Smith v Acquire Asia Pacific Philippines Inc

The separate question

1. For reasons that I explain below, I directed that a question intended to resolve the principal difference between the plaintiffs and the defendant as to the proper construction of the relevant provisions of the sale contract be heard and determined separately from and before the determination of all other questions in the proceedings. That question, to an extent reworded, is: Whether, on the proper construction of the contract entitled "Share Sale and Purchase Agreement" entered into between the parties on or about 15 October 2014, and in circumstances where the defendant has made Warranty Claims as defined in that contract, which Claims have not been finally agreed or adjudicated, the defendant is now obliged to direct the Escrow Agent to release the Escrow Amount to the plaintiffs.
2. The words "as defined in that contract, which Claims have not been finally agreed or adjudicated," have been inserted so that the question to be answered reflects more closely the submissions that the parties put.

Why order a separate question?

1. The matter had come before me on a Friday, on referral from the List Judge. What was referred was the defendant's notice of motion seeking security for its costs. Since all the plaintiffs are resident or organised outside Australia (five in the Republic of the Philippines, and one in the Kingdom of Belgium) and have no assets within Australia, their Counsel, Mr Elliott, accepted that in principle the defendant was entitled to security for its costs. However, the estimate of costs given by the defendant's solicitor was very much greater than the estimate given by the plaintiffs' solicitor.
2. Leaving aside relatively minor issues such as hourly rates and the like, the principal difference between those estimates arose from the solicitors' different views as to what was to be litigated. Mr Elliott submitted that the case involved no more than resolution of the question of construction to which I have referred. That, he said, could be dealt with in one day or less. Mr Lim of Counsel, for the defendant, submitted that a resolution of all the issues between the parties would, of necessity, require resolution of the defendant's claim to damages for breach of warranty, and would take several days.
3. In those circumstances, I indicated that the best way to deal with this problem was to order that the question of construction be decided first and separately, on the basis that the plaintiffs would provide security for the defendant's costs of the hearing and decision of that question.
4. Mr Lim submitted that this course was inappropriate, because (among other things) his client might have a right, independent of the relevant provisions of the sale contract, to set off against the Escrow Amount any amount of damages for breach of warranty that it might prove. That proposition when put appeared to be difficult to reconcile with the relevant provisions of the sale contract, specifically those relating to the way in which the Escrow Amount was to be held and paid out. Regardless, the point could not be resolved, one way or the other, in the course of an interlocutory hearing. Nonetheless, accepting that Mr Lim's proposition might be correct, it seemed to me that there was utility in deciding the separate question.
5. On the face of things at least, an affirmative answer to the separate question would entitle the plaintiffs to the substantive relief that they claim. That relief is, in substance, an order that the defendant specifically perform the sale contract by executing and delivering to the Escrow Agent the necessary authority for payment out to the plaintiffs of the Escrow Amount. A positive answer to the separate question could mean, among other things, that the defendant would have no right to set off in equity any cross-claim for damages that it might prove against the Escrow Amount. (On my view, it does not have that consequence: see at [83] to [93] below.) Thus, subject to any stay (and of course, to any decision on appeal), an affirmative answer would bring the plaintiffs' case to an end.
6. I should note that it did not appear to me that a resolution of the separate question would require a great body of evidence, nor would it involve any disputed question of fact. That was confirmed on the hearing of the separate question. The evidence comprised a small bundle of documents consisting of the sale contract, the Escrow Agreement, and three letters written by the defendant's solicitors to the plaintiffs between January 2015 and January 2016, setting out with some degree of particularity their client's claim for breaches of warranty, and quantification of its loss. Thus, the usual spectres of inconsistent findings as to credibility, and overlaps of evidence, were not relevant (nor did anyone suggest that they were).
7. The parties did not require me to give reasons for making the order under r 28.2 (on the entirely understandable basis that my reasons had appeared sufficiently in the course of argument). However, I think it appropriate nonetheless to include, in these reasons dealing with the separate question, an indication of why I decided to take the course that I did.

