As agent for Yulema Pty Limited (the first plaintiff), Mr Guy Reynolds (the second plaintiff) agreed on 25 October 2009 with his uncle, David Jerome Roche that his uncle would partly reimburse Yulema, if Yulema were required to pay any part of a $1.05 million debt. The issues in these proceedings are: (1) exactly what event the parties agreed would trigger the uncle's payment; and (2) whether that triggering event has now occurred. The plaintiffs allege that Yulema paid the debt in May 2011 and that David Roche is now liable to reimburse Yulema. David Roche died in 2013. The defendants, David Roche's executors, dispute the plaintiffs' claim.
The late John David Keith Roche (JDKR) established a group of companies, known as the "ADC/EDC Group, (in these reasons "the Group") in which his four children John Justin Roche, David Keith Roche (David Roche), Jennifer Reynolds and Josephine Lepetit came to have shareholding interests. JDKR's sons, John Justin Roche and David Roche, each held slightly more than one third of the Group through their respective family companies, John Justin through Justin Pty Limited (Justin) and David Roche through, Berenwode Pty Limited (Berenwode). The other part of the Group (slightly less than one third) was shared between JDKR's daughters, Jennifer Reynolds and Josephine Lepetit. Jennifer Reynolds held her almost one sixth interest through a family company Farnsworth Pty Ltd (Farnsworth). Josephine Lepetit held her almost one sixth interest through a family company Lisa Pty Limited (Lisa). The precise shareholdings of each of the shareholders in the Group are not of significance for the issues to be decided in these reasons, so they are sometimes referred to here as being respectively thirds and sixths.
When in 2009 the family were discussing the possible splitting of the Group, John Justin Roche and Jennifer Reynolds were deceased. In October 2009 interests associated with John Justin Roche, through Justin, were offering to acquire all the other interests in the Group, namely the interests associated with David Roche, Jennifer Reynolds and Josephine Lepetit, the Berenwode/Farnsworth/Lisa interests. This combination of often allied interests was commonly referred to by the negotiating parties as the "BFL interests", and the potential purchaser interests as "the Justin Interests".
On the second day of that mediation on 22 October the Justin interests made an offer to buy out the BFL interests. The offer was not accepted that day. But the offer meant that the parties saw sufficient purpose in informally continuing the mediation. The parties continued the mediation over the weekend by moving to the offices of Kelly & Co solicitors.
The Group's ownership structure was more complex. Relations between the Group's shareholders were governed by a deed made on 5 March 1990, known as the "Deed of Remaining Family Members" ("the 1990 Deed"). Under the 1990 Deed the BFL interests actually held 50 per cent of the voting entitlements in some of the companies within the Group and the Justin interests held the remaining 50 per cent.
The Group also had dealings with companies owned by some but not all family members. One of these was the first plaintiff, Yulema, a company controlled equally by Lisa and Farnsworth, the companies associated with Josephine Lepetit and the late Jennifer Reynolds. One of the Group's subsidiary companies, Paltara Pty Ltd (Paltara), which was owned in accordance with the Group's principal shareholdings, had advanced money to Yulema. In October 2009 Paltara claimed that Yulema owed it $1,042,898 (the Yulema Debt). By the time of the October 2009 negotiations the Justin Interests claimed that the Yulema Debt was an asset of the Group with a value of $1,042,898.
The parties were serious about effecting a final resolution of these negotiations. They convened a formal two day mediation on Wednesday 21 and Thursday 22 October 2009, conducted with the assistance of the former High Court justice, the Hon. Ian Callinan A.C, at the Adelaide Hilton Hotel.
The issue in these proceedings arises out of a side agreement made on 25 October just before ultimate consensus was reached for the Justin interests to buy out the BFL interests in the form of the 2009 Deed. This side agreement was a classic collateral contract, the consideration for which was entry into the 2009 Deed itself. It was oral and made between Yulema and David Roche. Mr Guy Reynolds represented the Yulema interests (he was then a director of Yulema), and Mr David Munt (a solicitor representing David Roche and Berenwode) agreed on the following terms of this side agreement (the Reynolds-Munt side agreement):
(i) If the buy out agreement were executed; and
(ii) If the Yulema Debt was satisfied, either in whole or in part; then,
(iii) David Roche would pay Yulema one third of the amount of the Yulema Debt so satisfied.
It is not in dispute that the parties then executed the 2009 Deed. The plaintiffs say that the Yulema Debt was satisfied on 6 May 2011 and that it is now entitled to one third of the debt namely $347,632.67 plus interest from 6 May 2011.
But the parties are in dispute about another alleged term of the Reynolds-Munt side agreement. The defendants contend, and the plaintiffs dispute that it was an express, or in the alternative an implied, term of the agreement that the payment of the one third of the Yulema Debt, contemplated by the agreement's other terms was subject to settlement occurring pursuant to the October 2009 Deed. But the plaintiffs say in the alternative that had the Reynolds-Munt side agreement contained such a term, that would have been satisfied in any event by what actually took place after execution of the 2009 Deed.
Mr N.C. Hutley SC, together with J.C. Hewitt appeared for the plaintiffs. Mr D. Sulan, together with A. D'Arville appeared for the defendants. The proceedings were heard on 18 and 19 May 2015.
[2]
Negotiating the Reynolds-Munt Side Agreement
At the mediation Mr Reynolds represented both Yulema, Farnsworth and another Group company, Meluke Pty Limited and the executors of the estate of Jennifer Reynolds (his mother).
The major blocs within the Group were legally represented at the mediation. Mr Robert King represented Josephine Lepetit and Lisa. Mr Grae McKenzie was retained to act for the BFL interests and associated persons as a bloc. The Justin interests were also represented.
David Roche was almost 80 at the time of the October 2009 mediation and was not in good health. His accountant, Mr Michael Shearer, whose evidence I generally accept, says that David Roche wanted to exchange his interest in the Group for cash within 5 years. Mr Shearer was of the view that David Roche was seeking to liquidate his investment within the Group within a shorter time frame than the other two within the BFL interests families, the Reynolds and the Lepetit families. I accept Mr Shearer's account as to this.
