Prout v FC Capital Holdings Pty Ltd

EX TEMPORE JUDGMENT (REVISED)

1. On 19 July 2019, the plaintiff, Mr Bradley Prout, and the defendant, FC Capital Holdings Pty Limited ("Holdings") entered a "Deed of Indemnity, Insurance and Access" ("the Deed").
2. By the Deed, Holdings agreed to advance the defence costs of defending proceedings, defined in the Deed as "Relevant Proceedings", brought against Mr Prout because he is or was an officer of Holdings or of one of its subsidiaries including FC Securities Pty Limited ("Securities").
3. Mr Prout has been involved in two "Relevant Proceedings," one in this Court and one in the Federal Court of Australia. Mr Prout has incurred costs in the order of $44,000 in the proceedings in this Court, and costs in the order of $1.6 million in the proceedings in the Federal Court.
4. Mr Prout has made the following requests for payment: No. Email Dated Invoice Date Amount

5. 18 August 2023     28 July 2023       $79,853.59
   

6. 18 August 2023     28 July 2023       $16,142.42
   

7. 18 August 2023     7 August 2023      $12,375.00
   

8. 10 September 2023  31 August 2023     $1,150.05
   

9. 10 September 2023  31 August 2023     $59,596.31
   

10. 13 October 2023    29 September 2023  $2,285.45
    

11. 13 October 2023    9 October 2023     $76,429.44
    

12. 9 November 2023    31 October 2023    $2,948.42
    

13. 9 November 2023    8 November 2023    $29,836.30
    

14. 8 December 2023 30 November 2023 $146,833.81
15. 8 December 2023 30 November 2023 $1,244.76
16. 22 December 2023 21 December 2023 $60,442.18
17. 9 February 2024 31 January 2023 $91,209.65
18. 11 March 2024 29 February 2024 $103,554.50
19. 11 March 2024 29 February 2024 $7,580.85
20. 5 April 2024 28 March 2024 $100,594.96
21. 10 May 2024 30 April 2024 $43,973.12
22. 11 June 2024 31 May 2024 $122,343.74
23. 10 July 2024 28 June 2024 $204.280,14
24. 23 October 2024 5 July 2024 $11,979.00
25. 16 August 2024 31 July 2024 $427.33
26. 16 August 2024 31 July 2024 $223,917.14
27. 16 September 2024 30 August 2024 $117.26
28. 16 September 2024 30 August 2024 $190,714.88
29. 11 October 2024 30 September 2024 $183,458.74 Total 1,773,289.04

1. Holdings has made the following payments: No. Date Amount Payee

2. 8 December 2023   $53,088.01   Holdings
   

3. 27 February 2024  $415,537.57  Securities
   

4. 26 June 2024      $100,000.00  Securities
   

5. 6 November 2024   $500,000.00  Holdings
   

Total $1,068,625.58

The Relevant Provisions of the Deed

1. The relevant provisions of the Deed are: "Indemnity 2.1 To the maximum extent permitted by law, [Holdings] agrees to indemnify and keep indemnified [Mr Prout], against all losses or liabilities (including all reasonable legal costs) incurred by [Mr Prout] as an officer of [Holdings] and [Securities]. … Advancement of defence costs 2.3 Subject to clause 2.6 and 2.7, [Holdings], on [Mr Prout's] request, must advance … to [Mr Prout] reasonable costs incurred or expected to be incurred by [Mr Prout] (whether legal or otherwise) in defending Relevant Proceedings. Any such advance will be interest free. … 2.5 If [Holdings or Securities] has advanced an amount for costs under clause 2.3, the amount of the advance will be in part satisfaction of [Holding's or Securities'] obligation to indemnify [Mr Prout] and will cease to be repayable unless it is subsequently found that [Mr Prout] was not entitled to be indemnified for those costs. 2.6 In the event of any dispute as to the reasonable defence costs incurred or expected to be incurred by [Mr Prout] in defending Relevant Proceedings, the parties will refer the dispute to a Senior Counsel or Queens Counsel … to make a determination. In providing an opinion, the Counsel will be acting as an expert and not as an arbitrator. … Repayment 2.7 If [Holdings] has paid an amount under clause 2.1 or advance an amount for costs under clause 2.3 and it is subsequently found that [Mr Prout] is not entitled to be indemnified for or advanced those costs, [Mr Prout] must repay the amount of the payment to [Holdings] within 180 days of a request by [Holdings]." (Emphasis in original.)

