SSABR Pty Ltd v AMA Group Limited

Catchwords

[1930] HCA 38 Australian Securities and Investments Commission v Hellicar (2012) 247 CLR 345[2012] HCA 17 Australian Securities and Investments Commission v Westpac Banking Corporation (No 2) (2018) 266 FCR 147[2018] FCA 751 Blatch v Archer (1774) 1 Cow 6398 ER 969 Brambles Holdings Ltd v Carey (1976) 15 SASR 270 Cherry v Steele-Park (2017) 96 NSWLR 548[2014] HCA 7 Fabre v Arenales (1992) 27 NSWLR 437 Fonterra Brands (Australia) Pty Ltd v Bega Cheese Ltd [2021] VSC 75(2021) 159 IPR 494 Fowler v Fowler (1859) 4 De G & J 25045 ER 97 Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603[2009] NSWCA 407 Galea v Bagtrans Pty Ltd [2010] NSWCA 350 GLJ v The Trustees of the Roman Catholic Church for the Diocese of Lismore [2023] HCA 32(2023) 97 ALJR 857 Hawksford Trustees Jersey Ltd v Stella Global UK Ltd [2012] 2 All ER (Comm) 748 Ho v Powell (2001) 51 NSWLR 572[2001] NSWCA 168 House v The King (1936) 55 CLR 499[1936] HCA 40 Jones v Dunkel (1959) 101 CLR 298[1959] HCA 8 Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563[1995] HCA 68 Kuhl v Zurich Financial Services Australia Ltd (2011) 243 CLR 361

Judgment (23 paragraphs)

[1]

Background to the sale

Discussions between Mr Nercessian and Mr Timuss as to the purchase by AMA of the Businesses were instigated by Mr Timuss in early 2017. From an early stage in the negotiations, it appears that AMA were suggesting that the purchase price be calculated by reference to a multiple of the "net profit (EBITDA)" of the Businesses. Thus, on 27 March 2017, Mr Hector Vieira, Mr Nercessian's accountant (and also his father-in-law), wrote in an email to Mr Nercessian: "[AMA] have indicated that they are willing to pay you multiple of 4.5 times of the net profit (EBITDA). Obviously this multiple should be negotiable to allow you to obtain a multiple greater than the 4.5 that they are suggesting."
Mr Vieira further observed that if AMA were a public company they would "earn or get the benefit" of 8-12 times the profit of the Businesses. Mr Vieira also suggested that Mr Nercessian tell AMA that the profits of the Businesses were likely to increase and that what this would mean was that: "… [AMA] will look and pay you a price based on your business as if it would be in 3 years' time, or at least the average of the profit over the next 3 years."
Mr Nercessian told Mr Timuss that he wanted $8,000,000 for the Businesses. Mr Nercessian's unchallenged affidavit evidence was that that reflected his opinion as to the value of the Businesses and the price at which he was prepared to sell them. Consistent with this the primary judge found that, at a meeting on 23 January 2018, Mr Nercessian told Mr Timuss that he wanted $8,000,000 for the Businesses: J[17].
By email of 29 January 2018, Mr Timuss suggested that the purchase price should be 4.5 times "NPBT", meaning net profit before tax, $2,000,000 "[a]verage NPBT", with $4,000,000 to be paid up front and the balance in three years, capped at $10,000,000. This offer was subject to due diligence and board approval. Mr Timuss suggested that he had "come up" with this from "our conversation last week". The source of Mr Timuss' figure of $2,000,000 "[a]verage NPBT" is not clear. There is no evidence as to whether Mr Timuss had by this stage received any financial information from Mr Nercessian or whether this figure came from Mr Nercessian.
Mr Timuss and Mr Nercessian spoke after this email offer. Mr Timuss said that the only way he could get the money Mr Nercessian was "after" was via an "[e]arnout": J[18]. Mr Timuss then sent Mr Nercessian a revised offer of 4 times NPBT, an average of $2,000,000 NPBT, $4,800,000 to be paid up front, described as "60% of $8 mill", with the balance payable in two years, and a cap of $10,000,000: J[18]. This conversation suggests that Mr Nercessian's position was that he had in mind a particular total figure for the transaction, and is consistent with his affidavit evidence that he wanted $8,000,000.
These two offers suggest that AMA's position was that the total purchase price be based upon a multiple (4 or 4.5) of NPBT, to be paid by an initial payment and a later payment, or Earn-Out, with a cap of $10,000,000. It is also apparent that these offers were informed by reference to a figure of $2,000,000 average NPBT for the Businesses. Whilst the total payment was to be 4 or 4.5 times NPBT, subject to a cap of $10,000,000, it was not suggested that this would be calculated by reference to an "average" NPBT. It was also not suggested that anything over and above the cap of $10,000,000 would be paid.
On 31 January 2018 Mr Timuss and Mr Nercessian spoke again. Mr Nercessian told Mr Timuss that he did not like the idea of an Earn-Out as he would not be in control of the Businesses after the sale: J[19]. Mr Timuss and Mr Nercessian spoke again in February 2018 at which time Mr Nercessian sought assurances that, if he was working on an Earn-Out, anything that happened needed to be discussed with him and Mr Timuss gave him that assurance. On 19 February 2018 Mr Nercessian sent a text message to Mr Timuss asking if he had thoughts on "the paperwork" and Mr Timuss replied that for AMA "to do a deal at that money it will have to be [an Earn-Out]". This suggests that Mr Nercessian was still seeking a particular figure for the sale of the Businesses, and having regard to his evidence, it is likely this was a figure of $8,000,000.
On 20 March 2018 Mr Timuss emailed a draft BHOA to Mr Nercessian. That document then formed the basis of further negotiations. Mr Finney was engaged by the appellants to review and advise on various drafts of the BHOA. Negotiations took place by email and in person. These emails and discussions were primarily between Mr Nercessian and Mr Timuss, although Mr Finney, Mr Hopkins and Mr Harding-Smith were also to some extent involved.
The primary judge found (at J[77]) that AMA's "consistent position during the negotiation of the deal recorded in [the BSA] was that the earn-out would be the average annual EBIT during the earn-out period multiplied by four, less the initial payment of $4.8 million" (emphasis in original). As is clear, there is no express statement as to this in the early negotiations. Nor, as will be apparent, was there any evidence that an express statement to this effect was made in the course of negotiation of the BHOA, or the BSA. In these circumstances, I would conclude that the primary judge's inference is unsupported by the evidence.
Other than as set out at [26] above, as regards the meeting on 23 January 2018, the primary judge did not make any finding as to what Mr Nercessian's position, or consistent position, was during the negotiations. As set out above, the available inference supports an inference that at least during some periods of the negotiation, his position was that he wanted $8,000,000 for the Businesses.
There is no evidence as to who drafted the version of the BHOA sent by Mr Timuss to Mr Nercessian on 20 March 2018. This version provided for AMA to pay a "Completion Balance Amount" of $4,800,000 on the completion date, and for AMA to pay "Deferred Settlement Components" 90 days after the two year anniversary of completion, conditional upon the requirements of cl 4(b)(ii) of the BHOA. Clause 4(b)(ii) was in the following terms: "ii) Deferred Settlement Components of the values listed below: (A) For the second year anniversary period: if the Businesses generate $4,000,000 EBIT in the period 1 to 24 months post Completion (i.e. an average of $2,000,000 EBIT per year), the Purchaser will pay to the Vendors $3,200,000 within 90 days of the expiry of the second year anniversary. This equates to an earn out of 4 times EBIT (Completion Balance Amount of $4,800,000 plus Deferred Settlement Component of $3,200,000). If the EBIT is less than $4,000,000, the Vendors will be entitled to a pro-rata payment; (B) [dealing with the situation if the Vendor acquired Other Businesses during the 24 months after Completion]; (C) The total Deferred Settlement Component the Vendors can receive … is capped at $10,000,000. …".
As is apparent, the suggested figure of $3,200,000 by way of Deferred Settlement Component in cl 4(b)(ii)(A) of the BHOA was explained on the basis of it resulting in a total purchase price payable which "equates" to an Earn-Out of "4 times EBIT", and on the figures set out in cl 4, the total Earn-Out was $8,000,0000, being $2,000,000 multiplied by 4. Thus, on the worked example in cl 4(b)(ii)(A), EBIT is calculated at $2,000,000. In that worked example, it is also apparent that $2,000,000 was the average EBIT over the 24 months post-completion. As is discussed in more detail below, however, cl 4(b)(ii)(A) of the BHOA does not set out any overarching agreement for AMA to pay the appellants a total purchase price of an "average annual" EBIT of the Businesses over the Earn-Out Period multiplied by 4, as contended by the respondents, and does not set out any agreement as to the basis upon which the "pro-rata payment" to which the appellants were entitled in the event that the EBIT of the Businesses was not $4,000,000 over the stated 24 month period.
Around this time Mr Nercessian wrote to Mr Timuss by letter, indicating that he did not wish to structure the acquisition costs under an Earn-Out regime and said: "Rather than the 'earn out', I need a price, based on the value of the business as at today to be determined and set. I am prepared for part of the purchase price to be paid over a period of two (2) years, but the figure must be fixed. In relation to the figure, I am confident that the sum of $8,000,000.00 represents value for the business as at today."
Mr Nercessian said that he was prepared to accept $5,000,000 on settlement and $1,500,000 per year for the following two years: J[23]. It is thus clear that Mr Nercessian's focus remained upon receiving $8,000,000 from AMA for the Businesses.
There followed further communications and exchanges of drafts of the BHOA between Mr Finney, Mr Nercessian, Mr Harding-Smith and Mr Timuss. The issues being discussed largely related to Mr Nercessian's concern that there be "no claw back" and with the "minimal sale price at 4.8m" (as described by Mr Nercessian in an email to Mr Timuss on 29 May 2018). There was also ongoing discussion as to whether the basis of calculation under cl 4 of the BHOA should be EBIT (as the respondents contended) or EBITDA being Earnings Before Interest, Taxes, Depreciation and Amortisation (as Mr Finney contended). There was, however, no change to the overarching structure of cl 4. In particular, throughout the negotiations cl 4 was expressed, as set out at [34] above, in terms of the sum that would be paid as Deferred Settlement Components on the assumption of a given total EBIT (or in some drafts EBITDA) generated by the Businesses over the Earn-Out Period, with the appellants entitled to a pro-rata payment if the total EBIT (or EBITDA) was less than the given figure.
On 29 April 2018, Mr Timuss emailed Mr Nercessian, copied to Mr Harding-Smith, saying: "… It was our understanding that commercial terms were agreed, so we issued the HOA in line with these agreements."
That suggests that prior to preparation of the first draft of the BHOA there had been some discussion between Mr Nercessian and someone at AMA, most likely Mr Timuss or Mr Harding-Smith, at which there was agreement as to such matters. Of course, as neither Mr Timuss nor Mr Harding-Smith gave evidence, it is not possible to know what they understood to have been agreed. Mr Nercessian did not address this in his affidavit and was not asked about this during cross-examination.
On 19 June 2018, when Mr Harding-Smith queried Mr Nercessian's redraft of the BHOA to change "EBIT" to "EBITDA", Mr Nercessian wrote to Mr Timuss: "Apparently Stephen told us that your ama deal was 10.7 times the ebitda, so thus we used it".
Mr Timuss responded "that is not right". This exchange suggests that some time around June 2018, Mr Nercessian and Mr Harding-Smith had a discussion of other deals in which AMA paid multiples of EBITDA well higher than the 4 or 4.5 multiples initially proposed by Mr Timuss in early 2017.
What is clear, however, is that over the period of the negotiations there were discussions between one or other of Mr Nercessian, Mr Finney, Mr Timuss, Mr Harding-Smith and Mr Hopkins about the terms of the draft BHOA. There was in evidence only a file note of one such discussion, between Mr Finney and Mr Harding-Smith and this file note does not suggest that anything of relevance to the issues now in dispute was discussed on that occasion.
On 24 August 2018 the BHOA was executed by Mr and Mrs Nercessian.
Subsequently some concern was apparently expressed within AMA as to the inability to "claw back" the Completion Balance Amount to be paid up front. On 5 September 2018 Mr Harding-Smith sent Mr Nercessian an email (copied to Mr Timuss) about this, suggesting that the upfront payment of $4,800,000 be retained but adding in provision for this to be a "minimum" of $2,400,000. This was to be effected by a proposed amendment to the BHOA, adding a clause providing for a pro-rata refund of the $4,800,000 initial payment if average EBIT was less than $1,200,000.
There are four aspects of this email that are significant to the issues arising in this appeal. First, the email indicates that the dissatisfaction with the terms of cl 4 came from "the AMA Board" and AMA's solicitors. There is, however, no evidence before the Court as to what information was given to the board of AMA, or the AMA solicitors, at this time. Nor is there any evidence as to what understanding the AMA board had of the commercial agreement or as to the terms of the BHOA, nor as to which of AMA's solicitors had considered these issues and raised concerns.
Second, it suggests that as at September 2018, the board of AMA was concerned that the Businesses may achieve less than $1,200,000 EBIT per year in the two years following completion of the sale, such that there was risk for AMA in agreeing to a minimum sale price of $4,800,000, which risk AMA was seeking to mitigate. There is, however, no explanation in the evidence as to why the AMA board or AMA's solicitors perceived there to be risk to them arising from the transaction, nor as to why (as will become apparent) AMA did not ultimately press their proposed changes to cl 4 of the BHOA.
Third, in the email of 5 September 2018, having suggested the change to a minimum payment of $2,400,000, Mr Harding-Smith wrote: "We know this is half the amount you are looking for as your protected earnings, however it [sic] the best outcome that can be achieved unfortunately."
This suggests that there had been some discussion between the parties as to the dollar figure that Mr Nercessian wanted as protected earnings. This apparent focus upon a particular sum is consistent with Mr Nercessian's affidavit evidence that for him, $8,000,000 represented the value of the Businesses and the price at which he was prepared to sell. That in turn suggests that Mr Nercessian's focus remained upon achieving a fixed total sum from AMA for the Businesses.
Fourth, in his email of 5 September 2018 Mr Harding-Smith wrote: "… The upfront payment of $4.8m should not really be of any concern to you given the businesses should achieve a minimum of $1.2m EBIT per year in any case".
This suggests that at that time, Mr Harding-Smith thought that the total price to be paid under cl 4 of the draft BHOA would be 4 times EBIT earned per annum. Further, it suggests that he thought the Businesses "should" earn at least $1,200,000 EBIT per year in the two years after completion of the sale. There is no evidence as to what he had considered in reaching this conclusion.
There must then have been discussion between Mr Harding-Smith and Mr Nercessian because on 6 September 2018, Mr Harding-Smith sent an email to Mr Nercessian, copied to Mr Timuss, saying that he had spoken with "Andy" (presumably Mr Hopkins), that Mr Harding-Smith knew Mr Nercessian "asked [him] to get approval for $4m" but that the best AMA could offer was a minimum purchase price of $3,000,000. Mr Nercessian received a phone call from Mr Hopkins that day. As the primary judge found (at J[41]), presumably Mr Hopkins and Mr Nercessian discussed the emails of 5 and 6 September 2018 given that the proposals set out by Mr Harding-Smith in those emails was not ultimately pressed. There is no evidence, however, as to what was in fact discussed during this phone call.
It was apparent from Mr Nicholson's oral evidence that he was aware of the proposed amendment suggested by Mr Harding-Smith as set out at [45] above. It is not clear when Mr Nicholson became aware of that proposed amendment and in particular, whether he was aware of this in September 2018. Mr Nicholson's oral evidence was that he was not aware that Mr Harding-Smith's proposed amendment "had been rejected and was not included in the [BHOA]". Given that it is obvious on the face of cl 4 of the BHOA that such amendment was not included, this casts some doubt upon the care with which he read the terms of the BHOA. It also indicates that he was not involved in discussions as to the final terms of the BHOA.

