Costs and orders
96The question concerning costs arises only if the judge's conclusion concerning the second question is disturbed. Thus it does not arise.
97I agree with the orders proposed by Giles JA.
98YOUNG JA: This is an appeal from a decision of the Chief Judge in Equity who construed a series of complex interlocking documents relating to the financing of aircraft. The judgment medium neutral citation is [2010] NSWSC 1235.
99The case concerns the financing of two aircraft (HL 7740 and HL 7741) for a South Korean airline, Asiana Airlines Inc ("Asiana"). The documentation is the same for each aircraft and counsel wisely ran the case with respect to HL 7740 alone.
100The finance required of just under $104,000,000 was provided in two lots. The majority ($88,180,000) was provided by MARS ECA Finance Ltd ("ECA") from monies it had borrowed from others (the "senior lenders") and the balance of $15,640,000 from monies ECA borrowed from the plaintiff below, now the appellant ("RILA").
101The essential transaction was that ECA purchased the aircraft from Airbus SA for $100,654,715 in accordance with a Purchase Agreement Assignment. ECA leased the aircraft to Allco Aviation A330 2005 Limited ("Allco Aviation") in accordance with the Master Head Lease and the Head Lease Schedule. Under the Head Lease Schedule, Allco Aviation pays rent of $908,670 each month to ECA.
102Allco Aviation has in turn sub-leased the aircraft to Asiana in accordance with the Master Operating Lease and the Master Operating Lease Schedule.
103Under the Master Operating Lease Schedule, Asiana pays rent of $908,870 each month to Allco Aviation. The flow of payments in relation to the monthly rents are therefore the payment of $908,870 by Asiana to Allco Aviation and the payment of $908,670 by Allco Aviation to ECA.
104ECA then pays out that sum, $789,892.31 per month to the senior lenders and $118,777.69 to RILA.
105RILA is a special purpose company established on 23 June 2005 to facilitate the financing and leasing arrangements of the aircraft.
106Alliance & Leicester plc ("A&L") and Allco JS Pty Limited ("Allco JS") provided secured loans to RILA in connection with the financing and leasing arrangements. RILA obtained its funds to make its loan by virtue of these two agreements: (1) the "LC Loan Agreement" (A&L was the LC Lender); and (2) the "Asset Loan Agreement" (Allco JS was the Asset Financier).
107Under the LC Loan Agreement RILA is obliged to make monthly repayments in accordance with clause 3.8 and Schedule 5 which for the month of April 2010 was an amount of $25,203.32. RILA is obliged to make monthly repayments under the Asset Loan Agreement in accordance with clause 3.1, 3.2 and Schedule 3 which for the month of April 2010 was an amount of $14,529.36. RILA is also obliged to make a payment to the Manager pursuant to clause 8.10 of the RILA Financing Deed and the Schedule of the Management Fee Letter which for the month of April 2010 was $79,045.
108RILA was thus obliged to pay for the month of April 2010: $25,203.32 (under the LC Loan Agreement); $14,529.36 (under the Asset Loan Agreement); and $79,045 (Manager's fee) totalling $118,777.69.
109The only other party to the appeal, Ladbroke Management Pty Limited ("Ladbroke"), was appointed as RILA's Manager in the financing and leasing arrangements after the original Manager's appointment was terminated.
110These arrangements were structured and organised by Allco Finance Group Ltd ("Allco") or subsidiaries and businesses owned and controlled by Allco that were placed into receivership in 2008 and restructured and/or sold in 2009/2010.
111The RILA Financing Deed is dated 12 July 2005. The parties to it are RILA, A&L (as the Security Trustee, the LC Facility Agent and the LC Lender), Allco Managed Investments Limited as trustee of the Aircraft Holdings Trust ("AMIL") (and Allco JS by substitution on 28 July 2007) as Asset Facility Agent, each person defined as an Asset Financer, and Allco Management Ltd ("AML") (as the Manager). "Asset Financier" is defined as each person named as such in the Asset Loan Agreement and any person who becomes a financier under that agreement by way of assignment and substitution: cl 26.1. The Asset Financier named in the Asset Loan Agreement is AMIL as trustee of the Aircraft Holdings Trust.
112As I noted earlier, the suite of documents was complex. Unfortunately they did not anticipate the difficulties that would arise if Allco became insolvent. I set out below a diagram which goes a long way to clarifying the position of the various parties. This diagram was prepared by the appellant for the first instance proceedings, agreed to by the respondents and adopted by the primary judge.
