Shandong Delisi Food Co Ltd v Yolarno Pty Ltd

Chronology of key events

1. Delisi entered into the SSSA following an appraisal carried out by Zhong Rui, a Chinese advisory firm. The appraisal was apparently required for Chinese government regulatory purposes. It put a value on the equity in Yolarno of at least $201 million, and a value on the proposed 45 per cent shareholding by Delisi (once fresh shares had been issued) of at least $140 million.
2. Completion of the SSSA was subject to four conditions precedent, one of which I will refer to in more detail below. Either party had a right to terminate if the conditions were not satisfied or waived within 120 days (22 February 2016). I will refer to this as the "termination trigger date".
3. The price payable by Delisi was specified in the SSSA as $140 million. But this was subject to negotiation following an investigation procedure. The procedure had two main steps.
4. The first step was the production of an audited set of accounts for Yolarno for the period ended 31 July 2015. These audited accounts, defined in the SSSA as the "Reference Audit Accounts", will be referred to in this judgment as the "July Accounts". They were to be completed by 25 December 2015. Any delay in completion was to result in a corresponding extension to the termination trigger date of 22 February 2016.
5. The second step was the production of a "final appraisal report" by the "appraisal agency" (Zhong Rui). Once this had been delivered, there was to be a five-day period for the parties to renegotiate the price to be paid by Delisi. It is unusual, to say the least, to have a contract for the purchase of an asset where the operative price depends upon future negotiations between the parties and is not fixed by any machinery. But it was not suggested by either party before me that this affected the validity of the SSSA.
6. According to Delisi's evidence, which was not disputed, a favourable appraisal report was necessary not only for Chinese government regulatory purposes. It was also required for compliance with the rules of the Shenzen Stock Exchange, where Delisi's shares are listed.
7. The third condition precedent required: a favourable opinion from the directors of Delisi (to be submitted to the shareholders in general meeting); approval by the shareholdings in general meeting; and approval from Delisi's board of directors. It seems strange to have a contractual agreement which is subject to a condition that the approval of one party's board of directors be obtained; usually such approval would be required before there could be any binding agreement in the first place. But again, no objection was taken to the validity of the SSSA on this ground.
8. The Chinese branch of the global accountancy firm PricewaterhouseCoopers ("PwC China") was chosen to undertake the audit of the July Accounts. PwC China was formally retained by Delisi for this purpose in November 2015. The Australian branch of PricewaterhouseCoopers ("PwC Australia") were the Bindaree Group's accountants and it appears that this was the reason for PwC China's retainer for the purposes of the SSSA.
9. PwC China and PwC Australia were separate legal entities. Nevertheless, they used common management systems, and the Australian firm, in Yolarno's interests, worked closely with the Chinese firm on the preparation of the Accounts. Yolarno's executives also dealt directly with PwC China for that purpose. In this judgment I use the term "PwC" to mean both firms, unless it is necessary to be specific.
10. Despite PwC's efforts, the July Accounts were not produced in audited form by the deadline in the SSSA of 25 December. Extensions were obtained but the Accounts had still not been produced by the end of February 2016.
11. The Extension Letter, as its name suggests, was entered into to deal with this delay. By February, accounts for the period up to 31 July 2015 were in any event out of date under the rules of the Shenzen Stock Exchange. The obligation instead became to produce audited accounts for the period to 31 December 2015 (defined in the Extension Letter as "Second Reference Audit Accounts"; I will refer to them as the "December Accounts"). They were to be produced by the date already mentioned, 20 May 2016. The termination trigger date was extended to 30 June 2016.
12. The Extension Letter provided for the Advanced Payment to be made by early March 2016. This was done. Delisi formally retained PwC China to undertake the audit of the December Accounts soon afterwards.
13. The audit of the Accounts was the principal responsibility of Ms Rita Li, an audit partner of PwC China based in Beijing. The lead partner for PwC Australia was Mr Adam Thompson.
14. On Yolarno's side, the transaction was principally the responsibility of Mr James Roger, who was the Chief Financial Officer. Mr Roger reported to Mr Andrew McDonald, who was the Chief Executive Officer and a director of the company.
15. Those mainly responsible for the day to day management of the transaction on Delisi's behalf were Mr Brian Zheng, who was a retained consultant of Delisi, and Mr Wang Song, Delisi's company secretary. They reported ultimately to Ms Simin Zheng, referred to in the evidence as the "Chairlady", who chaired Delisi's board.
16. Later in this judgment I will set out in detail the events leading up to the failure to deliver the December Accounts in audited form by 20 May. Following the late delivery of the Accounts, the parties continued to work towards the completion of the transaction (it was not suggested that this precluded Delisi from later acting under paragraph 5 if it had a contractual entitlement to do so).
17. On 29 June 2016, Zhong Rui provided its final appraisal. In the final appraisal the minimum value of Yolarno's equity was reduced from $201 million to $79 million.
18. Delisi's board took the view that, as a result, completion of the transaction was impossible. A notice of termination was issued on 30 June 2016. The notice relied upon non-satisfaction of the conditions precedent. This (it is now accepted) was premature; the termination trigger date was not reached until the end of the day. But the notice also relied upon paragraph 5 of the Extension Letter to justify the termination.
19. Yolarno's solicitors responded on 5 July. The response put two grounds for termination. One was that the purported termination by Delisi was invalid and repudiatory. The letter purported to accept the repudiation. Alternatively, the letter relied upon Yolarno's right to terminate the SSSA on the basis that the conditions precedent had not been satisfied and the termination trigger date had passed.

Evidence

1. Evidence was read from executives on both sides of the transaction. Neither side called Ms Li (or anyone else from PwC China). In the end there was no cross-examination of the witnesses who were called.
2. I deal with the course of events leading up to the completion of the audit in a separate section of the judgment below. The facts were relevantly undisputed. It is not necessary to discuss other aspects of the evidence any further.

