Plaintiff v Defendants

Supreme Court of Victoria|2012-10-15|Before: ROBSON J

CONTRACT LAW - Sale and purchase of business - Sale agreement - Valuation clause - terms of valuation clause - Terms agreed by conduct - Alternatively, parties estopped from denying terms of valuation clause - Whether implied term limited material available to independent expert in resolving conflict over valuation - Such limitation not necessary to give business efficacy to the contract.

1 Mr Parisi is the sole director and sole shareholder of the plaintiff, Alphater Consulting Engineers Pty Ltd. The plaintiff holds an interest in a group of companies and trusts that owns and operates the Moderno Café business and the Bite franchise business. In January 2012, Mr Parisi was removed as a director of one of those companies, Venture Capital Group Pty Ltd (VCG).

2 In March of 2010, the plaintiff's solicitors, Lennon Mazzeo, made certain demands on Mr Rozman, who controls the VCG group. Those demands included that Mr Parisi be reappointed as a director. Those demands were rejected by Mr Rozman in the letter of his solicitors dated 23 March 2010. The letter provides:

We refer to your letter dated 5 March 2010. Our client does not agree that your client owns one third of the units in the VCG Unit Trust. We are instructed that your client holds 25.5 per cent of the units. Your client does hold one of the three issued shares in VCG. Our client does not agree that it has always been part of any arrangement between our clients and Mr Parisi, that Mr Parisi would be entitled to be a director of VCG. We are instructed that the removal of Mr Parisi as a director was regrettable, but unavoidable given Mr Parisi's conduct in that capacity.

Our client will not rescind the termination of your client's directorship of VCG. We note the threat of legal proceedings seeking remedies, including a purchase of your client's interest in VCG. We are instructed that our client or his nominee agree to purchase all of your client's interests in VCG, the VCG Unit Trust and all other entities in trust forming part of the Café Moderno and Bite businesses at their market valuation. This will avoid the need for the unnecessary cost and expense of any proceedings.

It seems to us and to our client that in relation to the s 232 proceeding you have foreshadowed the real controversy may be the value of your client's interests. To resolve that issue we propose the following regime for determination of the market valuation. Each of our respective clients," this is Step 1, "Each of our respective clients engages a valuer to provide a valuation of your client's interests, (2) each of our clients valuers then meet to attempt to resolve any differences between our respective valuations and to identify any issues not capable of resolution, (3) any issues which are unable to be resolved as between our clients' respective valuers then be referred to an independent expert for determination and each of our clients be bound by the determination of such expert and the resulting valuation.

Our clients will provide such access to the financial records of the company as your client's valuer requires for the purposes of conducting the valuation. We trust that our client's proposal which is put on an open basis provides and acceptable method for resolution of any dispute. Alternatively, our client would consider a proposal for a single independent valuer to conduct a binding valuation of your client's interests. If your client rejects our client's proposal and elects to commence proceedings under s 232 of the Corporations Act 2001 then (a) our client will make available for inspection the books and financial records by your client under s 198F(2), (b) this letter will be produced to the court on a question of the costs of those proceedings. We will be grateful for your early response in this regard. The fact that we have not responded to any particular matter raised in your letter should not be taken as an indication that we agree with any such matter. Our client otherwise reserves all his rights.

3 Subsequently, there was an exchange of correspondence between the respective solicitors and eventually acceptance of the offer made in the letter, that Mr Rozman or his nominee would purchase all of the plaintiff's interests in the Café Moderno and Bite businesses at their market valuation.

4 The parties also agreed on a three step procedure for determining the market valuation. Mr Parisi appointed Mr Ray Richardson of KSR Partners as his valuer pursuant to Step 1 of the valuation procedure. Mr Richardson used the financial information as at 30 June 2010, his valuation being dated 13 April 2011, and he valued the total value of the group at $2,636,000 and that Mr Parisi's interest of 28.125 per cent would be $741,375.

