Reliance Franchise Partners Pty Ltd v Ford Kinter & Associates Pty Ltd [2018] VSCA 106

1 Until October 2013, Ford Kinter & Associates Pty Ltd conducted a general insurance brokerage business. It earned income from commissions and fees on the sale of insurance products, and from 'premium funding' in some cases.

2 By a deed entitled 'Book Sale Agreement - The purchase of the Client Book from Ford Kinter & Associates Pty Ltd' dated 11 October 2013 (the sale agreement) Ford Kinter sold its client book of about 3,600 insurance clients to Reliance Franchise Partners Pty Ltd. Under the terms of the sale agreement, the 'Purchase Price' (as defined) was payable in three instalments:

(1) 67.5 per cent on completion of the sale transaction;

3 The amount of the first instalment was $1,936,269.64 and was paid on completion. The calculation of that amount was set out in a document annexed to the sale agreement (the annexure). However, when the time arrived for the payment of the second instalment, Reliance refused to pay, or to engage in the contractual process by which an adjusted amount of the second instalment could be determined.

4 Ford Kinter treated Reliance's refusal as a repudiation of the sale agreement, which it accepted by commencing a proceeding in the County Court against Reliance in March 2015. In that proceeding, Ford Kinter claimed that the amount of the second instalment was $573,709.50 and the amount of the third instalment was $358,688.45, making a total of $932,397.95. It claimed the total amount from Reliance as a debt due under the sale agreement.

5 By its defence, Reliance alleged that nothing was owing in respect of the second or third instalments, on three grounds:

(1) Ford Kinter was in breach of a restraint on competition provision in clause 11 of the sale agreement. On this basis, Reliance contended that it had no obligation to pay the second or third instalments.

(2) Ford Kinter had provided it with false, misleading or deceptive financial information prior to execution of the sale agreement, and thereby breached warranties in clause 9 of the sale agreement, or engaged in conduct which contravened s 18 of the Australian Consumer Law.[1] Although not expressly pleaded, damages were claimed as a set-off against Ford Kinter's claims.

(3) In any event, applying the provisions of the sale agreement by which the Purchase Price was to be determined, the amount of the second and third instalments was zero.

6 The County Court proceeding was issued in the Expedited Cases List of its Commercial Division. Notwithstanding the expedited nature of that list, the trial did not commence until 30 October 2017. In the interim, Reliance maintained its defences based on breaches of the sale agreement by Ford Kinter, as described in (1) and (2) above. However, on the first day of trial, Reliance abandoned these defences. Thus, the only issue for determination by the County Court judge was whether Reliance was indebted to Ford Kinter in respect of the second and/or third instalments of the Purchase Price and, if so, in what amount.

7 Ford Kinter contended that, on a proper construction of the sale agreement, there was provision for adjustment of the Purchase Price, but that, in the absence of adjustment, the specified instalments had to be paid. As there had been no such adjustment, the specified instalments were due.

8 Reliance contended that, on a proper interpretation of the sale agreement, nothing was owing in respect of the second and third instalments until the adjustment process provided for had been completed; or, alternatively, that the Court should undertake the adjustment process and adjust the amount of the remaining instalments of the Purchase Price.

9 After a four day trial, the County Court judge delivered timely reasons.[2] The trial judge found in favour of Ford Kinter for the full amount of its debt claim. Reliance's defence based its construction of the contract was rejected. Its alternative defence, that the amount of the second and third instalments should be adjusted to zero, or some lesser amount than that claimed by Ford Kinter, was also rejected. The judge rejected the alternative defence on the basis that the financial records and other evidence relied upon by Reliance were incapable of supporting a determination that the specified amounts of the second and third instalments should be adjusted to any ascertainable amount.

10 Reliance applies for leave to appeal against the trial judge's decision on the construction issue. It does not seek to appeal against the rejection of its alternative defence.

11 The critical clause of the sale agreement is clause 2.2. Before turning to a consideration of that clause, it is important to put the construction issue in the context of the dispute. As is made clear by findings of the judge below which are not contested, the dispute began because Reliance wrongfully refused to engage in the process provided for by clause 2.2, relying upon allegations of breach by Ford Kinter which it then abandoned.[3] Reliance had taken sole custody and control of the data necessary to enable the process provided for by clause 2.2 to be carried out, yet by the time of the trial it had become impossible to undertake that process because of deficiencies in that data caused by actions deliberately taken by Reliance[4] and by a failure on its part to produce data which it never adequately explained.[5]

12 As counsel for Ford Kinter submitted on the application for leave, it is unlikely the parties to the sale agreement would have consciously adverted to the possibility of those circumstances occurring.