Facts

1. On 1 March 2016, Delisi made an announcement to the Shenzen Stock Exchange about the Extension Letter. The announcement relevantly stated (in translation): If the audit report with the base date on 31 December 2015 is not issued on or before 20 May 2016, and this transaction is not completed, the Company can terminate the Share Sale and Subscription Agreement at any time by serving a notice to the Target Company and its shareholders, and by then the Target Company will return the Advanced Payment and interest in full to the Company.
2. On the same day as it issued the stock exchange announcement, Delisi issued its proposed engagement letter to PwC China. On 7 March, Mr Roger sent a hurry-up email asking Delisi to finalise the terms of the engagement by that day. This did not happen, but the fee arrangements were discussed and agreed on 11 March. Mr Roger sent further hurry-up emails to Delisi on 16 and 21 March. The terms of engagement were signed on Delisi's behalf on 22 March. They did not specify a date according to which the Accounts should be delivered.
3. Planning for the audit had commenced between PwC and Yolarno as early as 29 February. On 29 April, in an internal PwC email, Ms Li stated that Friday 6 May (two weeks before the deadline) was achievable, provided that various internal PwC sign-offs were achieved.
4. But by 5 May, a further requirement had emerged. Yolarno's lender, the Australian and New Zealand Banking Group ("ANZ"), had required the completion of an equity raising as a condition of continuing its financial support. PwC wanted Delisi to sign a "confirmation letter" to the effect that it intended to proceed with the acquisition. Apparently this was because, in light of ANZ's attitude, Yolarno's ability to continue as a going concern would be in question if Delisi did not proceed.
5. On 5 May Mr Roger emailed Mr Zheng: Rita from PwC China has informed us that the remaining item open in relation to the PRC GAAP audit is for PwC to receive a letter of confirmation from Delisi in relation to the equity acquisition as attached (In Chinese) and as pasted below in English. We note that this letter does not require any further commitment or actions from Delisi and merely states the facts in relation to the Share Sale and Subscription Agreement noting a number of prerequisites that need to occur in order for the transaction to complete. We have Rita's assurance that subject to receiving this letter she is in a position to issue the audit report tomorrow. Given that we have all worked so hard on this audit project and that the letter is merely factual we would very much appreciate it if you could arrange for it to be signed and returned to Rita at PwC China today (Thursday 5th May 2016) so that we can finalise the audit tomorrow. If this is not possible we feel it is necessary to arrange an urgent phone conference which would include Andrew and Simin to clarify any issues in relation to the signing of this letter. Later the same day Ms Li replied to all parties with some changes to the text of the letter.
6. On the following day, Friday 6 May, a telephone meeting took place between the parties' representatives. Mr Wang stated that Delisi was "not comfortable" with signing the letter. He was asked to send a list of reasons and undertook to do so.
7. Meanwhile, PwC Australia came up with an alternative plan. If Delisi would not provide the confirmation letter, ANZ could be asked to alter its requirements under the finance facilities. If that was not possible either, then the going concern issue could be referred to in the audit opinion as an "emphasis of matter" without formally qualifying the accounts.
8. On Tuesday 10 May, Mr Thompson wrote to Mr Roger and Ms Li confirming the strategy. His email relevantly stated (emphasis added): Steps to complete: … 2. PwC has concluded that the going concern is dependent on the equity raising being completed as required by the ANZ refinance agreements. As such PwC requires evidence that the covenant for an equity injection will be met. PwC considered the SSSA between Yolarno and Delisi. PwC were unable to rely upon the SSSA as evidence that the deal would complete and the equity would be injected because Delisi advised they are still in discussions with their bank to obtain the equity injection from their bank and that they had not yet finalised the finance. As a result PwC asked Delisi for a confirmation they would complete the SSSA and that they would contribute the equity. Delisi have refused to provide the confirmation at this stage to PwC. PwC is now in a position where they must obtain other evidence the entity will continue as a going concern. Other evidence would need to be in the form of a letter from ANZ that explains that they would support the company up to 1 January 2017 while they work through their equity options. If PwC is unable to obtain a confirmation from ANZ they will issue an emphasis of matter regarding going concern audit opinion. However, PwC will wait until 20 May for Delisi to provide a response and if Delisi provide a confirmation that they will proceed with the SSSA on 20 May PwC will issue an unqualified audit opinion. If PwC does not receive a confirmation from Delisi on 20 May PwC will issue an emphasis of matter opinion. PwC Beijing advises they have been engaged by Delisi and they will not sign off the audit report until 20 May. 3. PwC Beijing advise that they would be happy to issue an unmodified audit opinion as soon as ANZ provide a confirmation and if this was to be the case they would no longer need to consult and wait for a confirmation from Delisi. …
9. On Thursday 12 May, Mr Roger emailed to Ms Li a letter signed by Mr McDonald for Yolarno concerning the conduct of PwC's audit of the December Accounts. The letter relevantly stated: We understand that your firm is currently in a position to deliver the Second Reference Audited Accounts, subject only to: a) A confirmation from ANZ to extend the covenant that requires Yolarno to complete the equity raising by 15 July 2016 to 1 January 2017 to demonstrate that all bank borrowings will be extended beyond 1 January 2017; b) A representation letter from Yolarno management in a form that has been provided to Yolarno; and c) Signatures of Yolarno management on the balance sheet, income statement, cash flow statements and statement of equity movement of the financial statements prepared in accordance with PRC GAAP. Please confirm that the items listed above at (a)-(c) are the only outstanding items required in order for you to deliver the Second Reference Audited Accounts. If there are any other matters that are outstanding, please provide details of those matters without delay. Furthermore, to the extent that you consider that any outstanding matters may require you to issue the Second Reference Audited Accounts in the form of a modified audit opinion (i.e. an emphasis of matter regarding going concern), please identify which items listed above, or which other items, will have that consequence. As you are aware, the delivery of the Second Reference Audited Accounts is a highly material step required for completion of the Transaction. Failure to deliver the Second Reference Audited Accounts within the stipulated timeframe is likely to cause Yolarno substantial losses and costs. Accordingly, this is a matter of utmost significance to us that we request you address as a matter of priority. As noted above, the parties to the Transaction, including Yolarno and Delisi, are obliged to work in good faith to procure the delivery of the Second Reference Audited Accounts. Please advise us without delay if there is any circumstance or conduct of any party that is preventing, delaying or otherwise inhibiting your delivery of the Second Reference Audited Accounts, including instructions received from any of the parties. We will endeavour to assist you to address and overcome any such issues. In the absence of identifying any other cause for a delay in the delivery of the Second Reference Audited Accounts, we expect that delivery will occur as a matter of priority, and in any event before 5pm Sydney time on 20 May 2016. To the extent that the Second Reference Audited Accounts are not delivered within this timeframe, we reserve any rights we may have against your firm in relation to your firm's conduct in connection with this audit. Please respond to this letter as a matter of urgency, and in any event before 13 May 2016.
10. Counsel for Delisi observed that the tone of this letter, when Yolarno was not PwC China's client, was surprising to say the least. It is not however necessary for the purposes of this judgment to go into the purposes behind the letter, or the effect it may have had on Ms Li. For present purposes, what the letter does show is that Yolarno was proposing to solve the going concern issue by obtaining an extension of the covenant from ANZ rather than a confirmation letter from Delisi.
11. For this purpose, Mr Roger approached Mr Ian Hanrahan of the ANZ. The dealings between Yolarno and the ANZ are recorded in a letter from Mr Hanrahan sent the following week.
12. The first step in the negotiations between Yolarno and the ANZ was a meeting which took place on Friday 13 May, the day after the email to Ms Li. Mr Hanrahan recorded in a subsequent letter to Mr Roger: Yolarno / ANZ Meeting - Friday 13 May 2016 We note that we met with Yolarno on Friday 13 May 2016, at which point you have confirmed to us that one of the completion steps for Yolarno's current equity raising process is to finalise the 31 December 2015 audit process which requires sign off from PwC China. At this meeting you communicated to us that it was your understanding that PwC China had sought to understand the impact of the Delisi transaction not completing. You advised us that PwC China required this information in order to complete the 'Going Concern' aspect of their audit report. You advised us that PwC China had requested ANZ provide an extension of the Event of Default to 1st January 2017. We noted that PwC China's request appears unusual given our experience (particularly the audit sign-off from PwC China in relation to Yolarno's 31 July 2015 accounts, where a similar condition was present in the loan documentation). We discussed the fact that PwC Australia had communicated that, regardless of this letter, based on the information at the time the audit report would be unqualified. You also advised that PwC China had not communicated any different position in relation to their audit opinion to that of PwC Australia and you were in the final stages of completing the audit for the period ending 31 December 2015. We discussed a general process that ANZ and Yolarno may go through if the Delisi transaction did not complete as planned. This included a series of information requirements that you would be required to provide to us, as well as some possible changes in terms and conditions which we may require. We noted that Yolarno's intention was to follow two paths over May and June 2016, being: (a) Follow the path to complete the transaction with Delisi as set out in the SSSA and Extension Letter; and (b) Work with ANZ to develop a plan that contemplates the ongoing provision of finance to Yolarno in the event that Delisi are unable to complete the transaction.
13. Mr Hanrahan's letter does not record that any direct request was made on behalf of Yolarno to ANZ for an extension of the covenant at the 13 May meeting. But following the meeting it seems that Yolarno's executives decided to go back to trying to get the confirmation letter from Delisi.