Relevant provisions of the sale contract

1. Clause 1 of the sale contract sets out a large number of definitions, often interrelated. I shall refer to those to the extent that is necessary.
2. Clause 2 sets out conditions precedent to completion, and the way in which those conditions were to be dealt with by the parties. Clause 3 dealt with the period before completion, and the parties' rights and liabilities during that period. Nothing turns on cls 2 and 3.
3. Clause 4 deals with "sale and purchase". I set out cl 4.1: 4.1 Sale and purchase (a) Subject to clause 2, the Sellers agree to sell to the Buyer, and the Buyer agrees to buy from the Sellers, all the legal and beneficial title in the Sale Shares on the Completion Date in consideration for the payment of the Purchase Price to the Sellers. (b) The Sale Shares must be sold to the Buyer: (i) free from all Encumbrances; (ii) with all rights attaching or accruing to the Sale Shares on and from Completion; and (iii) otherwise in accordance with the terms of this agreement.
4. Clause 5 deals with the "Purchase Price". It provides: 5.1 Purchase Price (a) The Purchase Price will be satisfied by: (i) payment of the Completion Amount in accordance with clause 5.2; and (ii) payment of the Adjustment Amount (if any) in accordance with clause 5.3. (b) Payment of the Purchase Price under and in accordance with this clause 5, and the allocations set out in Schedule 1 completely discharges the Buyer from its obligations to pay the Purchase Price and the Buyer is not required to enquire as to the application of the Purchase Price after payment. 5.2 Completion Amount (a) On Completion, the Buyer must pay: (i) a portion of the Completion Amount equal to the Saffelberg Loan Balance to Saffelberg, in accordance with the direction to pay under clause 6.2(b); then (ii) an amount equal to 20% of the Completion Amount (Escrow Amount) to the Escrow Agent, which will hold the Escrow Amount on and from Completion until the first anniversary of the Completion Date in accordance with the Escrow Agreement; and then (iii) the balance of the Completion Amount (less any portion of the Break Fee that has been paid, if any, in accordance with clause 2.6(a)(ii)(A)) to the Sellers. (b) Each of the Sellers and the Buyer must direct the Escrow Agent in accordance with the Escrow Agreement: (i) to make any payments from the Escrow Amount to the Buyer under clause 5.3 within 3 Business Days after the day on which the Completion Accounts are finalised in accordance with clause 7; and (ii) on the first anniversary of the Completion Date, to release the balance of the Escrow Amount to the Sellers. 5.3 Adjustment Amount If the Completion Working Capital: (a) exceeds the Target Working Capital, the Buyer must pay to the Sellers on the Adjustment Amount Payment Date the Adjustment Amount; (b) is less than the Target Working Capital, the Sellers must pay to the Buyer on the Adjustment Amount Payment Date the Adjustment Amount, by way of set off against the Escrow Amount; or (c) equals the Target Working Capital, the Adjustment Amount will be zero and no amount is payable by any party in respect of the Completion Working Capital. 5.4 Allocation of Purchase Price The Purchase Price will be allocated to the Sellers and the Sale Shares in accordance with Schedule 1.
5. Before turning to relevant definitions, I should note that nothing turns on the "Saffelberg Loan Balance" or the "Break Fee".
6. "Purchase Price" is defined as follows: Purchase Price means the Completion Amount as adjusted by the Adjustment Amount.
7. "Completion Amount" is defined to mean US$22 million.
8. "Adjustment Amount" is defined to mean the variance (if any) between "the Completion Working Capital" and "the Target Working Capital". They are, respectively, the actual working capital at completion, determined by the taking of accounts after completion in the way specified in the sale contract, and the contractually specified working capital at completion, "being zero".
9. Clause 7 deals with preparation of the "Completion Accounts", and contemplates that any dispute between the parties as to those accounts will be resolved under cl 15. In effect, to the extent that the draft Completion Accounts prepared by the buyer are the subject of dispute, if the parties resolve that dispute then the accounts are settled accordingly; if the parties cannot resolve that dispute, then an independent expert appointed pursuant to cl 15 is to do so.
10. Clause 10 deals with "warranties and indemnities". By cl 10.1, the plaintiffs gave "Key Warranties" and "Warranties" to the defendant. Those expressions are defined as follows: Key Warranties means the representations and warranties set out in Schedule 2, paragraphs 1, 2 and 3. Warranties means the representations and warranties set out in Schedule 2, paragraphs 4 to 17.
11. It is not necessary to go to the schedules referred to in those definitions. I do however note that in each case the warranties were detailed and numerous.
12. Clause 10.2 of the contract deals with the question of the defendant's reliance on the accuracy and completeness of Key Warranties and Warranties. Clause 10.3 provides for the survival of those warranties. Clause 10.4 provides indemnities in respect of those warranties. I set them out: 10.2 Reliance The Sellers acknowledge that the Buyer enters into this agreement and completes this agreement in reliance on the accuracy and completeness of the Key Warranties and Warranties. 10.3 Application of Key Warranties and Warranties Each Key Warranty and Warranty remains in full force after Completion and is separate and independent and not limited or restricted by any other Key Warranty or Warranty or provision of this agreement. 