113The following flow chart depicts the arrangements:
114The Financing Deed records AML as the "Manager" and the provisions relevant to the appointment and removal of the Manager are in clause 8. This includes provisions authorising the Manager to:
(a) make or cause to be made all calculations and determinations as and when required under the Transaction Documents and to provide to each of the other parties to the Transaction Documents details of any revised, amended or recalculated schedules, figures, sums, amounts or dates;
(b) undertake any other administrative or management tasks on behalf of RILA or the Lessor as the Manager may agree with those entities;
(c) prepare and keep or cause to be prepared and kept all accounting records of RILA; and
(d) do all acts and things that are reasonably incidental to the acts set out in this clause 8.2, and to sign or execute all such documents and instruments in connection with those duties as may from time to time be required under the Transaction Documents.
115Clause 8.7 empowers RILA to remove the Manager if, inter alia, it becomes insolvent. However, cl 8.9 specifies that the removal is not to become effective unless and until a replacement Manager has been identified and approved by the Security Trustee and each Facility Agent (acting on the instructions of the Relevant Financiers), and that replacement Manager has executed documents reasonably satisfactory to the Security Trustee to become the replacement Manager for the purposes of the Transaction Documents.
116Clause 8.10 is a key clause and I will set it out in full:
8.10 Management Fee
In consideration of the Manager entering into this deed RILA agrees to pay the Manager a management fee according to the terms of the Management Fee Letter.
117The parties below agreed that the central issue for determination was whether RILA is obliged to pay, or give a direction to pay, a monthly Management Fee to Ladbroke pursuant to clause 8.10 of the RILA Financing Deed.
118It is only if RILA is so obliged that it will be necessary to consider whether RILA has committed the Payment Events of Default set out in the Notice of Default.
119I should at this stage refer to that Notice of Default. The loan through A&L was secured by way of a floating charge. That charge could become fixed if RILA committed default and A&L served a Notice of Default. On 28 May 2010, A&L served RILA with what purported to be such a notice. I will refer to this document as the "Notice of Default".
120It is not necessary at this point to set out its terms in detail. I need only note that it was based on two grounds: (A) (Paras 4-11) that RILA had breached the negative pledge obligations laid on it by the documents in respect of property on which its loan was secured; and (B) a breach caused by the non payment of the Management Fee, clause 8.10 of the Financing Deed, is an Event of Default pursuant to clause 15(a) of the Financing Deed.
121The learned primary judge ruled at [143] that RILA is obliged to pay Ladbroke the Monthly Management Fee in the Schedule in the Management Agreement headed "Management Fee Letter" and that the respondents were not entitled to rely on the Notice of Default.
122The question of costs was the subject of a subsequent hearing. In it a notice of motion was filed which sought, inter alia, that KV Aviation Holdings Pty Ltd ("KVM"), which is RILA's holding company, pay costs to the respondents. It was put that RILA was a company of no substance and that KVM should be responsible to pay any costs ordered against RILA.
123In her second judgment, [2011] NSWSC 34, the primary judge ordered that each party should bear its own costs. Her Honour found it unnecessary to consider whether the non-party (KVM) ought to pay costs, but noted at [30], with reference to the principles laid down by the High Court in Knight v FP Special Assets Ltd [1992] HCA 28; 74 CLR 178, 192-3, that RILA was the equivalent of a "man of straw" and that KVA had played an active role and had an interest in the litigation.
124RILA appeals against the first part of the original determination. A&L, Allco JS and Ladbroke cross appeal in respect of the latter part of that determination and against the order that each party bear its own costs. They also press the claim against KVM which they name as the second cross respondent. RILA has filed a notice of cross contention contending that the determination the subject of the cross appeal should be upheld as well on other grounds.
125The appeal was heard on 20 October 2011, Mr S D Robb QC, Ms S Chrysanthou and Mr J Emmett appeared for the appellant and Mr A J Bannon SC and Mr R M Foreman of counsel appeared for the respondents.
126The structure of these reasons is dictated by the way the case was presented below. Part 1 focuses on the appeal, Part 2A on the cross appeal with respect to the Notice of Default, Part 2B on the notice of cross contention, Part 3 on the question of costs and Part 4 on the result of the appeal.
1271. Unfortunately, it is necessary to refer in some detail to a number of documents and some care has to be taken in doing this as not all parties to the appeal are parties to each and every document.
128As noted earlier, there were two streams of finance, the major stream, approximately 88 million US dollars, came from European investors and was under the aegis of ECA, the minor stream of 15.5 million US dollars was under the control of RILA's directors.
129I have referred to the Financing Deed of 12 July 2005 in some detail. The other principal agreement was the Management Agreement which was signed the day after the Financing Deed.
130The minor stream of financing also involved the RILA Intercreditor Deed of 12 July 2005.
