ADI v NAB

[1999] NSWSC 1080

CITATION:	ADI v NAB [1999] NSWSC 1080
CURRENT JURISDICTION:	Equity Division - Commercial List
FILE NUMBER(S):	50097/98
HEARING DATE(S):	1st November 1999
JUDGMENT DATE:	5 November 1999
PARTIES :	ADI Limited - Plaintiff National Australia Bank Limited - Defendant
JUDGMENT OF:	Rolfe J

COUNSEL :	Mr M.W. Hadley - Plaintiff Mr S.M.P. Reeves - Defendant
SOLICITORS:	Deacons Graham & James - Plaintiff Mallesons Stephen Jaques - Defendant
CATCHWORDS:	Construction of a one-off Agreement.; Australian Broadcasting Commission v Australian Performing Right Association Limited (1973) 129 CLR 99 at p.109 applied.
DECISION:	1. Judgment for the defendant against the plaintiff in the sum of $743,738.58.; 2. The plaintiff pay the defendant's costs of the proceedings.

20

I N D E X

Page

Introduction 1

The Terms Of The Agreement 4

A Consideration Of ADI’s Submissions 11

The Bank’s Cross-Claim 17

Conclusions 18

Orders 18

THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
COMMERCIAL LIST

ROLFE J

FRIDAY, 5 NOVEMBER 1999

50097/1998 - ADI LIMITED v NATIONAL AUSTRALIA BANK LIMITED

JUDGMENT

HIS HONOUR:

Introduction

1    The plaintiff, ADI Limited, (“ADI”), for which Mr M.W. Hadley of Counsel appeared, commenced these proceedings against National Australia Bank Limited, (“the Bank”), for which Mr S.M.P. Reeves of Counsel appeared, by a Summons filed on 6 August 1998.

2    The pleadings were amended from time to time and, at the commencement of the hearing on 1 November 1999, I was provided with a Further Amended Summons, a Defence thereto and a Third Further Amended Cross-Claim. These documents reflected a degree of agreement to which the parties had come in relation to a number of matters, and the matters in issue.

3    On 8 February 1994 the Bank took a fixed and floating equitable charge over the property of a group of companies, to which I shall refer as “Stanilite”. On 22 May 1996, the “Effective Date”, Messrs John William Murphy and Martin Madden were appointed as Receivers and Managers of Stanilite pursuant to the charge and, on 12 July 1996, the Bank, as vendor, entered into an Agreement for Sale of Business with ADI, as purchaser, for the sale of the assets and business of Stanilite on the terms set forth therein. “Completion” was defined as settlement of the sale and purchase of the Assets in accordance with clause 5, and “Completion Date” was defined as 19 July 1996 or any other date agreed by the Bank and ADI. In the result it was 19 July 1996.

4    The introduction to the Agreement stated:-

“A. Stanilite, primarily through SEPL, carries on the business of design, manufacture and service support of:
(a) aerospace and defence equipment and systems;
(b) wireless telecommunications equipment and systems; and
(c) emergency and evacuation lighting.
B. The Bank, being entitled under powers conferred upon it by the Charge has agreed to sell and the Purchaser has agreed to purchase the assets and the business of Stanilite on the following terms.
C. The Purchaser has based its valuation of the Business on its own investigation and analysis of Stanilite’s cost and cash flow position as at 22 May 1996. The Purchase Price will be adjusted upwards or downwards by changes in the net cash flow position of the Material Contracts which are agreed between the parties for the period between the Effective Date and Completion.”

5    ADI claims an entitlement to an adjustment, pursuant to the terms of the Agreement, in the sum of $823,115 on the basis that the Bank and/or Stanilite have received five payments after the Effective Date and prior to and including the Completion Date in respect of goods to be supplied or services to be rendered after the Completion Date. It was common ground that the adjustments were sought for payments made in respect of Excluded Contracts, and Mr Hadley conceded that there was no assignment or novation of any Excluded Contracts to ADI, such that it came under any contractual obligations for Excluded Contracts.

6    In its Third Further Amended Cross-Claim the Bank sought judgment in the sum of $628,248 for various amounts, the only issue in relation to its entitlement to that amount being whether it is entitled to $60,000 incurred prior to the Effective Date but paid after it, in circumstances to which I shall refer. In its Further Amended Summons ADI claimed $254,867 being the difference between the gross amount it sought of $2,711,971 and allowances to the Bank of $2,457,104.