10.4 Indemnity relating to Key Warranties and Warranties (a) The Sellers indemnify the Buyer and each other Buyer Group Member in respect of, and must pay the Buyer an amount equal to, any Loss which that Buyer Group Member suffers, incurs or becomes liable for at any time because of a breach of any Warranty other than the Key Warranties, except to the extent that the Warranty or the Sellers' liability for the Loss are limited or qualified by clause 11. (b) Each Seller indemnifies the Buyer and each other Buyer Group Member in respect of, and must pay the Buyer an amount equal to, any Loss which that Buyer Group Member suffers, incurs or becomes liable for at any time because of a breach by that Seller of any Key Warranty, except to the extent that the Key Warranty or the Seller's liability for the Loss are limited or qualified by clause 11. (c) For the avoidance of doubt, in respect of any breach of Warranty or Key Warranty, Loss includes an amount that would be necessary to put each relevant Buyer Group Member in the same position as if the Warranty or Key Warranty had been true.
13. Clause 11 sets out limitations on liability. Clause 11.1 assumed some significance in the course of submissions. It reads: 11.1 Minimum and maximum amounts (a) No Seller is liable under a Warranty Claim unless the amount finally agreed or adjudicated to be payable in respect of that Warranty Claim: (i) or a number of similar or related Warranty Claims taken together, exceeds $25,000; and (ii) either alone or together with the amount finally agreed or adjudicated to be payable in respect of other Warranty Claims exceeds $50,000, in which event the Seller is liable for and the Buyer may seek to recover the full amount of the Warranty Claims, and not just the excess.
14. Clause 11.2 provides, among other things, for time limits for the making of claims. A claim in respect of "Regulatory Warranties" or "Tax Warranties" is to be made within five years of the completion date. Claims in respect of all other Warranties and Key Warranties are to be made within 18 months of that date. The defendant "may not bring a Warranty Claim" outside those time periods. It is not necessary to go to all the definitions. However, I set out the definitions of "Claim" and "Warranty Claim": Claim means any claim, notice, demand, action, proceeding, litigation, investigation, judgment or cause of action, whether based in contract, tort (including negligence), under common law or statute, and whether involving a party to this agreement or a Third Party. Warranty Claim means a Claim by the Buyer relating to a breach of Warranty or Key Warranty.
15. Clause 11.4 stands at the heart of the defendant's argument. It reads as follows: 11.4 Adjustment to Purchase Price Any payment received or receivable by the Buyer from a Seller in respect of any Claim under or in connection with this agreement will be treated as a reduction to the Purchase Price (excluding any adjustments to it).
16. Clause 12 deals with the topic of "Buyer Warranties". It is not necessary to recite the content of that defined expression. However, it is necessary to note that cl 12.4 effectively mirrors, but in respect of the Buyer Warranties, cl 11.4 (save for the concluding parenthesized words). I set out cl 12.4: 12.4 Adjustment to Purchase Price Any payment received or receivable by a Seller from the Buyer in respect of any Claim under or in connection with this agreement will be treated as an increase to the Purchase Price.
17. Clause 15 deals with dispute resolution. That process requires delivery of a "Disagreement Notice", followed by expert determination. The clause sets out a timetable for various steps to be taken. However, the clause also makes it clear that the times may be extended if necessary. I mention that simply because although the parties may have hoped that any disputes could be resolved swiftly, they would have understood that the complexity of any particular dispute (or group of disputes) might make that difficult.
18. Clause 17 deals with the subject of "VAT" - as I understand it, a value added tax imposed under the laws of The Philippines. The clause deals, among other things, with VAT payable or refundable where there is some variance of an amount payable for a supply by one party to the other "under or in connection with this agreement", and with the parties' obligations each to the other if that were to happen.
19. Clause 18.17 provides that the parties' rights under the sale contract are cumulative with, not exclusive of, their rights, powers and remedies under the general law. Clause 18.8 provides for the sale contract to be governed by the law of the State of Victoria, and for the parties to submit to the non-exclusive jurisdiction of the Courts of that State. The defendant submitted unconditionally to the jurisdiction of this State.
20. The Escrow Agreement was made in writing on 16 February 2015. The parties were the plaintiffs, the defendant and the Escrow Agent.
21. It is necessary to note only the provisions of cl 1 and of cl 2.5: 1 OBLIGATIONS OF THE BUYERS AND SELLERS 1.1 On the date of this Agreement the BUYER shall deposit in escrow by delivering to the ESCROW AGENT the amount of US$4,400,000, United States currency (hereinafter, and as increased or reduced in accordance with this Agreement, the "ESCROW FUND"), which amount will be subject to release upon the fulfillment of the conditions set forth hereunder. 1.2 The SELLERS and the BUYER will provide joint written instructions to the ESCROW AGENT for the release and payment of the ESCROW FUND consistent with the provisions of the SALE AGREEMENT and this Agreement, and in substantially the same form as set out in Annex "C". … 2 OBLIGATIONS OF THE ESCROW AGENT The ESCROW AGENT shall perform the following functions: … 2.5 Release the ESCROW FUND to the SELLERS and/or the BUYER in accordance with the joint written instructions of the SELLERS and the BUYER delivered under Section 1.2, by credit to the relevant nominated account(s) within two (2) business days after receipt of any such instructions. …