14. On Saturday 14 May, Mr McDonald emailed a formal letter to Delisi, addressed to its board of directors. The letter relevantly stated (emphasis added): We acknowledge and appreciate the numerous conversations that have taken place recently between Delisi and Yolarno. However, we note that there are certain issues that have not yet been resolved, and the purpose of this letter is to set these out clearly so that we can work together to resolve them as a priority. PwC China has again confirmed on 11 May 2016 that they are presently able to deliver the Second Reference Audited Accounts to Delisi, subject to: (a) certain confirmations from Yolarno, which we are working to provide as a matter of urgency; (b) a letter of confirmation by Delisi confirming that Delisi intends to comply with its obligations under the SSSA to complete the transaction (subject to the satisfaction of conditions precedent) ("Confirmation Letter"); and (c) Delisi providing reasonable evidence that it has sufficient financing facilities to complete the transaction in accordance with the terms of the SSSA ("Evidence of Financing"). We understand that, to date, Delisi has not provided the Confirmation Letter, despite requests from PwC China, which have been communicated to us, and our subsequent requests. We are concerned by Delisi's failure to provide the Confirmation Letter. We have not been provided with any reasonable explanation for the delay, and it seems to us to be an unobjectionable request by PwC China that should be readily capable of being met by Delisi. Please let us know, as a matter of urgency, if and when this Confirmation Letter will be provided to PwC China. In the two WeChat calls on Thursday night (12 May 2016), between Chairlady Simin, myself, James Roger and Eric Pan, held at 6.04pm and 6.22pm, Chairlady Simin questioned why PwC China was requesting Delisi to provide Evidence of Financing. After further investigation of your question on Thursday night, it is our understanding that Mr Wang Song communicated to PwC China that Delisi's financing was not approved, and that as a result of that information, PwC China are obliged to make this request of Delisi (and indeed they have made similar requests of Yolarno, which we are progressing as a matter of urgency). We acknowledge that this request from PwC China is a matter that is of sensitivity to Delisi, but given that Delisi have repeatedly confirmed to us that Delisi is capable of providing Evidence of Financing, we are concerned by the delay in Delisi's provision of the material requested by PwC China. We also note that in the WeChat calls Thursday night, I explained that Yolarno had been informed that PwC China is ready to deliver the Second Reference Audited Accounts, but had been instructed by Delisi not to do so, and that this was a matter of significant concern to Yolarno. In response to this, Chairlady Simin stated that no one from Delisi had engaged in any conduct or communication for the purpose of influencing PwC China not to issue the Second Reference Audited Accounts. In order to resolve any uncertainty on this point, we would appreciate it if you could write to PwC China, copying us, to confirm that your instructions are that they are to deliver the Second Reference Audited Accounts to you on or before 20 May 2016. For clarity, we have obtained independent advice that if the Second Reference Audited Accounts are provided with any emphasis of matter regarding going concern, that that would meet the requirements of being unqualified reference audited accounts, as required for the purposes of the Second Reference Audited Accounts. As you know, we each have an obligation to work in good faith to procure that PwC China deliver the Second Reference Audited Accounts in accordance with the key condition of time for Completion (agreed in the Extension Letter per paragraph 5), and the obligation to do anything the other party asks as may be necessary and desirable to give full effect to the provisions of the SSSA, its commercial intention and the transactions contemplated by it (per clause 17.12 of the SSSA). We of course expect that Delisi will perform its fundamental obligations under the SSSA and the Extension Letter and not do anything to frustrate the transaction. In this regard, we reiterate our requests above that you please: (a) provide to PwC China the Evidence of Financing, and confirm to us in writing once you have done this; (b) provide to PwC China the Confirmation Letter, copying us; and (c) you confirm to PwC in writing that your instructions are that they are to deliver the Second Reference Audited Accounts to you on or before 20 May 2016, copying us. Delisi will be aware that, in the event that the Second Reference Audited Accounts are not delivered by PwC China to Delisi on or before 20 May 2016, and Completion under the SSSA does not occur and the SSSA is then terminated, Yolarno is not obligated to refund the Advanced Payment to Delisi unless the Parties have also complied with the obligation to work in good faith to procure the delivery of the Second Reference Audited Accounts within that timeframe. As noted above, we are continuing to perform our obligations under the SSSA and the Extension Letter, and we wish to see the Completion of the transaction for the benefit of all of the Parties, and the preservation of the ongoing commercial relationship between Yolarno and Delisi. We believe this matter can be promptly and amicably resolved with the delivery of the Second Reference Audited Accounts within the stipulated timeframe (i.e. on or before 20 May 2016). However, we reserve all of our rights in relation to this matter, including all of our rights in respect of the SSSA and the Extension Letter. We request that you respond to this letter as a matter of urgency, and in any event by 5 pm Sydney time on 15 May 2016.
15. Ms Li received a copy of this emailed letter. On the same day she wrote to Mr Wang commenting on it and Yolarno's letter to her of 12 May (in translation): As mentioned in our conversation just now, attached are the letters sent by Yolarno. I hope to further communicate with you regarding the content of the letters and our response plan as soon as possible. I would like to point out specifically some inaccurate points in these letters, especially the following: According to the engagement letter signed between your company and us, there is no specific requirement that we must issue an audit report before 20 May 2016 even though we are aware that Delisi and Yolarno have signed an agreement which requires both parties, in line with the principle of mutual trust, to facilitate the issue of the audit report before that date; The advice on those final steps leading to the completion of the audit report is not correct either. Before we provide an audit opinion, there might be new matters. It is mentioned in the letters that we are going to provide an unmodified opinion with an emphasis of matter paragraph. Before all questions are answered, or before we confirm that no further information may be obtained, we will not be able to determine which type of audit opinion we are going to provide. Here I would like to explain that as auditors, we perform the audit independently. We will issue an audit report that we consider appropriate based on the audit evidence we have obtained. The audit report may contain an unmodified opinion with an emphasis of matter or an adverse opinion. The Yolarno-related questions to be clarified by your company will not hinder us from issuing the audit report unless those questions are directly related to the audit performed by us. We will need to learn about the details of those questions and consider if they are relevant to the audit performed by us. I am looking forward to having a further discussion with you regarding the abovementioned matters. We sincerely hope that your company and Yolarno would be able to address the unresolved problems through negotiation as soon as possible. We also hope that we would be able to issue the audit report as quickly as we could.
16. On the following day, Sunday 15 May, Mr Wang responded on Delisi's behalf to Mr McDonald's emailed letter. His email relevantly stated (in translation): We have just received your email. Regarding the three questions you raised, our responses are as follows: 1. Provide proof of funds to PwC China and notify us in writing when it is done. PwC has not expressly requested Delisi Company to provide them with the proof of funds documents. We will email them to explain this and copy you on that email. The capital loan they were concerned about is proceeding well. The audit report and appraisal report will be issued in time. Afterwards, the bank will provide Delisi Company with the corresponding fund in time. 2. Provide and send a confirmation letter to PwC China and copy us on that email. Delisi Company understands its responsibilities under the relevant agreement and adopts an active attitude to fulfill its corresponding duties, advance related work and engage in loyal cooperation with you. Regarding the matter of the confirmation letter, as Yolarno experienced a disturbingly substantial decline in performance, the initial performance expectation provided to the appraiser by Yolarno's management team has not been fulfilled at all. There is a large uncertainty as to whether they are able to achieve the initial appraised value. In addition, so far the appraiser has not received the revised audit report on the base date of 31 July provided by PwC. Before the results of the relevant appraisal are received, Delisi will not be able to confirm related matters. 3. You need to confirm with PwC China in writing that your instruction is to ask them to provide the second audit report for reference on or before 20 May 2016 and copy us on that email. Delisi has never instructed PwC China to postpone relevant tasks, and PwC China stated that they had never received from Delisi Company an instruction asking them not to issue the report. We also hope the entire transaction would move ahead smoothly. We will advise them by email to issue an audit report conforming to the Chinese accounting standards and as required by the transaction as soon as possible. We are sincerely advancing various tasks to fulfill the agreed transaction, and we reserve our own legal rights as well. We also hope that PwC and you would adopt an honest attitude and make necessary efforts to facilitate the transaction. In the meantime, please provide true and reasonable responses to the questions we raised as soon as possible.
17. On the following day (Monday 16 May) Mr Wang replied to Ms Li's email of 14 May. He stated (in translation): I received your mail yesterday. I thought about it for a day. I understand your work and the work requirements of PwC as an auditing agency. Regarding the relevant work, we will work together for a solution as soon as possible, in order to move forward smoothly. But what I need to emphasize is that Delisi, as a client, engaged you to work for the entire transaction of Delisi. I hope you have a clear understanding of your position and the object of your work. The purpose of the work is to meet the requirements of merging and acquisition. If your report cannot meet the requirements of the exchange and relevant authorities, resulting in obstacles to transaction, we will not be able to accept it. We will continue our telephone conversation tody [sic] regarding relevant issues.
18. On the same day Mr Wang formally wrote to Ms Li on behalf of Delisi, as he had promised in his email to Yolarno the previous day. This email was copied to Mr Roger and others at Yolarno. It stated (in translation): I would like to clarify with you the following points: 1. Proof of funds You have never expressly requested Delisi Company to provide proof of funds documents. However, Delisi understands that you are concerned about its capital, and now we would like to clarify that Delisi's M&A loan is in progress. Once the finalised audit and appraisal reports are issued, we believe that Delisi will receive the funds from the bank, and its related work will be proceeding well. 2. Confirmation letter Regarding the confirmation letter, as Yolarno experienced a substantial decline in performance, the initial performance expectation provided to the appraiser by Yolarno's management team has not been fulfilled at all. There is a large uncertainty as to whether the appraiser is able to achieve the initial appraised value. In addition, so far the appraiser has not received from you the revised official audit report on the base date of 31 July. Before the results of the relevant appraisal are received, Delisi will not be able to confirm related matters. [Please complete the audit report on the base date of 31 July as soon as possible so that follow-up tasks could be completed.] 3. Audit report on the date of 31 December Delisi would like to clarify first that Delisi has never officially instructed you to postpone relevant tasks or asked you not to issue the report. Please reply through email to confirm this point and copy PwC Australia on that email. Delisi has always hoped that the entire translation [sic: transaction] would move ahead smoothly. Therefore, please issue the relevant report as soon as possible, which should fulfil the precondition of conforming to the Chinese accounting standards and meeting the requirements of the stock exchange.
19. Also on Monday 16 May, a telephone meeting took place between representatives of PwC China, Yolarno and Delisi. This meeting revealed a change of approach from Ms Li (or at least an apparent change of approach). As interpreted by Yolarno's representatives, Ms Li suggested that if the going concern issue could not be satisfactorily addressed, it would not be possible simply to refer to the issue by way of emphasis of matter. Instead, the accounts would, or at least might, have to be qualified.
20. This led Mr Roger to make urgent contact with the ANZ. Mr Hanrahan reported that ANZ was asked to consider providing Yolarno with an "unconditional letter of support" up to 1 January 2017. ANZ considered this over the following twenty-four hours, but advised that such a letter of support would require a full financial proposal, credit review and approvals process, which could not possibly be done by the time the accounts were due on Friday 20 May.