5 Mr Richardson says in his valuation under the heading "Valuation of Interest":

Each café is held in a separate trading structure. As stated we have relied on the 2010 financial statements of each entity in our valuation.

6 The defendants appointed Mr Shankar Bala from S. Bala Chartered Accountants as their valuer. His valuation is dated 18 May 2011. He also used the accounts as at 30 June 2010. His was an earnings based valuation looking at the earnings and looking at the future maintainable earnings based upon the accounts as at 30 June 2010.

7 After the exchange of the valuations, the parties moved to Step 2 of the valuation procedure which provided that:

Each of our clients' valuers then meet to attempt to resolve any differences between their respective valuations and to identify any issues not capable of resolution.

8 Step 2 was observed. The valuers met, attempted to resolve their differences and identified the issues not capable of resolution. The parties then turned their minds to Step 3 and were unable to agree on the approach to be taken under Step 3. The plaintiff said that the valuer, as the expert, should be limited to solely having regard to the material provided to the two valuers. The defendants contended there was no such limitation.

9 As a consequence, the plaintiff commenced legal proceedings on 6 July 2012 by an originating process. Under the application the plaintiff sought orders under s 232 and s 233 of the Corporations Act and at general law alleging oppressive conduct by the defendants in failing to comply with the dispute resolution agreement referred to in the supporting affidavit of Matthew Alfred Parisi. The application further provided:

This application is also made in equity against the third defendant for breach of its fiduciary duty as trustee of the VCG Trust and against the first, second, fourth and fifth defendants for breach of their fiduciary duties as controllers of the VCG Trust with respect to the failure to comply with the dispute resolution agreement.

On the facts, statements and supporting affidavit the plaintiff seeks orders for specific performance of the dispute resolution agreement, (2) Orders under s 233 of the Act that the defendants or one or some of them purchase (a) the plaintiff's share in the third defendant," the third defendant being as I said VCG, "and (b) the plaintiff's units in the VCG Trust for the value determined pursuant to the dispute resolution agreement or, alternatively, for the value determined by an independent valuer appointed by the court. (3) Alternatively, the orders under s 233 of the Act that the third defendant buy back the plaintiff's share and the third defendant and in its capacity as the trustee of the VCG Trust buy back the plaintiff's units in the unit trust. (4) The value determined pursuant to the dispute resolution agreement or, alternatively, for the value determined by an independent valuer appointed by the court. (4) Such further relief as the court deems just, directions and costs.

11 The matter came on for directions before Ferguson J. On 17 August 2012 she ordered:

(1) By 31 August 2012 the plaintiff provide written notice to the defendants of -

(a) what constitutes the dispute resolution agreement; and

(b) the terms of that dispute resolution agreement.

(2) By 14 September 2012 the defendants -

(a) provide a written response to the plaintiff's aforementioned written notice; and

(b) file and serve any affidavit on which they intend to rely concerning the preliminary question.

(As it eventuated they did not file any affidavit.)

(3) The matter be listed today for the separate trial of preliminary questions, specifically -

(a) whether there is a binding resolution agreement between the parties;

(b) if yes, whether it is a term of the dispute resolution agreement that the parties appoint an independent valuer whose role is to resolve differences between the valuations of Mr Richardson and Mr Bala and limited to the material that was available to Mr Richardson and Mr Bala when they conducted their valuations, determine the valuation of the VCG business to find as comprising the Moderno Café situated at Epping, Armidale, Eastland and Chadstone, The Bite franchised licenses and unused plant and equipment as at the date of the valuation of Mr Richardson and Mr Bala, that is 30 June 2010.

12 Her Honour further ordered that the parties exchange written outlines of argument on the preliminary questions by 28 September 2012. As a result of those directions, the plaintiff gave particulars of the dispute resolution agreement and in paragraph 1 of the particulars referred to the letters passing between the solicitors and "The implied term described in Paragraph 2(h) below."

