Alphater Consulting Engineers Pty Ltd (ACN 107 954 629) v Miles Rozman
[2016] VSCA 111
•18 May 2016
SUPREME COURT OF VICTORIA
COURT OF APPEAL
S APCI 2015 0076
| ALPHATER CONSULTING ENGINEERS PTY LTD (ACN 107 954 629) | Applicant |
| v | |
| MILES ROZMAN and ORS | Respondents |
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| JUDGES: | SANTAMARIA, BEACH and McLEISH JJA |
| WHERE HELD: | MELBOURNE |
| DATE OF HEARING: | 20 April 2016 |
| DATE OF JUDGMENT: | 18 May 2016 |
| MEDIUM NEUTRAL CITATION: | [2016] VSCA 111 |
| JUDGMENT APPEALED FROM: | [2015] VSC 319 (Robson J) |
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CONTRACT – Breach of contract – Repudiation – Parties entered into dispute resolution agreement – Parties appointed independent expert to resolve valuation differences – Applicant unilaterally terminated independent expert’s retainer – Whether independent expert breached terms of his retainer – Whether applicant entitled to terminate independent expert’s retainer – Whether applicant, in terminating independent expert’s retainer, evinced an intention not to be bound by dispute resolution agreement – Whether applicant repudiated dispute resolution agreement – Applicant did not evince intention not to be bound by dispute resolution agreement – Repudiation not established – Application for leave to appeal granted – Appeal allowed.
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| APPEARANCES: | Counsel | Solicitors |
| For the Applicant | Mr K J A Lyons QC with Mr D B Clough | Lennon Mazzeo |
| For the Respondents | Mr R A Heath with Mr K R Hickie | B2B Lawyers |
SANTAMARIA JA
BEACH JA
McLEISH JA:
Introduction
This case concerns the process by which the interest of the applicant, Alphater Consulting Engineers Pty Ltd, in the Moderno Café and the Bite franchise businesses was to be valued for the purpose of a sale of that interest to the first respondent, Miles Rozman, or his nominee.
The controlling entity of the group of companies and trusts that owned and operated the businesses was Venture Capital Group Pty Ltd (‘VCG’). The three companies which controlled VCG were Alphater, Romco Holdings Pty Ltd and Brierley Investments Pty Ltd. Those companies were respectively controlled by the directors of VCG, namely Matthew Parisi, Mr Rozman and Darren Brierley, or persons associated with them. VCG was the trustee of a unit trust in which the shareholders owned 25.5 per cent, 68.5 per cent and 6 per cent respectively.
At a meeting of shareholders in January 2010, Mr Parisi was removed as a director of VCG. In March 2010, Alphater’s solicitors, Lennon Mazzeo, made certain demands of Mr Rozman, including that Mr Parisi be reappointed. Those demands were rejected. However, an agreement was ultimately reached that Mr Rozman or his nominee would purchase Alphater’s interest in the businesses at market valuation. The agreement (sometimes called ‘the agreement’ and sometimes called ‘the dispute resolution agreement’) contemplated a three-stage dispute resolution process.
The parties to the agreement were Alphater and Mr Parisi, on the one hand, and Mr Rozman, VCG and Mr Brierley, on the other. It is convenient to refer to them as the respondents, although the other shareholders are also parties to these proceedings.
In stage 1 of the agreement, the respondents were to engage a valuer (Mr Bala) and Alphater and Mr Parisi were to engage another valuer (Mr Richardson). In stage 2, the two valuers were to meet to attempt to resolve any differences between their respective valuations and to identify any issues not capable of resolution. In stage 3, any issues which were unable to be resolved as between the two valuations were to be referred to an independent expert for determination. It was agreed that this determination would then be binding.
The parties appointed Mr Kenneth Stout of Boutique Corporate Advisory to be the independent expert for the purposes of stage 3. On 30 July 2014, some months after he was appointed, Alphater terminated Mr Stout’s engagement as the independent expert. On 5 August 2014, the respondents purported to accept Alphater’s alleged repudiation of the agreement.