21. On the following day, Tuesday 17 May, Mr McDonald emailed a letter to Delisi responding Mr Wang's email of Sunday 15 May. The letter relevantly stated (emphasis added; the underlined section was admitted only as evidence of what was said, not as evidence of the fact): We respond to the numbering used in your letter as follows: 1. Your letter asserts that you are making "progress" regarding finance. In our telephone conference yesterday, you noted that you do not have financing for the value agreed in the SSSA, and that you are not presently in a position to provide PwC China with any documentary evidence of the financing you are currently progressing. Please confirm that this understanding is correct. 2. In response to the request in our letter that you provide PwC China with the Confirmation Letter they have requested, confirming that Delisi intends to comply with its obligations under the SSSA to complete the transaction, your letter notes that you are not prepared to provide such a letter. Your letter cites Delisi's concern about the performance of Yolarno as a reason for not providing this Confirmation Letter. It is of significant concern to Yolarno that Delisi is suggesting that it will not provide this confirmation at this time, and that it will not be able to provide any such confirmation until the valuation appraisal is obtained. In this regard, we note the parties' obligation to work in good faith to procure that PwC China deliver the Second Reference Audited Accounts, and their obligation to do anything the other party asks as may be necessary and desirable to give full effect to the provisions of the SSSA, its commercial intention and the transactions contemplated by it. Delisi's performance of these obligations is not subject to its opinion of the performance of Yolarno's business or the valuation exercise being undertaken by the appraiser. 3. Your letter states that you have asked PwC China to issue the audit report "required for the transaction and in compliance with PRC accounting standards and the exchange requirement"'. The Extension Letter dated 28 February 2016 requires PwC China to deliver "unqualified reference audited accounts with an accounting reference date of 31 December 2015 (the "Second Reference Audited Accounts")". The parties' obligation in relation to the Second Reference Audited Accounts, recorded in the Extension Letter, does not require those accounts to comply with any "exchange requirement", as referred to in your letter. Whether the Second Reference Audited Accounts meet the requirements of any exchange is an entirely separate matter. Please confirm in writing to PwC China, copying us, that PwC's task is to deliver "unqualified reference audited accounts with an accounting reference date of 31 December 2015", and that it is not required to take into account any exchange requirements. 4. Prior to the telephone conversation with PwC China yesterday, Miss Li of PwC China had never previously communicated to Yolarno that PwC China was considering issuing a qualified or adverse opinion. Yesterday, during the telephone conversation, Ms Li stated, for the first time, that PwC China's position had changed, and that it now considered it may be necessary to issue an adverse opinion. It is our understanding that an adverse opinion is the same as a qualified opinion: if this is not your understanding, or that of PwC China, please advise us immediately. Ms Li was of the view that an unqualified report with an emphasis of matter on the going concern issue would not be appropriate. If our understanding of what is meant by an adverse opinion is a qualified opinion, then an adverse opinion would not meet the requirements of the Parties' Extension Letter, that PwC deliver "unqualified reference audited accounts" in the form of the Second Reference Audited Accounts. We are informed today by PwC Australia, that in their opinion, an adverse opinion should not be issued, even if the accounts contain an emphasis of matter on the going concern issue. Given you are instructing PwC China (and as we have written to PwC China directly seeking clarification on this matter and received no response), we would appreciate it if you could seek an explanation from PwC China as to the difference between it and PwC Australia on this issue. The purpose of this inquiry is to seek to address this issue, as there may be matters that PwC Australia or the Parties can assist with to resolve any areas of confusion or concern. In this respect, we note that as outlined above, the implications of any stock exchange requirements it is not a matter to be taken into account in the preparation of the Second Reference Audited Accounts. 5. During the telephone conference with PwC China yesterday, Mr Wang of Delisi informed Ms Li of PwC China that Delisi considered the 31 July 2015 audit report required for the appraiser, to be the most important matter for PwC China at this time. Yolarno considers that this direction by Delisi to PwC China is not consistent with Delisi acting in good faith. PwC China have informed Yolarno that they do not require the 31 July 2015 accounts in order to complete the Second Reference Audited Accounts. We therefore request you confirm to PwC China, in writing, as a matter of urgency, that your instructions are that PwC China is to deliver the Second Reference Audited Accounts on or before 20 May 2016, and that this work should take priority over any other work related to the Parties' transaction. Please copy us to this confirmation. As you are aware, the Parties have an obligation in the Extension Letter to work in good faith to procure that PwC China deliver the Second Reference Audited Accounts on or before 20 May 2016. We request that you respond to this letter as a matter of urgency, and in any event by 5 pm Sydney time on 18 May 2016.
22. There was no response to the letter. On Thursday 19 May, Mr McDonald emailed a follow-up letter to Delisi: As noted in our letter, we understand that PwC China may be considering issuing a qualified (or adverse) opinion in respect of the Second Reference Audited Accounts. PwC Australia have advised that they have issued an unqualified opinion in relation to the same accounts, and no circumstances have arisen to justify any departure from that view, including matters associated with the going concern issue. There is no suggestion that Yolarno does not have the full support of its financiers. As previously advised, Yolarno is continuing to progress discussions with its financiers in relation to the matters raised by PwC China. In our letter, we requested your assistance in seeking an explanation from PwC China as to the differences between it and PwC Australia in respect of this matter. We have previously sought independent advice from KPMG in relation to the differences between the audit standards applicable in Australia and China (PRC CPA Standard on auditing 1503). The differences identified by KPMG China have no bearing on the going concern issue raised by PwC China. In the circumstances, we are concerned about the approach taken by PwC China to the Second Reference Audit Accounts and the apparent discrepancies in their conclusions in contrast with advice received from PwC Australia and in light of the nature of the comparative points identified by KPMG. If the Second Reference Audited Accounts are not unqualified, this is a serious issue for both parties, due to its consequences for the transaction itself. Accordingly, if this discrepancy is not resolved within the time that was agreed for delivery of the Second Reference Audit Accounts, given this matter has been raised as an exchange issue, we intend to raise this matter, including the views of PwC Australia and KPMG, directly with the Shenzhen Stock Exchange and (if appropriate) the China Securities Regulatory Commission, to clarify our position, including with respect to the matters that were addressed in Delisi's announcement to the exchange on 14 April 2016. We have not yet received a response to our letter dated 17 May 2016. You will appreciate the urgency of resolving these issues in order for the transaction to proceed. We reiterate our request for a response to our letter dated 17 May 2016 and this letter, as well as your assistance in instructing PwC China as noted above, as a matter of urgency. We continue to reserve all of our rights. We look forward to your earliest response.
23. There was no immediate response from Delisi. Then at 2:09 pm on the afternoon of 20 May (Sydney time), Mr Zheng sent an email proposing a renegotiation of the deal.
24. At 3:31 pm that afternoon, Mr McDonald emailed a further letter to Ms Zheng, addressed to the board of Delisi. The letter relevantly stated (emphasis added): We reiterate our concerns outlined in previous correspondence, that Delisi is not acting in good faith to procure that PricewaterhouseCoopers China ("PwC China") deliver the unqualified Second Reference Audited Accounts to Delisi on or before 20 May 2016. We note that we have received no response to the serious matters referred to in our letters dated 17 May or 19 May 2016. The issues raised in your email of 20 May 2016 concern only the valuation of Yolarno, and give us further concern that Delisi is not acting in good faith in relation to the Second Reference Audited Accounts as they could suggest that your conduct in relation to the Second Reference Audited Accounts may be motivated by a desire to renegotiate the price to be paid by Delisi under the SSSA. As you are aware, Delisi's obligation to work in good faith to procure that PwC China deliver the Second Reference Audited Accounts, and do anything the other party asks as may be desirable to give full effect to the provisions of the SSSA, its commercial intention and the transactions contemplated by it, is not subject to its opinion of the performance of Yolarno or the independent valuation exercise being undertaken by the valuer. As noted in our previous correspondence, PwC Australia's view is that the Second Reference Audited Accounts should be unqualified, with an emphasis of matter on the going concern issue. We enclose PwC Australia's report confirming that, received today. We encourage you to comply with your good faith obligations, and instruct PwC China to deliver the unqualified Second Reference Audited Accounts to Delisi by 5.30pm Sydney time today. The Parties have specifically agreed that the process prior to completion of the SSSA requires that the Second Reference Audited Accounts be delivered by 20 May 2016, and that subsequently the appraisal agency should deliver the final appraisal report. There is no basis to depart from this agreed approach. Indeed, your letter of 15 May 2016 noted that the appraiser requires the amended audit report of July 31 2015 in order to complete its valuation, and your email of 20 May 2016 confirms that this is still outstanding. Today's priority should be to ensure that PwC China delivers the unqualified Second Reference Audited Accounts, which was one of the grounds for the extension of time on the original deposit. We take issue with several matters raised in your email of 20 May 2016, and will address those in a separate letter. We continue to reserve all of our rights.
25. Meanwhile, the letter from Mr Hanrahan of ANZ confirming the earlier discussions with Mr Roger had arrived (see [49] above). Mr Roger forwarded it to Mr Thompson at 3:29 pm, saying: Please find attached the letter from ANZ which demonstrates that we are productively working together regardless of the outcome of the Delisi transaction. Also, I note our previous discussion and confirm that the McDonald Family have a significant amount of unencumbered assets that are available should they be required. This matter has been acknowledged by the bank and I note you have not included this fact in the going concern note based on your view that you do not have the time to collect evidence of this unencumbered security. I see this as a material fact that has been omitted.
26. Four minutes later, after Mr McDonald's emailed letter had been sent, Mr Roger forwarded to Ms Li his email to Mr Thompson.
27. No further action was taken on behalf of Delisi before 5:30 pm Sydney time, which is now agreed as the deadline for the provision of the December Accounts. Later in the evening, at 9:05 pm Sydney time, Mr Wang emailed to Ms Li what was described (in translation) as "our official statement regarding the audit report".
28. The "official statement" recorded that Delisi "always insists [sic] and has been urging" the production of an unqualified audit report as soon as possible. But it also stated that if the report did not "conform to the format recognised and required by the Chinese regulation authorities and stock exchanges" it would "substantially impede and adversely impact Delisi's M&A transaction". If an unqualified report could not be issued, PwC China was asked to issue a "commitment letter" accepting responsibility for all losses suffered by Delisi.
29. The report was eventually issued by Ms Li in unqualified form, with an emphasis of matter only. Ms Li dispatched it by email to Mr Roger and Mr Wang at 11:57 pm China time (1:57 am on 21 May, Sydney time). It was received by Mr Roger at 11:58 pm China time but did not reach Mr Wang until 12:12 am China time.