[2]

The BHOA

The BHOA, executed by Mr Nicholson for AMA and by Mr and Mrs Nercessian for the appellants, is dated 7 September 2018. By cl 2(b) the parties agreed "to enter into Business Sale Agreements subject to the terms and conditions set out in this Heads of Agreement".
Clause 4 of the BHOA provided: "(a) The Purchase Price for the Businesses and the Assets is $4,800,000 plus the Deferred Settlement Components conditional upon the requirements of sub-clause 4(b)(ii) below and as adjusted in accordance with sub-clause 4(c) below; (b) The Purchase Price shall comprise of: (i) Completion Balance Amount (as adjusted per sub-clause 4(c) below) of $4,800,000 on Completion Date; plus (ii) Deferred Settlement Components (if any) of the values listed below: a) For the second year anniversary period: if the Businesses generate $4,000,000 EBIT in the period 1 to 24 months post Completion (i.e. an average of $2,000,000 EBIT per year), the Purchaser will pay to the Vendors $3,200,000 within 90 days of the expiry of the second year anniversary. This equates to an earn out of 4 times EBIT (Completion Balance Amount of $4,800,000 plus Deferred Settlement Component of $3,200,000). If the EBIT is less than $4,000,000, the Vendors will be entitled to a pro-rata payment; b) If the Vendor acquires Other Businesses during the 24 months post Completion i. as a result of the effective introduction of that business to the Purchaser by the Vendor or Covenantor(s); and ii. for the Vendors to manage, the Vendors will be entitled to a Deferred Settlement Component, calculated as follows. The Purchase Price of the Other Businesses will be divided by 4 to derive an 'Imputed EBIT' amount. If the Actual Average EBIT per year of these Other Businesses exceeds the Imputed EBIT (referred to as, 'Additional EBIT'), the Purchaser will pay to the Vendors 4 times the Additional EBIT, within 90 days of the expiry of the second fear anniversary; c) The total Deferred Settlement Component the Vendors can receive from items (A) and (B) above is capped at $10,000,000. If the total value of the Deferred Settlement Components calculated at items (A) and (B) exceed $10,000,000, the Purchaser will pay the Vendors 50% of this excess over $10,000,000 within 90 days of the expiry of the second year anniversary. …". (Emphasis in original).
A number of observations should be made about cl 4 of the BHOA.
First, it is not clear what, if anything, in excess of $3,200,000 would be paid to the appellants as the Deferred Settlement Component for the Businesses in the event that EBIT was higher than $4,000,000 in the period 1 to 24 months after completion. As to this, nothing can be gleaned from the terms of cl 4(c), as the maximum amount of $10,000,000 there set out could come both from cll 4(b)(ii)(a) and 4(b)(ii)(b).