13 The plaintiffs alleged that the terns of the dispute resolution agreement were as follows:

(2)(a) Miles Rozman (or his nominee) shall purchase all of Alphater's interests in Venture Capital Group Pty Ltd ('VCG'), the VCG Unit Trust and all other entities and trusts forming part of the Café Moderno and Bite businesses ('VCG Group'), at their market valuation (MAP-3).

(b) The aforesaid 'market valuation' shall be determined as follows;

(Stage 1) Miles Rozman, Darren Brierley and VCG on the one hand and Matthew Parisi and Alphater on the other shall each engage a valuer to provide a valuation of Alphater's interest in the VCG Group.
(Stage 2) The two valuers shall then meet to attempt to resolve any differences between their respective valuations and to identify any issues not capable of resolution.
(Stage 3) Any issues which are unable to be resolved as between the valuers then be referred to an independent expert for determination and each of Miles Rozman, Darren Brierley and VCG on the one hand and Matthew Parisi and Alphater on the other be bound by the determination of such expert and the resulting valuation.

Miles Rozman, Darren Brierley and VCG shall provide to Matthew Parisi and Alphater such access to the financial records of the VCG Group as their valuer requires for the purpose of conducting his valuation (MAP-3, MAP-4).

Until the resolution of the dispute, Miles Rozman, Darren Brierley and VCG undertake:
1. At all times to conduct the VCG in a bona bide manner (MAP-4, MAP-5).
2. Not to open any other bank accounts in the name of VCG or used for VCG's benefit any accounts other than the Westpac account currently held by VCG, without providing to Matthew Parisi and Alphater seven days advance notice in writing (MAP-4, MAP-5, MAP-6, MAP-7).
3. Miles Rozman, Darren Brierley and VCG shall provide to Matthew Parisi weekly accounts extending payment terms with suppliers (if such reports exist), quarterly details of rebates, monthly bank statements and monthly PLU summaries, subject to Matthew Parisi and Alphater providing an undertaking of confidentiality in relation to any reports provided (MAP-6, MAP-7, MAP-8).
4. At all times allow only the payment of bona fide expenses of VCG from the bank account referred to in the previous paragraph as incurred in the ordinary and proper course of business and not to pay any sum of money to themselves or any other person unless authorised in writing by Matthew Parisi, save that:
  1. Miles Rozman and Darren Brierley reserve the right to call for the repayment of funds recently advanced to VCG by them for the purposes of renovation of Chadstone, Armidale and Epping should external finance become available, otherwise loan accounts shall be repaid only on the basis that Matthew Parisi receives the same pro rata payment (in accordance with his unit holding in the VCG Unit Trust) on his loan accounts (MAP-4, MAP-5, MAP-6, MAP-7, MAP-8).
  2. Miles Rozman be reimbursed for business expenses incurred by him on the credit card used by him for purchases and expenditures for the VCG Group, subject to Miles Rozman providing relevant documents relating to (MAP-7, MAP-8).

Qualifications 1 and 2 shall be subject to Miles Rozman, Darren Brierley or VCG providing to Matthew Parisi and Alphater (and/or its representatives) relevant documents in relation to such financing, advances and credit card use upon request (MAP-8 and acquiescence in MAP-9).

To provide access to and copies of the books and records of VCG including its financial records to Matthew Parisi's and Alphater's accountants and all legal advisers (for the purposes of any valuation and providing instructions to Matthew Parisi's and Alphater's accountant and legal advisers) at the cost of Miles Rozman, Darren Brierley or VCG (MAP-4, MAP-5, MAP-6, MAP-7 and acquiescence in MAP-8).

In the event that the matter be referred to an independent expert for determination as referred to in Paragraph (b)(iii) above then:
1. The expert must be a qualified accountant with substantial experience in the valuation of companies and operations similar to those conducted by VCG.
2. The parties must agree the identity of the expert within seven days after its final report is obtained from a meeting of the parties and respective valuers and if the matter is unable to be resolved, failing which the identity of the expert will be determined by the Institute of Chartered Accountants.
3. As far as practicable the parties and the independent expert be bound by Rule 50 (Referee out of Court) of the Supreme Court (General Civil Procedure) Rules 2005 (Victoria).