Terms of good faith obligation

1. The first two sentences of paragraph 5 of the Extension Letter relevantly provided: The Parties shall each work in good faith to procure that PricewaterhouseCoopers China delivers … [the December Accounts] to [Delisi] on or before 20 May 2016. If, despite the Parties' compliance with this paragraph 5, PricewaterhouseCoopers China fails to deliver the [December Accounts] to [Delisi] on or before 20 May 2016 and Completion does not occur pursuant to the terms of the [SSSA] …, the [SSSA] may be terminated at any time by notice given by [Delisi] to the other Parties, upon which [Yolarno] shall refund the Advanced Payment to [Delisi] in full, together with all interest (if any) actually accrued.
2. Counsel for Yolarno also relied on cl 17.12 of the SSSA which provided: Further steps Each party agrees, at its own expense, to do anything the other party asks (such as obtaining consents, signing and producing documents and getting documents completed and signed) as may be necessary or desirable to give full effect to the provisions of this agreement, its commercial intention and the transactions contemplated by it.
3. The obligation in paragraph 5 of the Extension Letter was to "work in good faith to procure" production of the Accounts by the deadline. Counsel for Delisi submitted that the obligation was not an absolute one which required Delisi to subordinate its own commercial interests to those of Yolarno; for practical purposes the obligation required only the taking of reasonable steps. Counsel relied upon Cordon Investments Pty Ltd v Lesdor Properties Pty Ltd [2012] NSWCA 184 at [144]-[145]. Counsel for Yolarno expressly agreed with this analysis. I think that the obligation in cl 17.12 operated the same way.
4. In determining whether the conduct of Delisi was reasonable, it is important to remember that the obligation in question was one of co-operation. It required the parties to work together towards the relevant objective.
5. In such a context, there is a recognised distinction between a party being obliged to refrain from taking action to prevent the other party from achieving a benefit or advantage, and the first party being obliged to take positive action to confer such a benefit on the other party: see Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596 at 607 per Mason J. This distinction is hardly surprising. An obligation to take affirmative action is an imposition: it usually requires the diversion of resources which the first party would otherwise be deploying to advance other interests of its own.
6. For this reason, cases in which reasonableness will require the first party to act without having been actually asked to do so are unlikely. Usually it will be sufficient to leave matters to the other party until some specified action is asked for. And where it is not obvious why the action in question is necessary, some sort of explanation may be necessary. A peremptory demand may not be enough to trigger the first party's obligation.