[3]

Financial information provided during due diligence

Clause 7 of the BHOA provided for a due diligence process. Financial information for the Businesses for the financial year ending 30 June 2018 was within the due diligence materials provided by the appellants. Profit and loss accounts for the 2018 financial year, which have the date 13 September 2018, show the net income of Harris & Adams at $24,972, and the net income of Simply Smashing at $792,528 (a total of $817,500).
According to the email of 27 March 2017 from Mr Vieira (set out at [24] above), there was an expectation that profits would increase in 2018 and 2019 "due to the consolidation and refining [of] the new business structure." Even on this assumption, however, it is apparent that if the Earn-Out were to be calculated simply on the basis that the purchase price should be 4 times the "average annual" EBIT over two years, these figures were well below what would be required for Mr Nercessian to achieve the $8,000,000 that he explained was the price for which he was prepared to sell the Businesses.
A document described as "2018 Financial Year Adjusted Profit & Loss for Management Purposes" (the "2018 Adjusted P&L") was also provided by the appellants during due diligence. Numerous adjustments to the financial profit and loss account information for the Businesses were made in the 2018 Adjusted P&L, which has a final net operating income figure for the Businesses of $2,051,334. The most significant changes include the addition of an adjustment of approximately $1,164,954 in the rows for salaries and wages, payroll tax and superannuation accompanied by the comment "Excessive wages + Caroline's wages (Excessive relates to the staff that have left or deemed unnecessary)". To illustrate the significance of the changes, the total "salaries and wages" amount was reduced by about 33% from the figure in the profit and loss statements for Businesses for the 2017/2018 financial year. Further adjustments increasing the net income of the Businesses included an adjustment reducing the cost of goods sold by $227,200 for "Net Annual Increase in Stock & WIP", a reduction of advertising expenses by $24,000, a reduction in consultancy fees of $19,706, a reduction in insurance costs by $8,000 and a reduction in motor vehicle expenses by $25,000.

[4]

The BSA

At 9.24am on 20 September 2018 Mr Harding-Smith sent an email to Mr Finney telling him that he had taken delivery of the "BSA" from AMA's solicitors "last night" and that he was "just checking the commercial terms to ensure it reflects the [BHOA] and then you will have it". I infer that Ms Lefebvre was most likely the person who prepared the draft that was sent to Mr Harding-Smith. Mr Nicholson did not suggest that he drafted it, he said that Ms Lefebvre was doing most of the work, and there is no suggestion of anyone else at Nicholson Ryan being involved. I would also infer that it was Mr Harding-Smith or Mr Timuss who gave instructions to Ms Lefebvre on the drafting of the BSA. Whilst it is possible that she was simply instructed that the BSA should reflect the terms of the BHOA, given the differences between the two documents (discussed further below), it cannot safely be concluded that this was the case. The simple fact is that there is no evidence as to what instructions were given as regards the drafting of this draft of the BSA.
A draft of the BSA was then sent by Mr Harding-Smith to Mr Finney, copied to Ms Lefebvre, by email at 5.02pm on 20 September 2018. In this email Mr Harding-Smith told Mr Finney that he would be "handing" him over to Ms Lefebvre. There is no evidence as to whether or not Mr Harding-Smith made any alterations to the draft BSA that he had been sent the previous day, and if so, why. I would, however, infer that he checked cl 4, given that it was this clause that determined what AMA was required to pay for the Businesses. There is also no evidence as to whether Mr Harding-Smith discussed the terms of the draft BSA with anyone else within AMA before sending it to Mr Finney.
The relevant terms of the BSA, being cll 4.3 and 5.1, were in substantially the same form in the draft BSA sent by Mr Harding-Smith to Mr Finney on 20 September 2018 and in the final BSA as executed by Mr Nicholson and Mr Hopkins on 3 October 2018. As is immediately apparent on the face of the document, as set out at [77] below, the drafting of cl 5.1 of the BSA differed significantly from that of cl 4 of the BHOA.
There is no evidence as to why this happened. There is nothing in the evidence recording any consideration or discussion of cll 4.3 or 5.1 of the BSA in the period up to the execution of the BSA. No internal emails of AMA, or emails between AMA and Nicholson Ryan, are in evidence. No internal documents of AMA relating to the terms or drafting of the BSA are in evidence. Nor are there any Nicholson Ryan documents going to these issues in evidence. The evidence is thus completely silent as to how it is that cl 5.1 of the BSA came to be drafted in the way that it did. Given this gap in the evidence, I would reject the respondents' contention that neither Mr Timuss nor Mr Hopkins played any role whatsoever in relation to the BSA, save that Mr Hopkins executed it. Whilst their names are not on any of the correspondence between AMA or Nicholson Ryan on the one hand, and Mr Finney on the other, given the gaps in the evidence I have already identified, it is simply not possible to know whether they had any role in giving instructions as to the drafting or by reason of Mr Harding-Smith reporting to Mr Hopkins.

[5]

Mr Nicholson's role in relation to the BSA

Mr Nicholson does not, in his affidavit, suggest that he personally had any hand in drafting cl 5.1 of the BSA, although when asked by Senior Counsel for the appellants at trial, Mr Nicholson confirmed that he and his firm "were involved in the drafting and finalisation of the BSA". Mr Nicholson's oral evidence was that he read the BSA carefully before it was finalised, and that he "was overseeing" the BSA drafting process but that Ms Lefebvre was "doing most of the work". He agreed that Ms Lefebvre was primarily responsible for drafting and settling the BSA with Mr Harding-Smith.
Mr Nicholson did not suggest in his evidence that he, at any time, gave instructions as to the drafting of the BSA or as to the commercial terms to be agreed. Nor did Mr Nicholson suggest that he was present on any occasion when such instructions (or indeed any instructions in relation to the transaction between AMA and the appellants) were given. Mr Nicholson agreed in his oral evidence that Mr Timuss, Mr Harding-Smith and Mr Hopkins were involved in the transaction for AMA, and that he wasn't privy to their conversations in relation to the transaction if he wasn't present. Whilst Mr Nicholson said that he would have had "things relayed" to him, he did not specify what in particular had been relayed to him, nor suggest that everything that was discussed would have been relayed to him.
Whilst Mr Nicholson's evidence was that he was supervising Ms Lefebvre, he did not suggest that Ms Lefebvre would have discussed the instructions she received as to the drafting of the BSA with him. Nor does he suggest that, if instructions were sent by email, the emails would have been copied to him. In these circumstances, and given that no emails between AMA and Nicholson Ryan in relation to the BSA are in evidence, it cannot safely be concluded that Mr Nicholson would have been aware of instructions given to Ms Lefebvre as to the drafting of the BSA.
As to the documentary evidence before the Court going to Mr Nicholson's involvement in the transaction as AMA's solicitor, it is Ms Lefebvre who is copied to all emails exchanging drafts of the BSA with the appellants, including on 20 September 2018 when Mr Harding-Smith sent a draft BSA to Mr Finney for the first time. From 27 September 2018 Ms Lefebvre copied Mr Nicholson on four emails she sent to Mr Finney which attached drafts of the BSA. None of these emails discuss the drafting or substance of cl 5.1. There is no documentary evidence of Mr Nicholson having any input as to the drafting of cl 5.1, or of the BSA, at all.

[6]

The issue that arose as to legal costs on leases

On 10 October 2018, Mr Finney emailed Ms Lefebvre and indicated that there was an error in the BSA concerning the payment of legal costs on the leases associated with the Businesses. Mr Finney indicated that it had been negotiated and agreed in the BHOA that legal costs on the leases would be paid by AMA. Ms Lefebvre replied "[t]hanks for the clarification." The primary judge identified as to this (at J[56]) that: "… an error in the contract was encountered and dealt with on the basis that it was an error. The parties deferred to the agreement as recorded in the [BHOA]." (Emphasis in original).
Whilst some reliance was placed upon this as suggesting that the parties intended that the BSA not go beyond the terms of the BHOA, in my judgment that overstates the significance of what is better characterised as nothing more than capitulation by Ms Lefebvre, presumably instructed by AMA, on one discrete issue. As the primary judge found (at J[56]), in this instance the parties "deferred to the agreement as recorded in the [BHOA]". That is of no significance on the question of construction or rectification of cl 5.1 the BSA.