On 30 October 2014, and in oppression proceedings already commenced in the Commercial Court, Alphater filed an interlocutory process. In that interlocutory process, Alphater sought declarations that:
(a) the agreement was not validly terminated by the respondents;
(b) the agreement prohibited the parties from providing opinionated or argumentative submissions or material to the independent expert appointed for stage 3; and
(c) the agreement provided that any change in circumstances concerning the VCG group after 30 June 2010 was not relevant to the valuation that was required to be performed as at 30 June 2010.
In the interlocutory process, Alphater also sought specific performance of the agreement by the appointment of another independent expert to conduct stage 3, damages, and costs thrown away in connection with the appointment of Mr Stout.
In separate proceedings, the respondents sought declarations that Alphater had repudiated the agreement and that the respondents had validly terminated the agreement. Additionally, the respondents sought damages and costs. The trial judge ordered that the respondents’ claims in their proceeding be treated as points of cross-claim in the oppression proceeding in which Alphater had issued the interlocutory process.
On 15 July 2015, the trial judge dismissed Alphater’s interlocutory process and entered judgment for the respondents on the cross-claim. The trial judge made declarations that Alphater repudiated the agreement and that the respondents had validly terminated the agreement in August 2014. In addition, the trial judge ordered Alphater to pay damages. The question of damages and interest was then referred to an associate judge for assessment in default of agreement.
Alphater now seeks leave to appeal and (if leave is granted) to appeal from the orders made by the trial judge on 15 July 2015.
The issues in this Court
The trial judge found that Alphater was not entitled to terminate Mr Stout’s engagement and that, in doing so, it had repudiated the agreement. The judge rejected an alternative argument put by Alphater that it had an honest misapprehension as to its entitlement to terminate Mr Stout’s engagement and that in the circumstances it therefore had not repudiated the agreement.
While the application for leave to appeal contains 25 proposed grounds of appeal (some of which contain multiple parts), in broad terms, there are three issues raised by the proposed appeal:
1. Was Alphater entitled unilaterally to terminate Mr Stout’s engagement?
2. Did the termination of Mr Stout’s engagement amount to a renunciation of the agreement by Alphater?
3. If yes to 2, did Alphater have an honest misapprehension regarding its obligation and duties under the agreement?
In respect of these three issues, Alphater’s proposed grounds (a) to (j) relate to the first issue; proposed grounds (k) to (n) relate to the second issue; and proposed grounds (o) to (y) relate to the third issue.
In support of the judge’s conclusion that Alphater was not entitled unilaterally to terminate Mr Stout’s engagement and in support of the judge’s finding of no honest misapprehension on the part of Alphater (the first and third of the three issues referred to above), the respondents have filed a notice of contention that asserts that there was additional evidence that the judge should have accepted that supports the judge’s conclusions on those issues.
The terms of the agreement
In order to determine whether there is any substance in Alphater’s proposed appeal it is necessary to examine the terms of the agreement.
The terms of the agreement were the subject of an earlier hearing, in the oppression proceeding, conducted by the trial judge.[1] In the first judgment, the trial judge found that the terms of the agreement were as follows:
[1]Re Venture Capital Group Pty Ltd [2012] VSC 654 (‘the first judgment’).
(a)Miles Rozman (or his nominee) shall purchase all of Alphater’s interests in Venture Capital Group Pty Ltd (‘VCG’), the VCG Unit Trust and all other entities and trusts forming part of the Café Moderno and Bite businesses (‘VCG Group’), at their market valuation.