Alleged breach of obligation

1. In their submissions at the hearing, counsel narrowed the challenge to Delisi's conduct. Counsel did not press any contention that Delisi was obliged to execute the "confirmation letter" sought on 5 May and again in Mr McDonald's letter of 14 May. Nor did counsel pursue the request in the email of 17 May for Delisi to ask PwC China to explain any differences between its approach and that of PwC Australia (see [58] above). Counsel's submission was confined to Delisi's failure to direct PwC China to issue an unqualified audit report by 5:30 pm on 20 May.
2. So far as formally directing PwC China to issue the December Accounts was concerned, counsel for Delisi submitted that it lacked the power, and would not in any event have been proper, for it to have taken that step. I agree with this submission. In the end, it was up to Ms Li to exercise her own judgment. She could not be instructed by Delisi to form an opinion she did not in fact herself hold. It follows that, as Ms Li pointed out in her email to Mr Wang on 14 May (see [52] above), she could not be directed to issue an unqualified report.
3. This leaves the question of the 5:30 pm deadline. As I understood the submission from counsel for Yolarno, even if Delisi had no power to direct Ms Li to issue the report, Delisi could at least have urged her to issue it by 5:30 pm Sydney time.
4. The first difficulty with this contention is that it was not squarely put, and explained, to Delisi in correspondence. Yolarno's letter of 14 May asked Delisi to request the issue of the accounts by PwC China "on or before 20 May". Delisi's response was to ask PwC China to issue the accounts "as soon as possible". Yolarno's letter of 17 May complained about Delisi's response, but only in so far as that response may have suggested that completion of the July Accounts was regarded by Delisi as more important than the completion of the December Accounts. Yolarno's letter repeated the request that Delisi asked to have the December accounts delivered "on or before 20 May 2016" (as well as taking priority over any other work related to the transaction).
5. It was not until two hours before the Accounts were due that Mr McDonald emailed to Ms Zheng a letter asking Delisi to instruct PwC China to deliver the accounts at 5:30 pm on that day (see [61] above). But Mr McDonald's letter did not explain the significance of the reference to 5:30 pm.
6. Counsel's contention assumes that there may have been some lack of understanding on the part of PwC China about when the Accounts were due. Of course, any statement about this from Delisi would only have represented its own opinion. As the course of these proceedings shows, when the deadline fell due was potentially contestable. But there is a more fundamental point.
7. Both parties were aware that PwC China had its own copy of the SSSA and the Extension Letter and knew of the deadline. If there was any uncertainty about the timing of the deadline, PwC China could of course have obtained its own advice on the question. But there is no evidence that PwC ever said anything to any of the parties to indicate that there was any issue about it.
8. Indeed, it seems that Delisi itself may not have been conscious that the deadline was 5:30 pm. The "formal statement" provided by Mr Wang, which was not sent until after that deadline, proceeded on the basis that it was still open for PwC to comply.
9. Nor does the evidence explain why it was that on the afternoon of 20 May Mr McDonald mentioned a delivery time for the Accounts of 5:30 pm, when he had not previously, in his dealings with Delisi, referred to that particular deadline. If it suddenly occurred to Mr McDonald or Mr Roger that Ms Li might be proceeding on the basis that she had until midnight to issue the report, they did not confirm this with her. Mr Roger did communicate with Ms Li on the afternoon of 20 May, but only to raise an argument that the financial resources available to the McDonald family needed to be taken into account in forming her opinion (see [62] above).
10. In this context, it should be recalled that the good faith obligation was a joint one. If Delisi owed an obligation to remind PwC China that the Accounts were to be delivered by 5:30 pm Sydney time, then Yolarno owed the same obligation and was equally in breach for failure to do so.
11. Yolarno's correspondence had raised a number of issues which had nothing to do with the timing of the deadline. In this context, I think it was incumbent on Yolarno, if it wished for Delisi to intervene, to explain why its request that the accounts be prepared "as soon as possible" was inadequate, and to explain in particular the significance of the 5:30 pm deadline. Yolarno did not do so. In my view, in these circumstances, it was not unreasonable for Delisi to take the position that having asked for PwC China to issue the accounts as soon as possible, it had done all that it was reasonably required to do.
12. Furthermore, any reminder would have needed to be sent before the deadline expired. There was no evidence about where Ms Zheng was, and what her other commitments were, between 3:31 pm and 5:30 pm Sydney time (1:31 pm and 3:30 pm CST) on 20 May. There is accordingly no basis for concluding that, even if Mr McDonald's request was reasonable, it was unreasonable for Delisi not to comply with it in time.
13. There is a more fundamental point still. It is far from clear, on the evidence, whether a request from Delisi to issue the accounts by 5:30 pm would have made any difference.
14. Counsel for Yolarno submitted that this question was not relevant. The argument was that the mere failure by Delisi to act in good faith disqualified it from exercising any right of termination it would otherwise have had under paragraph 5 of the Extension Letter. No causal connection between non-compliance and PwC China's failure to deliver the Accounts was required.
15. I reject counsel's argument. The authorities suggest that usually, unless the contract expressly provides to the contrary, a causal connection is required between the failure to act in good faith and the termination relied upon: see Nina's Bar Bistro v MBE Corporation [1984] 3 NSWLR 613 at 620E-F; City of Gosford v Marim Pty Ltd (1990) 6 BPR 13,871 at 13,874; Plumor Pty Ltd v Handley (1996) 41 NSWLR 30 at [34]. In any event I think that the word "despite", in its ordinary meaning, itself connotes a causal connection between the non-compliance and the subsequent event (failure to deliver the Accounts in time).
16. Not only is that the natural meaning of the language but it is supported by commercial common sense. It would be absurd if a trivial breach, resulting in the loss of an hour, thereafter prevented Delisi from acting on a failure to deliver the Accounts which went on for a month. In my view a causal connection was required.
17. Counsel accepted that if I reached this conclusion, the onus lay on Yolarno to establish that PwC China would have delivered the accounts at 5:30 pm if asked by Delisi. Counsel submitted that I could infer that PwC China was unaware of the 5:30 pm deadline. But even if I accept that, there is a question about whether, had PwC been told about it at some point after 3:31 pm, there would have been sufficient time to complete the internal procedures required to issue the Accounts by 5:30 pm. The issue is particularly acute because it would have to be addressed on the assumption that Delisi took the maximum reasonably permissible time to make the request of PwC China and there is no way of fixing what that maximum time would have been (see [84] above).
18. There is a complete lack of evidence about what had to be done internally within PwC China on the afternoon and evening of 20 May to issue the Accounts. Counsel accepted that the evidence did not establish that Ms Li was in Delisi's "camp" for the purposes of the rule in Jones v Dunkel. On the face of it, the gap could have been filled by Yolarno obtaining direct evidence from Ms Li or someone else at PwC China. I see no reason why I should speculate on the question.
19. In these circumstances, I am not prepared to make the finding Yolarno seeks by inference. The necessary causal connection has not been established and Yolarno's defence on this point fails for that reason alone.

Validity of 30 June termination notice

1. I have already reproduced part of the second sentence of paragraph 5 of the Extension Letter (see [67] above). For the purposes of the present argument, the relevant parts of the paragraph are the second and third sentences. I now set those out in full: If, despite the Parties' compliance with this paragraph 5, PricewaterhouseCoopers China fails to deliver the Second Reference Audited Account to the Buyer on or before 20 May 2016 and Completion does not occur pursuant to the terms of the [SSSA] (as supplemented by … this Letter), the [SSSA] may be terminated at any time by notice given by the Buyer to the other Parties, upon which the Company shall refund the Advanced Payment to the Buyer in full, together with all interest (if any) actually accrued. For the avoidance of doubt, Clause 4.1 of the [SSSA] shall continue to apply with respect to the Deposit.