[7]

The Circular Resolution and board approval

The condition precedent of board approval was met when the five directors of AMA signed the Circular Resolution, which was itself dated 10 October 2018.
As relevant, the Circular Resolution provided as follows: "Purpose: Management have requested approval for the acquisition of the Simply Smashing Group of Businesses as outlined below: Consideration - Initial Cash: $4.8m at Completion/Signing. Earn-Out: Cash Payment of 4xEBIT (including any acquired businesses run by the Vendor post completion) minus Initial Cash to max of $10mil (CAP) over 2 year earnout period. Cash payment of 50% of any earnout amount above CAP. Estimated Total Consideration: $10mil. No maximum. Assets - Method: Business Purchase Agreement Locations: 2 smash repair locations in Gosford NSW: 1 Insurance and 1 Prestige. 3 leases over 2 locations Material Contracts: QBE, Suncorp, Custom Fleet, Australian Fleet Services, DriverCare Ratio: 4 x times earnings pre synergy 2017 turnover: $8.8mil 2018 turnover: $9.4mil 2019 (projected full year): $2.2mil EBITDA … Resolution: Resolved that the board of AMA Group Limited approve the acquisition of Simply Smashing Group Businesses under the terms forming part of and attached to this resolution." (Emphasis in original).
There is no evidence as to who prepared the Circular Resolution, why it was drafted in the way it was, or as to what the AMA directors made of it or why the directors approved the transaction. No internal AMA documents going to the preparation or drafting of the Circular Resolution are in evidence. Mr Nicholson, the only director of AMA at the relevant time to give evidence, did not explain in his evidence what he made of the Circular Resolution nor how it is that he signed the Circular Resolution, notwithstanding that it did not reflect his own intention and understanding.
What is clear, however, is that (save for the somewhat shorthand way in which "acquired businesses" are dealt with) the Circular Resolution is entirely consistent with cl 5.1 of the BSA. It identifies that the Earn-Out is equal to EBIT over a two year Earn-Out Period multiplied by 4. The reference to a $10,000,000 cap amount accurately reflects the terms of cl 4.3 of the BSA. There is nothing on the face of the explanation of the Earn-Out in the Circular Resolution which suggests that the Earn-Out was to be calculated by reference to an "average annual" EBIT as opposed to the EBIT over the Earn-Out Period.

[8]

Completion

The purchase was completed on 12 October 2018: J[60]. Accordingly, the Earn-Out was to be paid 90 days after 12 October 2020, being the second anniversary of completion.

[9]

Dispute as to the Earn-Out calculation

On 14 October 2020 Mr Finney emailed Ms Lefebvre requesting, in accordance with cl 5.1 of the BSA, that AMA calculate the EBIT figure. On 10 November 2020, Paul Opperman, then AMA's General Manager (Finance), provided the "AMA calculation/determination of the EBIT figure." It was apparent from this that AMA had calculated the Earn-Out by reference to a total purchase price of its calculation of "average annual" EBIT over the Earn-Out Period multiplied by 4. There is no evidence how it is that Mr Opperman came to the understanding that this was how the Earn-Out should be calculated.
Mr Finney responded, by email sent on 12 November 2020, setting out his own understanding of cl 5.1 of the BSA, which was that the Earn-Out should be calculated by multiplying EBIT for the Businesses over the two year Earn-Out Period, then subtracting the "Initial Cash Payment". Mr Opperman responded on 20 November 2020, suggesting: "On review of the terms of the business sale agreement and the underlying binding heads of agreement, it is apparent that the word "average" was mistakenly omitted from clause 5.1(a), despite the parties having discussed and agreed in detail the operation of the earn out calculation."
Mr Opperman then referred to cl 4(b)(ii)(a) of the BHOA and said that this "confirms that the parties understood that the earn-out calculation would utilise the average EBIT of the earn out period". Mr Opperman added that it was "never … contemplated" by the parties that the purchase price would be subject to a multiple of eight. There is no evidence as to whether Mr Opperman discussed this response with anyone at AMA before sending it or whether his position was informed simply by his own review of the BHOA and BSA.
On 23 November 2020, Mr Nercessian issued the Notice of Dispute, pursuant to cl 15(e) of the BSA, which included a complaint that AMA had not used the formula required pursuant to cl 5.1 of the BSA in calculating the Earn-Out. This was followed by an email from Mr Finney dated 23 December 2020 maintaining that EBIT was to be calculated in accordance with cl 5.1 of the BSA. In response, by letter dated 15 January 2021, Gerard Maxted of Nicholson Ryan wrote to Mr Finney, again suggesting that there was an "accidental omission" of the word "average" from cl 5.1(a) and contending that it was clear from the BHOA that the parties understood that the consideration payable for the transaction would be based on the average EBIT. Mr Maxted also suggested that the calculation set out in the BHOA and "understood by the parties" remained relevant as to the proper construction of cl 5.1 of the BSA.

[10]

The primary judgment

I have already set out some of the primary judge's key findings and indicated that in some respects, I have found these to be erroneous.
As to the first key issue, being the construction of cl 5.1 of the BSA, the primary judge found (at J[67]) that viewed objectively, "EBIT for the Businesses for [the] Earn-Out Period" in cl 5.1 means "total EBIT for the two calendar years commencing on the completion date."
Her Honour concluded (at J[68]) that: "It is apparent from the history of negotiations and drafting that this is not what the parties meant, but nor is this a case where 'rectification by construction' is appropriate. As Leeming JA explained in Seymour Whyte Constructions Pty Ltd v Ostwald Bros Pty Ltd (in liq) [2019] NSWCA 11; (2019) 99 NSWLR 317, two conditions are necessary to correct contractual language in this manner; the Court must be satisfied of both matters to a high level of conviction: at [8]-[10]. First, the literal meaning of the contractual words must be an absurdity. Second, it must be self-evident what the objective intention is to be taken to have been. Neither condition is satisfied here. The contractual words are not absurd. The objective intention of the parties for some other construction is not self-evident. This brings us to the next issue, rectification in equity."
On the issue of rectification, her Honour took as the starting point her finding (at J[77]-[78]) that the parties' common intention that the Earn-Out should be based upon "average annual" EBIT was documented in cl 4 of the BHOA and that that had been AMA's consistent position during the negotiation of the deal. As set out at [60]-[61] above, I have concluded that both of those findings are erroneous.
Her Honour rejected the appellants' contention that an adverse inference should be drawn from the respondents' failure to call Ms Lefebvre. Her Honour found (at J[81]) that it was unnecessary for the respondents to call Ms Lefebvre "where her work is clearly recorded in contemporaneous documents and her supervising partner came to court."
Her Honour also (at J[82]-[83]) rejected the appellants' contention that a Jones v Dunkel inference should be drawn given the respondents' failure to call Mr Harding-Smith. Her Honour observed that a subpoena had been issued to Mr Harding-Smith on 21 September 2023 but that the respondents' solicitor had then informed the appellants that attempts to confer with Mr Harding-Smith to provide clarity as to his likely evidence had proved unsuccessful and as such, the respondents did not intend to call him. Apparently, as the primary judge recorded, as at the date of trial the respondents had reached out to Mr Harding-Smith's solicitor and were waiting for a response. The primary judge found that a party is not obliged to call a witness "blind" in order to avoid the inference being drawn against it, as held by Mahoney JA (Priestley and Sheller JJA agreeing) in Fabre v Arenales (1992) 27 NSWLR 437 at 449-450.

[11]

Consideration

Logically, the question of construction arises before any question of rectification. I thus propose to deal first with the notice of contention, and then with the grounds of appeal. As to the grounds of appeal, I will deal with these in the order in which they were dealt with in the appellants' oral address.

[12]

Construction of cl 5.1 of the BSA (notice of contention)

As set out above, by notice of contention AMA contends that the primary judge erred in failing to find that, as properly construed, the BSA provided for any Earn-Out Amount payable to be calculated based on "average annual" EBIT. The respondents contend that, viewed in the context of the recitals in the BSA and the surrounding circumstances including the BHOA which is referred to in the recitals, cl 5.1 should be construed in this way.
It is common ground that the relevant principles as to contractual construction are those set out in Electricity Generation Corporation t/as Verve Energy v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7 at [35] (French CJ, Hayne, Crennan and Kiefel JJ) ("Electricity Generation v Woodside"). Those principles are well known and do not need to be restated. The respondents rely in particular upon the statement of the majority in Electricity Generation v Woodside (at [35]) that: "A commercial contract is to be construed so as to avoid it "making commercial nonsense or working commercial inconvenience"."
Where, as here, what is sought is "rectification by construction", Leeming JA set out the relevant principles in Seymour Whyte Constructions Pty Ltd v Ostwald Bros Pty Ltd (in liq) (2019) 99 NSWLR 317; [2019] NSWCA 11 ("Seymour Whyte"). The starting point, as Leeming JA set out (at [6]), is that: "At common law, if the error is clear, and it is also clear what a reasonable person would have understood the parties to have meant, then the mistake may be corrected as a matter of construction."
However, as his Honour identified (at [8]), there are two conditions that must be satisfied before the Court takes such a step: "Two conditions are necessary in order to correct the contractual language in this manner: (a) that the literal meaning of the contractual words is an absurdity and (b) that it is self-evident what the objective intention is to be taken to have been: see Mainteck Services Pty Ltd v Stein Heurtey SA (2014) 89 NSWLR 633; [2014] NSWCA 184 at [117]-[119], approving National Australia Bank Ltd v Clowes (2013) 8 BFRA 600; [2013] NSWCA 179, where it was stated at [34]: "[34] … Where both those elements are present … ordinary processes of contractual construction displace an absurd literal meaning by a meaningful legal meaning.""
Further, his Honour added (at [10]), that the Court must be satisfied of those matters to a "high level of conviction."

