) one party or a number of associated parties ("the control party") acquires 25% or more of the issued capital of the Company; and (b) anytime thereafter the composition of the Board of Directors of the Company is altered so that a majority of the Directors are nominated or appointed by the control party then:

Each of the Company and the Manager shall within 90 days of both these events occurring have the right to terminate this Agreement. If this Agreement is terminated by either party under the terms of this clause the Manager shall be paid out the balance of the Term of this Agreement from the date of termination together with any other accrued entitlements or paid for a minimum period of two years which ever is the greater.' 6 The primary Judge found that the Agreement was consensually discharged on 29 September 2000 in view of the appointment of another person as Managing Director and Chief Executive Officer of Energy World on that day and Brand's relinquishment of that office on that day ([2006] FCA 1004 at [163]). The background to, and the aftermath of, the events of 29 September 2000 are detailed by the primary Judge ([2006] FCA 1004 at [8]-[71]) and need not be repeated in full. 7 In October 1997 Energy World negotiated a two year financing facility with the Commonwealth Bank of Australia Limited (CBA) for a substantial sum. The moneys advanced were to be repaid or rolled over for a ten year period in January 2000. Towards the end of 1999 CBA advised Energy World that it was not prepared to refinance or renegotiate the facility. Energy World's share price had declined. From late 1999 negotiations took place as to a capital injection by a Hong Kong based company, Energy World International Limited (EWI). Mr Stuart Elliott was the Managing Director of that company. A Mr Ian Jordan was an Executive Director of that company. Elliott was appointed to the board of Energy World on 29 November 1999 with Jordan as his alternate. Negotiations ensued as to the basis upon which EWI would provide funds. EWI had the carriage of discussions with CBA. Brand, on behalf of Martech, unilaterally reduced the fee being paid to him to the rate of $300 000 per annum from 1 March 2000. 8 The minutes record the following at a meeting of the Board of Energy World held on 29 September 2000: 'Mr Brand noted that the Conditions Precedent of the CNF included changes in management. Mr Brand noted that he had discussed these proposed changes with Mr Elliott and as they were required in order for the CNF to proceed, it was a requirement that he step aside on a basis to be agreed. EWI proposed that he be appointed an Executive Director. With the slippage of time and the undertakings by EWI to provide the necessary funding to support the company, the changes were required.' 9 At that meeting, Elliott was appointed Managing Director and Chief Executive Officer of Energy World, Jordan was appointed an Executive Director and Brand was appointed an Executive Director. Brand's precise role had not then been agreed. 10 The primary Judge held that Elliott had effectively required Brand to relinquish his office as Managing Director and become an Executive Director instead. Brand agreed to the proposal because the financial circumstances of Energy World, the attitude of its major creditor and Elliott's control of it, left him no practical alternative. 11 From 29 September 2000 Brand ceased to perform the duties of Managing Director and any of the duties set out in the Schedule to the Agreement of May 1999. Martech rendered monthly invoices for consultancy fees for Brand's services as an Executive Director and these were paid. 12 Martech contended that the consensual discharge of the Agreement amounted to termination for a reason other than as stated in cl 8.1.1, cl 8.1.3, cl 8.1.4, cl 8.1.5 and cl 8.5, thus obliging Energy World to pay Martech the fee provided for by cl 8.6 of the Agreement (the Fee). 13 The primary Judge identified the following questions for consideration ([2006] FCA 1004 at [152]): '1. Was the Agreement of May 1999 discharged or varied on 29 September 2000? 2. If it was discharged, was that discharge a termination within the meaning of cl 8.6 which gave rise to an entitlement to a Termination Payment? 3. If the discharge was a termination within the meaning of cl 8.6, did it flow from an agreement which extinguished any such entitlement?' 14 Having effectively answered question 1 in the affirmative, his Honour went on to consider question 2 and gave a negative answer. He thus did not proceed to consider question 3. 15 The operative part of his Honour's reasons for rejecting the claim were as follows ([2006] FCA 1004 at [175]-[176]): 'The question arises whether by cl 8.6 Martech was entitled to a termination payment in the event of a discharge by agreement. Absent clear words, I do not construe cl 8.6 as extending to such a case. The bases and terms upon which parties to an agreement may agree to discharge it are many and various. The extension of cl 8.6 to mandate a very substantial payment in the event of an agreed discharge of the parties' contractual obligations would impose a requirement on the parties as to the terms on which they may so agree. Even if cl 8.6 expressly applied to a discharge by agreement, it would be open to the parties by agreement to discharge that obligation along with all the others. Indeed so to construe cl 8.6 is to give it, in its application to an agreed discharge, an operation rather like that of an agreement to agree. Such an agreement is not a contract. I accept in so saying that it may theoretically be possible to create an entitlement to a termination payment which vests, pursuant to the Agreement, upon the external event of a later agreement to discharge. I do not accept, however, that cl 8.6 so operated. The basis upon which the Agreement was discharged did not include any obligation to pay a termination fee. Whatever the terms of the New Contract which supplanted the Agreement it included Mr Brand's continuance as an executive director, initially at the fee he was then being paid as managing director. That was a rate which he himself proposed and subsequently reduced to $240,000 per annum with effect from 1 October 2000. There was no suggestion in the discussion leading up to the Board's resolution of 29 September 2000, nor in the terms of the Board's resolution, that Martech was to be afforded a Termination Payment under cl 8.6. That would have been a very considerable sum. Mr Brand did not, on behalf of Martech, purport to reserve any rights with respect to a Termination Payment.' 16 The only ground of appeal is that the primary Judge erred in law in his construction of cl 8.6 in holding that Martech was not entitled to a termination payment on termination of the Agreement by mutual agreement. There is no challenge to any of the findings of primary fact. Energy World, in addition to supporting the reasons of the primary Judge, seeks a positive answer to the third question posed by the primary Judge as an independent ground of upholding the judgment.