Each party is to meet the costs of their own valuation (MAP-11 and acquiescence in MAP-12).
The parties' respective valuations are to be conducted by reference to documents including but not limited to:
1. The VCG books of account up to 30 June 2010 (MAP-11, MAP-12.
2. The documents set out in the facsimile dated 13 November 2010 from KSR Partners to Shankar Balac (MAP-12 (attachment) and acquiescence in MAP-13).
The independent expert's role is confined to resolving differences between the parties' valuers solely on the basis of the information that was available to the parties' valuers and upon resolving those differences thereby determine the value of Alphater's interest in the VCG Group as at 30 June 2010 (implied term that is obvious and necessary to give business efficacy to the Dispute Resolution Agreement).

14 In accordance with Her Honour's order, the defendants responded to the plaintiff's submission. They admitted that the dispute resolution agreement was constituted by the documents enumerated in paragraphs 1(a) to (k) of the notice (which, as I mentioned previously, was a list of letters exchanged between the solicitors) but denied the implied term alleged by the plaintiff in 2(h).

15 The defendants admitted the terms in paragraphs 2(a) to (f). They also admitted the term in paragraph (g)(ii) but deny the term alleged in paragraph (g)(i) and the implied term alleged in paragraph(2)(h).

16 Accordingly, the defendants agree that a dispute resolution agreement was entered into as alleged by the plaintiff save that it does not contain the term that the books will be limited to the accounts up to 30 June 2010, and they deny the implied term in paragraph (2)(h).

17 In argument, the defendants' contended that the dispute resolution agreement was not binding at law because all the necessary terms were not identified and accordingly the agreement was void for uncertainty and so unenforceable.

18 First, the defendants contend that there was no agreement as to the date at which the defendant's interests was to be valued.

19 Secondly, the defendants contend that there was no agreement as to the matters which the experts were to have regard to in making their valuation and that thirdly, no agreement as to who would pay for the valuations.

20 The plaintiff on the other hand says that all the essential terms were agreed by the subsequent agreement of the offer contained in the letter of 23 March 2010 after the resolution of the issues of the undertakings required to be given by the defendants and that there was sufficient certainty in the agreement by leaving the matter to the valuers in accordance with Clause 1 and so forth and Clause 1 of the dispute resolution agreement.

21 In my view the date of the valuation was agreed on by the parties. As the defendants submitted the agreement evolved over time as issue after issue fell away in correspondence.

22 In my opinion the essential term of the date of the valuation also fell away as matters evolved. Each valuer adopted and accepted that the 30 June 2010 was the valuation date. Each party by its actions accepted that date. Each party moved from Stage 1 of the dispute resolution agreement to Stage 2 knowing and accepting that the valuation date being used was 30 June 2010.

23 By their conduct, the parties entered into a contract on that term, or alternatively, they are estopped from denying that term. By moving on to Stage 2 knowing that there was no difference between the valuers as to the date of the valuation each party accepted that the agreement was still on foot and should be observed.

24 If either party had not accepted the 30 June 2010, it is inconceivable that that party would have moved to Stage 2 and instructed their valuer to meet with the opposite numbers valuer to seek to identify the outstanding issues. That party would have accepted that there was no dispute between the parties, that the relevant date was 30 June 2010.

25 The matter can be either seen as contractual or estoppel. The law recognises that contracts can be constituted by conduct. The principle was recognised in Brogden v Metropolitan Railway Company,[1] and I can read a summary of that case from Cheshire and Fifoot's Law of Contract:[2]

Brogden had for years supplied the defendant company with coal without a formal agreement. At length the parties decided to regularise their relations. The company sent a draft form of agreement to Brogden and the latter having inserted the name of an arbitrator in a space which had been left blank for this purpose, signed it and returned it marked approved. The company's agent put it in his desk and nothing further was done to complete its execution.

