MORGAN EQUIPMENT CO. v. UMW CORPORATION SDN BHD [2002] NSWCA 193

1 SPIGELMAN CJ: I agree with Meagher JA and with Powell JA. 2 MEAGHER JA: The plaintiff ("Morgan") appeals against a judgment by Foster AJ given on 7 May 2001. It is a Californian company which has its principal place of business in California. It had sued the defendant UMW Corporation, a Malaysian corporation, the present respondent. The litigation arises out of the sale by Morgan, in 1993, to UMW of the whole of the issued share capital in its wholly owned subsidiary Morgan Equipment Pty Ltd ("MEPL"), which was a company incorporated and carrying on business in Papua New Guinea. 3 The sale was the subject of a written agreement dated January 1993, (which has subsequently been amended once, although in an immaterial respect). The business of MEPL was the selling and servicing of heavy equipment. From time to time it made trade losses which could be carried forward and used as a deduction against profits in future years in accordance with the revenue laws of Papua New Guinea, which in this respect were the same as the laws of Australia. The agreement made provision for the sale of such losses. The terms of this sale and purchase were the subject of a separate régime contained in the agreement, although the price is not contained in the general price for the sale of the MEPL shares. 4 The clauses of the agreement which require consideration in this appeal are clauses 1(g), 2(b), (g), (n), (z), (aa), and 5(c). These must be set out in full: "1. INTERPRETATION (g) where any word or phrase is given a defined meaning in this Agreement, any other part of speech or other grammatical form in respect of such word or phrase shall have a corresponding meaning. 2. DEFINITIONS (b) "Accounts" means the Company's audited balance sheet, profit and loss account drawn to the Accounting date, annexed as Exhibit A, including all applicable notes, statements and reports of directors and auditors; (g) "Completion" means actual completion of the sale and purchase of the Sale Shares in accordance with the terms of this Agreement; (n) "Income Tax Act" means the Income Tax Act 1989 of the Independent State of Papua New Guinea; (z) "Tax Loss Carry Forward" means losses of the Company whether reflected in the Accounts, the books and records or the tax returns of the Company, which losses result in tax credits which can be utilized against payment of income tax in Papua New Guinea; (aa) "Taxes" includes all taxes levied or assessed pursuant to the Income Tax Act or any other statute, ordinance or law, in Papua New Guinea or elsewhere, sales tax, payroll tax, group tax, PAYE, undistributed profits tax, land tax, water rates, municipal rates, stamp duties, gift duties or other provincial, or municipal charges or impositions together with any penalties of any kind assessed, charged or imposed in respect of the non late or short payment of the same; 5(c) In addition to the Purchase Price, and as part of the consideration for the Sale of Shares, the Purchaser agrees to pay to the Vendor, or its successors and assigns, a sum calculated as follows and subject to the provisions of this clause 5(c): (i) The Purchaser will pay to the Vendor an amount calculated as follows: 50% of the Tax Loss Carry Forwards, multiplied by the applicable effective tax rates, as stated on the tax returns of the Company as at December 31, 1991, subject to adjustment for additional tax loss carry forwards which are accrued on the books and records of the Company through the Completion Date, if any. (ii) Payments under clause 5(c)(i) will be due upon utilization of the tax loss carry forwards by the Company or upon a finding that taxable income should be imputed to the Company and thus subject to payment hereunder . For purposes of this Agreement, utilization will occur upon the filing of a tax return of the Company wherein a tax loss carry forward is used to reduce or eliminate the amount of Taxes payable by the Company . An imputation of taxable income would occur if, for example, the Purchaser or the Company engaged in actions reasonably calculated to transfer or reduce taxable income in Papua New Guinea in a manner inconsistent with the prior operating procedures of the Company. An imputation should not be made if such actions of the Company are consistent and in accordance with the then subsisting operating procedures of other companies owned or controlled by the Purchaser. In this regard, Purchaser shall be entitled to assert interest charges incurred by the Purchaser on behalf of the Company and a management fee not to exceed 1.5% of annual sales of the