The declaration sought

1. Mr Prout seeks a declaration that: 1. Clause 2.3 requires Holdings to advance, to Mr Prout, on his request, costs incurred, whether legal or otherwise, by Mr Prout in the Relevant Proceedings; and 2. Clause 2.7 requires Mr Prout to repay the portion of any advance made under cl 2.3 which is determined by an expert appointed under cl 2.6 not to comprise reasonable defence costs, within 180 days of a request made by the company that made the advance under cl 2.3.
2. Mr Prout seeks the declaration concerning cl 2.7 in aid of the declaration he seeks in relation to cl 2.3. Holdings denies that cl 2.3 should be construed as Mr Prout contends. As I understand it, Holdings does not dispute that, taken alone, cl 2.7 should have the construction contended for, but contends that this is not the only work cl 2.7 does. I will return to this below.
3. In her careful written submissions, Ms Jonker put the argument this way: [1] "On a proper construction of the Deed, clause 2.3 read with clauses 2.6 and 2.7 operates as follows: a. Mr Prout requests an advance, supported by invoices (or other relevant evidence) of costs incurred. b. [Holdings] (or [Securities]) pays to Mr Prout the amount of the request. c. If [Holdings] disputes that the request, supported by invoices, comprises reasonable costs, [Holdings] is required to communicate any dispute as to the reasonable costs to Mr Prout and that dispute is to be referred to a Senior/Kings Counsel for determination. d. Following the determination, Mr Prout must repay [Holdings] (or [Securities]) the component of any payment that has been determined to comprise costs that are not 'reasonable costs' within 180 days of a request by the company that made the payment."

Principles

1. There was no dispute as to the relevant principles.
2. A court in interpreting a provision of a document has regard to its words, its context, and the purpose of the document as a whole. The leading modern statement on the importance of context and purpose is found in the reasons of French CJ, Nettle and Gordon JJ in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd: [2] "The rights and liabilities of parties under a provision of a contract are determined objectively, [3] by reference to its text, context (the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract) and purpose. [4] … Ordinarily, this process of construction is possible by reference to the contract alone. Indeed, if an expression in a contract is unambiguous or susceptible of only one meaning, evidence of surrounding circumstances (events, circumstances and things external to the contract) cannot be adduced to contradict its plain meaning. [5] However, sometimes, recourse to events, circumstances and things external to the contract is necessary."
3. The question is what a reasonable business person in the position of the parties would have understood the relevant terms to mean; an objective task involving identification of the imputed intention of the parties by reference to the contractual text, construed in the light of its context and purpose. [6]
4. Further, as has also been correctly stated: "… the only relevant meaning is that which the text conveys. This follows from the need to ascertain the intention expressed in the document. Although ... context and purpose are relevant, ultimately the court must attribute meaning to the words actually used." [7] (Emphasis in original.)
5. Reference was also made in submissions to cases dealing with what has been described as "rectification by construction". This is the process of construction where the Court has power to correct obvious mistakes in a contract where "something has gone wrong with the language", [8] and where "there is obviously an error in the parties' written contract", [9] and where the "literal meaning of [a clause] is absurd". [10]
6. That is not this case. There is no obvious error in the wording the parties have used in clause 2.3. There is perhaps some infelicity in the drafting of the Deed, but no obvious error of the kind referred to in those authorities. Those principles have no relevant application here.