131Additionally there were the documents dealing with the major lending. These included the ECA Loan Agreement of 12 July 2005, the ECA Intercreditor Agreement of 12 July 2005, the Instalment Sale Deed of 12 July 2005 between Mars ECA and RILA, the Head Lease and Operating Lease of the aircraft between Mars ECA and Allco Aviation and the Management Agreement of 13 July 2005 between RILA, Allco Aviation and AML.
132The parties appear to agree, as the primary judge recorded at [55], that:
a suite of commercial contracts should be interpreted having regard to what a reasonable person would have understood the language used by the parties to mean: Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; 218 CLR 451 at [22]; Toll ( FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; 219 CLR 165 at [40]; International Air Transport Association v Ansett Australia Holdings Limited [2008] HCA 3; 234 CLR 151 at [53]. It will be necessary to give a business like interpretation to the contracts with attention being given to the language used by the parties, the commercial circumstances which the documents address and the objects intended to be secured: McCann v Switzerland Insurance Australia Limited [2000] HCA 65; 203 CLR 579.
133The parties seem to accept also that the contracts should be construed, if at all possible, as a group of interlocking agreements where inconsistencies are to be kept to a minimum.
134It is an accepted principle of the interpretation of contracts that, where there are a series of contracts, but, in essence, one transaction, it is appropriate to read them together for the purpose of determining their legal effect: Smith v Chadwick (1882) 20 Ch D 27, 62; Manks v Whiteley [1912] 1 Ch 735, 754.
135We were also reminded of the oft repeated principle that the construction of commercial contracts needs to be approached against the matrix of facts which underpinned the agreements and in no narrow way, but as business people would have understood the words in the surrounding circumstances: ( Di Dio Nominees Pty Ltd v Brian Mark Real Estate Pty Ltd [1992] 2 VR 732, 741-2).
136The principles referred to in the preceding two paragraphs need to be held in tension against: (a) where there is a fact situation that appears not to have been contemplated by the parties; (b) where the parties appear to have spent a large sum on commercial solicitors to put their agreement into the best possible form; and (c) where there are companies incorporated in tax havens involved (as part of the explanation for what is stated in the documents may be for foreign forensic purposes).
137Point (c) is significant as ECA is a Cayman Islands company and a number of the Allco companies were incorporated in Eire.
138There is a further complication. One should not speak too glibly about a "suite of documents". That expression conveys the flavour that the set of documents is internally consistent and that all relevant parties are parties to all documents. At least the latter matter, if not both, are not the case with the documents in the present case. Indeed, the drafter seems to have deliberately chosen not have all relevant parties execute each document in the so-called "suite". The best defence that Mr Robb could make of the situation was to describe the documentary regime as holding together though frayed at the edges.
139Whilst generally accepting the approach to construction taken by the primary judge, the appellant says that her Honour did not consider another important principle of construction of documents: that a construction which would lead to an absurd, unreasonable or capricious result is to be avoided: see Australian Broadcasting Commission v Australasian Performing Right Association [1973] HCA 36; 129 CLR 99 at 109; JP Morgan Australia Ltd v Consolidated Minerals Pty Ltd [2011] NSWCA 3 at [96].
140Although I was curious, we did not press for answers as to why the present proceedings were commercially purposeful. One answer may be that, whilst Allco was in the picture, its subsidiary ALM was the intended recipient of considerable monthly sums as management fees. With ALM out of the picture, both the appellant and the respondents are making claim to those monies as an unexpected windfall.
141It does appear that somehow or other out of the mass of documents, if all works out as intended, RILA will end up after the end of the lease of the aircraft with the ability to acquire the aircraft at an advantageous price.
142It is RILA's case that "Manager" in clause 8.10 means AML and does not include a "replacement Manager" and therefore RILA is not obliged to pay Ladbroke a Management Fee pursuant to that clause. However RILA accepts that it is obliged to pay Ladbroke a "reasonable" fee for its services as Manager.
143The primary judge noted at [60] that AML held two appointments relevant to the present dispute: (1) as the Manager under the Management Agreement in respect of the $88 million ECA transaction; and (2) as the Manager under the RILA Financing Deed in respect of the $15 million RILA transaction.
144Thus, the primary judge said at [61], there were two separate relevant appointments and two separate ways of terminating or removing the Manager from those appointments. Under the Financing Deed, RILA and A&L were able to remove the Manager for, inter alia , breaches of the Manager's obligations under the Financing Deed. Both RILA and Allco Aviation were able to remove the Manager for breaches of the Management Agreement. A&L was not able to remove the Manager in respect of the ECA transaction as it was not a party to the Management Agreement and had no rights in respect of the appointment of the Manager under that Agreement.