The parties' submissions

1. I set out below a broad outline of the parties' submissions, for the purpose of explaining the principal points in issue and the boundaries of the debate. In the course of giving my reasons for deciding the live issues, I will refer, to the extent necessary, to more detailed aspects of those submissions.

Submissions for the plaintiffs

1. Mr Elliott submitted that the provisions of cl 5.2(b) were clear and mandatory. The Escrow Amount was to be held, and applied, only: 1. to pay to the defendant any Adjustment Amount in its favour (i.e., an Adjustment Amount of the kind contemplated by cl 5.3(b)); and 2. on 15 November 2015 (in the events that have happened), for the balance of the Escrow Amount to be paid to the plaintiffs.
2. Mr Elliott submitted that cl 5.2(b) constituted in effect a code, entire in itself, for the payment out of the Escrow Amount (of course, subject to the rights of the Escrow Agent to receive its fees). He submitted that it was inconsistent with this regime that the Escrow Amount could be held, despite the clear wording of cl 5.2(b), beyond (perhaps well beyond) 15 November 2015, in whole or in part against the possibility that the defendant might have, and might prove, an unliquidated claim for damages for breach of warranty.
3. Mr Elliott noted that the process of adjustment contemplated by cl 5.3 could work in favour of the plaintiffs or in favour of the defendant (or could be neutral). He noted, further, that if the adjustment were in favour of the plaintiffs, the Escrow Amount was not to be increased in any way. Rather, the defendant was to pay the plaintiffs the Adjustment Amount. By contrast, where the adjustment was in the defendant's favour, the plaintiffs were required to procure it to be paid out of the Escrow Amount to the defendant. Thus, Mr Elliott submitted, where cl 5.2(b)(ii) talked of "the balance of the Escrow Amount", that could refer only to the amount held in escrow less any payments made to the defendant pursuant to an adjustment in its favour as contemplated by cl 5.3(b).
4. Mr Elliott referred to the process for preparation and finalisation of the Completion Accounts (a necessary step in determining any Adjustment Amount). That process would include, where necessary, expert determination of any difference between the parties. He submitted that the parties contemplated that the process might take some time to finalise, and thus chose the period of 12 months as the appropriate time for holding the Escrow Amount in escrow. However, and by contrast, he submitted that claims for breach of warranty could be brought well outside that 12 month period: up to a further four years, depending on the nature of the warranty said to have been breached. In those circumstances, he submitted, the clear intention of the parties was that the Escrow Amount should not be retained to stand in effect as security for any amount payable by the plaintiffs to the defendant for any proved breach of warranty. He noted that neither cl 11.4 nor cl 12.4 provides for any adjustment to, or payment into or out of, the Escrow Amount in respect of any proved breach of warranty.
5. Mr Elliott submitted that the function of cls 11.4 and 12.4 was to define the way in which the parties could properly treat, in their financial statements, the proceeds of any proved claim for breach of warranty. Those clauses did this by providing in each case for those proceeds to be dealt with as an adjustment to the Purchase Price. In that respect, Mr Elliott referred to the evident intention that amounts of VAT payable might need to be adjusted, and that the adjustments themselves could create rights and liabilities between the plaintiffs and the defendant.
6. Thus, Mr Elliott submitted, the regime relating to indemnity and breaches of warranty, established by cls 10.4, 11.4 and 12.4, was separate to, and had nothing to do with, the regime established by cls 5.2 and 5.3 for payment out of the Escrow Amount.

Submissions for the defendant

1. Mr Pike of Senior Counsel, who appeared with Mr Lim on the hearing of the separate question, submitted that there were three, he said independent, reasons why the question should be answered "no": 1. the defendant's warranty and indemnity claims gave rise to a right of equitable set-off, by reason of which it was not now obliged to direct release of the Escrow Amount; 2. either by reason of that right of set-off, or otherwise by reason of s 135 of the Civil Procedure Act 2005 (NSW), and calling in aid UCPR r 13.2, the interests of justice would entitle the defendant to a stay of any order that it should direct release of the Escrow Amount to the plaintiffs. By analogy with those principles, the Court should decline to give judgment on the plaintiffs' claim; 3. in any event, on the proper construction of the sale contract, the plaintiffs had no contractual right to release of the Escrow Amount.
2. It might be thought that Mr Pike's first reason falls outside the ambit of the separate question. For reasons that will become apparent, I do not think that it does. That is in substance because in my view the sale contract, on its proper construction, excludes any right of equitable set-off in the circumstances that have arisen.
3. Mr Pike's second reason does seem to me to fall outside the ambit of the question that has been formulated for decision. (It seems to me also to have little if anything to do with the answer to the question.) The parties appeared to accept that the second reason could be dealt with on a limited basis. However, I have decided on reflection not to deal with it. It is outside the scope of the question both as formulated and as modified in the terms set out at [4] above. The better course is to express a conclusion on the separate question, so worded, and to leave it to the parties to take up the question of what orders should be made having regard to that answer. Having so decided, I see no utility in outlining the competing submissions.
4. As to equitable set-off, Mr Pike submitted that the defendant's warranty and indemnity claims impeached the plaintiffs' claim in the relevant sense. That was so, he submitted, because the defendant's claims were for the monetary equivalent of the contractual rights said to have been breached, which rights were part of the consideration for the Purchase Price.
5. Mr Pike referred to the decision of Mann CJ in Sun Candies Pty Ltd v Polites [1939] VLR 132, and to the decision of Henry J in Drane v Aqualyng Holdings [2016] QSC 139. He referred also to Heydon, Leeming and Turner, Meagher Gummow and Lehane's Equity: Doctrines and Remedies (Fifth Edition, 2015) at [39-060] and Young, Croft and Smith On Equity (2009) at [15.4400].
6. As to the question of the proper construction of the sale contract, Mr Pike submitted that the sale contract contemplated reduction and increase of the Purchase Price to reflect the value of Warranty Claims made during what might be called the escrow period - the period of 12 months from completion of the sale contract. This construction, he submitted, was consistent with the purpose of the Escrow Amount, namely to secure for the benefit of his client variations to the Purchase Price reflecting the value of any claims it might have for breach of warranty or indemnity.
7. Mr Pike relied on cl 11.4. He submitted, correctly, that the word "Claim" was defined very broadly, and that it included a "Warranty Claim".
8. Mr Pike submitted that Warranty Claims could be brought at a variety of times: 1. before there were funds held in escrow (that is, before completion of the sale contract); 2. whilst there were funds held in escrow (in the period of 12 months following completion); or 3. after the Escrow Amount had been released to the plaintiffs (in a period of six months or four years after the 12 month anniversary of completion, depending on the nature of the claim).
9. Mr Pike next submitted that the Purchase Price, comprising the Completion Amount and the Adjustment Amount, could be increased or reduced on account of Claims (including Warranty Claims). He submitted that it would be inharmonious if a cl 11.4 reduction could be made, by adjustment to the Purchase Price, before completion, but not afterwards. (He submitted that the same applied in respect of increases to the Purchase Price under cl 12.4). On ordinary principles, Mr Pike submitted, cl 11.4 (and, where relevant, cl 12.4) should operate consistently regardless of the time at which the relevant Claim was made. Mr Pike accepted that this could not be so where the Claim was one made after the Escrow Amount had been released.
10. Mr Pike noted that the Escrow Amount formed part of the Purchase Price. Thus, he submitted, the natural and ordinary meaning of cl 11.4 was that whilst funds were held in escrow, the Escrow Amount, being part of the Purchase Price, was susceptible to reduction on account of amounts payable to the defendant in respect of Claims. In effect, he submitted, the Escrow Amount was to stand as security for variations (in his client's favour only) to the Purchase Price that occurred within 12 months of completion.
11. Mr Pike submitted that the parties would not have fixed a period of 12 months if, as Mr Elliott submitted, the function of the Escrow Amount was to stand as security only for accounting adjustments in his client's favour (that is to say, an Adjustment Amount in his client's favour). He submitted that it would take no more than four months to resolve any dispute as to the quantification of the Adjustment Amount.
12. Alternatively, Mr Pike submitted, a reduction to the Completion Amount arising though the operation of cl 11.4 would lead to a proportionate reduction of the Escrow Amount. That followed, he submitted, because the Escrow Amount was, by definition, 20% of the Completion Amount.