13 It is necessary to set out clause 2.2 of the sale agreement, and the related definitions of the terms used in that clause.

14 Clause 2.2 of the sale agreement uses the following defined terms:

1.1 Definitions

In this document unless the context otherwise requires:

'Assets' means the Vendors book of Clients, the Client List and all Associated Data, but excludes the Transferred Clients.

...

'Effective date' means 1 November 2013.

...

'Purchase Price' means the consideration for the sale of the Assets as determined under clause 2.2.

...

'Renewal Revenue' means, for any given period of time, the total of all fees and commissions (including premium funding commissions but excluding government taxes and statutory charges such as GST, stamp duty and fire service levies) earned during that period in relation to insurance policies or premium funding taken out or renewed by the Clients, but excludes any interest income.[6]

2.2 Purchase Price

(a) The Purchase Price for the Assets is 2 times Renewal Revenue for the 12 months ending 30 June 2013 ('Initial Purchase Price Calculation'), in relation to which:

(i) 67.5% of the Initial Purchase Price Calculation is payable at Completion ('First Instalment');

(ii) subject to clause [2.2](b), 20% of the Initial Purchase Price Calculation is payable on 1 November 2014 ('Second Instalment'); and

(iii) subject to clause [2.2](c), 12.5% of the Initial Purchase Price Calculation is payable on 1 November 2015 ('Third Instalment').

(b) As soon as practicable after 30 June 2014, the parties will determine the value of 2 times Renewal Revenue for the 12 months ending 30 June 2014, using the Vendor's commission rates which were in force at the Effective Date. This amount will be deemed to be the Purchase Price. If the adjusted Purchase Price is more or less than the Initial Purchase Price Calculation, the Second Instalment will be calculated as 87.5% of the adjusted Purchase Price minus the First Instalment (with a minimum of zero).

(c) As soon as practicable after 30 June 2015, the parties will determine the value of 2 times Renewal Revenue for the 12 months ending 30 June 2015, using the Vendor's commission rates which were in force at the Effective Date. This amount will be deemed to be the Purchase Price. If this adjusted Purchase Price is more or less than the Initial Purchase Price Calculation, the Third Instalment will be calculated as the adjusted Purchase Price minus the First Instalment and the Second Instalment (with a minimum of zero).

(d) Despite anything to the contrary in clauses 2.2(a), (b) or (c), the Purchaser's obligation to pay the Second Instalment and Third Instalment is always subject to the Vendor and each of the Covenantors not being in breach of any of their obligations under this document, including but not limited to clause 11.[7]

16 Following the abandonment of a proposed ground 2, there is only one proposed appeal ground:

The learned trial judge erred in determining that clause 2.2 of the [sale agreement] should be construed so as to fix the amount of the second and third instalments of the purchase price unless and until a party undertakes the process of determination in accordance with clauses 2.2(b) and (c).

17 It is necessary to construe the relevant provisions of the sale agreement in accordance with the general principles to be applied in giving commercial contracts a businesslike interpretation.[8] The principles were summarised by French CJ, Nettle and Gordon JJ in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd in the following terms:[9]

Applicable legal principles in these appeals

The rights and liabilities of parties under a provision of a contract are determined objectively,[10] 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.[11]

In determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable businessperson would have understood those terms to mean.[12] That inquiry will require consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract.[13]

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.[14]

However, sometimes, recourse to events, circumstances and things external to the contract is necessary. It may be necessary in identifying the commercial purpose or objects of the contract where that task is facilitated by an understanding 'of the genesis of the transaction, the background, the context [and] the market in which the parties are operating'.[15] It may be necessary in determining the proper construction where there is a constructional choice.

...