Company. (iii) In this regard, the Vendor will have the absolute right to inspect and audit the tax returns, books and files, including internal accounting records, of the Company and any other accounting, tax or other records of the Purchaser or its subsidiary corporations or entities to the extent that such records specifically relate to the Company and, if appropriate, to impute the income which was derived from the operations of the Company but were not accounted for in such a manner as described in Clause 5(c)(ii) above so as to constitute taxable income in Papua New Guinea. (iv) For purposes of this Agreement, and in direct reference to the Company and the relevant tax laws of Papua New Guinea as the same shall apply, provided always that the tax loss carry forwards if utilizable and in respect of which payment is to be made to Vendor or its successors or assigns hereunder, shall have to be utilized within a period of seven (7) years from the date they were first incurred, unless the laws and regulations of Papua New Guinea are amended to provide for a different period of utilization, in which case the appropriate period set forth in amended laws or regulations shall apply. (v) The Purchaser will cause the Company to reflect the Tax Loss Carry Forwards on the books and records of the Company and its tax returns. The Purchaser will cause the Company to take all steps necessary to preserve and qualify the Tax Loss Carry Forwards. In no event will the Purchaser be required to make payment under this clause 5(c) unless the Tax Loss Carry Forwards are recognized as valid under the provisions of the Income Tax Act or in the event that the Company utilizes any portion of the Tax Loss Carry Forwards in the payment of Taxes payable by the company which payment is related to the Asset Sale Agreement and the transactions contemplated therein. (vi) The parties acknowledge that there have been writedowns of certain of Sale Assets on the books and records of Company which will create additional Tax Loss Carry Forwards. The Purchaser will cause the Company to reflect said Tax Loss Carry Forwards on the books and records of the company and its tax returns. The Purchaser will cause the Company to take all steps necessary to preserve and qualify these Tax Loss Carry Forwards. However, in the event that the Tax Loss Carry Forwards referred to in this clause 5(c)(vi) are not recognized as valid under the provisions of the Income Tax Act, the Purchaser will not be required to make payment therefore and shall not be held responsible to the Vendor in such an event." 5 The "effective tax rate" referred to in clause 5(c)(i) is 25%. 6 There is what Foster AJ called a "tension" between 5(c)(ii) and 5(c)(v). The former seems, at first blush, to say that payments must be made, subject to certain conditions, on the filing of an income tax return, the latter that no payments are due until the company receives its income tax assessment. The former view was favoured by Morgan, the latter by UMW. The trial judge found in favour of the latter. 7 Some evidence was admitted by his Honour to clarify the meaning of the expression "upon the filing of a tax return by the Company wherein a tax loss carry forward is utilized" in clause 5(c)(ii). This is best illustrated by an example. In the Company's tax return for the period ending 31 December 1989 there is a document consisting of a series of calculations concluding with the words "Income Tax Loss - K397,632", followed, at the foot of the page, by the words "Please confirm the loss carried forward." 8 There was another document, issued by the Papua New Guinea tax authority, which obviously refers to the preceding document. It contains the sentence "Loss Carry-Forward is K397,632". His Honour drew the obvious inference, saying: "I am satisfied that document 493 is, relevantly, an indication from the taxation authority that the income tax loss shown" in the previous document "was confirmed as being a loss carried forward in that amount." 9 Other pairs of documents show similar results for other years. 10 The canons of construction relevant to the interpretation of the Agreement are hardly in dispute, but of particular importance is the rule that one must construe a document as a whole so as to yield an "harmonious", not an unworkable, reading. To this end, his Honour gave primacy to the provisions of cl 5(c)(v). The Appellant contended that the words in cl 5(c)(v) 'recognised as valid' refer to the document described as an Adjustment Sheet of the character identified in par [8] above. However as Foster AJ concluded unless such an Adjustment Sheet issues, a loss cannot be utilised against payment of income tax and, accordingly, there is no 'Tax Loss Carry Forward' within cl 2(z). Accordingly, cl 5 including cl 5(v) proceeds on the assumption that an indication of the character identified in an Adjustment Sheet has been made. The words 'recognised as valid', refer to the point of time at which loss is reflected in an assessment. His Honour was quite correct in this regard. 