Construction issue 17 Clause 8.6 must be construed as at the time the Agreement was executed. As such, it seems clear that the effect of it was to assure Martech that, unless the Agreement was terminated for one of the defined causes during the term, Martech was entitled to a renewal or payment of the agreed Fee. This could not be circumvented by termination on the part of Energy World during the term of the Agreement other than for one of the defined causes. There would be no payment of the Fee in the event of resignation with three months' notice on the part of Martech. So understood, there is no sound basis for not giving 'terminated' its ordinary meaning. Thus, the Agreement was terminated when it was brought to an end on 29 September 2000. If that be so, it was terminated for a reason other than as stated in the named paragraphs. 18 This construction is supported by consideration of cl 8.4. It is obvious that 'termination … for whatever reason' within the meaning of that clause took place on 29 September 2000. There is no basis for construing 'terminated' in cl 8.6 in a different sense. If construed as it is in the judgment below, there is virtually no work for it to do. 19 The finding of discharge by agreement needs to be understood in the light of the further finding of the primary Judge that Brand had no practical alternative but to accept Elliott's decision to remove him from providing services as Managing Director - the only position provided for by the Agreement. That would be akin to constructive dismissal if the contract were a contract of service albeit by the major shareholder (Thomson v Orica Australia Pty Ltd (2002) 116 IR 186; [2002] FCA 939; Hem, in the matter of Coulco Trading Pty Ltd (Subject to Deed of Company Arrangement) v Cant (Administrator of the Deed of Company Arrangement of Coulco Trading Pty Ltd (Subject to Deed of Company Arrangement)) [2007] FCA 81 at [20]-[23]). The fact that Brand accepted the removal rather than resign and litigate does not change the true nature of what occurred. It was comfortably within the concept of termination of the Agreement. Brand's later provision of other services to Energy World is beside the point. 20 The primary Judge noted that Brand did not, on behalf of Martech, purport to reserve any rights with respect to a termination payment and that there was no express reference to a termination payment under cl 8.6 or otherwise at the time of discharge. In the first place, what occurred cannot be described as bargaining in any sense. In the second place, as cl 8.6 expressly provided for a termination payment in the circumstances that occurred, it was for Energy World to negotiate an escape from it. That was not done.

Discharge 21 If the question of construction is decided against it, Energy World contends that the resolution of the board of directors on 29 September discharged all rights and obligations under the Agreement including Martech's right to receive, and Energy World's obligation to make, a termination payment under cl 8.6. 22 This contention is based upon the passage from Carter J, 'Termination' in Furmston M (ed), The Law of Contract (2nd ed, Butterworths Common Law Series, LexisNexis UK, 2003) at par 7.4 p 1319 cited by the primary Judge [2006] FCA 1004 at [170] and some statements by Lord Diplock in Paal Wilson & Co A/S v Partenreederei Hannah Blumenthal (The Hannah Blumenthal) [1983] 1 AC 854 at 915 and Photo Production Ltd v Securicor Transport Ltd [1980] AC 827 at 849. It is submitted that termination of a contract by agreement, by contrast with termination for breach or default, generally involves the discharge of all obligations. 23 Whatever the limits and operation of any such principle, it could have no operation in the present circumstances. Clause 8.6 is directed to what happens at the point of termination and expressly provides for that event. The very act which terminated the contract triggered the obligation to pay the Fee. Again, there is little doubt that cl 8.4 would also survive that moment of time. 24 Attention was drawn to cl 9 of the Agreement which was in the following terms: 'Continuing Obligations The termination of this Agreement or the engagement of the Manager shall not operate to terminate the provisions of Clauses 7 and 9 which shall remain in full force and effect and be binding on the Manager notwithstanding such termination.' 25 Counsel for Martech faintly suggested that the reference to 9 may be a mistake for 8. There is no proper basis for coming to that conclusion. Clause 7 concerned confidential information. The special attention paid to cl 7 does not detract from the conclusion that the obligation under cl 8.6 can be enforced after termination. The obligation that can be enforced later arose at the point of termination. The obligations in cl 7 are continuing.

Conclusion 26 The appeal is allowed and the judgment and orders below set aside. The respondent should pay the appellant's costs of the appeal. The appellant should bring in minutes of order covering the orders that should be made in lieu of the orders below, including costs. If the minutes are agreed, orders can be made in chambers. If not agreed, the matter should be relisted by arrangement with the Court. I certify that the preceding twenty-six (26) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Moore, Tamberlin and Gyles.

Associate: Dated: 21 March 2007 Counsel for the Appellant: Mr DM Stone of Williams & Hughes

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