145The question as to whether AML was validly removed as Manager under the Management Agreement was the subject of separate proceedings. Her Honour said at [62] that she was going to assume that AML was removed from its appointment as Manager under the Management Agreement by the letters to it from RILA and Allco Aviation on 17 and 20 November 2009. It was not clear, at least on the documentary material, on what particular basis RILA and Allco Aviation removed AML as Manager.
146Her Honour then noted at [63] that clause 8.9 of the RILA Financing Deed refers to a "replacement Manager", an expression that is not defined in the Deed. The removal of a Manager under clause 8.7 of the Deed is not effective unless and until the replacement Manager has been identified and approved by A&L and each Facility Agent and the replacement Manager has executed documents to become the replacement Manager for the purposes of the Transaction Documents that are "reasonably satisfactory" to A&L. She further noted that all of the steps necessary to give effect to the removal of AML and the appointment of Ladbroke occurred by 12 April 2010. On 13 April 2010, A&L wrote to AML confirming AML's removal and Ladbroke's appointment as replacement Manager on 12 April 2010.
147The primary judge referred to part of the Dictionary in the Financing Deed where cl 26.2 provides:
Unless the contrary intention appears, a reference in a Transaction Document to:
...
(k) a particular person includes a reference to a person's executors, administrators, successors, substitutes (including persons taking by novation) and assigns;
148The primary judge reached her conclusion on this issue in [69] and [70] of her reasons:
69 RILA submitted that had the parties intended that the term "Manager" was to be understood to include a reference to "replacement Manager" they would have included such a provision. The expression "substitutes" in clause 26.2(k) includes the words "(including persons taking by novation)". Far from limiting the expression "substitutes" to the "Substitute Financier", who takes by novation under the Substitution Agreement, it expressly includes them by these words in parentheses. If the expression is limited to a Substitute Financier taking by novation then there would have been no need for the words in parentheses. The words in parentheses make it clear that it is intended that the expression "substitutes" includes a larger category of persons than merely the Substitute Financier.
70 The expression "substitutes", as the plural of "substitute", has a number of ordinary meanings including "replace (someone or something) with another": The New Oxford Dictionary of English ; and "to put (one person or thing) in the place of another; to take the place of; replace": The Macquarie Dictionary Federation Edition. Clearly the parties to the RILA Financing Deed contemplated that the Manager would have a substitute or a replacement having regard to the regime set out in clause 8 of the Deed and, in particular, the use of the expression "replacement Manager". I see no material difference between the expression "replacement Manager" and "substitute" Manager in the context of the RILA Financing Deed as a whole. I am satisfied that a replacement Manager is a substitute. It follows that the expression "Manager" in clause 8.10 refers to Ladbroke from 12 April 2010 onwards. Even if that were wrong, I am satisfied that Ladbroke can reasonably be described as a "successor" to AML having regard to the ordinary meaning given to that expression: "one who or that which succeeds or follows; one who succeeds another in an office, position, or the like": The Macquarie Dictionary Federation Edition.
149The primary judge thus ruled that a replacement Manager was a substitute for or a successor to AML and was entitled to receive the fee under cl 8.10. She also rejected the submission that the fee was not payable because the Management Agreement had been terminated.
150Mr Robb says that it is too simplistic to take this approach.
151He puts that the commercial reality of the situation is that AML, which is part of the Allco group of companies was appointed as Manager under documents relating to each of the two funding streams. It had different duties under two different documents, but it was entitled to be paid the one indivisible "Management Fee". What would happen if one of the appointments was terminated and the other was still on foot was not specifically dealt with and would need to be resolved in a way that was equally effective no matter what the alternative outcomes in relation to the timing and replacement of the Managers.
152Counsel puts that the primary judge's solution means, in effect, that the minor lender can nominate the Manager to handle the duties required to be performed for the major lenders. This can hardly be what the parties had in mind.
153As to the Management Fee, Mr Robb puts that the monthly Management Fee was clearly for management even though it was expressed as consideration for the Manager entering into the agreement.
154This means that one cannot escape from the complications by saying only AML could be said to be the person who took remuneration for entering into the agreement. One can always give evidence as to the real consideration for a promise no matter what is recorded as being the consideration. Whilst one can understand a once and for all fee payable by instalments, a continuous income stream, as here, shows that the fee was really for ongoing management.
155The fee is an ongoing one payable out of the monthly lease repayments. This fact alone points to Mr Robb's submission being correct. Thus, I accept that it is too simplistic a solution to say that, because AML was the only Manager of whom it could be said that it was being paid for entering into the agreement, it alone was entitled to the fee.
156The primary judge also focused on cl 26.2(k) of the Financial Deed which provides that reference to a particular person includes reference to (inter alios) the person's successors or substitutes.