(b)The aforesaid ‘market valuation’ shall be determined as follows:
i)(Stage 1) Miles Rozman, Darren Brierley and VCG, on the one hand, and Matthew Parisi and Alphater, on the other, shall each engage a valuer to provide a valuation of Alphater’s interest in the VCG Group.
ii)(Stage 2) The two valuers shall then meet to attempt to resolve any differences between their respective valuations and to identify any issues not capable of resolution.
iii)(Stage 3) Any issues which are unable to be resolved as between the valuers then be referred to an independent expert for determination and each of Miles Rozman, Darren Brierley and VCG, on the one hand, and Matthew Parisi and Alphater,
on the other, be bound by the determination of such expert and the resulting valuation.
(c)Miles Rozman, Darren Brierley and VCG shall provide to Matthew Parisi and Alphater such access to the financial records of the VCG Group as their valuer requires for the purpose of conducting his valuation.
(d)Until the resolution of the dispute, Miles Rozman, Darren Brierley and VCG undertake:
i)At all times to conduct the VCG [business] in a bona bide [sic] manner.
ii)Not to open any other bank accounts in the name of VCG or use for VCG’s benefit any accounts other than the Westpac accounts currently held by VCG, without providing to Matthew Parisi and Alphater 7 days advance notice in writing.
iii)Miles Rozman, Darren Brierley and VCG shall provide to Matthew Parisi weekly accounts extending payment terms with suppliers (if such reports exist), quarterly details of rebates, monthly bank statements and monthly PLU summaries, subject to Matthew Parisi and Alphater providing an undertaking of confidentiality in relation to any reports provided.
iv)At all times allow only the payment of bona fide expenses of VCG from the bank account referred to in the previous paragraph as incurred in the ordinary and proper course of business and not to pay any sum of money to themselves or any other person unless authorised in writing by Matthew Parisi, save that:
1.Miles Rozman and Darren Brierley reserve the right to call for the repayment of funds recently advanced to VCG by them for the purposes of renovation of Chadstone, Armidale and Epping should external finance become available, otherwise loan accounts shall be repaid only on the basis that Matthew Parisi receives the same pro rata payment (in accordance with his unit holding in the VCG Unit Trust) on his loan accounts.
2.Miles Rozman be reimbursed for business expenses incurred by him on the credit card used by him for purchases and expenditures for the VCG Group, subject to Miles Rozman providing relevant documents relating to [sic]
Qualifications 1 and 2 shall be subject to Miles Rozman, Darren Brierley or VCG providing to Matthew Parisi and Alphater (and/or its representatives) relevant documents in relation to such financing, advances and credit card use upon request.
v)To provide access to and copies of the books and records of VCG including its financial records to Matthew Parisi’s and Alphater’s accountants and all legal advisers (for the purposes of any valuation and providing instructions to Matthew Parisi’s and Alphater’s accountant and legal advisers) at the cost of Miles Rozman, Darren Brierley or VCG.
(e)In the event that the matter be referred to an independent expert for determination as referred to in Paragraph (b)(iii) above then:
i)The expert must be a qualified accountant with substantial experience in the valuation of companies and operations similar to those conducted by VCG.
ii)The parties must agree the identity of the expert within 7 days after a final report is obtained from a meeting of the parties’ respective valuers and if the matter is unable to be resolved, failing which the identity of the expert will be determined by the Institute of Chartered Accountants.
iii)As far as practicable the parties and the independent expert be bound by Rule 50 (Referee out of Court) of the Supreme Court (General Civil Procedure) Rules 2005 (Victoria).
(f)Each party is to meet the costs of their own valuation.
(g)The parties’ respective valuations are to be conducted by reference to documents including but not limited to:
i)The VCG books of account up to 30 June 2010.
ii)The documents set out in the facsimile dated 30 November 2010 from KSR Partners to Shankar Balac [sic].
While originally there was a dispute about whether (g)(i) was a term of the agreement, in the first judgment, the judge concluded that the agreement did not contain any term that the books would be limited to the accounts up to 30 June 2010. Immediately one can see that (g)(i) of the agreement does not have the effect of limiting the independent expert’s reference to documents to books of account up to 30 June 2010. Thus the apparent dispute between the parties as to the existence of the term in (g)(i) is of no moment for present purposes.