Each of the events, circumstances and things external to the contract to which recourse may be had is objective. What may be referred to are events, circumstances and things external to the contract which are known to the parties or which assist in identifying the purpose or object of the transaction, which may include its history, background and context and the market in which the parties were operating. What is inadmissible is evidence of the parties' statements and actions reflecting their actual intentions and expectations.[16]

Other principles are relevant in the construction of commercial contracts. Unless a contrary intention is indicated in the contract, a court is entitled to approach the task of giving a commercial contract an interpretation on the assumption 'that the parties ... intended to produce a commercial result'.[17] Put another way, a commercial contract should be construed so as to avoid it 'making commercial nonsense or working commercial inconvenience'.[18]

18 To this summary, we would add that the Court should have regard to all of the words used in the agreement 'so as to render them all harmonious one with another'[19] and to ensure the 'congruent operation of the various components as a whole.'[20]

19 In summary, the rival contentions of the parties may be summarised as follows.

20 Reliance contends that the plain meaning of clause 2.2, when read as a whole, is that payment of the second and third instalments is 'subject to' the prior determination of the adjusted Purchase Price under paragraphs (b) and (c) respectively. The central plank of this contention is the definition of Purchase Price, which expressly states that it means the amount 'as determined under clause 2.2' - and the only determination process in clause 2.2 is that contained in paragraphs (b) and (c) for the purpose of adjusting the Purchase Price. Reliance also relies upon the fact that the instalment payment obligations in sub-paragraphs (a)(ii) and (iii) are expressly 'subject to' the determination processes in paragraphs (b) and (c) and that those processes are mandatory. It submits that Ford Kinter's construction creates a position where sub-paragraphs (a)(ii) and (iii) override paragraphs (b) and (c) rather than being subject to them, and renders the processes in paragraphs (b) and (c) optional rather than mandatory.

21 Ford Kinter first contends that the Purchase Price remains that calculated in accordance with the defined 'Initial Purchase Price Calculation' until it is adjusted under paragraphs (b) or (c) - at which time, but not before, the Purchase Price is deemed to be the adjusted Purchase Price under one or other of those paragraphs. In other words, there is a default Purchase Price until any adjustment is determined by the parties under those paragraphs. This is the only interpretation which gives meaning to the requirements under sub-paragraphs (a)(ii) and (iii) to pay a percentage 'of the Initial Purchase Price Calculation' - on 1 November 2014 and 1 November 2015 respectively.

22 Second, Ford Kinter contends that this interpretation accords with commercial common sense, because it fixes an amount payable on the specified dates for payment of the second and third instalments - whether or not the adjustment process under paragraphs (b) and (c) has been completed. If the process has been completed by the due date, the relevant instalment is calculated by reference to the adjusted Purchase Price. Otherwise, it remains payable in accordance with the Initial Purchase Price Calculation.

23 Third, Ford Kinter contends that, if Reliance's interpretation were to be preferred, that would lead to an uncommercial result - nothing would be payable until the adjustment process contemplated in paragraphs (b) and (c) had been completed. It contends that would be an uncommercial result in a case such as the present, where Reliance repudiated the sale agreement by refusing to participate in the adjustment process for the second instalment. On the other hand, if Ford Kinter had, for some reason, refused to participate in the process or had delayed it, then clause 2.2(d) would have the effect that Reliance's obligation to pay would be delayed until Ford Kinter did all things necessary on its part to determine the relevant adjusted Purchase Price under paragraphs (b) or (c).

24 The trial judge accepted the contentions of Ford Kinter. He gave careful and detailed reasons for doing so. For generally the same reasons, we agree that Ford Kinter's interpretation of clause 2.2 is to be preferred to that put forward by Reliance.

25 First, while we accept that the Purchase Price is defined in terms of the amount 'as determined under clause 2.2', the Initial Purchase Price Calculation is a determination of that price. Paragraph (a) expressly states that the Purchase Price 'is 2 times Renewal Revenue for the 12 months ending 30 June 2013'.[21] That amount 'is' $1,936,269.64, as determined by the calculation in the annexure. This amount is then defined as the Initial Purchase Price Calculation.

26 Second, sub-paragraphs (a)(i), (ii) and (iii) then expressly adopt the Initial Purchase Price Calculation as the basis for the percentage amounts 'payable' in respect of all instalments. There is a clear distinction in clause 2.2 between the Initial Purchase Price Calculation and the 'deemed' or 'adjusted' Purchase Price following further determination by the parties under paragraphs (b) or (c). On the construction advanced by Reliance the second and third instalments would never be payable by reference to the Initial Purchase Price Calculation. In every case there would have to be a determination resulting in a calculation unrelated to the Initial Purchase Price Calculation. That construction is inconsistent with the express words of paragraphs (a), (b) and (c).

27 Third, the words 'subject to clause [2.2](b)' and 'subject to clause [2.2](c)' in sub-paragraphs (a)(ii) and (iii) would be understood by reasonable persons in the position of the parties as meaning 'subject to adjustment of the Purchase Price' under those sub-paragraphs. Further, they would understand that paragraphs (b) and (c) are directed at adjustments to the Purchase Price, but are not concerned with the times for payment specified in sub-paragraphs (a)(ii) and (iii).