11 The obvious objection to this construction is that it involves the elimination of the second sentence of clause 5(c)(ii). However, I do not think this objection can be sustained. One permissible use of the preposition "upon" is to mean "as a result of", and that in my view is how it is used here. One then has an "harmonious" whole: a claim is made, it is "utilized" when it is provisionally accepted or "utilized", and it results in a liability to pay when an assessment reflecting it is issued. There thus cannot follow the complications, which might occur if a loss once "confirmed" is later disallowed. 12 In my view the appeal should be dismissed with costs. 13 POWELL JA: This is an appeal against a Judgment delivered, and orders made, by Foster AJ on 7 May 2001 on which day his Honour dismissed with costs the proceedings which had been brought by the Appellant ("Morgan") against the Respondent ("UMW") and directed the entry of Judgment accordingly. 14 In those proceedings, Morgan sought to recover from UMW a sum of money which it claimed to be owing to it pursuant to the terms of an Agreement entered into between itself and UMW in January 1993. 15 By that Agreement (Blue AB 18-67) - which Agreement was amended in an immaterial way by a further Agreement executed on 30 March 1993 (Blue AB 68) - Morgan, as vendor, agreed to sell and transfer to UMW, and UMW agreed to purchase from Morgan, the whole of the issued shares in Morgan's then wholly owned subsidiary, Morgan Equipment Pty. Limited ("MEPL"), a company incorporated, and carrying on business, in Papua New Guinea, for the sum of US$3,706,899.00. Although the Agreement was directed primarily to the sale and transfer of those shares, the Agreement also made provisions, in the circumstances set out in clause 5(c) for payment by UMW to Morgan of sums to be calculated in respect of what were described as "Tax Loss Carried Forwards". 16 Insofar as bore upon the claim made by Morgan in the proceedings with which Foster AJ was concerned to deal, the Agreement provided as follows (Blue AB 18-20, 24-25): "1. Interpretation In this Agreement unless the context otherwise requires: ……… (g) where any word or phrase is given a defined meaning in this Agreement, any other part of speech or other grammatical form in respect of such word or phrase shall have a corresponding meaning. ……… 2. Definitions In this Agreement unless otherwise expressly provided: ……… (n) 'Income Tax Act' means the Income Tax Act 1989 of the Independent State of Papua New Guinea. ……… (z) 'Tax Loss Carry Forward' means losses of the Company whether reflected in the Accounts, the books and records or the tax returns of the Company, which losses result in tax credits which can be utilized against payment of income tax in Papua New Guinea. ……… 5. Completion ……… (c) In addition to the Purchase Price, and as part of the consideration for the Sale Shares, the Purchaser agrees to pay the Vendor, … a sum calculated as follows and subject to the provisions of this clause 5(c): (i) The Purchaser will pay to the Vendor an amount calculated as follows: 50% of the Tax Loss Carry Forwards, multiplied by the applicable effective tax rates, as stated on the tax returns of the Company as at December 31, 1991, subject to adjustment for additional tax loss carry forwards which are accrued on the books and records of the Company through the Completion Date, if any. (ii) Payments under clause 5(c)(i) shall be due upon utilization of the tax loss carry forwards by the Company … For the purposes of this Agreement, utilization will occur upon the filing of a tax return of the Company wherein a tax loss carry forward is sued to reduce or eliminate the amount of Taxes payable by the Company. ……… (iv) For purposes of this Agreement, and in direct reference to the Company and the relevant tax laws of Papua New Guinea as the same shall apply, provided always that the tax loss carry forwards if utilizable and in respect of which payment is to be made to Vendor … shall have to be utilized within a period of seven (7) years from the date they were first incurred, unless the laws and regulations of Papua New Guinea are amended to provide for a different period of utilization in