[13]

Rectification in equity: the onus and standard of proof

All of the grounds of appeal set out in the appellants' notice of appeal must be considered against the backdrop of the well-established principle that rectification will only be ordered in equity on the basis of clear and convincing proof of the parties' common intention. As the majority explained in Simic v New South Wales Land and Housing Corporation (2016) 260 CLR 85; [2016] HCA 47 at [103]-[104]: "For relief by rectification, it must be demonstrated that, at the time of the execution of the written instrument sought to be rectified, there was an "agreement" between the parties in the sense that the parties had a "common intention", and that the written instrument was to conform to that agreement. Critically, it must also be demonstrated that the written instrument does not reflect the "agreement" because of a common mistake. Unless those elements are established, the "hypothesis arising from execution of the written instrument, namely, that it is the true agreement of the parties" cannot be displaced. The issue may be approached by asking - what was the actual or true common intention of the parties? There is no requirement for communication of that common intention by express statement, but it must at least be the parties' actual intentions, viewed objectively from their words or actions, and must be correspondingly held by each party." (References omitted).
In Simic, Kiefel J cited with approval (at [41]) the following judgment of Lord Chelmsford in Fowler v Fowler (1859) 4 De G & J 250; 45 ER 97 at 103, observing that this had been approved in Australian Gypsum Ltd v Hume Steel Ltd (1930) 45 CLR 54 at 64; [1930] HCA 38, Maralinga Pty Ltd v Major Enterprises Pty Ltd (1973) 128 CLR 336 at 349; [1973] HCA 23, Pukallus v Cameron (1982) 180 CLR 447 at 457; [1982] HCA 63: "a person who seeks to rectify a deed upon the ground of mistake must be required to establish, in the clearest and most satisfactory manner, that the alleged intention to which he desires it to be made conformable continued concurrently in the minds of all parties down to the time of its execution."
As was more recently held by Kirk JA in Property Investors Alliance Pty Ltd v C88 Project Pty Ltd (in liq) [2023] NSWCA 291 at [130] ("Property Investors"), in a claim in rectification for mutual mistake, an applicant must discharge the onus of making out its claim and must do so "by reference to clear and convincing proof of the parties' common intention." In the same case (at [154]), Griffiths AJA described this as a "heavy onus". As Gleeson JA in Newey v Westpac Banking Corporation [2014] NSWCA 319 at [173] ("Newey") explained, assistance as to the approach to be taken can be derived from the following obiter observations of Tobias JA (with whom Mason P and Campbell JA agreed) in Ryledar Pty Ltd v Euphoric Pty Ltd (2007) 69 NSWLR 603; [2007] NSWCA 65: "[182] It follows from the foregoing that first, the common intention which must be established by clear and convincing proof to justify rectification must be the actual or true common intention of the parties. Second, evidence of that intention may be ascertained not only from the external or outward expressions of the parties manifested by their objective words or conduct but also from evidence of their subjective states of mind. ... [185] Fifth, it follows that where the correspondence and/or conduct positively establishes the necessary common intention, then assertions by the party opposing rectification of his or her subjective state of mind which is inconsistent with that party's outward manifestation of his or her intention, being unexpressed and uncommunicated, is unlikely to trump his or her expressed intention. But this is because that party is unlikely to be believed. [186] Sixth, where as in the present case, the outward expression of the parties' common intention is at best inconclusive, then establishing that the subjective states of mind of the parties evinces the relevant common intention becomes critical if the necessary standard of proof to support an order for rectification is to be achieved."

[14]

The primary judge's reliance upon the Circular Resolution

By appeal ground 3, the appellants contend that the primary judge erred (at J[88]) in finding that the Circular Resolution evidenced an understanding by AMA that the Earn-Out Amount would be derived from "average annual" EBIT. As is apparent from [94]-[108] above, I agree that the primary judge erred in this regard. It follows that ground 3 should be upheld.

[15]

The primary judge's reliance upon Mr Nicholson's evidence as establishing AMA's intention in entering the BSA

The appellants contend, in ground 2 of the notice of appeal, that the primary judge erred (at J[86]) in finding that Mr Nicholson's intention could be attributed to AMA as to its intention when entering the BSA. The appellants contend that the relevant decision-makers, as regards the decision to enter the BSA and the terms of the BSA, were those in management at AMA and not the board. They contend that the board had only a formal role of ratification, and so deferred to the judgment of management and that it was those in management whose state of mind should be attributed to AMA. In any event, the appellants contend that Mr Nicholson's state of mind should not have been attributed to either management or the AMA board.
The respondents seek to uphold the primary judge's finding, contending that the decision to go forward with the BSA rested with the AMA board and that, in any event, Mr Nicholson was involved at each step of the transaction and in those circumstances it was appropriate for the primary judge to attribute his intention to AMA. Moreover, the respondents place reliance upon the terms of the Circular Resolution as reflecting both the intention of management involved in the transaction and of the AMA board which approved the Circular Resolution. They contend that it was the board whose state of mind should be attributed to AMA, and that Mr Nicholson's evidence sufficed to prove that state of mind.
Before considering these submissions, it should be observed that there is some uncertainty as to the primary judge's findings as to the knowledge of AMA. This is because the primary judge considers (at J[86]-[88]) both the intention of AMA management and of the board of AMA such that it is not entirely clear whether the primary judge found that it was the intention of the AMA board, or that of management, that was the relevant intention of AMA. On balance, as her Honour found (at J[86]) that Mr Nicholson's intention could be attributed to the corporation "as to what the AMA Group intended to approve", it appears that her Honour found that the relevant intention of AMA is that of the AMA board in approving the deal, rather than that of management involved in negotiation. Whilst the matter is not free from doubt, it appears to be on that basis that her Honour attributed Mr Nicholson's intention to AMA, as to what AMA intended to approve. I propose to approach ground 2 on that basis.

[16]

Inferences that should be drawn from the failure of the respondents to call witnesses

By appeal grounds 4-6, the appellants contend that the primary judge erred in failing to draw Jones v Dunkel inferences in respect of AMA's failure to call each of Mr Hopkins, Mr Harding-Smith and Ms Lefebvre. In Kuhl v Zurich Financial Services Australia Ltd (2011) 243 CLR 361; [2011] HCA 11 at [63], Heydon, Crennan and Bell JJ distinguished two types of inferences that can be drawn where Jones v Dunkel applies: "The rule in Jones v Dunkel is that the unexplained failure by a party to call a witness may in appropriate circumstances support an inference that the uncalled evidence would not have assisted the party's case. ... The failure to call a witness may also permit the court to draw, with greater confidence, any inference unfavourable to the party that failed to call the witness, if that uncalled witness appears to be in a position to cast light on whether the inference should be drawn." (Footnotes omitted).
As Kirk JA recently explained in Ling v Pang [2023] NSWCA 112 at [23] (Leeming and Mitchelmore JJA agreeing): "The drawing of a Jones v Dunkel inference requires the court to be satisfied that, first, it is expected or natural for the party in question to have called the person; second, the person's evidence would have elucidated a particular matter; third, the absence of the person is unexplained: Payne v Parker [1976] 1 NSWLR 191 at 201 per Glass JA. In this case it is the first matter which is in issue. It is obvious that Mr Zhuang's evidence could have elucidated how Ms Wang's purported signatures came to be on the Loan Agreements. And senior counsel for the respondent accepted that there was no evidence of attempts having been made on Mr Pang's behalf to track down Mr Zhuang, and that despite the "absconding" remark it did seem that he was potentially available."
His Honour added (at [26]-[28]): "The latter point, however, is more significant. In Payne v Parker Glass JA listed examples of where it would be expected or natural for the party in question to have called the person (at 201-202, citations omitted): "The first condition is also described as existing where it would be natural for one party to produce the witness, or the witness would be expected to be available to one party rather than the other, or where the circumstances excuse one party from calling the witness, but require the other party to call him, or where he might be regarded as in the camp of one party, so as to make it unrealistic for the other party to call him, or where the witness' knowledge may be regarded as the knowledge of one party rather than the other, or where his absence should be regarded as adverse to the case of one party rather than the other." What underlies the principle in Jones v Dunkel is that the failure to call the witness "serves to indicate, as the most natural inference, that the party fears to do so, and this fear is some evidence that the circumstance or document or witness, if brought, would have exposed facts unfavourable to the party": Jones v Dunkel (1959) 101 CLR 298; [1959] HCA 8; at 320-1 at 320-321 per Windeyer J; see also Fabre v Arenales (1992) 27 NSWLR 437 at 449 per Mahoney JA. The circumstances in which such a fear may be inferred are various. In some cases no inference will be drawn merely because corroborative or cumulative witnesses are not called: see eg the discussion in Manly Council v Byrne at [60]-[67]. Not calling yet further witnesses to establish some point already established by evidence does not suggest that the party in question fears what they might say; it is rather just a matter of not wasting the time and resources of the parties and the court."