We turn now to the circumstances and terms of the engagement of Mr Stout.
The engagement of Mr Stout
Mr Stout was engaged on 11 September 2013. Lennon Mazzeo (the solicitors for Alphater) wrote to Mr Stout on behalf of their client, and with the consent of the respondents’ solicitors on behalf of their clients. The letter stated that it comprised instructions to Mr Stout on behalf of all parties in the matter. Relevantly, the letter provided:
Instructions
Pursuant to the dispute resolution process, you are instructed to determine all issues which were unable to be resolved by Richardson and Bala and, in so doing, determine the valuation of the VCG Group as at 30 June 2010.
You are to assume that the issues you must determine are those set out in Richardson’s final report dated 6 December 2011 and in Bala’s letter of 19 April 2012. If you observe differences or unresolved issues between the valuations that are not identified in the final report dated 6 December 2011 or the Bala letter of 19 April 2012, you are to describe and determine those differences or issues in your report.
Where there are loans concerning Alphater in the books of the VCG Group as at 30 June 2010, you should treat such loans as you see fit taking into account any matters you consider to be relevant.
Having determined the valuation of the VCG Group as at 30 June 2010, you are to value Alphater’s interest in the VCG Group, assuming a 25.5% share.
Factual material
These instructions are accompanied by:-
a.The aforementioned valuations performed by Richardson and Bala, respectively.
b.The material to which Richardson and/or Bala had regard for the preparation of their valuations.
c.The aforementioned report dated 6 December 2011 prepared by Richardson, identifying his understanding of the unresolved disputes or differences between him and Bala.
d.The aforementioned letter from Bala to Richardson identifying Bala’s understanding of the unresolved disputes or differences between him and Richardson.
You may take into account any additional factual material which you request be provided by the parties, provided it is relevant to resolving the differences between the first two valuations (as set out in the aforementioned Richardson report and Bala letter) and, therefore, the valuation as at 30 June 2010 of the VCG Group and Alphater’s interest in it.
Should you wish to discuss any aspect of this letter, please do not hesitate to contact our Mr Nick Mazzeo.
By a further letter dated 20 September 2013, Lennon Mazzeo wrote to Mr Stout referring to an email he sent on 11 September 2013. The letter provided:
Mr Matthew Sweeney, on behalf of B2B Lawyers and the writer have agreed, subject to your willingness to undertake this assignment, to appoint you the independent expert for the purpose of resolving Alphater’s interest in the VCG business.
The letter provided other information, including details of court orders, and concluded as follows:
Your expert determination will effectively finalise the dispute between the parties given that the parties have agreed to be bound by your determination and the resulting valuation.
Subsequently, by letter dated 11 October 2013, Mr Stout raised some questions with the parties. Mr Stout said as follows:
For the purpose of the matter as outlined in your joint letter to me of 11 September 2013 and per your previous subsequent email received 20 September 2013, I set out a series of questions for both you and your client to answer so that a ‘scope of the tasks to be performed by the independent expert [IE] are to your full understanding.
I would like to obtain an understanding and acceptance from you both as to the process for the IE to utilize for this assignment.
1.Do the parties agree that the assessment of value is to be ‘as at’ on one date; and that ‘subsequent events’ (events known to have occurred after the valuation ‘as at’ date opinion) are to be ignored totally. (This means events relating to granting of or use of premises or obtaining leases are to be ignored as part of the task).
Is this acceptable to both parties?
2.Is it expected that the IE call both parties to address (in the presence of each other) the IE on issues considered relevant by the IE before concluding his, IE opinion.
3.The exact nature of what is being valued and when is blurred. The S. Bala valuation refers to ‘Matthew Parisi Business Interest’ in the Group comprising 6 Trusts for Matthew’s interests (25.5% Share) to exit the business.
3.1The KSR Valuation refers to 4 Cafes, one franchise (5 businesses — not 6) and plant and equipment in storage.