7    Essentially, the various amounts being agreed, each of the claims depends upon a proper construction of the Agreement.

8    During the hearing I rejected certain evidence, which ADI sought to tender. That evidence was Marked for Identification 1, 2 and 3. I have given sufficient reasons for rejecting the tender. After that occurred the parties requested me to decide the construction issues on the basis that adverse findings to ADI on the issue it propounded would mean that it was not necessary to seek to call, at some future time, the rejected evidence. The evidence was not necessary for the issue put forward by the Bank. I agreed to this course, as it seemed to me a sensible approach to bring about as speedy a possible resolution to the litigation.

The Terms Of The Agreement

9    ADI’s claim, essentially, was that between the Effective Date and the Date of Completion payments were made by parties to the Bank and/or Stanilite, in respect of goods to be supplied or services to be rendered pursuant to Excluded Contracts after the Completion Date, to which payments ADI was entitled pursuant to various terms of the Agreement, including clause 1.2(1) of Schedule 12. ADI’s three main submissions in support of this entitlement were that:-

(a) The Excluded Contracts were Assets, as defined, which it acquired under the Agreement.
(b) If the first submission was not correct, none-the-less payments received in respect of the Excluded Contracts were payments “in respect of goods to be supplied or services to be rendered after the Completion Date” and, in accordance with clause 1.2(1) of Schedule 12 were amounts in respect of which an adjustment had to be made in favour of ADI.
(c) That if neither of these submissions was accepted ADI none-the-less acquired the Goodwill and the failure to meet the obligations under those Contracts, notwithstanding that they were not acquired by ADI, would detrimentally affect the Goodwill.

10    The Bank’s principal submissions were that:-

(a) The Assets did not include the Excluded Contracts.
(b) Accordingly, any adjustment in the purchase price was not appropriate in relation to moneys paid in respect of Excluded Contracts.
(c) The purpose of clause 1.2(1) of Schedule 12 was to provide a method of adjustment of the purchase price conformably with clause 3(1) of the Agreement, and was subject to that clause, such that it did not stand alone as the provision for making an adjustment.
(d) The adjustment provision was to ensure that any payments received by the Bank or Stanilite prior to and including the Completion Date, in respect of goods to be supplied or services to be rendered after that date, was a payment in respect of contractual obligations ADI would have to meet pursuant to its acquisition of all contracts other than Excluded Contracts and Material Contracts and, therefore, was a necessary adjustment in respect of such other contracts pursuant to which ADI would have to supply the goods and render the services. A separate provision was made in respect of Material Contracts.
(e) There was no assignment or novation of Excluded Contracts to ADI, such as to place it under any obligation or liability to perform such contracts.
(f) The matters just stated indicated that there could be no adverse affectation on ADI’s Goodwill, because there was no requirement on it to perform the Excluded Contracts.

11    The Agreement defined “Assets” as meaning all Stanilite’s right, title and interest in, inter alia, “Contracts (including Material Contracts)”. It also defined Assets as including:-

“(i) all other property and assets of Stanilite (excluding land and buildings) connected with the Business and required by the Purchaser.”

12    “Contracts” were defined as:-

“… the contracts and commitments entered into by Stanilite which are not fully performed as at the completion date as listed in part 1 of schedule 6 or agreed between the Bank and the Purchaser in writing, which are to be assumed by the Purchaser under this agreement but does not include the Excluded Contracts .” (My emphasis.)

13    “Excluded Contracts” were defined as:-

“… the contracts and commitments of Stanilite in the ordinary course of conducting a Business (including associated debtors and creditors) which are not fully performed as at the Completion Date listed in part 2 of schedule 6 and any other substantially unprofitable contracts related to the Business and includes contracts which are completed except for performance of warranty and/or support obligations by Stanilite and contracts which are outside the ordinary course of conducting the Business.”

14    “Business” was defined as the business presently carried on by Stanilite, being the design, manufacture and service support of:-

“(a) aerospace and defence equipment and systems;
(b) wireless telecommunications equipment and systems; and
(c) emergency and evacuation lighting.”

15    “Secured Property” was defined, in relation to Stanilite, as:-

“.. all the present and future rights, property and undertaking of Stanilite of whatever kind and wherever situated including, without limitation, the capital and share premiums of Stanilite, called or uncalled, paid or unpaid.”