[17]

Mr Hopkins

There was no explanation in the evidence for AMA's failure to call Mr Hopkins. The appellants submitted at trial that an adverse inference should be drawn from the respondents' failure to call Mr Hopkins given that, as CEO at the relevant time, he appeared most likely to be the person entrusted with making business decisions for AMA, and that he executed the BSA and signed the Circular Resolution. Mr Hopkins was also party to a telephone conversation with Mr Nercessian shortly before the BHOA was executed. The respondents submitted that no such inference should be drawn given that there was evidence of only that one interaction between Mr Hopkins and Mr Nercessian during the negotiation of the BHOA. The primary judge did not deal with the question whether any Jones v Dunkel inference should be drawn from the failure to call Mr Hopkins as a witness.
Mr Hopkins had a dual role as he was both a director of AMA, signing the BSA and the Circular Resolution, and he was CEO of AMA and in that role was part of AMA management. Mr Nicholson gave evidence that the reference to "management" requesting approval for the acquisition, as set out in the Circular Resolution, included Mr Hopkins. Mr Bizon explained in his affidavit that, at the time of the acquisition of the Businesses, both Mr Timuss and Mr Harding-Smith reported to Mr Hopkins. Whilst Mr Bizon said in his affidavit that he understood that it was likely to be necessary for AMA to subpoena one or more of Mr Hopkins, Mr Timuss and Mr Harding-Smith to give evidence, there was no evidence of any attempt having been made to subpoena Mr Hopkins, or to ascertain whether he would be willing to give evidence in support of AMA on the issue of rectification.
Whilst no evidence was put before the Court to explain why Mr Hopkins had not been called as a witness for the respondents, at the commencement of the hearing an issue arose as to whether the appellants should be entitled to rely upon a further affidavit from Mr Nercessian and if so, what steps the respondents would need to take to answer that evidence. This is discussed more fully below at [193]-[195]. In that context, Senior Counsel for the respondents told her Honour that there was ongoing litigation between AMA and Mr Hopkins such that he "might not be" a cooperative witness for AMA and that the respondents would need to be very careful if they called him that any questions asked did not amount to an abuse of process in the other proceedings.

[18]

Mr Harding-Smith

The failure to call Mr Harding-Smith was explained in the evidence. Mr Harding-Smith was subpoenaed by AMA in September 2023. The appellants' solicitor, Mr Finney, then wrote to the respondents' solicitor on 5 October 2023, asking for them to serve an outline of the expected evidence of Mr Harding-Smith as a "matter of urgency." Mr Finney said that the appellants would "object to Mr Harding-Smith giving evidence without advance notice of the substance of the evidence he is expected to give". By letter of 9 October 2023 Mr Finney again wrote to the respondents' solicitors, stating that the appellants maintained their "current objection in relation to your client adducing evidence from Mr Harding-Smith, particularly in circumstances where no notice has been given of the evidence he intends to give". On 10 October 2023 the respondents' solicitors informed Mr Finney that their attempts to confer with Mr Harding-Smith to provide clarity as to his likely evidence had "proved unsuccessful." The respondents' solicitors added: "Consequently, our clients will accede to your objections and they no longer intend to call on the Subpoena to Mr Harding-Smith".
The respondents' solicitors said that they would inform Mr Harding-Smith that he was not required to attend the hearing.
In these circumstances, the failure to call Mr Harding-Smith was explained. I would reject the appellants' contention that a Jones v Dunkel inference should be drawn having regard to the fact that there is no evidence of attempts to confer with Mr Harding-Smith at any time prior to the subpoena being issued shortly before the trial. The simple fact is that the respondents proposed that Mr Harding-Smith be called and the appellants objected to that. That explains why he was not called as a witness. That does not alter the circumstance that the lack of any evidence from Mr Harding-Smith left another gaping hole in the respondents' evidence. That was particularly so given that no evidence was called from anyone explaining what, if any, instructions Mr Harding-Smith (or anyone else) gave as to the drafting of cl 5.1 of the BSA, or whether Mr Harding-Smith made any changes to the draft that Nicholson Ryan sent to him on 19 September 2018 and if not, why not. This gap in evidence is particularly stark given that there is nothing to indicate that Mr Harding-Smith was asked what he had intended cl 5.1 to mean at the time the Notice of Dispute was given to AMA (discussed at [110]-[112] above), which was before Mr Harding-Smith left his employment with AMA.

[19]

Ms Lefebvre

No evidence was led from Mr Nicholson as to what instructions were given regarding the drafting of the BSA and, as set out at [66] above, the person who drafted the BSA was likely Ms Lefebvre. In these circumstances, the appellants contend that Ms Lefebvre is a "crucial missing witness." The appellants submit that Ms Lefebvre could have explained how the BSA came to include cl 5.1 in its final form, and in those circumstances she had "peculiar knowledge" which Mr Nicholson did not profess to have: see eg Manly Council (at [62]).
The respondents submit that Ms Lefebvre's role was "only in emails to which Mr Nicholson, her supervising partner, was copied … or subsequently sent to him". There is no evidence to support that bold contention. As set out above, no communications between AMA and Nicholson Ryan were in evidence. It would, however, appear likely that Ms Lefebvre sent the first draft of the BSA to Mr Harding-Smith on 19 September 2018 by email. It would also appear likely that, before that, instructions as to the drafting of the BSA were provided to Ms Lefebvre by email. Even if these communications were not by email, I would infer that Ms Lefebvre could have given evidence as to both of these matters, and as to how cl 5.1 came to be in the BSA. In this context, it can be observed that Mr Nicholson was not copied into emails from Ms Lefebvre until 27 September 2018, well after cl 5.1 was first drafted in what turned out to be its final form.
The respondents also submit that it is "artificial" for the appellants to focus upon Ms Lefebvre when it was Mr Nicholson who was supervising Ms Lefebvre as the draftsperson. The problem with this submission, however, is that there is no evidence at all that Mr Nicholson had any active involvement in drafting cl 5.1 of the BSA. The highest the evidence goes as to his involvement in drafting is, as set out at [82] above, that he responded "yes. That's correct" to a question that he and his firm were involved in the drafting and finalisation of the BSA and the more general evidence that he was "overseeing", but Ms Lefebvre was doing most of the work in respect of, the BSA drafting. That falls well short of showing that Mr Nicholson was the drafter of cl 5.1, or had any knowledge of how it came to be drafted in its final form.
Whilst communications with Ms Lefebvre as AMA's solicitor might attract legal professional privilege, given that AMA pleads in its commercial list cross-claim statement filed on 22 October 2021 that the parties entered into the BSA on 3 October 2018 in reliance upon a common intention that the Earn-Out would be calculated on the basis of an "average annual" EBIT, and that AMA believed and expected that the BSA embodied and was in accord with that common intention, AMA impliedly waived privilege in any communications with their solicitors as to the drafting of cl 5.1 of the BSA. This pleading impliedly made an assertion as to the instructions that were given to AMA's solicitors as regards the drafting cl 5.1 of the BSA: Standard Chartered Bank of Australia Ltd v Antico (1993) 36 NSWLR 87 at 93-94 (Hodgson J); Evidence Act 1995 (NSW), s 122(2). Thus, the exception to the rule in Jones v Dunkel where the calling of the solicitor would lead to privilege being lost does not apply: see eg J D Heydon, Cross on Evidence, (13th ed, 2021, LexisNexis) at [1215].

[20]

Did the respondents discharge their burden of proof?

By grounds 1 and 7 of the notice of appeal, the appellants contend that the primary judge erred in finding that AMA had discharged its burden of proof by clear and convincing evidence. Having regard to the matters set out above, in my judgment the evidence adduced by the respondents fell well short of discharging the heavy onus they carried. In these circumstances, the primary judge erred (at J[91]) in finding that the contemporaneous documents, the evidence of Mr Nicholson and the absence of any evidence to the contrary from the appellants were sufficient to prove, by clear and convincing proof, that the parties to the BSA had the common intention that cl 5.1 should provide for the Earn-Out to be calculated by reference to "average annual" EBIT, rather than EBIT, over the Earn-Out Period.
Rather, as is apparent from the discussion set out above, there were real and significant gaps in the evidence, and the limited contemporaneous documents in evidence were either somewhat unclear (in the case of the BHOA) or tended against the respondents' contentions (in the case of the Circular Resolution). Moreover, the evidence of Mr Nicholson did not go to the key questions of what instructions were given as to the drafting of cl 5.1 of the BSA and how it came to be drafted as it was if AMA intended it to have a quite different meaning.
The simple fact is that there are matters of significance that are completely unexplained in the evidence. In particular: 1. There is no evidence from anyone in AMA's management as to their intention regarding how cl 4(b)(ii)(a) of the BHOA was intended to work if the Businesses earned EBIT of something other than $4,000,000 over the Earn-Out Period. 2. There is no evidence from anyone in AMA's management as to their intention regarding how the Earn-Out was to be calculated in the BSA. 3. There is no evidence as to what if any instructions were given as to the drafting of cl 5.1 of the BSA. In particular, there is nothing to suggest that instructions were given to AMA's solicitors simply to draft cl 5.1 to be consistent with the underlying formula in the worked example in cl 4 of the BHOA. 4. Whilst it appears likely that Ms Lefebvre drafted cl 5.1 of the BSA, there is no evidence at all to explain why it differed in its terms from the drafting of cl 4(b)(ii)(b) of the BHOA. 5. There is no evidence as to whether Mr Harding-Smith, or someone else at AMA, made any changes to cl 5.1 when it was reviewed on 20 September 2018 before being sent to Mr Finney. Nor is there any evidence as to whether, during this or any other review, there was any identification or consideration of whether cl 5.1 of the BSA reflected AMA's intention as regards how the Earn-Out was to be calculated.