157The primary judge said that clearly the parties to the Financing Deed contemplated that the Manager would have a substitute or a replacement having regard to the regime set out in clause 8 of the Deed, in particular, the use of the expression "replacement Manager". She saw no material difference between the expression "replacement Manager" and "substitute" Manager in the context of the RILA Financing Deed as a whole and was satisfied that a replacement Manager is a substitute or, if this were wrong, that Ladbroke could reasonably be described as a "successor" to AML.
158Mr Robb puts that this reasoning is flawed and does not provide a solution. He says that her Honour did not analyse in sufficient detail what it means to say that one person is a substitute for another in relation to the first person's role and obligations under a complex series of Transaction Documents.
159Mr Robb says that it is inadequate just to look at dictionary definitions. One must determine what, in context, is actually required for one person to be a substitute for another. In the present case, the question as to whether Ladbroke is a substitute for AML does not depend on whether it has assumed the title of Manager and has assumed some of AML's obligations. To be a substitute requires, substantially, total assumption of AML's obligations.
160Likewise, Ladbroke cannot be properly classed as a "successor" to AML.
161I accept Mr Robb's submissions as the true construction of "substitute" and "successor".
162The appellant's written submissions (para 57) summarise its argument as to why there should be a negative answer to the question as to whether a management fee remains payable. It makes 21 points:
57.1 RILA and Allco Aviation have rights and obligations in relation to the $88 million loan under the ECA Transaction Documents for which they require the assistance of management services where inadequate performance or failure of performance by the manager will put them in default.
57.2 RILA has different but comparable rights and obligations in relation to the $15 million loan under the RILA Transaction Documents for which it requires the assistance of different management services where inadequate performance or failure of performance by the manager will put it in default.
57.3 The Management Agreement is the tripartite agreement which is defined in the ECA Loan Agreement as the "Management Agreement", and its terms clearly impose obligations on AML to manage RILA's and Allco Aviation's rights and obligations under the ECA Transaction Documents.
57.4 Clause 8 of the Financing Deed creates a management relationship between RILA and AML in relation to RILA's rights and obligations under the RILA Transaction Documents.
57.5 Clause 8.2(b) of the Financing Deed expressly contemplates that AML's management duties may include additional duties in favour of both RILO and Allco Aviation as may be agreed.
57.6 The Financing Deed and the Management Agreement are effectively contemporaneous documents.
57.7 Both the Financing Deed and the ECA Loan Agreement expressly identify AML as the Manager.
57.8 Clause 2 of the Management Agreement obliges RILA to pay the amounts set out in the Schedule to AML as a management fee for the services set out in the Management Agreement.
57.9 The Schedule to the Management Agreement takes the form of a document called "Management Fee Letter". The columns in that document correspond with what is required by clause 2 of the Management Agreement.
57.10 Clause 8.10 of the Financing Deed requires RILA to pay the Manager a management fee according to the terms of the Management Fee Letter.
57.11 The Management Fee Letter is defined in the Financing Deed as the "the fee letter dated on or about the date of this deed between RILA and the Manager".
57.12 The obligation referred to at 57.10 cannot be a reference to the Schedule to the Management Agreement alone, because the Management Fee Letter lists dates and different amounts in different columns, and it is necessary to have regard to clause 2 of the Management Agreement to know which sums are payable in which circumstances.
57.13 If the Management Fee Letter referred to in clause 8.10 of the Financing Deed is the Management Agreement as a whole, then the effect is that RILA is separately required by clause 2 of the Management Agreement and clause 8.10 of the Financing Deed to pay the same indivisible amounts to the respective managers for the provision of different management services under the two agreements.
57.14 The amounts set out in the Schedule to the Management Agreement as being the management fees payable to AML constitute the entirety of the money which will be received by RILA in relation to the two funding streams to pay management fees.
57.15 RILA and Allco Aviation have the power to terminate the Management Agreement at any time. It follows that they will be free to appoint a replacement Manager to provide the management services required by the Management Agreement.
57.16 Under clause 15.2 of the ECA Intercreditor Agreement the Security Trustee can terminate the appointment of AML under the Management Agreement for breach, but cannot appoint a replacement.
57.17 Under clause 8.7 of the Financing Deed RILA and the Security Trustee can in different circumstances terminate the appointment of AML as Manager under the Financing Deed.
57.18 The effect of clause 8.9 is that a termination under clause 8.7 will not be effective until a replacement manager has been appointed in accordance with clause 8.9.
57.19 Consequently, AML may be terminated as Manager under one or both of the Management Agreement and the Financing Deed. Terminations may be made at the same time, or different times, and in any order.
57.20 The parties who are entitled to appoint replacement Managers under the two agreements may agree to appoint the same party as replacement Manager, or different parties.
57.21 Whatever the outcome may be the only money available to pay management fees will be the amounts already listed in the Schedule to the Management Agreement.