16    Clause 2.1(1) provided:-

“The Bank being entitled under the powers conferred upon the Charge agrees to:
1. Sell and the Purchaser agrees to purchase the interest that Stanilite has in the Assets the subject of the Charge for the Purchase Price and on the terms and conditions of this agreement with effect from the close of business on the Completion Date;”

17    Clause 3.1 provided:-

“The Purchase Price for the Assets is $29,400,000 as adjusted in accordance with the provisions of:
1. schedule 12 (Adjustments):
2. clause 7 (apportionment) and
3. clause 11.5 (accrued entitlements of Transferring Employees).”

18    Clause 5.1 provided for completion of the sale and purchase of the Assets to take place on the Completion Date and for the delivery by the Bank to ADI or its solicitors of various documents including, Clause 5.2(d):-

“assignments or novations of such of the Contracts relating to the Business as it has then obtained duly executed by all the parties to the Contracts together with the originals or counterparts of the Contracts held by Stanilite as can be located by the Bank."

19    Clause 5.3(1) required that at Completion the Bank must use all reasonable endeavours to transfer to ADI the benefit of any Contracts, (other than the Material Contracts and the Property Leases), entered into by Stanilite in the ordinary course of carrying on the business; and clause 5.5 provided:-

“From the date of this agreement until 60 days after the Completion Date the parties will use all reasonable endeavours to obtain the consent of all parties to the Material Contracts to assignment to the Purchaser or novation of each Material Contract on terms reasonably satisfactory to the Purchaser with effect from the date of such novation or assignment.”

20    Clause 8.2 provided that risk in the Contracts, including Material Contracts, passed to ADI on assignment to it or novation of the Contract in question.

21    Clause 13.1 provided that the Bank and ADI agreed to use all reasonable endeavours to ensure that ADI obtained the benefit of the Contracts from the close of business on the Completion Date; and to obtain the consent of the other parties to any Contracts reasonably specified by ADI to the assignment of those Contracts or to their novation on terms reasonably acceptable to ADI. Clause 13.2 provided that ADI accepted responsibility for the performance of the Contracts assigned or novated to it, and indemnified the Bank against any liability or loss arising under any of the Contracts assigned to it as a result of any act or omission of ADI after assignment or novation.

22    Schedule 6 is headed “Particulars of Contracts”. Part 1 identified “Contracts”. Part 2 referred to “Excluded Contracts” as “contracts not identified in parts 1 and 3 of this schedule”, and part 3 specified the “Material Contracts”.

23    Schedule 12 is headed “Adjustments”. Paragraph 1 is headed “The Business (other than Material Contracts)”, and provided:-

“1.1 The Purchaser must reimburse the Bank for any payments (except with respect to the Material Contracts) made by the Bank or Stanilite, in the ordinary course of the Business, prior to and including the Completion Date:
(1) in respect of wages paid, goods to be supplied and services to be rendered to the Business after the Completion Date for the benefit of the Purchaser (other than any payments under contracts for breach of warranty or other claims or which are covered by insurance); and
(2) which result in a benefit being received by the Business after the Completion Date.
1.2 The Bank must reimburse the Purchaser for (except with respect to the Material Contracts):
(1) any payments received by the Bank or Stanilite prior to and including the Completion Date in respect of goods to be supplied or services to be rendered after the Completion Date;
(2) any goods supplied or services rendered (including service by employees) to Stanilite in respect of the Business prior to and including the Completion Date, payment for which must be made by the Purchaser after the Completion Date; and
(3) any payment which the Purchaser will become liable to make in respect of the Business after the Completion Date, where the benefit was received by the Business before the Completion Date.”

The effect of these two clauses is to ensure an adjustment of amounts paid, other than in respect of Material Contracts, where either ADI or the Bank would obtain a benefit, which benefit would pass to the other.

24    Clause 2 was concerned with Material Contracts, and provided:-

“2.1 Where, in the ordinary course of performing the Material Contracts:
(1) any payments have been made by the Bank or Stanilite after the Effective Date in respect of wages paid, goods supplied or services rendered under the Material Contracts after the Effective Date (other than any payments under Contracts for breach of warranty or other claims or which are covered by insurance), then the Purchaser must reimburse the Bank for those payments;
(2) any payments have been received by the Bank or Stanilite after the Effective Date in respect of goods supplied or services rendered under the Material Contracts, then the Bank must reimburse the Purchaser for those payments.”