But David Roche was only prepared to accept an offer from the Justin interests for his share of the Group, if the interests associated with the Reynolds and Lepetit families, Farnsworth and Lisa, were to accept the buy out offer on the same basis. He did not want to find himself after the event, having done a worse deal than either of the other two families.
Early in the mediation the Justin interests presented to the BFL interests a document entitled "Review of EDC/ADC Group Assets" (the "Review") which listed all the real estate, bank accounts, choses in action, including debts, shares in public companies and other assets of the Group, attributing to each one an asset value. The total of the values that the Review attributed to Group assets was $41 million. The Yulema Debt was listed in this Review as "advance-Yulema", owned by "Paltara" and with a "Valuation" of $1,042,898. The individual values attributed to other Group assets are not of present significance.
As indicated, Mr Reynolds took the leading role for Yulema on negotiating this side deal. Mr David Munt took the lead for David Roche. But Mr Munt died in 2013. The only person now available to give evidence for David Roche's side of this transaction is Mr Michael Shearer, who was present at the mediation, as the accountant for David Roche and Berenwode.
Mr Reynolds and Mr Shearer were the only witnesses called on each side of these proceedings. They both deposed their evidence on affidavit and were cross-examined. They are both professional men, Mr Reynolds senior counsel at the New South Wales Bar and Mr Shearer an experienced accountant. They disagreed about what was said on 25 October in minor respects. But their disagreements were not due to any lack of reliability on the part of either of them. The Court formed the view that both Mr Reynolds and Mr Shearer were good witnesses who were each genuinely attempting to give an accurate account to the Court of what had occurred that day. The differences in their accounts are due to the fallibility of memory after five and a half years. The Court had confidence in both of them as witnesses. The plaintiffs submitted that Mr Shearer's evidence was "confused, unclear and contradictory". I do not accept that. His cautious response that he "cannot remember the specific words" and similar statements were the work of a careful professional, rather than someone lacking genuine recollection.
By late morning on 25 October the parties had reached a detailed draft of the 2009 Deed, setting out the terms on which the Justin interests would buy out the BFL interests in the Group. The draft Deed was circulated shortly after lunch that day. At that point Mr Reynolds returned to a subject that he had raised earlier in the mediation. Yulema did not want the Group to be able to enforce the Yulema Debt against it after the buy out. This was more important an issue for the Farnsworth and Lisa interests, which controlled Yulema, than it was for David Roche and his company Berenwode, which had no interest in Yulema. David Roche would never have to find future funds to satisfy this liability. David Roche seemed prepared to agree to the terms of Justin's proposed buy out in the draft 2009 Deed without further complications. But for understandable reasons the Farnsworth and Lisa interests wanted as complete a resolution as possible (and therefore a resolution including the Yulema Debt) after liquidating their interests in the Group under the proposed 2009 Deed, just as the Berenwode interests were expecting for themselves.
The Justin interests' October 2009 buy out was structured on the basis that the Justin interests would pay the BFL interests $41 million, which was the aggregate of the asset values in the Review that included giving full value for the Yulema Debt of $1,042,898. The Justin interests' contention at mediation was that the Yulema Debt was fully recoverable. But Yulema (Farnsworth and Lisa) disputed this.
The Yulema interests showed no sign of backing down. So David Roche took the initiative. Early in the afternoon of Sunday, 25 October he made an offer through Mr Munt to the effect (at least) that if the 2009 Deed was executed that he would pay Yulema one third of the Yulema Debt once Yulema had satisfied the debt.
David Roche was caught in the middle. If the buy out went ahead for $41 million Farnsworth and Lisa would thereby liquidate their interests in the Group on the basis that the Yulema Debt was recoverable at full value. Should the transaction proceed Farnsworth and Lisa, as 50 per cent shareholders in Yulema would each ultimately be responsible for meeting half the Yulema Debt but would only receive approximately one third of it back when receiving consideration under the October 2009 buy out from the Justin interests, because David Roche through Berenwode, would share with them the other approximately third of that consideration, having as he did an equal entitlement with the BFL interests to share in it.
So to get the 2009 Deed signed David Roche offered to return to Yulema the value of the one third of the Yulema Debt that he would receive under the 2009 Deed. But it made no sense for David Roche to do that, unless the Yulema Debt were wholly or partly paid. Because if the Yulema Debt were not paid, Farnsworth and Lisa would not suffer any financial disadvantage. Upon the non-payment of the debt each of Berenwode, Farnsworth and Lisa would equally enjoy the windfall of sharing in the receipt of one third of the $41 million buy out consideration that was attributed to the ultimately uncollected Yulema Debt.
[3]
The Final Day of the Mediation - 25 October
I accept Mr Reynolds' account of what happened on Sunday, 25 October 2009 after the final version of the proposed buyout agreement became available. All the BFL interests were together in a private conference room at Kelly & Co. Mr Reynolds says, and I accept, that in the conference room that day, a little after lunchtime and after the final draft 2009 Deed had been distributed, he said to Mr King and to McKenzie:
"I am not prepared to sign the agreement unless the alleged Yulema Debt is released or substantially reduced"
At that time the Yulema Debt was just under $1.05 million. Mr McKenzie said to Mr Reynolds on the Sunday that Justin would not agree to the release or reduction of the debt. Mr Reynolds then said "I do not wish to sign the buyout agreement".
Mr Munt returned to the issue about an hour to an hour and a half later, saying to Mr Reynolds words to the following effect:
"If you sign the buyout agreement, David Roche will pay Yulema one-third of the Yulema debt, namely $350,000. Are you prepared to sign the buy-out agreement on that basis?"
Mr Reynolds did not respond immediately to this proposal. I accept his evidence that from his perspective this offer came "a bit out of the blue". Rather he said to Mr Munt "I will get back to you on that issue".
After considering what course he would take, about 20 minutes to half an hour later Mr Reynolds returned to clarify what was being put with Mr Munt. He said words to the effect:
"Just let me be clear about this, David. Are you proposing an agreement between Yulema Pty Ltd and David Roche whereby David Roche pays $350,000 to Yulema, if this buyout agreement is signed by me and all the other parties to it?"
Mr Munt immediately responded saying, "Yes I am - that is the deal David Roche is offering", to which Mr Reynolds said "Thank you".