163The argument presented seems plausible. Two points must be made. First, with respect to the drafters, the documents are, in hindsight, not well drawn and do not deal with what might follow from the insolvency of the Allco companies, particularly AML. Thus, it is not surprising that problems like those mentioned in the appellant's 21 points arise. Secondly, the difficulties mentioned by the appellant have to be assessed and balanced against other difficulties noted in the respondents' submissions, which arise if the appellant's submissions are accepted.
164Alternatively, the appellant puts that cl 8.10 of the Financing Deed must be construed having proper regard to the place and function of cl 8 in that agreement in relation to the Transaction Documents which relate to two separate funding streams. Thus, such construction should achieve as effective and fair an outcome as can be achieved equally in relation to all possible permutations of terminations, timing of terminations and choices of replacement Managers under the Management Agreement and the Financing Deed.
165The respondents' counsel cite the decision of the Full Federal Court in Leveraged Equities Ltd v Goodridge [2011] FCAFC 3; 191 FCR 71, 109, where it was held that a contract may provide for it to be novated by a unilateral act. This is a decision of a full court and is not clearly wrong, it must be followed, though it seems to me that there is little in the way of authority to support it.
166The basic question is whether cl 8.9 of the Financing Deed has that effect.
167The clause is as follows:
Replacement Manager
Neither the termination of the Manager under clause 8.6...nor the removal of the manager under clause 8.7...is effective unless and until a replacement Manager has been identified and approved by the Security Trustee and each Facility Agent...and that replacement Manager has executed documents reasonably satisfactory to the Security Trustee to become the replacement Manager for the purposes of the Transaction Documents.
168The respondents put that cl 8.9 impliedly authorised the Security Trustee (A&L) to effect a substitution of the RILA Manager upon it being removed under cl 8.7. It is difficult to see how this is so. The clause speaks in terms of the Security Trustee approving an appointment rather than being the person to make the appointment.
169Mr Bannon puts that, although it would have been better had more words been supplied, there are sufficient words to show that the Security Trustee's role in identifying and approving the replacement Manager and the fact that RILA is not mentioned at all, mean that the Security Trustee can make the appointment, at least if necessary, to fill in a defect in the process.
170In the Deed Poll (called a "Deed of Accession") that Ladbroke executed, it covenanted to observe the obligations of the Manager. It is suggested that this completed the process.
171The Deed Poll is said to be for the benefit of the other parties to the financing. Whilst this is odd in a deed poll, it is of no moment as any person can sue on a deed poll: Sunderland Marine Insurance Co v Kearney (1851) 16 QB 925; 117 ER 1136; Chelsea and Walham Green Building Society v Armstrong [1951] Ch 853.
172The point goes nowhere because the parties have agreed that Ladbroke was properly appointed the replacement Manager for the RILA stream.
173Mr Robb submits that it was clearly not the parties' intention that whoever was the replacement Manger on the RILA side from time to time would be entitled to 100% of the money that was available to pay Managers.
174One construction of the Financing Deed is that, once a replacement Manager is appointed under 8.9, that Manager has all the duties that AML originally had, so that that Manager is truly a "substitute".
175Mr Robb rejects this construction. He puts that this would be to foist on the major lender a Manager of its side of the transaction without that side's consent. Further, cl 8.2 acknowledges that the Manager under the Deed is essentially a person to act for RILA and that the Manager has no obligations except those expressly set out in that Deed.
176Mr Bannon argues that Mr Robb's approach is also commercially absurd. He says you would then have a system which requires there to be a Manager who can never leave until there is a replacement Manager, but the replacement Manager's remuneration is left open.
177If one focuses on a scenario where an existing Manager wants to or needs to get out, its ability to do so is seriously affected because it cannot until a new Manager is appointed. No new Manager will take the position until it is reasonably assured that there is sufficient remuneration there to make it worthwhile to accept the appointment. It might not wish to bargain with RILA or to be forced into court or arbitration.
178Again, it might be asked: why should RILA get an increased monthly payment merely because the appointed Manager becomes insolvent or wishes to resign?
179Further, commercially, it is essential that the Manager be replaced quickly. The whole agreement requires that a Manager always be in place. The agreements do not deal with the case of a Manager who is a natural person dying or a corporate Manager going into liquidation. However, the implication is there that the situation must be remedied quickly.
180We have here a problem that the drafter evidently did not foresee and the Court has to construe what is in the documents to discover what the parties intended to happen in the events which have in fact occurred.
181Both sides of the argument rely on commercial viability and reject the more technical approach favoured by the primary judge. At least up to a point I agree with this approach as the strictly technical construction leads to an over simplistic result as to the parties' intention.