which case the appropriate period set forth in amended laws or regulations shall apply. (v) The Purchaser will cause the Company to reflect the Tax Loss Carry Forwards on the books and records of the Company and its tax returns. The Purchaser will cause the Company to take all steps necessary to preserve and qualify the Tax Loss Carry Forwards. In no event will the Purchaser be required to make payment under this clause 5(c) unless the Tax Loss Carry Forwards are recognised as valid under the provisions of the Income Tax Act in the event that the Company utilizes any portion of Tax Loss Carry Forwards in the payment of Taxes payable by the Company which payment is related to the Asset Sale Agreement and the transactions contemplated therein. (vi) The parties acknowledge that there have been writedowns of certain of the Sale Assets on the books and records of the Company which will create additional Tax Loss Carry Forwards. The Purchaser will cause the Company to reflect said Tax Loss Carry Forwards on the books and records of the company and its tax returns. The Purchaser will cause the Company to take all steps necessary to preserve and qualify these Tax Loss Carry Forwards. However, in the event that the Tax Loss Carry Forwards referred to in this clause 5(c)(vi) are not recognised as valid under the provisions of the Income Tax Act, the Purchaser will not be required to make payment therefor and shall not be held responsible to the Vendor in such an event. ………" 17 Although the materials which are before the Court do not appear to be complete, such materials as are before the Court tend to indicate or to establish the following:

(u) on 19 April 2000 (Blue AB 7), MEPL paid to Morgan the sum of US$472,099.61, that amount being calculated, at then current rates of exchange, in accordance with the provisions of clause 5(c)(i) of the Agreement. 18 Morgan claimed that the total of the sums paid to it by MEPL (US$681,857.87) was less than the sums (US$1,151,443.30) which it was entitled to receive under the Agreement. The principal Affidavit which was filed on Morgan's behalf in support of the claim made by it in the Summons with which Foster AJ was concerned to deal made it clear (Blue AB 7-8) that Morgan's claim was that it was entitled to receive sums calculated in accordance with clause 5(c)(i) of the Agreement on the "tax loss utilised in (each) return" at the rate of exchange current on the date of filing each tax return. Thus, in respect of the return for the period ended 31 December 1993, which was lodged on 28 July 1994, it claimed to be entitled to receive the sum of US$194,788.39, that sum being calculated on the basis of K206,935.50, at the Kina to US dollar exchange rate on 28 July 1994 of 0.9413. Similar calculations were made in respect of the return for the period ending 31 December 1994, which was lodged on 12 February 1996; in respect of the return for the period ended 31 December 1995, which was lodged on 15 November 1996; and in respect of the return for the period ended 31 December 1996, which was lodged on 30 June 1997. In addition, Morgan claimed - in effect, by way of damages - a sum representing the difference between the sums which it would have earned by investing the sums which it claimed it had been entitled to receive if they had been paid on what it claimed were the due dates and the sums which it had in fact earned by investing the sums which were in fact paid to it by MEPL - the sum so claimed was, at the date of the swearing of that Affidavit - 14 December 2000 - US$1,702,480.50 (Blue AB 15). 19 The respective stances adopted by Morgan and UMW on the hearing before Foster AJ were recorded by his Honour as follows (RAB 24-26): "7. It is the contention of UMW that, on the proper construction of these provisions, no liability to make payment to Morgan could arise until the relevant Tax Loss Carried (sic) Forward had been accepted by the PNG taxation authority, by way of the issue of an assessment under the provisions of the Income Tax Act, which allowed the relevant loss as a deduction. In this regard, reliance was placed upon Batagol v. The Commissioner of Taxation of the Commonwealth of Australia (1963) 109 CLR 243 and Commissioner of Taxation v. Ryan (2000) HCA 4. 