Mr Reynolds retired once more to consider his position. After a short while he went back to Mr Munt and said "I accept David's offer".
About another half an hour to forty minutes later and at what was then about 4.30pm, Mr Munt appeared to have misgivings about a possible ambiguity in what had been agreed. He later sought out Mr Reynolds. He and Mr Reynolds had a supplementary conversation to the following effect:
"Mr Munt said: Can I just clarify one matter relating to the agreement between David Roche and Yulema? If Yulema only ends up paying a portion of the debt or none of the debt at all, may I assume that David Roche's one third liability will be reduced accordingly?"
Mr Reynolds said: Yes"
But Mr Shearer's evidence of these discussions is slightly different. He says that to broach the subject Mr Reynolds had said to him the following words (although he thinks this could have been before 25 October):
"The interests associated with [Mr Reynolds] would not sign any agreement whereby the BFL interests were purchased by the Justin Interests, unless the Yulema Loan was released."
Mr Shearer observed the various meetings between Mr Munt and Mr Reynolds and Mr King discussing the terms of the mediated buy out settlement and the side deal. He says that he witnessed Mr Munt convey David Roche's offer, by saying to Mr Reynolds words to the effect:
""If you and Josephine [Lepetit] sign the agreement, David Roche will repay to you one third of the Yulema Debt that was paid."
Mr Shearer says that yet at a later point of time he saw Mr Munt say to Mr Reynolds words to the effect:
"David Roche has reluctantly agreed to repay one third of the Yulema loan to enable the wider agreement for the sale of the BFL Interests to the Justin interests to be signed and proceeded with."
Mr Shearer says that after that he saw Mr Reynolds accept the offer Mr Munt had made. In general terms this follows the same conversational sequence as Mr Reynolds' evidence although it is less detailed and in places the content of what Mr Shearer remembers is different.
Mr Reynolds disputes two principal parts of Mr Shearer's account. He does not disagree with Mr Shearer that Mr Munt conveyed that David Roche had agreed to repay one third of the Yulema Debt to secure the signing of the October 2009 Deed. But Mr Reynolds first disagrees that Mr Munt communicated that David Roche had done this "reluctantly". Mr Reynolds also disputes that Mr Munt used the words "and proceeded with". On the first of these issues I prefer Mr Shearer's evidence. On the second, I prefer Mr Reynolds' evidence.
David Roche was not present during these negotiations. Mr Munt and Mr Shearer saw David Roche earlier that Sunday morning until about 11.30am in David Roche's office. Mr Shearer remembered David Roche being reluctant to sell out of the Group. Mr Shearer's belief that David Roche was reluctant, was based on what David Roche had said to him and to Mr Munt that morning. David Roche's reluctance to compensate Yulema was not just negotiating theatrics. I infer that Mr Munt was keen to convey David Roche's reluctance. If Yulema's stated negotiating position at the mediation were right and the Yulema Debt was unrecoverable and worthless, David Roche was entitled to take the view that the Yulema interests were being somewhat hardnosed in insisting in negotiations for compensation on a basis which was inconsistent with their primary position. These are objective reasons why David Roche would perhaps have been reluctant. But more importantly I accept Mr Shearer on this issue in preference to Mr Reynolds. Mr Shearer said of David Roche's attitude after he and Mr Munt had met him that morning and offering the $350,000 to Yulema had been discussed: "Well, he was reluctant to sell at all but he was prepared to do so. And, as part of that, he was reluctant to pay this amount to Yulema. But if he had to he would". And I accept that Mr Roche said to Mr Munt "I am reluctant to sell at all and reluctant to pay the third". I infer that conveying his client's sense of reluctance was important to Mr Munt. And I doubt that Mr Reynolds really took in what Mr Shearer was saying that David Roche "had reluctantly agreed" because his focus was on the outcome. He did not really notice this in the thick of these negotiations.
But the reverse is true on the other issue. Mr Reynolds was sure that the words "and proceeded with" were not said. He is likely objectively to have been right, apart from the fact that the Court prefers his evidence on this issue. To a trained lawyer with Mr Reynolds' expertise, an expression such as "and proceeded with" would be brimming with uncertainty. Had these words been said, I accept Mr Reynolds' evidence that he would have sought further clarification. He did not need to clarify what was said because in my view Mr Munt did not say "and proceeded with".
I infer from Mr Reynolds' evidence that he was being carefully strategic about these negotiations. He said, and I accept, that he approached the negotiations in "a very formal mechanistic way" and as he explained it was "as if I was settling a case". The timing between the negotiators' exchanges is largely filled by Mr Reynolds' consideration of Yulema's most potentially advantageous response back to Mr Munt. It would have been hopelessly unstrategic of him to leave words like "and proceeded with" unclarified, when negotiating this oral agreement. Everything in Mr Reynolds' approach was deliberate and was designed to reduce ambiguity rather than leave it in play. He was unlikely to have made such a clueless error.
Further supporting this conclusion are Mr Shearer's own notes of their conversation, which do not record the use of the words "and proceeded with". Nor do they record the words "reluctantly". But "reluctantly" is more of a nuance that would not have demanded recording.
This reduces the issues. Part of the defendants' case was a construction argument based on the meaning of the words "and proceeded with" in the oral agreement. It is now not necessary for the Court to consider this argument. The words were not used. And it also unnecessary to consider the plaintiffs' alternative arguments that the words "and proceeded with" would not in any event have had contractual effect.
But in the alternative, the defendants argued that the Reynolds-Munt side agreement contained an implied term to the effect that David Roche's obligation to pay the one third of the Yulema Debt was, as the Amended Defence pleaded, "subject to settlement occurring pursuant to the October 2009 Deed".
It is now useful to look at the 2009 Deed and then consider the defendants' implied term argument. The plaintiffs are the more persuasive on this issue.
[4]
The 2009 Deed
As earlier indicated, the 2009 Deed was executed. Its terms are relevant to both to an understanding of the alleged implied term and the later issue, whether settlement under the 2009 Deed has occurred. The relevant provisions of the 2009 Deed are the following.
First the 2009 Deed relevantly recited as follows:
"A. Farnsworth, Lisa, Berenwode and Justin are the legal and beneficial owners of all of the issued capital in Paltara Pty Ltd ACN 008 916 621 ("Paltara").