Approach to construction

1. I start by observing that there was no dispute as to the approach that the Court should take to the construction of the relevant provisions of the sale contract. They mean what a reasonable business person with knowledge of relevant matters would take them to mean. The following steps, or processes, tell how the understanding of that hypothetical person is deduced: 1. those provisions are to be given a commercial and businesslike construction. 2. The process of construction requires attention to the actual words used by the parties, both in their immediate context (the particular clauses in question) and in the context of their agreement overall (the sale contract). 3. The process of construction requires attention also to the object or commercial purposes to be served by the clauses in question, as those objects or purposes appear from the sale contract and from any other relevant matter of context. 4. The Court should seek to construe the sale contract as a whole, rendering its provisions internally consistent, and to give each aspect of the parties' bargain real work to do.
2. Those principles have been stated in numerous decisions of binding authority. It is not necessary to engage in citation.

Some preliminary observations

1. First, the Escrow Amount is US$4.4 million. The total value of the defendant's claims, as presently quantified, does not exceed US$500,000.00. In effect, on the first and second ways that the defendant puts its case, it is seeking to deny the plaintiffs access to US$4.4 million whilst its claims for no more than US$500,000.00 remain unresolved.
2. The second point relates to the defendant's submissions based on equitable set-off. It does not seem to me that its claim to such a set-off can be decided on some a priori basis, without reference to the words of the parties' bargain. If, on its proper construction, the sale contract entitles the plaintiffs to be paid the Escrow Amount even though the defendant's claims for breach of warranty and indemnity have not been resolved, it is somewhat difficult to see why equitable considerations should dictate a different outcome.
3. Assume, for the moment, that the relevant provisions of the contract are to be construed as Mr Elliott submitted. If the Court were to decline to enforce the contract, on the basis of the equitable set-off upon which the defendant relies, it would by hypothesis be rewriting (more accurately, subverting) the bargain that the parties struck. Another way of putting that proposition is that it is well recognised that the parties to a contract may, by the express terms of their contract or by necessary implication from those terms, exclude any right of equitable set-off. On the hypothesis presently under consideration, it would follow that the sale contract might well exclude, at least by necessary implication, any such right.
4. The third point, following from what I have just said, is that I do not think that the question of the impact of equitable set-off is outside the terms of the reformulated question for decision. A positive answer to the question would encompass both the pure question of construction initially contemplated and the defendant's submission that the question should be answered "no" for the first reason advanced by Mr Pike.
5. In the circumstances, it seems to me that it is necessary to decide the question of construction first before turning to what is now (consistent with what I have said at [43] above) the only other topic requiring decision: namely, whether the doctrine of equitable set-off is available to the defendant.