[21]

The costs judgment

Given that I would uphold the appeal, the question of whether the primary judge was correct to order that the appellants pay costs on an indemnity basis necessarily falls away. In these circumstances, it is unnecessary to consider ground 9 of the notice of appeal in any detail. It suffices to observe that I would have rejected the appellants' contention of any error of the kind identified in the House v The King (1936) 55 CLR 499; [1936] HCA 40 in the primary judge's conclusion that an order for indemnity costs was appropriate given the terms of the Calderbank offer made by the respondents at 3.53pm on 12 October 2023, the Thursday before the Monday when the trial started. The offer was expressed to remain open until 10.00am on 16 October 2023, the first day of the trial. The primary matter relied upon in support of this ground of appeal is an alleged error of the primary judge in giving insufficient weight to the lateness of the offer, and placing insufficient weight upon the fact that the appellants were, at that time, preparing for trial.
These were both matters of weight in her Honour's evaluation of whether a reasonable time was available for the appellants to accept the offer. There was no error in her Honour's reasoning. By that point in time the issues were clearly well understood by the parties, and it can be noted that the appellants themselves had served a Calderbank offer on the respondents not much earlier with an even shorter time allowed for acceptance. Whilst that is of course not of any great weight, it does suggest that the appellants themselves considered that there would be no impediment to the respondents giving adequate consideration to an offer of settlement notwithstanding the pending trial.
Had it been necessary to determine this issue, I would have dismissed ground 9.

[22]

Conclusion

In light of the above, the appeal against the primary judgment should be allowed, but the appeal against the costs judgment should be dismissed. As the primary judge did not determine the issues raised by the appellants' claim as to how JobKeeper payments to AMA, or rebates received from or in relation to the Businesses, should be treated under cl 5.1 of the BSA, those issues must be remitted to the primary judge. Whilst the orders sought by the appellants are that these issues be remitted to a different judge, no basis for that has been advanced. The primary judge has detailed knowledge of these matters, having heard the oral evidence of all witnesses, including the expert witnesses. In these circumstances, it is appropriate for remittal to be to the primary judge.
Until those issues are resolved, it is not possible for the Court to determine what amount is owing to the appellants under cl 5.3 of the BSA.
The parties agreed, moreover, that these issues could not properly be considered in the first instance by this Court.
No submissions were made by the parties that there should be any order other than that the costs of the appeal should follow the event. I would make that order.
However, given that there may be some complexity as to what order this Court should make in respect of the proceedings at first instance in circumstances where there are issues outstanding, it is appropriate for the parties to make short submissions on costs, with the issue to be determined on the papers.
Accordingly, I propose the following orders: 1. Allow the appeal. 2. Dismiss the notice of contention. 3. Set aside the orders of Rees J made on 15 December 2023 and in lieu thereof dismiss the cross-claim cross-summons filed by the respondents on 22 October 2021. 4. Set aside the orders of Rees J made on 2 February 2024. 5. Remit prayers 1-4 of the summons filed by the appellants on 8 September 2021 to the primary judge for determination. 6. Order that the respondents pay the appellants' costs of the appeal. 7. Direct that the parties exchange submissions on the issue of what order should be made as to the costs of the proceedings at first instance: 1. Parties file submissions of no more than 3 pages by 4.00pm on 30 July 2024; 2. Parties file reply submissions of no more than 2 pages by 4.00pm on 6 August 2024.

[23]