B. Farnsworth, Lisa, Berenwode, Justin, Neah, DJKR, JJR, JL and the Reynolds Executor are the legal and beneficial owners of all of the issued capital in Edgecliff Proprietary Limited ACN 007 519 548 ("Edgecliff") and Tralee Proprietary Limited ACN 007 519 575 ("Tialee").
C. Subject to Recital D, Farnsworth, Lisa, Berenwode and Justin are the legal and beneficial owners of all of the issued capital in:
Wiliambury Station Pty Ltd ACN 007 624 535 ("Wiliambury Station");
Centric Properties Pty Ltd ACN 007 632 699 ("Centric Properties");
Hersey Pty Ltd ACN 008 920 287 ("Hersey"); and
Sorrento Estates Pty Ltd 008 686 128 ("Sorrento Estates"), (each a "Satellite Entity").
D Tralee also owns one (1) ordinary share in Sorrento Estates.
E. Heroc, Meluke, Pihiga and DJKR are the legal owners (and DJKR is also the beneficial owner) of all of the issued capital in Clone Pty Ltd ACN 060 208 602 ("Clone").
F. Clone is the owner of the land at 73-79 Pirie Street, Adelaide, South Australia 5000 which is the whole of the land comprised in Certificates of Tide Register Book Volume 5950 Folio 229 and Volume 5950 Folio 230 ("Clone Land") and holds the Clone Land on bare trust for Heroc, Meluke, Pihiga and DJKR and is the owner of a gaming licence and a liquor licence (the "Other Clone Assets").
G. Together Paltara, Edgecliff, Tralee, the Satellite Entities and Clone control all of the companies which'make up the Group.
H. The Vendors wish to exit the Group and the Purchaser wishes to buy out the Vendors' interests in the Group, being all of the Vendors' shares in Paltara, Edgecliff, Tralee, the Satellite Entities and Clone, the Clone Land and the Other Clone Assets.
I. The parties wish to effect the orderly sale of the Vendors interests in the Group to the Purchaser ("Group Buy-Out").
J. The parties have been in Dispute in relation to the management and future of the Group.
K. The parties have agreed to effect the Group Buy-Out and resolve the Dispute upon the terms set out in this deed."
Next, the 2009 Deed defined some relevant terms:
"1.1(d) 'Clone Partnership Loans' means the loans made by Leetra Pty Ltd ACN 091 373 170 to the following people for the following amounts:
(i) Meluke for $288,591.04;
(ii) Pihiga for $288,591.04; and
(iii) DJKR for $602,507.08;
…
(f) 'Completion Date' means 29 January 2010 or such other date as agreed by the Purchaser and Vendors;
…
(p) 'Initial Purchase Price' means the amount set out in clause 4.1(a)(i), being part of the Purchase Price;
…
(u) 'Purchase Price' means the total amount payable by the Purchaser to the Vendors in accordance with clauses 4.1 and 4.2;
…
(w) 'Respective Proportion' means, subject to clause 6.6(a)(iii), the respective proportion in which each Vendor is entitled to share in the Purchase Price as determined by the Vendors;
…
(dd) 'Vendors' means Farnsworth, Lisa, Berenwode, Meluke, Pihiga, DJKR, JL and the Reynolds Executor; and"
Clause 4 of the 2009 Deed defined the program for the payment of consideration commencing with payment of $15 million on completion of the 2009 Deed:
"4.1 Cash Component
(a) The Purchaser must pay to the Vendors in their Respective Proportion:
(i) $15,000,000 on the Completion Date;
(ii) $5,000,000 on or before the 3 month anniversary of the Completion Date;
(iii) $3,500,000 on or before the 6 month anniversary of the Completion Date;
(iv) $3,500,000 on or before the 12 month anniversary of the Completion Date;
(v) $3,500,000 on or before the 18 month anniversary of the Completion Date;
(vi) $3,500,000 on or before the 24 month anniversary of the Completion Date;
(vii) $3,500,000 on or before the 30 month anniversary of the Completion Date; and
(viii) $3,500,000 on or before the 36 month anniversary of the Completion Date.
(b) The Purchaser must pay simple interest of 5% per annum on each amount which makes up the Deferred Cash Purchase Price to be calculated from the Completion Date until the relevant amount is paid on the basis of a 365 day year and payable quarterly in arrears on the last day of each Quarter following the Completion Date."
The acts of completion required under the October 2009 Deed were reasonably complex. Clause 6 generally dealt with the issue of completion in the following terms:
"6.1 Date, place and time for Completion
Completion must take place at the offices of Kelly & Co. Lawyers, Level 21, 91 King William Street, Adelaide SA 5000 at 11.00am on the Completion Date or such other place or time as agreed by the parties.
6.2 Delivery of documents
(a) At Completion, the Vendors must deliver or cause to be delivered to the Purchaser the following documents:
(i) all the share certificates for the Shares;
(ii) completed transfers of the Shares to the Purchaser (or their nominee(s)), duly executed by or on behalf of each relevant Vendor as transferor in favour of the Purchaser (or the Purchaser's nominee(s)) as transferee ("Share Transfers");
(iii) the written resignations of all Key Persons in relation to any position of director or secretary they hold (including as any alternate) in any of the companies in the Group, in a form acceptable to the Purchaser, and which acknowledges that the resigning Key Persons have received all money, consideration and benefits to which they are entitled in their capacity as officers of the relevant company in the Group, such resignation to be effective immediately; and
(iv) the forms of proxy required to give effect to clause 6.6, duly executed by or on behalf of each Vendor.
(b) At Completion Heroc, Meluke, Pihiga and DJKR must deliver or cause to be delivered to the Purchaser all duly executed documents necessary to transfer their interests in the Clone Land and the Other Clone Assets as contemplated in clause 3.3.
6.3 Purchaser's Obligations at Completion At Completion, the Purchaser must pay to each Vendor their Respective Proportion of the Initial Purchase Price; provide the Security to the Vendors; and provide to each Key Person a release and discharge from each Group company in accordance with clause 2.1.
6.4 Conditions of Completion
Completion is conditional on the parties complying with all of their obligations under this clause 6.