Provisions in Securities' Constitution

1. Ms Jonker, who appeared for Mr Prout, drew my attention to the following provisions in the Constitution of Securities: "20.2 Indemnity The company indemnifies each Officer on a full indemnity basis and to the full extent permitted by law against all losses, liabilities, costs, charges and expenses (Liabilities) incurred by the Officer as an officer of the company or of a related body corporate. 20.3 Scope of Indemnity The indemnity in rule 20.2; … (b) is enforceable without the Officer having to first incur any expense or make any payment; … 20.6 Contract The company may enter into an agreement with any Officer to give effect to the rights conferred by this rule … on any terms as thew directors think fit which are not inconsistent with this rule".
2. I cannot see how those provisions assist me in construing the Deed.
3. First, Securities is not a party to the Deed, although, as a subsidiary of Holdings, it is referred to in it.
4. Second, r 20.6 in the Constitution contemplates that Securities might enter into an agreement with the relevant officer "to give effect to the rights conferred by this rule" and "on any terms as the directors [of Securities] think fit which are not inconsistent with this rule".
5. The alleged inconsistency between the Deed and the rules, upon which Ms Jonker relied, was with the provision in r 20.3(b) that the indemnity in r 20.2 was to be "enforceable without the Officer having to first incur any expenses or make any payment". The Deed does not, however, require Mr Prout "to first incur an expense or make any payment" before being entitled to the indemnity. Indeed, cl 2.3 provides for the advance of reasonable costs "expected to be incurred" as well as actually "incurred".
6. There is thus no inconsistency between the Deed and Securities' Constitution, assuming that to be a relevant matter.

Clause 2.3

1. Turning to cl 2.3, a particular construction of that clause is proposed. My task is to decide whether that construction is correct, not to determine whether any alternative construction of that clause, or of the Deed generally, might be available.
2. My conclusion is that the posited construction cannot be correct.
3. That construction would oblige Holdings to pay costs incurred "on [Mr Prout's] request", that is, in the first instance, as soon as he made a request and whether or not the costs were "reasonable". Indeed, the posited construction would oblige Holdings to advance such costs even if the costs were, on their face, unreasonable; or not incurred "as an officer of the Company and each Subsidiary", and thus falling outside the indemnity in cl 2.1. [11]
4. The construction would also involve reading cl 2.3 as if the word "reasonable" were absent.
5. Ms Jonker submitted that the posited construction would still give work for the word "reasonable" in cl 2.3 to do, as it would act to define Holdings' ultimate obligations under the Deed, once the processes in cll 2.6 and 2.7, referred to in the opening words of cl 2.3, were undertaken.
6. In my opinion, the word "reasonable" has more work to do than this. In cl 2.3 it defines the very nature of Holdings' obligations at all times, including on the making by Mr Prout of a request. The language of cl 2.3 compels a conclusion, in my opinion, that Holdings has no obligation, at any time, to "advance" costs other than "reasonable costs".
7. The words of cl 2.3 cannot yield to the construction proposed by Mr Prout. It is one that is "not reasonably open on the text" of cl 2.3. [12]
8. The fact that cl 2.3 is expressed to be subject to cll 2.6 and 2.7 cannot, in my opinion, take matters further.

Clause 2.6

1. Clause 2.6 is the method chosen by the parties to determine whether costs are reasonable.
2. The clause can be invoked by either party, at any time when there is a dispute "as to the reasonableness of the costs incurred". If there is a dispute, the clause obliges the parties to refer that dispute to senior counsel.
3. Here, for whatever reason, neither party has sought to invoke cl 2.6. Each could have sought to do so.
4. A dispute may arise as to whether there is a "dispute" for the purposes of cl 2.6. And it may be that the: "dispute resolution process outlined [in cl 2.6] is flawed, at least in so far as it applies to the bearing of costs of the process where, as here, there is no D&O policy insurer involved." [13]
5. But that is, or may be, a problem arising from the words the parties have chosen to use in cl 2.6(i). It can have no bearing on the meaning of cl 2.3, nor in my opinion provide any support for reading cl 2.3 by ignoring the word "reasonable" in that clause.