25    Clause 3 is headed “Details of Payment” and provided:-

“3.1 The Bank must provide the Purchaser with details of all the payments referred to in the above clauses in writing not later than 14 days after the Completion Date together with such verification as the Purchaser may reasonably require.”

A Consideration of ADI’s Submissions

26    It was not in issue, as I have said, that the payments for which ADI sought reimbursement, pursuant to Schedule 12 clause 1.2(1), were made in respect of “Excluded Contracts”. As I have indicated, the first submission of ADI was that an Excluded Contract constituted an Asset, which was sold by the Bank to ADI. As a matter of construction I consider that this submission must be rejected. It was conceded by Mr Hadley that in so far as the list of Assets included “Contracts including Material Contracts”, that “Contracts”, wherever used in the Agreement, had the meaning attributed to that word in the definition clause and, accordingly, did not include the Excluded Contracts. However, he submitted, that the Excluded Contracts were included in “all other property and assets of Stanilite .. connected with the Business and required by the Purchaser”. In my view this cannot be correct. The reference to Contracts clearly deals with those Assets falling within the definition of “Contracts” and, in these circumstances, it is equally clear that the Excluded Contracts are not included in the Assets being acquired, a point reinforced by the fact that there was no assignment or novation of them to ADI. I do not consider that one can seek to draw back into the contracts being acquired the Excluded Contracts by reference to sub-clause (i) of the definition of Assets, which, in my opinion, is a catch-all provision for Assets not otherwise dealt with. In my opinion, the Excluded Contracts have been dealt with by exclusion from the Assets. Mr Hadley also submitted that the Excluded Contracts were part of the Business. I do not agree. Business defined the activities in which Stanilite operated. That which was sold was the Assets, not the Business. That is made clear by clauses 2.1 and 3.1.

27    Nextly clause 3.1 provides that the Purchase Price is for the Assets. In my opinion, it cannot be asserted that the Purchase Price is to cover something other than the Assets. Nor can it be asserted that the adjustment to be made as provided by Schedule 12 is other than in relation to the Purchase Price for those Assets and not, as Mr Hadley suggested, for some other assets, which were not being acquired. To achieve that result would require very clear words. I should mention that Mr Hadley referred back to clause 2.1(1) and submitted that as the charging provision of the Charge was sufficiently wide to cover the Excluded Contracts the reference to “the Assets the subject of the Charge” was a reference to, inter alia, the Excluded Contracts. I do not agree with this submission. It seems to me that one firstly has to find what the Assets are and then, in so far as they are subject to the Charge, they are the subject of the sale and purchase.

28    Mr Hadley submitted that no assistance was derived from Schedule 6. In the circumstances of this case that may well be so because there was agreement that the amount sought to be recovered was in respect of the Excluded Contracts and, therefore, it was not necessary to further consider that matter.

29 He submitted nextly that the adjustment to be made pursuant to clause 1.2(1) of Schedule 12 was not confined to the Assets, but to any payments made prior to the Completion Date in respect of goods to be supplied or services to be rendered after the Completion Date. He agreed that goods were only to be supplied and services were only to be rendered pursuant to contracts, but he continued that notwithstanding that it mattered not that the payments were in respect of goods to be supplied or services to be rendered under the Excluded Contracts, notwithstanding that ADI was undertaking no obligations under those contracts. He submitted, and in terms this submission is probably correct, that the Agreement could provide for the Purchase Price to be adjusted in any way the parties agreed, so that even if the Excluded Contracts were not Assets, none-the-less the parties could agree to adjust it by reference to payments made in respect of goods to be supplied or services to be rendered under them. That may be correct, as an hypothesis, but it would, in my opinion, require the use of very clear words and it does not arise from the words used in the Agreement. The further difficulty however with that submission, in my view, is that the adjustment being made pursuant to clause 3.1 is an adjustment in respect of the Purchase Price of the Assets and, as a matter of construction, it would be a very strange result if it was to be inferred from clause 3.1 and Schedule 12 that the Purchase Price for the Assets was to be adjusted by reference to assets which were not the subject of the sale and in respect of which ADI was undertaking no liability. Theoretically the Contract could make such a provision, but, in my opinion that does not arise from a proper construction of it and no rational commercial reason is suggested as to why it should be adopted. It is clear that clause 1.2(1) is speaking of goods to be supplied or services to be rendered by ADI after the Completion Date pursuant to a Contract. That is the reason for the necessity for the adjustment, viz that the Bank or Stanilite had already received pre-payments for the goods to be supplied or the services to be rendered after the Completion Date, but, pursuant to the terms of the Agreement, was acquitted from the obligation of supplying the goods or rendering the services. Therefore, in so far as that obligation fell upon ADI there was every commercial reason to credit ADI with amounts paid to recompense it for the goods to be supplied or the services to be rendered. That would be an obligation it would undertake, at least in all probability, pursuant to the assignment and novation of Contracts and for the purpose of protecting its Goodwill. However, to suggest that there should be an adjustment in circumstances where ADI was under no obligation to supply goods or render services under the Excluded Contracts defies commercial rationality and, in my opinion, it is a construction which must be rejected. If there is any ambiguity, the words of the Agreement will bear, and should receive, the construction I have given them: Australian Broadcasting Commission v Australasia Performing Right Association Limited (1973) 129 CLR 99 at p.109.