If any party fails to fully comply with their obligations under this clause 6 and the parties do not complete this deed, each party must
(i) return to the other all documents delivered to it under this clause 6;
(ii) repay to the other all payments received by it under this clause 6; and
(iii) do everything reasonably required by any other party to reverse any action taken under this clause 6, without prejudice to any other rights any party may have in respect of that failure.
6.5 Title and Risk
Legal and beneficial title to, and risk in, the Shares, Clone Land and Other Clone Assets passes to the Purchaser (or their nominee(s)) on Completion.
6.6 Period After Completion
(a) From Completion and until the Shares are registered in the name of the
Purchaser (or their nominee(s)), the Vendors must
(i) at the cost of the Purchaser, appoint the nominee(s) of the Purchaser as sole proxy of the Vendors to attend shareholders' meetings and exercise the votes attached to the Shares;
(ii) not attend or vote at those meetings; and
(iii) at the cost of the Purchaser, take all other actions in the capacity of a registered holder of the Shares and the beneficial owner of the Clone Land and the Other Clone Assets as the Purchaser directs including but not limited to the apportionment of the Purchase Price between the respective Share Transfers, Clone Land and Other Clone Assets solely for the purpose of lodging the documents contemplated by this deed for stamping (for all other purposes the parties shall be responsible for their own apportionment of the Purchase Price).
(b) From Completion the Vendors must do all things, and execute all documents, necessary to effect the Group Buy-Out contemplated by this deed and provide the Purchaser such reasonable assistance as is required to effect the terms of this deed."
[5]
Applicable Legal Principles - Implied Terms
As the Reynolds-Munt side agreement does not contain the express term for which the defendants contend, the remaining issue is whether the agreement had the implied term alleged.
The applicable legal principles as to the implication of terms into oral agreements, as distinct from written agreements may be shortly stated. Counsel referred the Court to the judgment of Justice Deane in Hawkins v Clayton (1987) 164 CLR 539 which his Honour said at 571:
"Care must be taken to avoid an automatic or rigid application of the ordinary cumulative criteria for determining whether a term should be implied in a written contract to a case where the contract is oral or partly oral or where it is apparent that the parties have never attempted to reduce their agreement to complete written form (cf Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41 at 121; 55 ALR 417). The cases in which those criteria were laid down or accepted as the cumulative ingredients of an overall test were concerned with the question whether a term should be implied in a formal contract which was complete upon its face (see, in particular, BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 52 ALJR 20 at 26; 16 ALR 363 at 376; Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596; 26 ALFR 567; Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337; 41 ALR 367). In such cases, the insertion of an additional term effectively involves an alteration to what the parties have formally accepted as the complete written record of the compact between them. As the judgment of Mason J in Codelfa (CLR at 345-7; Stephen and Wilson JJ concurring with his Honour's comments on this aspect of the case) clearly indicates, the cumulative criteria formulated or accepted in such cases cannot be automatically applied to cases such as the present where the parties have not attempted to spell out all the terms of their contract but have left most or some of them to be inferred or implied. Where that is so, there is no question of effectively altering the terms in which the parties have seen fit to embody their agreement; the function of a court is, as Lord Wilberforce pointed out in Liverpool City Council v Irwin [1977] AC 239 at 254, "simply … to establish what the contract is, the parties not having themselves fully stated the terms". In the performance of that function, considerations of what is "reasonable", "necessary to give business efficacy to the contract" and "so obvious that 'it goes without saying'" (BP Refinery (Westernport) Pty Ltd (ALJR) at 26; The Moorcock (1889) 14 PD 64 at 68; Shirlaw v Southern Foundries (1926) Ltd [1939] 2 KB 206 at 227) may be of assistance in ascertaining the terms which should properly be implied in the contract between the parties. There will not, however, be the need or the justification for the law to refuse to imply any imputed term which does not clearly satisfy all such requirements. This is particularly so where, as here, the contract has passed from the executory stage and has been executed by one or both parties."
Counsel also referred the Court to the judgment of McHugh J and Gummow J in Byrne v Australian Airlines Ltd (1995) 185 CLR 410 at 442, where their Honours stated the law in relation to oral implied terms, as follows:
"In such situations, the first task is to consider the evidence and find the relevant express terms. Some terms may be inferred from the evidence of a course of dealing between the parties. It may be apparent that the parties have not spelled out all the terms of their contract, but have left some or most of them to be inferred or implied. Some terms may be implied by established custom or usage, as described above. Other terms may satisfy the criterion of being so obvious that they go without saying, in the sense that if the subject had been raised the parties to the contract would have replied "of course"(Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 121). If the contract has not been reduced to complete written form, the question is whether the implication of the particular term is necessary for the reasonable or effective operation of the contract in the circumstances of the case; only where this can be seen to be true will the term be implied (Hawkins v Clayton (1988) 164 CLR 539 at 573)."
The principles in relation to the implication of terms into written contracts are well-known and are set out in BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266 at 282-3:
"Their Lordships do not think it necessary to review exhaustively the authorities on the implication of a term in a contract which the parties have not thought fit to express. In their view, for a term to be implied, the following conditions (which may overlap) must be satisfied: (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract so that no term will be implied if the contract is effective without it; (3) it must be so obvious that "it goes without saying"; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract."
These principles were not in dispute. The issue in this case was their application.
Did the Reynolds-Munt side agreement contain an implied term? The defendants' case is that, in addition to the undisputed terms that if the 2009 Deed was executed and the Yulema Debt was satisfied in whole or in part, then David Roche would pay one third of the amount of the Yulema Debt, so satisfied, to Yulema, an implied term was that the payment of the one third of the Yulema Debt was "subject to settlement occurring pursuant to the October 2009 Deed".
For the defendants Mr Sulan put that the implied term was necessary because it was obvious to both parties that the mutual objective was to produce an outcome where the Yulema Debt would be dealt with at a time when David Roche had available to him the cash from completion of the 2009 Deed so that he could thereby fund up to the $350,000 ($1.05 million ÷ 3) that might be required in satisfaction of his obligations under the side agreement. In other words, Mr Sulan submitted that both parties must have known that it was critical to David Roche's entry into the side agreement that he would have the $350,000 available to him from completion of the 2009 Deed to meet the obligations of the side agreement.