Decision: the construction issues

1. By cl 4.1(a), the plaintiffs agree to sell their shares in the Target Company to the defendant "in consideration for the payment of the Purchase Price to" the plaintiffs. The Purchase Price is not an amount of money that can be ascertained at completion. That is because it is defined to be the Completion Amount (which is a defined sum of money, US$22 million) less the Adjustment Amount. The Adjustment Amount will not be ascertained until the Completion Working Capital has been ascertained (by the process set out in cl 7) and compared to the Target Working Capital. Further, if there is a dispute as to the Adjustment Amount, it will not be ascertained until the dispute is resolved through the process of expert determination.
2. Against that background, the mechanism that cl 5.1 establishes for satisfaction of the Purchase Price makes sense. That obligation "will be satisfied" (cl 5.1(a)) by payment of the Completion Amount in accordance with cl 5.2, and by payment of any Adjustment Amount in accordance with cl 5.3.
3. It is correct to say, as Mr Pike submitted, that the Purchase Price may be diminished pursuant to cl 11.4, or augmented pursuant to cl 12.4. However, cl 5 says nothing about the way in which any amount due from one party to the other, under cl 11.4 or cl 12.4, will be paid. Specifically, cl 5.2 makes no provision for any amount due by the plaintiffs to the defendant to be paid out of the Escrow Amount.
4. Further, a variation to the Purchase Price prior to completion would not follow through, so as to vary, the Completion Amount. That amount, US$22 million, would remain payable on completion as cl 5 stipulates, regardless of any variation to the Purchase Price. The defendant would not be entitled contractually to diminish the Escrow Amount in respect of any cl 11.4 variation to the Purchase Price that was "finally agreed or adjudicated" prior to completion.
5. Thus, on its face, cl 5.2(b) does not entitle the defendant to be paid out of the Escrow Amount the justified amount of any Claim (including for breach of Warranties or Key Warranties) that the defendant may have established against the plaintiffs. That subject is dealt with, to the extent that it is, by cl 10: specifically, by the indemnities given both in respect of Warranties (including Key Warranties) and otherwise.
6. In my view, the language of cl 5.2(b) is intractably clear, and so is its meaning. The Escrow Amount is to be held for a period of 12 months following completion. During that period, and when the Completion Accounts are finalised so as to enable the Adjustment Amount to be ascertained, the amount of any shortfall between the Target Working Capital and the Completion Working Capital is to be paid from the Escrow Amount to the defendant. Otherwise, and on the expiry of that period, the balance is to be released to the plaintiffs. The language of the paragraph is expressed in mandatory terms: the parties "must direct the Escrow Agent" to pay the Escrow Amount in accordance with subparas (i) and (ii). By necessity, payment in accordance with those subparagraphs will deal with the whole of the Escrow Amount. The simplicity and finality of that scheme tell very strongly against the Escrow Amount's being available for any other purpose.
7. As I have said, Mr Pike relied strongly on cl 11.4, in particular on the direction that payments received or receivable are to be treated as reductions to the Purchase Price. However, in my view, that argument goes nowhere once it is realised, as I have sought to explain, that: 1. the Purchase Price is in effect an artificial construct; 2. the obligation to pay the Purchase Price is to be (and will be) discharged in accordance with cl 5: specifically, by paying the Completion Amount in accordance with cl 5.2; and 3. a variation to the Purchase Price does not flow through to the Completion Amount or to the Escrow Amount.
8. Once the defendant pays the Completion Amount, it has no further liability to pay the Purchase Price. It has a right to have adjustments in its favour in respect of working capital paid out of the Escrow Amount, and an obligation otherwise to direct the Escrow Amount or its balance to be paid out to the plaintiffs at the appropriate time. The time at which that "must" happen bears no relationship to either the Key Warranty period of 18 months following completion or the limitation period for other Warranty Claims (5 years following completion). The apparently mandatory requirement for release of the balance of the Escrow Amount to the plaintiffs before either of those limitation periods expires is a very clear indication that the Escrow Amount is not to be treated as available for the satisfaction of Warranty Claims.
9. On the defendant's approach, its rights would be different depending on the time any Warranty Claim was made. If it were made (and justified) before the escrow period expired, then on the defendant's argument it would be entitled to recoup itself out of the balance of the Escrow Amount. If it were made (and justified) outside that period, it would not. It is difficult to understand why the parties would have contemplated such an arrangement. To my mind, that difficulty tells against the construction for which the defendant contends.
10. There is another problem with the defendant's contention. Clause 11.4 operates in respect of "[a]ny payment received or receivable by" the defendant from a plaintiff "in respect of any Claim…". Some meaning must be given to the words "received or receivable". The word "received" can be put to one side, because (the payment having been received) there is no need for it to be paid out of the Escrow Amount. However, the word "receivable" has separate work to do. Clearly, it refers to a payment that is required to be made, but has not yet been made, on account of a Claim. That follows (in respect of Warranty Claims at least) from cl 11.1. The plaintiffs will have no liability under a Warranty Claim "unless the amount finally agreed or adjudicated to be payable in respect of [it]" meets the stated criteria.
11. In my view, reading cl 11 as a whole, where a Claim has been made and has not been admitted, it cannot be said, as a matter of construction of the sale contract, that there is a specific amount "receivable" in respect of that claim which can properly "be treated as a reduction to the Purchase Price". And the claim will not be "receivable" in that sense, until, as cl 11.1 contemplates, its amount has been "finally agreed or adjudicated to be payable".
12. Mr Pike acknowledged that the defendant's approach to construction produced some inconsistency. On the defendant's approach, it is entitled to have recourse to the Escrow Amount if the Purchase Price is reduced pursuant to cl 11.4. However, and again on its approach, it is not obliged to increase the Escrow Amount if the Purchase Price is increased pursuant to cl 12.4. If the parties intended, through the mechanism of cls 11.4 and 12.4, to use the Escrow Amount as security for payments receivable in respect of Claims, one would expect the rights to be corresponding, or symmetrical. But as Mr Pike acknowledged, they are neither.
13. For those reasons, I conclude that the defendant has no contractual right of recourse to the Escrow Amount for any Claim that it may have against the plaintiffs. It follows, as a matter of construction of the sale contract, that the defendant is not entitled to refuse to give the direction for which cl 5.2(b) calls simply because it has unresolved Claims. Any such right must therefore depend on equitable set-off.