8. On the part of Morgan, it was asserted that the provisions required that the appropriate payments be made to it when MEPL filed a tax return in which a claim for deduction based upon a Tax Loss Carried (sic) Forward had been made. This construction would require payment to have been made at significantly earlier points of time than the payments were actually made, in reliance upon the construction adopted by UMW. 9. A reading of the provisions of paragraphs 5(c)(i) to (vi) reveals a possible tension between paragraphs 5(c)(ii) and 5(c)(v) and (vi). There is the statement in paragraph 5(c)(ii) that payment 'will be due upon utilization of the tax loss carry forward', which 'utilization' is to 'occur' upon the filing of a tax return of the company wherein a Tax Loss Carry Forward is used to reduce or eliminate the amount of taxes payable by the Company.' In paragraphs 5(c)(v) and (vi), however, there is the provision that payment would not be required 'unless the Tax Loss Carry Forwards (sic) are recognised as valid under the provisions of the Income Tax Act'. 10. It is the assertion of Morgan that these later provisions do not contemplate the issue of an assessment under the provisions of the Income Tax Act in which the losses are accepted as allowable deductions, but are satisfied by the issue by the taxation authority of appropriate adjustment sheets in respect of the years of income in which the losses were claimed to have arisen, in the tax returns for those years." 20 The question with which Foster AJ was, and which this Court is, concerned to deal is one, not of interpretation - that is, what is the meaning of words - but of construction - that is, what is the legal effect of the words used - (The Life Insurance Company of Australia Limited v. Phillips (1925) 36 CLR 60, 78 per Isaacs J (as he then was)), the construction of the Agreement thus being a pure matter of law. 21 The approach to be adopted by a court of construction may be found in the following passage in the Judgment of Gibbs J (as he then was) in Australian Broadcasting Commission v. Australasian Performing Right Association Limited (1973) 129 CLR 99, 109-110: "It is trite law that he primary duty of a court in construing a written contract is to endeavour to discover the intention to the parties from the words of the instrument in which the contract is embodied. Of course the whole of the instrument has to be considered, since the meaning of any one part of it may be revealed by other parts, and the words of every clause must if possible be construed so as to render then all harmonious one with another. If the words used are unambiguous the court must give effect to them, notwithstanding that the result may appear capricious or unreasonable, and notwithstanding that it may be guessed or suspected that the parties intended something different. The court has no power to remake or amend the contract for the purpose of avoiding a result which is considered to be inconvenient or unjust. On the other hand, if the language is open to two constructions, that will be preferred which will avoid consequences which appear to be capricious, unreasonable, inconvenient or unjust, 'even though the construction adopted is not the most obvious, or the most grammatically accurate', to use the words from earlier authority cited in Locke v. Dunlop ((1888) 39 Ch. D. 387 at p.393) which, although spoken in relation to a will, are applicable to the construction of written instruments generally; see also Bottomley's case ((1880) 16 Ch. D. 681, at p.686). Further, it will be permissible to depart from the ordinary meaning of the words of one provision so far as is necessary to avoid an inconsistency between that provision and the rest of the instrument. Finally, the statement of Lord Wright in Hillas & Co. Ltd. v. Arcos Ltd. ((1932) 147 L.T. 503, at p.514) that the court should construe commercial contracts 'fairly and broadly without being too astute or subtle in finding defects', should not, in my opinion, be understood as limited to documents drawn by businessmen for themselves and without legal assistance (cf. Upper Hunter County District Council v. Australian Chilling & Freezing Co. Ltd. ((1968) 118 CLR 429, at p.437)." 22 Foster AJ's approach to the task of construing the Agreement is to be found in the following passages in his Honour's Judgment (RAB 36-39): "31. It is clear that, as emphasised by paragraph 1(g), the words 'Tax Loss Carried Forward' must have their defined meaning wherever they are used in the Agreement. It is an essential element of that definition that the 'losses result in tax credits which an be utilized against payment of income tax in Papua New Guinea.' I am satisfied that these words contemplate that the relevant losses have the status of 'tax credits' which are able to be used in reduction of the Company's income tax liability. The use of the word 'can' rather than 'may' is strongly suggestive of a present ability to utilize in the sense that no further step is required