Grounded in clear evidence, this may well have presented an interesting implied term argument. But the principal difficulty for Mr Sulan's contention is that the evidence neither demonstrated: (1) the necessity for David Roche to have the $350,000 available from completion of the 2009 Deed for him to satisfy his liability on the side agreement; nor (2) that Mr Reynolds understood that this was an important consideration for David Roche in entering into the side agreement.
To create the basis for this term it would have been necessary for the defendants to show that David Roche either did not have access to the $350,000 readily, or even that he had conveyed to Mr Reynolds through Mr Munt or Mr Shearer that he did not have the funds available to satisfy the side agreement without the money from coming on completion from the Justin interests. But there is nothing in the evidence about Mr Shearer's or Mr Munt's dealings with David Roche on the Sunday morning that suggests that David Roche did not have ready access to the $350,000 he would need to satisfy the side agreement, and there was no clear objective evidence of David Roche's then financial affairs. Moreover the evidence about Mr Reynolds' understanding of David Roche's financial position falls well short of demonstrating that Mr Reynolds would have understood Mr David Roche needed settlement of the 2009 Deed in order to fund the $350,000 under the side agreement. The best support Mr Sulan's case gets in cross-examination of Mr Reynolds is the following passage, which in my view is not good enough (at pages 22 and 23):
"Q. So you said dividends had dried up. When had that occurred?
A. I can only give an estimate of that but my recollection is for a period of about 18 months prior to the mediation in 2009.
Q. Dividends was the manner in which those with a financial interest in the group received any form of liquidity from the group, correct?
A. I believe that's correct, yes.
Q. You understood that to be important to Mr David Roach, did you not?
A. Yes.
Q. That was in part because Mr Roach was elderly, correct?
A. Not particularly.
Q. Well, he was about 80 at the time, you knew that, didn't you?
A. I think he was late seventies but I understood, I don't know where I derived this understanding from but I understood that he was eager for dividends, as was I.
Q. At his stage in life, not receiving a financial interest from the group was not something that he would have been happy with, you knew that?"
But apart from this threshold problem with the implied term argument, Mr Hutley SC for the plaintiff advances a number of other reasons why such a term should not be implied.
The plaintiffs' contentions are persuasive. First, the term is neither reasonable nor equitable. The term alleged would ultimately place the obligation to make payment under the Reynolds-Munt side agreement within the control of the payer, David Roche. Were David Roche to vary by agreement his obligations or benefits under the 2009 Deed by further negotiation or even to assign his interests in the 2009 Deed, then settlement would arguably not occur strictly "pursuant to the 2009 Deed", and his payment obligations under the Reynolds-Munt side agreement would not arise. That kind of unilateral control over the obligation to perform a collateral contract like this side agreement is an unlikely candidate for an implied term.
Secondly, the term is not necessary to give business efficacy to the Reynolds-Munt side agreement. The side agreement would be perfectly effective without it. The agreement makes good sense as creating an obligation to pay once all parties had signed the 2009 Deed, after which the collection of the Yulema Debt would be a matter of "wait and see". Once the 2009 Deed was executed by all parties, it would have been enforceable by all parties and it was unlikely, given the lengthy mediation that had occurred that they would all agree to walk away from their obligations. Even if completion of the 2009 Deed were not assured in the short term David Roche had the right to seek specific performance and to then collect the funds due to him on its completion.
Thirdly the term is neither obvious nor capable of clear expression. The expression "settlement occurring pursuant to the October 2009 Deed" is replete with ambiguity. Should there be some minor variation to the October 2009 Deed before settlement, even if it were merely to delay settlement for a short period, the form of the implied term pleaded would always raise issues as to whether or not the settlement had occurred "pursuant to the 2009 Deed". A term of this sort would be more a source of debate than clarity.
The Reynolds-Munt side agreement did not contain the implied term for which the defendants contend.
[6]
David Roche Sells Out - October 2009 to May 2011
The plaintiffs' principal contention is that David Roche's liability to pay Yulema under the Reynolds-Munt side agreement would arise merely upon the signing the 2009 Deed and the payment of the Yulema Debt. But the plaintiffs contend in the alternative that even if the defendants are right and that the Reynolds-Munt side agreement contained an implied term that the 2009 Deed should also be completed before the payment obligation was triggered, that is indeed what happened by May 2011, so that this additional requirement was in fact satisfied. It is now no longer necessary to decide this question. But the plaintiffs' case for payment on the Reynolds-Munt side agreement does still require proof that the Yulema Debt was satisfied in whole or in part. In this section the Court finds that the plaintiffs have demonstrated that the Yulema Debt was wholly satisfied by May 2011.
The following principal events occurred between the making of the 2009 Deed in October 2009 and May 2011. First, the 2009 Deed became the subject of proceedings in the Federal Court of Australia for misleading and deceptive conduct ("the Federal Court proceedings") after Paltara sued Yulema for recovery of the Yulema Debt in the Supreme Court of South Australia . These proceedings were commenced on 8 July 2010. Second, on 18 January 2011, David Roche sold his shares in Berenwode to the Justin Interests. Third, on 22 March 2011, pursuant to what was called a "Deed of Acknowledgement and Settlement", the Federal Court proceedings were settled on the basis that the parties would complete the transactions contemplated by the October 2009 Deed. Fourth, what the plaintiffs say, and the defendants dispute, was completion under the October 2009 Deed, took place on 6 May 2011. Each of these four events now requires some analysis.
The Federal Court Proceedings. Farnsworth, Lisa and interests associated with the Reynolds and Lepetit families commenced the Federal Court proceedings in the South Australian District Registry on 8 July 2010 (proceeding number 98 of 2010). These applicants in the Federal Court proceedings alleged that the respondents, the Justin interests, Berenwode, David Roche and some of their representatives had engaged in misleading and deceptive conduct by understating the value of the assets of the Group through the presentation of the various asset values in the "Review" during the mediation. The contents of the "Review" and the asset values attributed to each asset in the Review were pleaded, together with their alleged true values to show the misleading conduct.
The application in the Federal Court proceedings sought principal relief, declaring the 2009 Deed void or in the alternative an order for its rescission. The Justin interests as Respondents, cross-claimed in the Federal Court proceedings for specific performance of the 2009 Deed. The trigger for the Federal Court proceedings seems to have been Paltara suing in the Supreme Court of South Australia for recovery of the Yulema Debt (proceedings no 70 of 2010).