Equitable set-off: the principles

1. For there to be a right of set-off in equity, more is needed than the mere existence of a cross-claim or cross-demand. The cross-claim or cross-demand must be of such a nature that it impeaches the ground of the plaintiff's claim. As Emmett JA (with whom Beazley P and Meagher JA agreed) said in HP Mercantile Pty Ltd v Dierickx [2013] NSWCA 479 at [136]: For there to be an equitable set-off, the set-off must essentially be bound up with and go to the root of, challenge, call in question, or impeach the title of the claimant. Equitable set-off is available where the party seeking it can show a recognised equitable ground for being, to the relevant extent, protected from its adversary's demand. The mere existence of a cross-claim is not sufficient. There must be some ground for equitable intervention beyond the mere existence of a cross-claim, such that it can be said that the equity of the defendant impeaches the claimant's title to the legal demand being enforced.
2. The "impeachment" test was upheld and explained by Barrett JA (with whom, relevantly, Bathurst CJ and McColl JA agreed) in Hawes v Dean [2014] NSWCA 380. Barrett JA reviewed the authorities (including what Emmett JA had said in HP Mercantile) at [60] to [64]. At [65], his Honour said that equitable set-off will be allowed where: … two wrongs or defaults are so closely connected that a net position or result ought in equity to prevail between the parties because it would be unconscionable to allow one of them to insist on its legal right without first accommodating the other's countervailing legal right. It is the existence of that unconscionability that causes the first party's claim to be "impeached" (that is, undermined and defeated) by the second party's claim.
3. The cross-claimant's equitable right to set off its claim or demand against that of its "adversary" therefore arises because it would be unconscionable to permit the adversary to enforce its claim without taking into account the cross-claimant's opposing claim. See SR Derham, The Law of Set-off (4th Edition, 2010) at [4.30]; the passage in question was cited with approval by Corboy J (with whom Martin CJ agreed) in Palaniappan v Westpac Banking Corporation [2016] WASCA 72 at [127].
4. However, rights of equitable set-off are available only to the extent that they are not excluded by the terms of any contract between the parties. As Corboy J said in Palaniappan at [130]: There is no ground of public policy that prevents the parties to a contract agreeing to exclude or suspend a defence of equitable set-off… .
5. Corboy J said at [131] that the question, whether a contract had the effect of suspending or excluding rights of set-off in equity, depended on its proper construction. The task of construction is to be performed in accordance with the well-recognised general principles applicable to commercial contracts generally (see at [53] above). That task is to be undertaken, his Honour said, "without any predisposition in favour or against the existence of, or a restriction on, the right of set-off".

Submissions

1. I turn to the debate in this case. Mr Pike submitted that his client's claim against the plaintiffs was of such a nature as to be capable of impeaching the plaintiffs' claim against it. He relied on cl 10.2 of the sale contract. As has been seen, that clause contains the plaintiffs' acknowledgment that the defendant both entered into the agreement and completed it "in reliance on the accuracy and completeness of the Key Warranties and Warranties".
2. Mr Elliott submitted that, before considering the question of impeachment, it was necessary to identify the precise right that the plaintiffs claimed, enforcement of which was said to be prevented on conscientious grounds by the doctrine of equitable set-off. He relied on what Buss JA said in Palaniappan at [50] (his Honour agreed with Corboy J in the outcome, but gave separate reasons). Buss JA said that for there to be an equitable set-off, "the equity of the party claiming the set-off [must impeach] the title of the other party to the legal demand which it is seeking to enforce".
3. Mr Elliott relied also on what Barrett JA said in Hawes at [61]. His Honour there said, by reference to authority which I need not cite, "that equitable set-off does not depend upon an unfettered discretionary assessment of what is fair. Rather, it is essential that there be such a connection between the claim and cross-claim that the cross-claim can be said to impeach the claim".
4. Mr Elliott submitted that the precise legal right that the plaintiffs sought to enforce was their right pursuant to cl 5.2(b) to have the defendant give the direction to which subpara (ii) referred. Assuming that the plaintiffs had that right, Mr Elliott submitted, it was one which logically could not be "impeached" by a Warranty Claim. It would not be unconscionable for the plaintiff to insist upon the performance of that right because the parties had agreed that it could be exercised in those circumstances.
5. Alternatively, Mr Elliott submitted, the language of cl 5.2(b) had the effect of excluding, by necessary implication, any right of equitable set-off of the kind claimed in this case. Mr Pike submitted, in response, that clear words would be needed to achieve exclusion, and that the language of cl 5.2(b) was not sufficient to exclude his client's right.