before utilization can take place. The term 'tax credits', although, not apparently, of statutory origin, sufficiently conveys the concept of a loss which can be legally set off against a taxation liability. In my opinion, a financial loss of the company cannot qualify as a 'Tax Loss Carry Forward' unless it has become a utilisable tax credit which, in turn, requires that it be in a form such that a credit can be claimed for it in the Company's tax return. In my view, this necessitates that it should have already been accepted by the taxation authority as a quantified loss capable of being carried forward in a future tax return, in diminution of the tax otherwise payable in respect of that return. In other words, I am satisfied that a Company loss does not become a 'Tax Loss Carry Forward' unless, in counsel's words, it has 'been through the system once' and has become the subject of an Adjustment Sheet. 32. This being so, I am of the view that the 'Tax Loss Carry Forwards' referred to in paragraphs 5(c)(v) and (vi) necessarily refer to losses which had already been the subject of confirmation as losses to be carried forward, through the issue of Adjustment Sheets by the taxation authority. In these circumstances they have already been 'recognised as valid' if the submission of Morgan as to the meaning of those words be adopted. This indicates, in my view, that the phrase cannot have that meaning. If it did, it would be redundant. Accordingly it must be intended to do other and different work. In these circumstances, I am satisfied that it must refer to the ultimate acceptance by the taxation authority, in accordance with the Income Tax Act, of the claimed loss carried forward, as being an allowable deduction against the income of the year in respect to which the relevant return is lodged. Therefore, in my opinion, paragraphs 5(c)(v) and (vi) each require that UMW as purchaser is not obliged to make payment except in circumstances where a previously accepted loss has ultimately been allowed as a deduction. 33. So far as paragraphs 5(c)(ii) is concerned, I do not agree that the meaning I have ascribed to the words 'recognised as valid' in paragraphs 5(c)(v) and (vi), which is the meaning contended for by counsel for UMW, necessarily requires that its second sentence be, in effect, written out of the Agreement. Counsel for UMW sought to avoid this result by arguing that the word 'upon' did not, in the sentence, have a temporal significance and would, rather, have the meaning 'as a result of'. It may be noted that 'upon' does not necessarily mean 'at the same time as' ( Ex parte Lesiputty v. Murphy 47 SR 433 AND 436). Accordingly, attributing to the word 'upon' in that sentence and also in the first sentence of paragraph 5(c)(ii) the meaning 'as a result', would have the effect of producing consistency between that paragraph and the other paragraphs. 34. Another approach to the construction of paragraph 5(c)(ii) would focus on the word 'due' in the first sentence. A distinction is often made between the words 'due' and 'payable'. In Jowitt's Dictionary of English Law , Second Edition, Voll. 1 p.669 the following appears in relation to the word 'due': 'As applied to a sum of money 'due' means either that it is owing or that it is payable: in other words it may mean that the debt is payable at once or at a future time. It is a question of construction which of these two meanings the word 'due' bears in a given case.' 35. If the word 'due' in paragraph 59(c)(ii) is taken to mean 'owing' rather than 'immediately payable', then consistency between the paragraphs can be achieved, on the basis that the debt is created when 'utilization' occurs but payment is not required until the Tax Loss Carry Forward has later been accepted, in accordance with the Income Tax Act in reduction or elimination of the taxable income of the company. 36. I therefore find that, as a matter of construction, UMW was not obliged to make payment to Morgan under clause 5(c)(i) at the times when the Company filed tax returns utilizing the tax losses, as shown in the schedule set out above. As it is not suggested that the times when UMW in fact made its payments to Morgan were productive of any loss, it follows that UMW must succeed." 23 Save only that I prefer the approach reflected in paragraphs 31-33 of Foster AJ's Judgment to that suggested in paragraphs 34-35, I would not dissent from the views expressed by his Honour. Nor do I dissent from his Honour's conclusion. This being so, I am of the opinion that the Appeal should be dismissed with costs.

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