David Roche Sells to Justin. On 18 January 2011 David sold all his shares in Berenwode to Echor DFS Developments Pty Limited ("Echor") the corporate representative of the Justin Interests (the "Berenwode Sale Agreement"). The Berenwode Sale Agreement contemplated in clause 3.1(g) that completion could occur under both the 2009 Deed and the Berenwode Sale Agreement. And the Berenwode Sale Agreement also acknowledged that the cash component of the purchase price of the Berenwode Sale Agreement payable by Echor as purchaser had been calculated on the basis of the cash component of the purchase price under the 2009 Deed, namely $41 million, by reference to Berenwode's "respective proportion", or entitlement to share in the purchase price under the 2009 Deed, which was 51.463 per cent.
The Berenwode Sale Agreement, defined all the classes of shares in Berenwode as "the Shares" and then clauses 2.1 and 3.1 relevantly dealt with some other assets and provided as follows:
"2.1 Sale and Purchase - Shares, Clone Land and Clone licence
The Vendor must:
(a) sell, and the Purchaser must purchase, the Shares; and
(b) assign and transfer to the Purchaser all of their beneficial rights and interests in the Clone Land and the Clone Licence (including their beneficial interest in and under the Bare Trust),
together with all rights attached to them as at the date of this agreement and all those rights which accrue between the date of this agreement and Completion free from all Security Interests and other third party rights and otherwise on the terms and conditions set out in this agreement"
David Roche, as the vendor under the Berenwode sale agreement agreed to receive a sum calculated by reference to the purchaser's payment obligations under the 2009 Deed.
"3.1 Purchase Price
(a) The price payable for the Shares, Deferred Shares, Clone Shares, Clone Land and Clone licence is $21,100,199 plus any amounts payable under clauses 8 or 11.2.
(b) The Purchaser must pay to the Vendor:
(i) $7,719,585 on the Completion Date;
…
(f) The Vendor warrants that, for the purposes of the Settlement Deed, the 'Respective Proportion' (as defined in the Settlement Deed) for the Vendor and the Company was 51.4639%.
…
(i) The parties acknowledge that:
(i) the Cash Purchase Price has been calculated on the basis of the cash component of the purchase price as set out under clause 4.1(a) of the Settlement Deed, being $41,000,000 ('Settlement Deed Price');"
The Deed of Acknowledgment and Settlement. On 22 March 2011 the Federal Court proceedings and South Australian Supreme Court proceedings were settled on the basis that the parties would complete the transactions contemplated by the October 2009 Deed. The parties to this March 2011 "Deed of Acknowledgment", which included Paltara and Yulema, agreed that Yulema would consent to judgment in the amount of the Yulema Debt and that at completion (as defined in the October 2009 Deed) the Yulema Debt would be satisfied by set off against an equivalent amount that the nominee of the purchaser under the 2009 Deed agreed to pay Lisa, Farnsworth and related entities.
This act of set off by agreement is the way the plaintiffs contend that completion occurred under the 2009 Deed. The plaintiffs submit that a set off by agreement is in law equivalent to actual payment: Re Application of Keith Bray Pty Ltd (1991) 23 NSWLR 430, at 431F, per McLelland J and Phoenix Commercial Enterprises v City of Canada Bay Council [2009] NSWSC 17 at [88]. I accept that this set off by agreement in the Deed of Acknowledgement is sufficient to constitute payment of the Yulema Debt.
Referring to the 2009 Deed as "the Settlement Deed", the Deed of Acknowledgement recited as follows:
"RECITALS
A. The Settlement Deed has been the subject of the Federal Court Proceedings.
B. Paltara has claimed repayment of the Yulema Debt in the Yulema Proceedings.
C. Leetra has lent monies to Pihiga and Meluke pursuant to the Clone Loans.
D. The parties have agreed to settle the Federal Court Proceedings and the Yulema Proceedings, complete the transactions contemplated by the Settlement Deed and effect repayment of the Clone Loans on the terms of 'this document'".
After providing relevant definitions the Deed of Acknowledgement provided for its own Completion Date (clause 2), for the Purchaser's Nominee under the 2009 Deed to be, Echor (clause 3), for the Respective Proportion (Clause 4) and for the Purchase Price (clause 5):
"2. COMPLETION DATE
The parties agree that the Completion Date shall be 21 April 2011.
3. PURCHASER'S NOMINEE
The parties acknowledge and agree that Echor is the nominee of the Purchaser under the Settlement Deed.
4. RESPECTIVE PROPORTION
4.1 Farnsworth, Lisa, Meluke, Pihiga, Reynolds Executor and JL warrant that their combined Respective Proportion is 48.5361%.
4.2 Echor shall pay any monies due under clause 5.1 into the trust account of Colin Biggers & Paisley Lawyers.
5. PURCHASE PRICE
5.1 The parties acknowledge and agree that the entitlement of Farnsworth, Lisa, Meluke, Pihiga, Reynolds' Executor and JL to monies under clause 4.1 of the Settlement Deed shall be satisfied by Echor paying:
(a) $1,000,000 on execution of this document to Farnsworth, Lisa, Meluke, Pihiga, Reynolds' Executor and JL; and
(b) $18,358,593.93 at Completion to Farnsworth, Lisa, Meluke, Pihiga, Reynolds' Executor and JL"
The Deed of Acknowledgement also provided the following general set off structure in clause 8.2 and 8.3 of what would happen at Completion of the 2009 Deed:
"8.2 The parties agree that at Completion:
(a) Echor will pay to Farnsworth, Lisa, Meluke, Pihiga, Reynolds' Executor and JL an amount equal to the Clone Loans; and
(b) Meluke and Pihiga will repay the Clone Loans to Leetra.
8.3 The parties agree and acknowledge that the amounts payable under clause 8.2 shall be set off against each other, notwithstanding that the amounts are due and payable between different parties."