28 Fourth, Reliance's interpretation does not recognise the intention of the parties in paragraphs (b) and (c) that the adjustment process will take place promptly, so that an adjusted Purchase Price will be determined '[a]s soon as practicable after 30 June' 2014 and 2015. The parties clearly intended that the adjustment process should be completed before the 1 November dates specified in sub-paragraphs (a)(ii) and (iii). However, on the construction we prefer, the agreement does recognise and provide for the circumstance that this does not occur. The use of the phrase 'as soon as practicable' recognises that there may be difficulties or delays in determining an adjusted Purchase Price. The use of the defined term 'Initial Purchase Price Calculation' in sub-paragraphs (a)(ii) and (iii) evinces an intention, in our view, as to what amounts are payable in the event that the adjustment process is not completed by the specified 1 November dates. The amounts payable are the relevant percentages of the Initial Purchase Price Calculation.

29 Fifth, the interpretation we (and the trial judge) prefer provides for all circumstances where one party breaches its obligations under clauses 2.2(b) and (c) to engage in the adjustment process in a timely fashion ('the parties will determine').[22] If, as here, Reliance refuses to participate in the adjustment process, it is required to pay the proportions of the Initial Purchase Price Calculation without adjustment. This does not mean that the adjustment process cannot be completed after payment and any overpayment claimed back from Ford Kinter. Alternatively, if the adjustment process resulted in an increased deemed Purchase Price, Reliance would be liable to pay an increase. These outcomes are provided for in clause 10, which provides that clause 2.2 survives the payment of the first instalment on completion and the termination of the sale agreement for any reason. On the other hand, if Ford Kinter were to breach its obligations under clauses 2.2(b) and (c), clause 2(d) provides that Reliance's payment obligations would be suspended until Ford Kinter participated in the adjustment process. The construction we adopt does not render the process 'optional', as Reliance contends.

30 In this case, Reliance endeavoured to have the Court rule on the requisite adjustment process as part of its defence. That belated engagement with the process failed because the evidence to enable an adjustment to be calculated was deficient, for the reasons to which we have referred.

31 Finally, we accept that an interpretation which results in nothing being payable on the specified dates for payment of the second and third instalments - in the absence of a zero adjustment being determined beforehand - does not produce a commercial result but, instead, works a commercial inconvenience.

32 In conclusion, while we grant leave to appeal as the construction issue was arguable, the appeal must be dismissed.

[1] Schedule 2 of the Competition and Consumer Act 2010 (Cth).

[2] Ford Kinter & Associates Pty Ltd v Reliance Franchise Partners Pty Ltd [2018] VCC 9 (Reasons).

[7] Emphasis added. Sub-paragraphs 2.2(a)(ii) and (iii) mistakenly refer to 'clause 2.3(b)' and 'clause 2.3(c)'.

[8] McCann v Switzerland Insurance Australia Ltd [2000] HCA 65; (2000) 203 CLR 579, 589 [22]; Wilkie v Gordian Runoff Ltd [2005] HCA 17; (2005) 221 CLR 522, 528-9 [15].

[9] [2015] HCA 37; (2015) 256 CLR 104, 116-17 [46]-[51] (citations in original).

[10] Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; (2014) 251 CLR 640, 656 [35].

[11] Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337, 350 (citing Reardon Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989, 995-6), 352. See also Sir Anthony Mason, 'Opening Address' (2009) 25 Journal of Contract Law 1, 3.

[12] Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; (2014) 251 CLR 640, 656 [35].

[14] Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337, 352. See also Sir Anthony Mason, 'Opening Address' (2009) 25 Journal of Contract Law 1, 3.

[15] Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; (2014) 251 CLR 640, 657 [35], citing Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337, 350, in turn citing Reardon Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989, 995-6.

[16] Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337, 352; Reardon Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989, 995-6.

[17] Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; (2014) 251 CLR 640, 657 [35], citing Re Golden Key Ltd [2009] EWCA Civ 636 [28].

[18] Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; (2014) 251 CLR 640, 657 [35], citing Zhu v Treasurer (NSW) [2004] HCA 56; (2004) 218 CLR 530, 559 [82].

[19] Australian Broadcasting Commission v Australasian Performing Right Association Ltd [1973] HCA 36; (1973) 129 CLR 99, 109.

[20] Wilkie v Gordian Runoff Ltd [2005] HCA 17; (2005) 221 CLR 522, 529 [16].