3.2In your joint instructions 11 September 2013 on page 3 you request two tasks ‘….determine the valuation of the VCG Group as at 30 June 2010…’ and further having determined that value I am asked to determine a second value namely ‘…. Alphater’s 25.5% value within that group….’
There is a difference in valuation of an interest in a group and finding someone who wants to buy that minority interest (to exit the group).
What are the instructions for IE regarding assumptions (the possibility of buying that interest considered a minority interest) and what dividend entitlements flow historically to unit holders within the group?
4.The 30 June, 2010 Financial Statements for various entities were used as the financial statements as at 30 June, 2010 and do both parties agree that ‘cash trading’ element is to be totally ignored and the reported financial statements as at 30 June, 2010 be solely used rather than statements closer to valuation date (say 31 March, 2011) and or adjusted for the possibility of cash trading.
In other words, is it to be submitted by both parties to the IE that more recent financial statements (management accounts for trading post 1 July, 2010 to 31 March, 2011) be ignored and rely on the earlier agreed date to be 30 June 2010 with no recognition for subsequent events or elements of any cash trading.
…
By letter dated 28 October 2013, Lennon Mazzeo (on behalf of Alphater) responded to Mr Stout’s first question as follows:
We confirm that you are to determine the valuation of the VCG Group as at 30 June 2010 (‘relevant date’) however all information (past and future) should be taken into account in valuing the business as at the relevant date.
In response to the second question identified above, Lennon Mazzeo said:
If you believe that a conference with the parties will assist you in completing your determination then our client is amenable to attending your offices in the presence of the other parties for the purpose of dealing with any matters you consider relevant.
In response to the question about the use of post valuation date financial statements, Lennon Mazzeo said:
This is a matter for your discretion but the valuation should be conducted on the basis that you have available all information you consider relevant, provided that the valuation is conducted as at the relevant date.
Lennon Mazzeo’s letter of 28 October concluded:
The valuation date has been determined by agreement. You are simply to value the VCG Group as at the agreed date, with full information at your discretion, and assume that the Alphater/Parisi interest is 25.5% of the whole.
By letter dated 15 November 2013, B2B Lawyers (on behalf of the respondents) responded to Mr Stout’s first question as follows:
There was no specific direction or agreement about subsequent events and the extent to which they may be relevant and taken into account. That is a valuation question you may consider in determining the valuation at the relevant date, and in doing so you may invite submissions to the extent you consider appropriate.
In response to the second question, B2B Lawyers said that it was a matter for Mr Stout. In relation to the third question, B2B Lawyers said that it was a valuation question for the valuer, and one upon which he could invite submissions from the parties if he saw fit.
By letter dated 21 November 2013, Lennon Mazzeo wrote to Mr Stout stating that ‘it seems to us that the status of your queries is as follows’ and then set out the following table:
Your query
Our response
B2B’s response
Status
1. Are subsequent events to be ignored?
All past and future information should be taken into account as you see fit
A matter for you
Effectively resolved
…
4. Is ‘cash trading’ to be ignored and is regard to be had to statements after 30 June 2010?
You should use all information you consider relevant
A matter for you
Resolved
…
The letter concluded with the following:
As a general comment, we reiterate your instructions that the issues you must determine are those set out in Richardson’s final report dated 6 December 2011 and in Bala’s letter of 19 April 2012, and thereby determine the valuation of the Group as at 30 June 2010. Further, if ‘you observe differences or unresolved issues between the valuations that are not identified in [those documents], you are to describe and determine those differences or issues in your report’. Your task, therefore, is to resolve the differences between the
initial valuations in order to determine the valuation of the Group as at 30 June 2010.
Next, by letters dated 18 February 2014 to the parties, Mr Stout proposed a joint meeting and asked the parties to provide any additional information that they considered relevant. Alphater responded to this by letter dated 25 February 2014, agreeing to attend but stating that the letter of engagement required Mr Stout to take into account only additional factual material which he requested, provided it was relevant.