182Even in commercial contracts, the intention of the parties must be gleaned from the words they have used in their contract. Time and time again, courts have given little endorsement to arguments that, despite what is written, commercial reality means that the Court should apply some different approach to contractual interpretation. However, where the basic documents do not contemplate the event which has happened, the Court has greater liberty to consider commercial realities, particularly when both parties accept that it should do so.
183It seems to me that it is at the heart of the parties' agreement that there must always be a Manager in place. It is common ground that the Manager would be remunerated. I consider that, whilst there is considerable validity in Mr Robb's submissions, Mr Bannon's more rationally fit in with the basic principles of the conjoined agreements.
184Accordingly, I agree with the result reached by the primary judge.
1852A. I now turn to the Notice of Default.
186The respondents relied below on two discrete acts or failures by the appellant as justifying the issue of the Notice. In summary these were:
A. RILA's conduct in pressing for payments otherwise due to AML to be paid into KVM's bank account (Paras 4-11 of the Notice); and
B. (Which is no longer an issue) that RILA did not pay management fees pursuant to cl 8.10 in April and May 2010.
187As to A, the primary judge held at [139] that the facts showed that RILA had not breached the negative pledge and that its conduct did not constitute an Event of Default.
188The cross appellants say that the primary judge's analysis was flawed in a number of respects.
189First, the primary judge erred in concluding at [137] that RILA formed the intention to create and did create an immediately operative trust.
190Secondly, the primary judge erred by determining whether an Event of Default occurred by reference to the December 2009 conversation
191Thirdly, if a trust was created, the primary judge erred by failing to consider whether the creation of that trust was itself an Event of Default.
192Fourthly, the primary judge erred by failing to consider whether RILA's conduct amounted to an attempt to allow an interest to arise in respect of the Secured Property, because an equitable lien was created over that property which would vest in the trustee.
193The decision on the allegation that RILA breached its negative pledge requires an analysis of cl 4.2 of the RILA Security Deed which is as follows:
Without the consent of the Chargee, the Chargor may not, and may not agree, attempt or take any step to, do any of the following in respect of Secured Property over which this deed is fixed:
...
(d) deal in any other way with the Secured Property or any interest in it, or allow any interest in it to arise or be varied.
194The allegation is that some monies, part of the Secured Property, were to be paid into a "custodian" bank account in the name of KVM. The account was opened, but no monies were ever paid into it. However, it is put that what occurred constituted an attempt or the taking of a step to deal with an interest in the Secured Property or to allow an interest in it to arise.
195The vital document is a letter which RILA wrote to the Security Trustee on 15 April 2010. That letter read, so far as is relevant:
Given the Removal Letter, AML has now been removed for the purposes of the Financing Deed.
To this end, we hereby direct you to comply with our letter to you entitled "Payment Instruction" ... dated 20 November 2009 and to pay RILA all amounts from the date of this letter to which RILA is entitled under the Intercreditor Deed into the following account:
Bank: Australia and New Zealand Banking Group Limited
Swift Code: [Provided]
Account No: [Provided] (same account number as in letter of 3 February 2010)
We note that the date of the Removal Letter is 12 April 2010. We hereby direct that the payment due to RILA on or around 13 April 2010 pursuant to the Intercreditor Deed be paid into the account detailed above.
RILA reserves its rights in relation to all other amounts retained by you in the "suspense account" referred to in the Escrow Letter.
196The account number provided was for an account whose holder was KVM.
197There was some correspondence between the parties. On 6 May 2010, RILA wrote that RILA did not have a bank account and that the KVM account nominated was "a special purpose custodian account....which if the funds had been deposited as requested would have been held by KVM as a custodian for RILA. Given that no funds have been received no such custodian arrangement has in fact been entered into...".
198Mr Bannon says that there was an attempt to convert a book debt into cash in the account of KVM: the only reason this would not be a breach is if there was a trust over that account in favour of RILA; but there was no such trust.
199The primary judge found no breach basically because she found that a trust had been created on 3 December 2009.
200On 23 November 2009, the controllers of RILA approached the ANZ Bank to open a US dollar account for RILA. The bank obliged. On 3 December, the controllers asked that that account be closed and a fresh account opened for KVM. The RILA account was closed on 3 December, the KVM account was opened on 7 December. This latter is the account referred to in the 15 April letter.
201The evidence which the primary judge accepted was that Mr Lennox, solicitor for RILA, was nervous about RILA opening a bank account as that may have been taken as breaching a term of one of the agreements. He advised that a custodian account be opened. On 3 December 2009, Mr Veal, an officer of RILA, accepted that advice in a telephone conversation.