Clause 9.1 provided for settlement of the Federal Court proceedings and clause 9.2 for settlement of the Yulema Debt proceedings. Then clauses 11 and 13.2 relevantly provided for a set off of the Yulema Debt on Completion of the 2009 Deed:
"11. COSTS AND SET OFF
11.1 Costs
(a) Echor agrees at Completion to pay to Farnsworth, Lisa, Meluke, Pihiga, Reynolds Executor and JL an amount equal to the Yulema Debt as costs of and in respect to the Federal Court Proceedings and Yulema Proceedings.
(b) The parties agree that all previous orders as to costs in the Federal Court Proceedings and the Yulema Proceedings are of no effect between them.
11.2 Set Off
The parties agree and acknowledge that the Yulema Debt shall be set off against the amount due under clause 11.1 at Completion, notwithstanding that the amounts are due and payable between different parties.
…
13.2 Inconsistency
If there is any inconsistency between the provisions of this document and the Settlement Deed, the provisions of this document shall prevail to the extent of such inconsistency."
This was a commercial agreement between parties who were operating very much at arm's length, the Justin interests and the Farnsworth and Lisa interests. The defendants have not sought to contend it was a sham. Clause 11.2 provides for a specific agreement for a set off at Completion of the 2009 Deed. This was an acceptable form of payment of the Yulema Debt.
A settlement checklist for the Deed of Acknowledgement was prepared. Mr Michael Durrant of Kelly & Co sent it to Mr Stuart Clout, and copied it to other parties. His covering email relevantly said, as follows:
"Stuart,
As discussed today, as there is less than a month until Completion we have begun preparing all the documentation which will be required to be signed. Fortunately much of the documentation was previously agreed with Grae McKenzie.
I have attached to this email a draft completion checklist which sets out all of the actions required to be undertaken to effect completion. Please review this checklist and let us know if you believe any amendments are required.
I also attach the following draft documents for your review:
Deed of Release and Discharge (required by clause 6.3(c) of the original Settlement Deed);
resignation of Josephine Lepetit and Bob King as director and alternate director of the EDC/ADC Group companies,
transfer and proxy forms in respect of all of the required share transfers; and
circulating resolutions of all of the EDC/ADC Group companies confirming the transfer of shares and resignations of directors (where relevant).
I note that all of these documents (in particular the Deed of Release and Discharge) were previously negotiated and agreed with Grae McKenzie. The only changes that have been made are in respect of dates and other minor amendments to reflect the fact that David Roche has already completed the sale of his interests. Next week we will forward to you the further documentation required to be signed at Completion (such as promissory notes and consent to judgment in respect of the Yulema Debt).
Could you please review the documents and let us know if you have any comments."
The checklist for completion (as at 24 March 2011, anticipating completion as at 21 April 2011) is relevantly set out below. The words used but not defined in the table below have the same meaning as the words defined in the 2009 Deed. All references to 'KCo' are to Kelly & Co Lawyers, 'Echor' are to Echor DI'S Development Pty Ltd, 'CBP' are to Colin Biggers & Paisley Lawyers, and 'ADC' are to Adelaide Development Company. It should also be noted that references to clause numbers are to the 2009 Deed unless accompanied by a *, in which case the reference is to a clause in the Deed of Acknowledgement and Settlement:
Item No Clause Action Required Responsibility Status
5.1(a)* Echor to pay $1,000,000 to Farnsworth, Lisa, Meluke, Pihiga, Reynolds Executor and JL. Echor COMPLETED
9.2(b)* Five Business Days prior to Completion (14 April 2011), Yulema Pty Ltd to provide KCo with an executed consent to judgment in the amount of the Yulema Debt. Yulema Pty Ltd KCo to draft
6.2(a) At Completion the Vendors must deliver to Echor: Vendors
11.1(a)* At Completion Echor will pay to Farnsworth, Lisa, Meluke, Pihiga, Reynolds and JL an amount equal to $1,042,897.88 as cost of an in respect of the Federal Court and Yulema Proceedings. Echor Note: to be set off against the Yulema Debt in item 16.
KCo to draft promissory notes.
9.1(b)* File for sealing the executed consent to judgment in the amount of the Yulema Debt consent in the Supreme Court of South Australia. KCo Note: Amount of Yulema Debt to be off set against amount payable under item 13.
KCo to draft promissory notes.
[7]
Completion of the 2009 Deed. The 2009 Deed relevantly completed on 6 May 2011, when Yulema executed a consent judgment in favour of Paltara in the amount of the Yulema Debt namely, $1,042,987.88. Completion occurred and the Yulema Debt was satisfied in the amount of $1,042,987.88 in accordance with clause 11.2 of the Deed of Acknowledgement. One of the settlement documents furnished was a promissory note evidencing the satisfaction of the Yulema Debt in accordance with the above checklist.
Three days later on 9 May 2011 the contemplated consent to judgment in relation to the Yulema Debt was filed with the Supreme Court of South Australia in accordance with the Deed of Acknowledgment, clause 9.2(b). And the Federal Court proceedings were dismissed by an order made on 11 May 2011.
The Yulema Debt has been satisfied in accordance with the terms of the Reynolds-Munt side agreement.
[8]
Conclusions and Orders
The plaintiffs seek specific performance of the Reynolds-Munt side agreement of 25 October 2009 or damages for its breach, or an order that the defendants pay Yulema the sum of $347,632.67, plus interest from 6 May 2011.
For the reasons stated the defendants should be ordered to pay Yulema the sum of $347,632.67. Costs would ordinarily follow the event. But it may be that some special costs order is sought. If so, the matter can be listed at some convenient time by arrangement with my Associate.
Although the present judgment is in favour of Yulema, it seems to me that Mr Reynolds was a necessary party to these proceedings to ensure that every way in which the Reynolds-Munt side agreement could have been pleaded was available for the Court's consideration. In any event, his presence as a party does not seem to have occasioned any additional costs. So I propose to make a costs order in favour of both plaintiffs.
The orders of the Court therefore will be:
1. Judgment for the first plaintiff for $347,632.67 (the judgment sum);
2. Order that there be interest on the judgment sum from 6 May 2011 up to the date of judgment;
3. Order the defendants to pay the plaintiffs' costs of these proceedings.
4. Leave is granted to approach my Associate within 7 days for any application in relation to these orders.
[9]
Amendments
29 May 2015 - case citations.
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: 29 May 2015