Before the joint meeting, in a letter dated 5 March 2014, Mr Stout wrote to the parties to confirm his and their understanding of the terms of his engagement. Copies of this letter were signed on behalf of the parties by their solicitors, as an acceptance of the terms and conditions of Mr Stout’s engagement as referred to in the letter of 5 March. The terms of Mr Stout’s engagement were expressly referred to in this letter by reference to ‘the letter of instructions dated 20 September 2013 and 28 October 2013’.
At the joint meeting on 12 March 2014, Alphater refused to participate except on the basis that Mr Stout confined himself to specific requests for factual information, and said that if he wished to seek opinions then he should put the request in writing and Alphater would consider it.
In a letter dated 18 March 2014, Mr Stout wrote to the parties and requested material from them within various categories and said further: ‘The offer is there for either party to assist with reasons or better explanations’. Alphater responded, by letter dated 21 March 2014, emphasising the limitations on Mr Stout’s role, in particular that he ought not receive argumentative submissions. That said, Alphater provided Mr Richardson’s explanations of his reasoning as specifically requested by Mr Stout.
On 4 April 2014, purportedly in response to Mr Stout’s request for material in his letter dated 18 March 2014, the respondents provided a bundle of material which, broadly, included company accounts, the respondents’ synopses of those accounts, details of certain electricity charges from 2009 to 2013 and Mr Bala’s explanations of his reasoning as specifically requested by Mr Stout. The bundle also included a letter from an accountant, G R Sincock, Director, Deloitte Private Pty Ltd, to the respondents’ solicitors, providing critical opinions of Mr Richardson’s valuation (‘Deloitte Private Report’).
There followed a series of communications between the parties through their solicitors. In a letter dated 8 April 2014 to Mr Stout and copied to the respondents, Alphater said that it objected to him receiving argumentative submissions, whether accounting or legal, and requested that he refrain from considering any of the material provided by the respondents on 4 April 2014 (apart from the company accounts) until it had the opportunity to provide specific details of its objections.
In a letter to Mr Stout dated 9 April 2014 and copied to Alphater, the respondents denied Alphater’s position and stated that they had simply provided material in relation to the issues Mr Stout had identified as matters in respect of which he would be assisted by further material. The respondents stated that Mr Stout could consider the material provided to the extent he considered it relevant or appropriate, and that Alphater should identify any matters or issues in the materials provided for consideration. The respondents said that Mr Stout was entitled to take into account such materials provided to him as he saw fit.
In a letter dated 9 April 2014 to Mr Stout and copied to the respondents, Alphater detailed certain parts of the respondents’ bundle of documents, which it described as the ‘objectionable material’, and objected to it on the basis that the material was not merely factual and relevant to resolving differences between the first two valuations but rather included argument and the opinions of another expert.
In a further letter dated 9 April 2014 and sent only to the respondents, Alphater referred to its letter to Mr Stout and stated that it considered that providing the Deloitte Private Report, in particular, to Mr Stout had been a blatant and gross breach of the dispute resolution agreement and an act of bad faith. Alphater reserved its right to take action against the respondents for the alleged breach, unless the respondents withdrew the material.
In a letter dated 11 April 2014 to Mr Stout and copied to Alphater, the respondents said that it was a matter for him to determine whether the information they had provided was relevant and that there was nothing in his letter of engagement to the effect that he was not permitted to call for submissions or further material which he considered might assist him.
In a letter dated 16 April 2014 to Mr Stout and copied to the respondents, Alphater stated its position that Mr Stout was not entitled to receive argumentative material, and Alphater’s understanding that Mr Stout had not requested any of the ‘objectionable material’. Alphater asked Mr Stout to respond in writing to the following questions:
(a)Do you consider that you requested any of the Objectionable Material? If yes, which parts?
(b) Have you read any of the Objectionable Material? If yes, which parts?
(c)Do you intend to rely on or otherwise have regard to any of the Objectionable Material in the preparation of your report? If yes, which parts?