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: 23 July 2024

HEADNOTE [This headnote is not to be read as part of the judgment] The first respondent, AMA Group Limited (AMA), purchased two of the appellants' businesses, Simply Smashing Auto Group Pty Ltd (Simply Smashing) and H&A Prestige Repair Group Pty Ltd (Harris & Adams) (together, the Businesses), pursuant to a Business Sale Agreement (BSA) entered into on 3 October 2018. Clause 5.1 of the BSA provided a formula to calculate the amount to be paid by AMA to the appellants within 90 days of the second anniversary of completion of the BSA by way of deferred consideration for the purchase of the Businesses (the Earn-Out). In November 2020, a dispute arose when AMA purported to calculate the Earn-Out in a manner which the appellants contended did not comply with cl 5.1 of the BSA. The crux of the dispute was whether the Earn-Out should be calculated by reference to Earnings Before Interest and Tax (EBIT) over a period of two calendar years (the Earn-Out Period), as the appellants contended, or by reference to the "average annual" EBIT for the Earn-Out Period, as the respondents contended. On 8 September 2021 the appellants commenced proceedings by summons seeking declaratory relief as to the proper construction of cl 5.1 (and other relief not relevant on appeal). By cross-summons filed on 22 October 2021, the respondents also sought declaratory relief, including that cl 5.1 be rectified either as a matter of law by construction or in equity by adding words to specify that the formula for calculating the Earn-Out is based upon the "average annual" EBIT of the Businesses over the Earn-Out Period and not, as stated in cl 5.1 of the BSA, upon the EBIT of the Businesses over the Earn-Out Period. In this regard, the respondents contended that the common intention of the parties as to the calculation of the Earn-Out is that recorded in an earlier Binding Heads of Agreement dated 7 September 2018 (BHOA) and a Circular Resolution of the AMA board of directors approving the transaction. At the trial, Raffie Nercessian, who was at all times the directing mind and will of the Businesses, gave evidence for the appellants. Giles Finney, the appellants' solicitor for the purpose of the negotiation and execution of the BHOA and BSA, and in the proceedings, was not called to give evidence. By reason of this, the primary judge, in reliance on Jones v Dunkel (1959) 101 CLR 298; [1959] HCA 8, inferred that Mr Finney's evidence would not have assisted the appellants. Carl Bizon, the CEO of AMA from February 2021, and Leath Nicholson, the principal of the law firm that acted for AMA on the purchase of the Businesses (Nicholson Ryan) and who was also a non-executive director of AMA, gave evidence for the respondents. Stephen Harding-Smith (then CFO of AMA), Jim Timuss (then Acquisitions Director of AMA) and Andrew Hopkins (then CEO of AMA), all of whom were involved in the transaction culminating in the BSA, were not called by the respondents to give evidence. In addition, no evidence of Sophie Lefebvre, a solicitor at Nicholson Ryan and who was "doing most of the work" on the BSA, was relied upon by the respondents at trial. The primary judge declined to draw any Jones v Dunkel inferences against the respondents for failing to call evidence from these individuals. The primary judge found against the respondents as to construction of cl 5.1 but found that the respondents had shown, by clear and convincing proof, that cl 5.1 did not correctly record the common intention of the parties to the BSA. Her Honour ordered that cl 5.1 should be rectified, as sought by the respondents, to ensure that the BSA accurately recorded the parties' bargain. The primary judge subsequently ordered that the appellants pay the respondents' costs on a party and party basis up to and including 12 October 2023 and on an indemnity basis thereafter. The appellants appealed against the primary judge's decision. By notice of contention, the respondents challenged the primary judge's rejection of their contention as to the proper construction of cl 5.1 of the BSA. The principal issues on appeal were: (1) Whether, as contended by the respondents, the primary judge erred in failing to find that, as properly construed, the BSA provided for any Earn-Out payable to be calculated based on "average annual" EBIT over the Earn-Out Period. (2) Whether, as contended by the appellants, the primary judge erred in finding that the respondents had shown by clear and convincing evidence that cl 5.1 of the BSA did not correctly record the common intention of the parties. Resolution of this issue turned on the following sub-issues: (i) Whether the primary judge erred in finding that the Circular Resolution evidenced an understanding by AMA that the Earn-Out would be derived from "average annual" EBIT; (ii) Whether the primary judge erred in finding that Mr Nicholson's intention could be attributed to AMA as to its intention when entering the BSA; (iii) Whether the primary judge erred in failing to draw Jones v Dunkel inferences in respect of AMA's failure to call each of Mr Hopkins, Mr Harding-Smith and Ms Lefebvre; and (iv) Whether the primary judge erred in drawing a Jones v Dunkel inference against the appellants for failing to call Mr Finney. (3) Whether the primary judge erred in ordering indemnity costs against the appellants. The Court (Stern JA, Ward P and Price AJA agreeing) held, allowing the appeal and dismissing the notice of contention: As to issue (1) (1) There was no basis to find that the parties' objective intention was anything other than as reflected in the words used in cl 5.1 of the BSA. The plain words of cl 5.1, viewed in the context of the relevant surrounding circumstances, as is appropriate, do not permit of any ambiguity. Having taken into account the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract, it is clear that the conditions that must be met before the court takes the step of rectification by construction, have not been satisfied: [127]-[137]. Cherry v Steele-Park (2017) 96 NSWLR 548; [2017] NSWCA 295; Seymour Whyte Constructions Pty Ltd v Ostwald Bros Pty Ltd (in liq) (2019) 99 NSWLR 317; [2019] NSWCA 11; Electricity Generation Corporation t/as Verve Energy v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7, applied. As to issue (2) (2) The evidence adduced by the respondents fell well short of discharging the heavy onus they carried. In these circumstances, the primary judge erred in finding that the contemporaneous documents, the evidence of Mr Nicholson and the absence of any evidence to the contrary from the appellants were sufficient to establish, by clear and convincing proof, that the parties to the BSA had the common intention that cl 5.1 should provide for the Earn-Out to be calculated by reference to "average annual" EBIT, rather than EBIT, over the Earn-Out Period: [185]. (3) There were real and significant gaps in the evidence, and the limited contemporaneous documents in evidence were either somewhat unclear (in the case of the BHOA) or tended against the respondents' contentions (in the case of the Circular Resolution). Moreover, the evidence of Mr Nicholson did not go to the key questions of what instructions were given as to the drafting of cl 5.1 of the BSA and how it came to be drafted as it was if AMA intended it to have a quite different meaning. There were matters of significance that were completely unexplained in the evidence and what was left, then, were the clear and unambiguous terms of cl 5.1 of the BSA, which were repeated in the Circular Resolution, and which stood against the contention that the parties intended the Earn-Out to be calculated by reference to the "average annual" EBIT over the Earn-Out Period: [186]-[188]. (4) The respondents' evidence fell well short of being sufficiently cogent to place an evidentiary burden upon the appellants: [189]-[196]. Purkess v Crittenden (1965) 114 CLR 164; [1965] HCA 34; Rockcote Enterprises Pty Ltd v FS Architects Pty Ltd [2008] NSWCA 39, considered. As to sub-issue (i) (5) The primary judge erred in finding that the Circular Resolution evidenced an understanding by AMA that the Earn-Out Amount would be derived from "average annual" EBIT: [144]. (6) The Circular Resolution was entirely consistent with cl 5.1 of the BSA. It identified that the Earn-Out is equal to EBIT over a two year Earn-Out Period multiplied by 4. The reference to a $10,000,000 cap amount accurately reflected the terms of cl 4.3 of the BSA. There was nothing on the face of the explanation of the Earn-Out in the Circular Resolution which suggested that the Earn-Out was to be calculated by reference to an "average annual" EBIT as opposed to the EBIT over the Earn-Out Period: [97]-[108]. As to sub-issue (ii) (7) Whilst the Circular Resolution was entered after the BSA was executed, it was inferred that the AMA board nonetheless retained a decision-making role as regards entry into the BSA. Completion of the transaction was conditional upon the board's consent. That consent was obtained by the Circular Resolution, which sought to inform the AMA board of key aspects of the transaction. In these circumstances, whilst it was inferred that Mr Hopkins and Mr Nicholson had authority to execute the BSA, it was not inferred that they thereby had effective decision-making authority. Nor did those in management at AMA who were involved in the negotiation of the BSA have effective decision-making authority. There was nothing to suggest that the role of the AMA board was merely formal as opposed to it being the substantive decision-maker as regards the decision whether to enter the BSA: [153]. Brambles Holdings Ltd v Carey (1976) 15 SASR 270; Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563; [1995] HCA 68; Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500; Australian Securities and Investments Commission v Westpac Banking Corporation (No 2) (2018) 266 FCR 147; [2018] FCA 751; Hawksford Trustees Jersey Ltd v Stella Global UK Ltd [2012] 2 All ER (Comm) 748; Murray Holdings Ltd v Oscatello Investments Ltd [2018] EWHC 162 (Ch); Fonterra Brands (Australia) Pty Ltd v Bega Cheese Ltd [2021] VSC 75; (2021) 159 IPR 494, considered. (8) The primary judge erred in attributing Mr Nicholson's intention to the AMA board. Mr Nicholson could not give evidence as to what other members of the board thought, and he did not purport to do so. His evidence was limited to his own understanding and intention. In the absence of any evidence from any of the other board members, or of the substance of any communications about the BSA either between management and board members or between the directors themselves, the intention of AMA should have been inferred from the terms of the Circular Resolution which each of the AMA directors approved. The Circular Resolution clearly set out that the Earn-Out was to be calculated by multiplying EBIT over the two year Earn-Out Period by 4. There was no proper basis to infer that any member of the board other than Mr Nicholson had any other intention: [154]. (9) Even on the hypothesis that the board was not the effective decision-maker as regards the decision to enter the BSA, there was no proper basis to attribute Mr Nicholson's intention to AMA. He said that he read the BSA before it was finalised, and he clearly executed the BSA on behalf of AMA. There was, however, no evidence that he had any role in negotiating or giving instructions as to the content or intended effect of cl 5.1, and there was no evidence as to what if any role he had in relation to cl 5.1 as supervisor of Ms Lefebvre. In these circumstances, contrary to the primary judge's finding, Mr Nicholson's role as AMA's solicitor does not support a finding that his intention should be attributed to AMA as regards the decision to enter the BSA: [155]. As to sub-issue (iii) (10) The primary judge did not err in not drawing any Jones v Dunkel inference in respect of Mr Hopkins. Given that there was material before the Court to show that, by the time of trial, Mr Hopkins was engaged in litigation with AMA, it should not be inferred that, at that time, he was in the respondents' camp. However, the absence of any evidence from Mr Hopkins exacerbated the real gaps in the evidence actually relied upon by AMA. Whilst it cannot be known what Mr Hopkins would have said as to these matters, the absence of any evidence, either by way of affidavit or by reference to internal AMA documents, was of some significance in considering whether AMA discharged the "heavy onus" of proving that there was a common intention to contract on a basis other than as set out in cl 5.1 of the BSA: [166]-[174]. (11) The failure to call Mr Harding-Smith was explained in the evidence. The appellants' contention that a Jones v Dunkel inference should be drawn was rejected. That does not alter the circumstance that the lack of any evidence from Mr Harding-Smith left another gaping hole in the respondents' evidence: [175]-[178]. (12) The primary judge erred in declining to draw a Jones v Dunkel inference in respect of the respondents' failure to call Ms Lefebvre, on the basis that Ms Lefebvre's evidence would have been "merely cumulative" or "of equal significance" to that of Mr Nicholson. Mr Nicholson gave no evidence as to what instructions were given regarding the drafting of cl 5.1 of the BSA, nor as to how it was that cl 5.1 came to be in the form in which it was when Mr Harding-Smith sent a draft BSA to Mr Finney on 20 September 2018. Ms Lefebvre's evidence would have been highly significant on these issues. Consistent with the principle in Blatch v Archer (1774) 1 Cow 63; 98 ER 969, the absence of evidence from Ms Lefebvre should be taken into account in deciding whether or not AMA had discharged the heavy onus of proof which they bore. Whilst communications with Ms Lefebvre as AMA's solicitor might attract legal professional privilege, given that AMA pleaded in its commercial list cross-claim statement that the parties entered into the BSA in reliance upon a common intention that the Earn-Out would be calculated on the basis of an "average annual" EBIT, and that AMA believed and expected that the BSA embodied and was in accord with that common intention, AMA impliedly waived privilege in any communications with their solicitors as to the drafting of cl 5.1 of the BSA [179]-[184]. As to sub-issue (iv) (13) The primary judge erred in drawing a Jones v Dunkel inference against the appellants for failing to call Mr Finney to give evidence. The question whether a Jones v Dunkel inference should be drawn from the failure to call a party's solicitor turns very much upon whether or not privilege would be waived by doing so. In circumstances in which the appellants chose not to adduce evidence as to Mr Nercessian's state of mind, but rather to defend the rectification claim by denying that the evidence relied upon by the respondents' made the claim good, a Jones v Dunkel inference was not drawn from the failure to lead evidence from Mr Finney. To do so would have risked waiving privilege: [197]. Jones v Dunkel (1959) 101 CLR 298; [1959] HCA 8, applied. As to issue (3) (14) As the appeal was upheld, the question of whether the primary judge was correct to order that the appellants pay costs on an indemnity basis necessarily fell away. It was sufficient to observe that the appellants' contention of any error of the kind identified in the House v The King (1936) 55 CLR 499; [1936] HCA 40 in the primary judge's conclusion that an order for indemnity costs was appropriate given the terms of the Calderbank offer made by the respondents at 3.53pm on 12 October 2023, was rejected: [201]-[203].

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