Decision: equitable set-off

1. In my view, the defendant has no right of equitable set-off in the circumstances with which I am concerned. The starting point must be that it has not proved that there is any Claim, in respect of which the Purchase Price is to be treated as reduced by the operation of cl 11.4. (I am not being critical; the validity of the defendant's demands was not one of the issues to be debated under the rubric of the separate question.) However, as I have said, the Purchase Price is only to be varied in respect of an "amount received or receivable … in respect of [a] Claim". At present there is nothing that is shown to be "receivable" on the proper construction of that clause.
2. I accept, of course, that the defendant entered into the sale contract on the basis set out in cl 10.2, and that the plaintiffs acknowledged this. That might provide a basis (as Mr Pike submitted it did) for a conclusion of impeachment in some circumstances. However, as Mr Elliott submitted, the analysis must focus precisely on the nature of the right that is said to be impeached.
3. As I have noted, Mr Pike relied on the decision of Henry J in Drane. In that case, the parties entered into a contract for the sale of the plaintiff's shares in a company to the defendants. The purchase price was payable by instalments. The plaintiff sued for one of the instalments. It sought summary judgment. The defendants pleaded a defence by way of set-off, and a cross-claim relating to breaches of warranty and the like.
4. Henry J held that some of the pleaded breaches were capable of grounding a defence by way of set-off. As to one such matter, his Honour said at [57], the "claim bears upon the quantum of the overall purchase price and so impeaches the present claim for summary judgment, for that claim is a claim for part of the purchase price". As I read that paragraph in context, Henry J did not hold that the defendants had a right of set-off in equity. He held, rather, that their claim to have such a right was arguable, and hence that the plaintiff should not have summary judgment.
5. The facts of that case may be contrasted with the facts with which I am concerned. In that case, the defendants' obligation to pay the purchase price remained in part unsatisfied. There were further instalments to be paid. In this case, by operation of cl 5.1, the defendant's obligation to pay the Purchase Price has been fully satisfied, or "discharged" (to use the language of cl 5.1 itself).
6. In the case considered by Henry J, it was (with respect) easy to see why the defendants' claims were capable of impeaching the precise claim brought by the plaintiff. In the present case, the defendant has paid all that it is liable to pay (leaving aside the question of any adjustment under cl 12.4). The plaintiffs' demand is not for payment of any part of the Purchase Price. It is, rather, a demand to have the balance of the Completion Amount, already paid by the defendant but into the Escrow Account, paid out of that account to them.
7. In those circumstances, I do not think that the decision in Drane assists Mr Pike's submissions. Certainly it does not do so directly. And bearing in mind the significant distinction between the facts considered by Henry J and the facts with which I am concerned, I do not think that it offers Mr Pike any great assistance by way of analogy.
8. In my view, taking into account what I have said is the proper construction of the relevant provisions of the contract, it is not relevantly unconscionable for the plaintiffs to enforce their right under cl 5.2(b), to have the defendant give the requisite direction to the Escrow Agent, simply because the defendant has made Warranty Claims (which I accept have been made in good faith) that are yet to be resolved. There is no unconscionability because, reading the sale contract as a whole, the right that the plaintiffs seek to enforce is one that the parties agreed could be exercised in the circumstances that have arisen.
9. It follows, to my mind, that there is no sufficiently close connection between the demand that the plaintiffs make and the defence that the defendant asserts, to lead to the conclusion that the latter relevantly impeaches the former. On the contrary, the demand and the suggested defence operate in separate areas of legal obligation.
10. Further, I think that the sale contract, on its proper construction, necessarily excludes any right of equitable set-off in the circumstances with which I am concerned. I say that because: 1. cl 5.2(b) provides for the payment out of the whole of the Escrow Amount in the circumstances that it describes; and 2. it does so in circumstances where, as the parties must have known (because it is plain from the structure of their contract), there might well remain unresolved claims between them.
11. Put in different language, the result for which the defendant contends would be directly inconsistent with the clear and detailed contractual regime for which the parties bargained.

Conclusion and orders

1. It follows that the separate question, as reframed, should be answered "yes". On the face of things, the hearing of the separate question being a discrete "event" for the purposes of UCPR r 42.1, the plaintiffs should have their costs of the separate question. However, as I have said, I shall do no more than answer the question, reserve consideration of all other issues in the suit, and stand the matter over for a time for directions. I shall also give directions intended to ensure that everyone (including the Court) knows what is to happen when the matter comes back before me.
2. I make the following orders: 1. direct that the separate question be answered as follows: Question: Whether, on the proper construction of the contract entitled "Share Sale and Purchase Agreement" entered into between the parties on or about 15 October 2014, and in circumstances where the defendant has made Warranty Claims as defined in that contract, which Claims have not been finally agreed or adjudicated, the defendant is now obliged to direct the Escrow Agent to release the Escrow Amount to the plaintiffs. Answer: Yes. 1. Direct the parties to provide to my Associate and exchange drafts of the orders that each seeks in consequence of that answer, and written submissions no more than five pages in length in support of those proposed orders, by 19 August 2016. 2. Direct the parties to provide to my Associate and exchange written submissions in reply, no more than five pages long, by 26 August 2016. 3. Reserve all questions of further relief, and as to costs, for further consideration. 4. Stand the matter over for directions before me at 9:30am on 30 August 2016.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 09 August 2016