Both parties acted thereafter on the terms, supplying and paying for coal in accordance with its clauses until a dispute arose between them and Brogden denied that any binding contract existed.

It could not be argued that the return of the draft was an acceptance of the company's offer, since Brogden by inserting the name of an arbitrator had added a new term, thus making it a counter offer which the company had no opportunity of approving or rejecting.

But assuming that the delivery of the document by Brogden to the company with the addition of the arbitrator's name was a final and definite offer to supply coal on the terms contained in it, when was that offer accepted. No communication passed between the parties so that there was no express acceptance.

On the other hand, the subsequent conduct of the parties was explicable only on the assumption that they mutually approve the terms of the drafts. The House of Lords held that a contract came into existence either when the company ordered its first load of coal from Brogden on those terms or at least when Brogden supplied it.

27 In this case, the conduct of the parties in moving from Stage 1 to Stage 2 and then seeking to implement Stage 3 is explicable only on the assumption that they mutually approved the acceptance by their arbitrators of the 30 June 2010 as the relevant date for valuation purposes. There is no other reasonable explanation for the conduct of the defendants in seeking to move to Stage 2 in the face of a valuation by their valuer prepared as of 30 June 2010.

28 If I am wrong on the question of the term being imputed or adopted by conduct then I rely on the law of estoppel.

29 This is an estoppel by representation, of a fact, being the representation made by the defendants to the plaintiff that the defendants were moving to Stage 2 on the basis that the parties had agreed on a valuation date of 30 June 2010, which representation was relied upon by the plaintiff and the plaintiff in moving to Stage 2 and on to Stage 3. Accordingly, I find that the defendants are estopped from denying their acceptance of 30 June 2010 contract date as the agreed date of valuation.

30 I would therefore answer the first preliminary question of whether there was a binding resolution agreement between the parties as "yes".

31 I now turn to the second question, that is whether there was an implied term to qualify or expand on the third term of the binding dispute resolution agreement.

32 As mentioned above, the plaintiffs allege that it was an implied term of the agreement that:

The independent expert's role is confined to resolving differences between the parties' valuers solely on the basis of the information that was available to the parties' valuers and upon resolving those differences thereby determine the value of Alphater's interest in the VCG Group as at 30 June 2010.

33 In my view, such a term is not necessary to provide commercial efficacy to the agreement. One can imagine many circumstances in which the independent expert who is called upon to rule on the matters in issue may call for further evidence. He may want to see source documents, he may be given ledgers, he may want to see the journals. One can imagine a variety of circumstances where he may call for more material so he is able to resolve the dispute between the respective valuers.

34 In my opinion, where the parties have agreed that an independent expert should be used to resolve a dispute between the valuations reached by the valuers appointed by each party), there is no need (to give commercial efficacy to that agreement) to confine the independent expert to the material which was before the respective valuers. The independent valuer may not need to go beyond that material. On the other hand, I do not see it necessary to confine him to the material before the valuers if he forms the view that he needs something further to assist him to determine the issue before him.

35 I think that the concerns of the plaintiffs will be met in substance by my finding that it was a contractual term (or there is an estoppel) which limits the valuation to 30 June 2010. The valuer obviously cannot take into account evidence that is not relevant to a valuation at that date. The evidence he relies on must be relevant to the issue at hand and the issue at hand is the correct valuation as at 30 June 2010.

36 My ruling only goes so far as to the questions asked of me, and the question asked of me. My answer to that second question is "no" for the reasons I have given.

37 Accordingly I will make the orders. The answer to (a) is "yes" and the answer to (b) is "no".

[2] N C Seddon and M P Ellinghaus, Cheshire and Fifoot's Law of Contract (9th Aust ed, 2008), [3.23].

Court (General Civil Procedure) Rules 2005

At a glance

Court

Decision date

Before

Source

Judgment (56 paragraphs)

Parties

Legislation Cited (1)