30    Finally Mr Hadley submitted that the Goodwill of ADI would be affected because it would not be performing contracts, i.e. Excluded Contracts, which, although it was not obliged to perform them, would lead to a perception that it was not performing the obligations of Stanilite. In this way, it was submitted the Goodwill, which was an Asset, would be lessened in value. In my view this does not give rise to an entitlement to any such adjustment. ADI could only perform the obligations under the Excluded Contracts, and, therefore, take the benefits of pre-payments pursuant to them, if it acquired them and obtained an assignment or novation of them. None of these things occurred. Accordingly, no obligations were imposed on ADI in respect of Excluded Contracts and the Goodwill it acquired could not be eroded by the failure to obtain adjustment payments, which is what the submission came down to.

31    In these circumstances I consider that ADI is not entitled to any of the pre-payments in respect of the Excluded Contracts and its Further Amended Summons must be dismissed.

The Bank’s Cross-Claim

32    By its Third Further Amended Cross-Claim the Bank sought to recover $60,000. The facts agreed were that it was reported to Mr Madden that sub-contractors on the Material Contracts were threatening to walk out and cease performing these contracts and that, accordingly, Mr Madden paid the whole amount owing to them for work done prior to the Effective Date so that they would continue providing services or supplying goods in respect of the Material Contracts. The payments were obviously made after 22 May 1996, but, equally obviously, in respect of matters occurring prior to the Effective Date. Clause 2.1(1) of Schedule 12 required two occurrences, each after the Effective Date. That had not happened and, accordingly, the requirements of the clause were not met.

33    Mr Reeves’ submission was that because the payment was made to ensure that the sub-contractors continued providing services or supplying goods in respect of the Material Contracts the payments were made “in respect of wages paid, goods supplied or services rendered under the Material Contracts after the Effective Date”: clause 2.1(1). In other words his submission was that the payments were made to ensure that work would continue after the Effective Date. Whilst the words “in respect of” may, in certain circumstances, have a wide meaning, they do not, in my opinion, do the work Mr Reeves’ submissions demand in this case. Accordingly, the Bank’s claim for $60,000 must fail.

Conclusions

34    It was agreed that in the event of my coming to these conclusions, judgment for $628,248 sought by the Bank in its Third Further Amended Cross-Claim should be reduced by $60,000 to $568,248. It was not disputed that interest on that amount should run from three months after the Completion Date, i.e. 19 July 1996. Interest shall therefore run from 19 October 1996. Calculated on Supreme Court rates from 19 October 1996 to 5 November 1999 it amounts to $175,490.58. It was also not greatly in issue that ADI should pay the Bank’s costs. A submission was made in relation to the Bank’s claim for rectification, which claim was not pursued either at an evidentiary level or on the hearing. However, in my opinion, that should not deprive the Bank of its costs of the proceedings in which it has been substantially successful.

Orders

35    I order:-

1. Judgment for the defendant against the plaintiff in the sum of $743,738.58.
2. The plaintiff pay the defendant’s costs of the proceedings.
3. Exhibits be returned.

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Last Modified: 11/05/1999