Clause 2.7

1. Clause 2.7 provides a mechanism for reimbursement where Holdings pays Mr Prout an amount to which he "is not entitled".
2. Clause 2.7 might well be enlivened following either party invoking the procedure in cl 2.6. But it also may be enlivened in other circumstances. One example to which Mr Burnett, who appeared for Holdings, pointed was if costs were incurred in one of the circumstances specified in s 199A(3) of the Corporations Act 2001 (Cth). [14]
3. But that provides no support for reading cl 2.3 in a way which ignores the word "reasonable" in that clause.
4. Ms Jonker pointed to the facts that 1. Clause 2.1 refers to an "indemnity" to be provided by Holdings to Mr Prout; 2. Clause 2.3 obliges Holdings to make "advances" to Mr Prout as there set out; and, 3. Clause 2.5 provides that such "advances" are to be treated as satisfaction of the obligation of "indemnity" and will "cease to be repayable" unless Mr Prout is found not to be entitled to be indemnified for those costs.
5. Mr Jonker then referred to a provision in cl 2.7 obliging Mr Prout to repay any amount paid under cl 2.2, or advanced under cl 2.3, if he were found not to be entitled to be "indemnified for or advanced those costs", and submitted that, if cl 2.7 were enlivened otherwise than by reason of senior counsel providing an opinion under cl 2.6, the words "or advanced those costs" in cl 2.7 would have no work to do. Ms Jonker submitted, as I understood the argument, that for that reason cl 2.7 should be read as only being enlivened by reason of the operation of cl 2.6.
6. I cannot see how that follows.
7. The advance of costs under 2.3 is an aspect of Holdings' obligations under cl 2.1 to provide the indemnity there referred to, as foreshadowed by the parenthetical words in cl 2.1. They are two sides of the same coin.

Conclusion as to Declaration Sought

1. I decline to make the declaration sought as to the proper construction of cl 2.3. There is, in those circumstances, no utility in making the declaration sought as to cl 2.7.

Other Declarations

1. Mr Prout also seeks the declarations that: 1. the Deed is valid and enforceable; 2. Securities is a "Subsidiary" of Holdings; 3. the proceedings in this Court and the Federal Court are "Relevant Proceedings"; and 4. "Legal costs" means costs solicitor/client costs.
2. There is no evidence of any controversy about those matters. In those circumstances, I see no utility in making those declarations.

Endnotes

1. At [11].
2. (2015) 256 CLR 104; [2015] HCA 37 at [46], [48]-[49].
3. Citing Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640 at 656; [2014] HCA 7 at [35] (French CJ, Hayne, Crennan and Kiefel JJ).
4. Citing Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 350, 352 (Mason J); [1982] HCA 24; Reardon Smith Line Ltd v Hansen-Tangen; Hansen-Tangen v Sanko Steamship Co [1976] 1 WLR 989 at 995; [1976] 3 All ER 570 at 574 (Lord Wilberforce).
5. Citing Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (supra) at 352 (Mason J).
6. Miles v Luneburger Franchising Pty Ltd [2021] NSWCA 248 at [32] (Gleeson, Macfarlan JJA and Simpson AJA agreeing), citing Electricity Generation Corporation v Woodside Energy Ltd (supra) at [35] French CJ, Hayne, Crennan and Kiefel JJ); Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd supra) at [46]-[51], [108]-[109] (French CJ, Nettle and Gordon JJ); Victoria v Tatts Group Ltd [2016] HCA 5 at [51]-[75] (French CJ, Kiefel, Bell, Keane and Gordon JJ); Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd (2017) 261 CLR 544; [2017] HCA 12 at [16] (Kiefel, Bell and Gordon JJ); Simic v New South Wales Land and Housing Corporation (2016) 260 CLR 85; [2016] HCA 47 at [18] (French CJ).
7. P Herzfeld and T Prince, Interpretation (3rd ed, 2024, Thomson Reuters) at [19.60].
8. Chartbook Limited v Persimmon Homes Limited [2009] AC 1101 at [25] (Hoffman LJ); [2009] UKHL 38.
9. QBT Pty Limited v Wilson [2024] NSWCA 114 at [71] (Leeming JA, Bell CJ and Ward P agreeing).
10. Ibid at [81].
11. Cf [C29] of the List Statement which shows that Mr Prout made a claim for costs he now accepts is "not related to Relevant Proceedings".
12. Adopting the language of Meagher and Kirk JJA in The J & P Marlow (No 2) Pty Ltd v Joseph Hayes & Andrew McCabe in their capacity as joint and several liquidators of Peak Invest Pty Ltd (in liq), Five Islands Invest Pty Ltd (in liq), Surry Hills Pub Invest Pty Ltd (in liquidation) and Four By Four Investments Pty Ltd (in liq) [2023] NSWCA 117 at [100].
13. As asserted in Holding's solicitor's letter of 3 September 2024.
14. Defending proceedings where there is a liability in respect of which the company is not permitted to provide an indemnity; for example where the officer has a liability to the company itself: see s 199A(2)(a). 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: 29 November 2024