Terms of SSSA

1. Of critical importance for present purposes is the phrase "and Completion does not occur pursuant to the terms of the [SSSA]" in the second sentence of the paragraph. Under cl 5.1 of the SSSA, "Completion" was conditional on satisfaction or waiver of each of the Conditions Precedent.
2. Clause 5.2 provided: Benefit of Conditions Precedent The Conditions Precedent are for the benefit of the Company, the Buyer and the Sellers. A Condition Precedent may only be waived by mutual agreement of the parties in writing and will be effective only to the extent and subject to any condition set out in that waiver.
3. Clause 5.3 provided: Reasonable endeavours Each party must use its reasonable endeavours to obtain the satisfaction of the Conditions Precedent, including procuring performance by a third party. The parties must keep each other informed of any circumstances which may result in any Condition Precedent not being satisfied in accordance with its terms.
4. Clause 6.1 dealt with when Completion was to occur. It provided: Time and place of Completion Completion will take place at 12.00 noon on the Completion Date at the Sydney offices of King & Wood Mallesons that is stated on the cover of this agreement, or any other time and place agreed between the Company and the Buyer.
5. The definitions of "Completion" and "Completion Date" were: Completion means the simultaneous completion of the sale and purchase of the Sale Shares in accordance with clause 6 and the issue of Subscription Shares in accordance with clause 6 and Complete has a corresponding meaning. Completion Date means 10 Business Days after the satisfaction of the last Condition Precedent or any other date agreed by the Company and the Buyer in writing.
6. Clause 13.1 of the SSSA gave the parties a right to terminate if either the Conditions Precedent were not satisfied by the termination trigger date, or the final purchase price had not been determined between them following delivery of the final appraisal report. Subclauses (a) and (c) provided: (a) Subject to clauses 13.1(b) and 13.1(c), if by the end of the 120th day after the date of this agreement (or any later date agreed by the Sellers and the Buyer) any of the Conditions Precedent are not satisfied and have not been waived, or if the final Purchase Price has not been determined between the parties within 5 days after the final appraisal report is provided by the appraisal agency, this agreement may be terminated at any time before Completion by notice given by one party to the other parties and termination shall be deemed effected on the day of issuance of such notice. … (c) Notwithstanding the above, if by the date falling 10 days before the end of the period mentioned in clause 13.1(a)(or the period as extended pursuant to clause 13.1(b)) any of the Conditions Precedent are not satisfied and have not been waived, then any party may request that the other parties consent (such consent not to be unreasonably withheld) to an extension of the period set out in 13.1(a) or as extended pursuant to clause 13.1(b) of not more than 30 days. A notice requesting an extension must be in writing with sufficient details and information of the reasons why such Conditions Precedent have not been satisfied and must be given in compliance with clause 17.1.
7. Clause 13.3 provided for termination in the event that the Conditions Precedent were satisfied but a party did not complete. It provided: Failure by a party to Complete In the event that all Conditions Precedent set out in clause 5.1 have been fulfilled but a party does not Complete, other than as a result of default by the other party, the non-defaulting party may give the defaulting party notice requiring it to Complete within 14 days of receipt of the notice. If the defaulting party does not Complete within this period, the non-defaulting party may choose either to proceed for specific performance or terminate this agreement. In either case, the non-defaulting party may seek damages for the default.
8. Clause 4.1 provided for the refund or forfeiture of the deposit, in whole or part, in various different scenarios "if Completion does not occur". Subclause (a) applied where "completion does not occur for any reason other than default by [Yolarno] or one or more of the Sellers". Subclause (b) applied where "completion does not occur due to default by [Yolarno] or one or more of the Sellers". Subclauses (c), (d), and (e) applied where "completion does not occur and this agreement is terminated under clause 13.1 solely because" one or other of the Conditions Precedent was not satisfied.

Other terms of Extension Letter

1. Paragraph 3 of the Extension Letter dealt with the extension of the termination trigger date to 30 June 2016. Paragraph 4 provided for the making of the Advanced Payment. Delisi's agreement to make the Payment was stated to be in consideration of the extension.
2. I have already quoted paragraph 5 of the Extension Letter (see [67] and [92] above). Paragraph 7 provided for PwC China's costs in preparing the Second Reference Amended Accounts to be borne equally between the parties.
3. Paragraphs 6 and 8 provided: 6. The Parties agree that all provisions in the Share Sale and Subscription Agreement that apply to the Deposit, save as set out in this Letter and save for the provisions in relation to the Deposit being placed in the escrow account and provisions relating to the management and use of the Deposit by the Escrow Agent, shall be applicable to the Advanced Payment mutatis mutandis. The Advanced Payment shall be deemed to be in partial satisfaction of the Buyer's obligation to pay the Purchase Price to the Company. Save as set out herein, all interest earned on the Advanced Payment belongs to the Company and shall not be deemed to be in partial satisfaction of the Buyer's obligation to pay the Purchase Price to the Company. … 8. Except to the extent expressly varied, supplemented or amended by the provisions of this Letter, the terms and conditions of the Share Sale and Purchase Agreement (as supplemented by the Confirmation Letter) are hereby confirmed and shall remain in full force and effect. This Letter shall be considered to be part of the Share Sale and Purchase Agreement and the Parties agree that any action taken pursuant to this Letter shall not constitute a breach of any provision in the Share Sale and Purchase Agreement, regardless of when the action is taken.