202The primary judge said at [136] to [138]:
136 Mr Lennox gave evidence that he gave advice to Mr Veal about the specific structure that could be put in place to establish a custodian arrangement. His evidence was that it would operate by way of "deed poll" (tr 163). He also gave evidence that he was not asked to prepare a custodian agreement. The letter from RILA to A&L dated 6 May 2010 advised that the KVM account was to be a special purpose custodian account and that the funds, that is the Secured Property, if deposited "would have been held by KVM as a custodian of RILA". That letter also included the statement that, "Given that no funds have been received no such custodian arrangement has been entered into".
137 I do not regard these statements as evidence of an intention to create a trust at a later date.... The intention to create the trust was formed when Mr Lennox gave his advice in December 2009 and Mr Veal agreed on 3 December 2009 that RILA had decided to proceed with the custodian arrangement. The subject matter of the trust was the Secured Property and clearly the objects of the trust were to hold the money for RILA to enable RILA to comply with its obligations under the Transaction Documents. The fact that there was a dispute over whether Ladbroke was entitled to the Management fee that had previously been paid to AML does not change these conclusions.
138 I am not satisfied that the absence of any written custodian agreement in the circumstances that I have described establishes that Mr Kinghorn [a director of RILA] decided not to take Mr Lennox advice so that the Secured Property could pass to KVM. I have no doubt that Mr Kinghorn intended to follow Mr Lennox' advice. I also have no doubt that it was Mr Kinghorn's intention that KVM hold the Secured Property on trust for RILA when A&L paid money into the KVM account. I am not satisfied that RILA intended to deal with the Secured Property as alleged.
203Mr Bannon says that the fundamental flaw in this approach is that, at the time of the December 3 conversation, there was no trust property and one cannot set up a trust unless one has trust property. There was no attempt to make the book debts trust property. What they had in mind was that monies would come in from time to time and it was proposed that when they did, they would be held in trust. That does not set up a trust: one cannot have a trust of future property.
204Jacob's Law of Trusts , 7 th ed [2404] says that equity regarded a purported assignment of future property as a covenant to assign the property when it came into existence. The authors continue:
However, since there was no property in existence at the time of the purported creation of the trust, there could not be an immediately existing trust.
205I respectfully agree with that statement and thus must agree that the primary judge fell into error. However, as subsequently appears, this was only a technical error and does not affect the validity of her decision.
206Jacobs continues by noting that, if there is consideration, equity will seize upon property as soon as it does come into existence and a completely constituted trust will then arise. That statement is supported by the reasons of Jessel MR in Collyer v Isaacs (1881) 19 Ch D 342, 351.
207In Federal Commissioner of Taxation v Everett (1978) 38 FLR 26, 51, Deane J, in a dissenting judgment in the Full Federal Court, put the proposition this way:
The relevant principle is that equity considers as done that which ought to be done. The consequence is that the beneficial interest in the property the subject of the assignment never vests in the assignor when the property is acquired by him. He holds it immediately in trust for the assignee.
208There is no doubt that RILA gave consideration for the arrangement: it was its monies that were the subject of the arrangement.
209Thus, whilst no trust was created on 3 December, on the facts found by the primary judge, such equities were created that immediately any of the book debts turned into cash, they would have been held on trust for RILA.
210There was thus no attempt to breach the negative pledge.
211A subsidiary argument was put by Mr Bannon that, by having the monies paid into such an account, RILA would be breaching the negative pledge because there must inevitably be created an indemnity for expenses in operating the account supported by an equitable charge in the trustee.
212There is probably some technical validity in this argument. However, it is an absurd proposition commercially to construe the negative pledge clause in such a way as would preclude RILA from using a bank account to clear money. Even if it used its own bank account, there would be a small deletion of funds by bank fees, etc.
213Thus, I would dismiss the cross appeal.
2142B. The notice of cross contention raises two issues: (a) that the relevant Secured Property was a floating rather than a fixed charge; and (b) that the primary judge made some factual errors in her costs decision which errors are only significant if this court needs to reconsider the question of costs below.
215As to (a), I consider that the assumption made by the primary judge that the charge was fixed is correct. On that basis, the cross appeal should be dismissed. If the charge was floating the same result would follow.
216As to (b), as I propose that the costs order below not be disturbed, the point does not arise.
2173. The need to examine the orders as to costs in detail only arises if the cross appellants are successful in their cross appeal about the Event of Default. This has not occurred.
2184. It follows that the appeal and the cross appeal must each be dismissed.
219It also follows that the respondents are entitled to their costs of the appeal and the cross respondent to the costs of the cross appeal.
220Thus, in my view, the result of the appeal is:
1 Appeal and cross appeal dismissed.
2. Appellant to pay the respondents' costs of the appeal.
3. Cross appellants to pay cross respondent's costs of cross appeal.