Whether Delisi was entitled to terminate before the termination trigger date

1. There was no dispute between the parties about the principles to be applied in construing paragraph 5 of the Extension Letter. The parties accepted that the Court would apply the construction principles stated by the High Court in Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640 at 656-657 [35]; see also Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104 at 116-117 [46]-[51].
2. Counsel for Delisi particularly emphasised the reference to termination "at any time". Counsel submitted that this language was in the widest terms and should not be constrained by any contrary implication.
3. Counsel submitted that the phrase "and completion does not occur" was designed, looking forward from the date of the Extension Letter, to be applied to the situation after 20 May if the December Accounts had not been provided in accordance with the deadline. The natural meaning of the language was said to be that, as at that date, completion had not in fact occurred. In effect, counsel read the phrase as meaning "and completion shall not have occurred". The result was that once the deadline was missed, Delisi could terminate at will at any point up until completion actually took place.
4. Counsel for Yolarno criticised this reading on textual grounds. Counsel made four main points.
5. First, counsel pointed out that, grammatically, the phrase "at any time" in paragraph 5 referred to termination if two conditions were not satisfied. The first condition was that the December accounts were not delivered in time. The second condition was that "completion does not occur". It was only if both conditions were satisfied that there was a right to terminate "at any time". Therefore, it was illogical to suggest that Delisi's reading of the paragraph was supported by a need to give an unconstrained meaning to the phrase "at any time".
6. Counsel also emphasised that the Extension Letter was designed to be read together with the SSSA. Had the intention been that, if the December Accounts were not delivered in accordance with the deadline, Delisi could terminate at any time until completion occurred, paragraph 5 could readily have said so in terms. Indeed, that very language was used in cl 13.1.
7. Furthermore, the phrase "Completion does not occur" appeared in cl 4.1 of the SSSA. Clearly in that context the phrase could not mean simply that Completion had not yet occurred. Counsel relied on the principle of construction that a term which appears in different places in the same contract is usually given the same meaning in both places.
8. Finally, counsel emphasised that the phrase in question was "completion does not occur" not "completion has not occurred". Before the termination trigger date completion might not have occurred, but it could still do so. Counsel submitted that it was not a natural use of language to say that a condition that "completion does not occur" could be satisfied at that point. Counsel submitted that textually the phrase could only naturally apply when it became clear that Completion not only had not occurred, but would not occur.
9. There is force in these arguments. But it is also necessary to consider whether Yolarno's construction, preferable as it might at first appear to be as a matter of language, operates in a commercially satisfying way.
10. A peculiarity of the SSSA was that it did not explicitly provide a date for Completion. Completion was fixed to occur within a certain period of the satisfaction of the Conditions Precedent (the termination trigger date, being 30 June 2016, but subject to an extension for a period of up to thirty days under cl 11.1(c)). But failure to satisfy the Conditions Precedent by the termination trigger date did not automatically bring the contract to an end. If the Conditions Precedent were not satisfied, the contract would remain in force unless it was terminated, albeit that no completion date would be identifiable and accordingly the parties would not be obliged to proceed to completion under cl 6.
11. One obvious way to accommodate this to the textual points made by counsel for Yolarno would be to read "Completion does not occur" as meaning "Completion does not occur because the contract is terminated". Counsel for Delisi pointed out however that such a reading would give rise to absurdity. The purpose of paragraph 5 of the Extension Letter was to confer a right of termination on Delisi in certain circumstances. But if "Completion does not occur" required the contract to have been terminated already, the right would be meaningless.
12. Counsel for Yolarno did not accept that it was necessary to read the contract in that way. Instead, in counsel's submission, "Completion does not occur" was to be read as meaning "the conditions upon which Completion depends are not satisfied". Thus the right to terminate could be exercised once the termination trigger date had been passed, without any need to wait for formal termination.
13. But, as counsel for Delisi pointed out, at that point both parties would have a right to terminate under cl 13.1(a) in any event. Counsel submitted that the commercial consequences of this reading were unlikely to have been intended by commercial parties. In the first place, so far as Delisi was concerned the right of termination under the Extension Letter would be redundant. Secondly, according to the preferred construction of both parties (see [129]-[131] below), Delisi's right of termination was liable to be defeated by Yolarno terminating first. If Delisi terminated one minute after the deadline for the satisfaction of the Conditions Precedent expired, it would recover $6 million under paragraph 5. But if Yolarno beat it to the punch by getting its notice of termination in thirty seconds after the deadline, the $6 million would be forfeited.
14. Counsel's submission invoked two principles which apply in the construction of contracts, especially commercial contracts. The first is that the court should in general adopt a construction which will avoid redundancy and achieve a harmonious construction of the termination provisions of the SSSA as modified by the Extension Letter; the second is that the court should avoid a construction which would give rise to a commercially capricious result: see Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109-110.
15. Counsel for Yolarno did not dispute the existence of these principles. But counsel contended that they had limited operation in the present case.
16. As to the argument that Yolarno's construction resulted in a right of termination which was redundant, counsel argued that in some circumstances paragraph 5 could give rise to a right of termination where none was expressly given under the SSSA: for example, if the Conditions Precedent were satisfied but Yolarno later failed to complete in accordance with its obligations under cl 6. I am not sure of this example, as it seems to me that in such circumstances the logic of Yolarno's construction would require the cl 13.3 procedure to play out before termination would be possible. In any event the contingency posited by counsel is a relatively remote one. The parties may be presumed to have had more clearly in mind the possibility of the Conditions Precedent not being satisfied. There is no doubt of the redundancy which arises, on Yolarno's construction, in those circumstances.
17. As to the possibility of competing rights of termination, counsel for Yolarno submitted that this also arose under Delisi's construction. It could happen if Delisi failed to terminate under paragraph 5 of the Extension Letter before Yolarno acquired a right of termination under cl 13.1(a). Counsel also submitted that the nature of the Conditions Precedent was such that it was unlikely that whether they had been satisfied would be contestable, and whether they had been satisfied as more likely to be known to Delisi than to Yolarno. For practical purposes, therefore, the likelihood of a "race to termination" was not very great. These submissions may be correct so far as they go, but they are only a partial response to the point being made by counsel for Delisi.
18. On balance, the factor which weighs most heavily with me is this. Paragraph 5 of the Extension Letter could have been drafted so as to provide for repayment of the Advanced Payment upon termination of the SSSA. Instead, paragraph 5 gave to Delisi (alone) a new right of termination of the SSSA, with an accompanying right to recover the Advanced Payment. I think this has two consequences.
19. First, it makes textual consistency with the phraseology of the SSSA less important. The parties can be presumed to have been focusing on the new right of termination created by the Extension Letter rather than on the language used for the purposes of different rights of termination in the SSSA. Indeed, Yolarno's construction of the phrase "Completion does not occur" in paragraph 5, namely that it means "after the termination trigger point has been reached" does not really sit comfortably with cl 4.1 of the SSSA any more than Delisi's does. That clause was clearly designed to operate after the termination of the SSSA pursuant to cl 13, looking backwards.
20. The second point is that, if nothing else, the parties agreed that Delisi, and Delisi alone, was to have the benefit of the new right of termination. This makes it particularly important that the right of termination should have had some practical commercial utility. Despite the submissions from counsel for Yolarno, I think that Yolarno's construction undermines that right by subjecting it to a "race to terminate" which could operate capriciously so as to deprive Delisi of the opportunity to terminate and to recover the Advanced Payment.
21. Delisi's construction does have the textual drawbacks identified by counsel for Yolarno. But Yolarno's construction likewise involves some departure from the text, by reading in words which are not there. I conclude on balance that the construction advanced by Delisi is the preferable one. The notice was not invalid because it was issued before the termination trigger date and Delisi's claim succeeds.

Whether Delisi's notice had ongoing effect

1. My conclusion makes it unnecessary to decide whether the notice, if not validly issued on 30 June, had some sort of continuing operation which allowed it to take effect on 1 July. In deference to counsel's arguments, however, I will make some brief observations.
2. Counsel for Yolarno emphasised that a contractual right to terminate must strictly match the contractual terms granting that right. Counsel cited what Lord Hoffman said in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749 at 776: If the clause had said the notice had to be on blue paper, it would be no good serving a notice on pink paper, however clear it might have been that the tenant wanted to terminate the lease.
3. Counsel also relied on the statement by the learned author of Contract Law in Australia (7th ed, 2018, LexisNexis Butterworths) at [30-09]: Since express rights conferred by termination clauses must be exercised according to their terms, if the right is stated to come into operation at a particular time, the clause cannot be exercised in advance by the promise.
4. In the present case, this principle was not in doubt. The question is whether, on its true construction, paragraph 5 required that notice of termination could only be given after the termination trigger date. As this is purely a question of construction, which does not depend upon any contested issue of fact, I do not propose to address it further in the present judgment. If I am wrong in my conclusion that Delisi's notice was validly issued on 30 June, then the point, and the authorities relied upon by counsel, can be considered by the Court of Appeal.
5. For completeness, I should mention one further possible argument. Paragraph 5 of the Extension Letter does not expressly deal with a situation (which on Yolarno's case applied here) whether the conditions in the paragraph are satisfied but Yolarno terminates rather than Delisi. Paragraph 5 refers to termination by Delisi "upon which" the Advanced Payment is repayable. Both parties' primary position was that the words "upon which" referred to a termination by Delisi, so that there was no right of repayment of the $6 million in the case such as the present where (on the hypothesis I am considering) Delisi's purported termination was invalid and Yolarno's termination brought the contract to an end. Counsel for Yolarno relied on the provisions of paragraph 6 of the Extension Letter (see [103] above), which, counsel submitted, expressly provided to the contrary.
6. But I am not completely sure of this. It might be possible to read the words "upon which" as simply referring to termination rather than necessarily being confined to termination by Delisi. If the redundancy and "race to terminate" considerations discussed above are insufficient to establish the correctness of Delisi's construction argument about the termination trigger date, they may nevertheless arguably support such an interpretation. That might be a strained reading of paragraph 5, but it might be considered necessary to ensure that the court reached a result which did not flout business common sense: see Antaios Cia Naviera SA v Salen Rederierna AB [1985] AC 191 at 201 per Lord Diplock.
7. With some diffidence counsel for Delisi adopted this as their final fall-back argument. Counsel for Yolarno did not contend that there was any prejudice in the argument being available. But again, given my conclusion, it is not necessary to address the issue further.

Conclusions and orders

1. I have concluded that: 1. there was no breach by Delisi of its obligation of good faith which deprived it of any right it had to terminate the SSSA under paragraph 5 of the Extension Letter; 2. Delisi's notice of termination was validly issued on 30 June 2016, notwithstanding that at that point the termination trigger date had not been reached.
2. Delisi is therefore entitled to recover the Advanced Payment from Yolarno. In due course I will enter judgment in favour of Delisi on its claim. It will be necessary to calculate the interest to which Delisi is entitled. I will adjourn the proceedings for a short period to allow that to happen. It will also be necessary to deal with the costs of Delisi's claim.
3. In accordance with the agreement of the parties, the cross-claim will be dismissed with no order as to costs. I will defer making this order until I make the final orders on Delisi's claim.
4. The orders of the Court are: 1. Adjourn the proceedings to 9:45 am on 7 February 2022 or such other time as may be arranged with my Associate. 2. Direct that the parties confer on the form of orders to be made to give effect to this judgment and to deal with costs, and, no later than 24 hours before the adjourned hearing, submit proposed orders for this purpose.

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