In a letter to both parties dated 25 June 2014, Mr Stout responded to the correspondence from Alphater stating:
(d) in his letter dated 18 March 2014, he had:
(i) asked the parties to formally present or better explain or answer points that might assist him; and
(ii) offered the opportunity for either party ‘to assist with reasons or better explanations behind the points of disagreement’ between Mr Richardson and Mr Bala.
(e) he had ‘not considered in any detail’ the material provided by the respondents on 4 April 2014;
(f) Alphater had proceeded with the joint meeting on 12 March 2014 in the knowledge that Mr Stout was prepared for it to be reconvened ‘to allow for both parties to be better presented if they so desired’;
(g) he now offered the parties an opportunity to attend a meeting (bringing with them whoever they wanted) to explain to him why the material, as presented to him by the respondents pursuant to his request of the parties dated 18 March 2014, was not relevant material; and
(h) ‘in the interim’, he had ‘not considered the material’ and would refrain from further work until the proposed second joint meeting.
In response to Mr Stout’s letter of 25 June 2014, in a letter dated 30 July 2014 addressed to Mr Stout, and copied to B2B Lawyers, Alphater’s solicitors:
(i) disputed Mr Stout’s description of the events of the first joint meeting on 12 March 2014;
(j) noted that Mr Stout had not desisted from reading the objectionable material but rather said he had ‘not considered in any detail’ the material;
(k) stated that Alphater had received advice that the objectionable material was substantively prejudicial;
(l) stated that the process involving Mr Stout as the independent expert at Stage 3 of the dispute resolution process was ‘irrevocably infected’ by him having accepted and read the respondents’ argumentative submissions in the objectionable material;
(m) disagreed with his proposal for a further joint meeting, whereby he purported to place himself in the position of an arbitrator to determine the legal meaning of the terms of his own engagement;
(n) stated that he had departed from the terms of his engagement, which had made the dispute resolution process vastly more complicated, expensive and time-consuming;
(o) stated that throughout his involvement in the dispute resolution process, he had effectively opened a general invitation to the parties to provide unlimited rounds of factual and argumentative material;
(p) stated that his approach was fundamentally contrary to the terms of his engagement and that, therefore, he had repudiated them; and
(q) accepted his repudiation of the terms of his engagement and terminated the contractual relationship between them.
By letter dated 5 August 2014 from B2B Lawyers (on behalf of the respondents) to Lennon Mazzeo (on behalf of Alphater), the respondents made the following assertions:
(r) correspondence between the parties demonstrated that the independent expert appointed at Stage 3 had a broad, unfettered discretion to request and have regard to any material submission or information which he considered relevant to determining the value of the VCG Group as at 30 June 2010;
(s) as a matter of law, Mr Stout, as the appointed independent expert, was entitled to give the parties the opportunity to make whatever submissions he considered necessary or appropriate;
(t) the respondents had provided the Deloitte Private Report following Mr Stout’s ‘offer to the parties to provide reasons or better explanations behind the points of disagreement between the valuers’;
(u) Alphater had provided further information to Mr Stout concerning Mr Richardson’s methodologies; and
(v) if Mr Stout considered that the ‘objectionable material’ was irrelevant then presumably he would not take it into account.
The letter of 5 August 2014 concluded with an assertion by B2B Lawyers, on behalf of the respondents, that Alphater had repudiated the agreement. B2B Lawyers then advised that their clients accepted Alphater’s repudiation and rescinded the agreement. Specifically, the letter concluded:
The engagement of an independent expert to resolve the differences between the parties was an essential term of the dispute resolution agreement. By unilaterally purporting to terminate the agreed upon independent expert’s engagement without any proper basis before he had completed his task, your client has evidenced (scil, evinced) an intention to no longer [to] be bound by the dispute resolution agreement with our client by which our client agreed to purchase your client’s interests in the VCG Group, and has thereby repudiated the dispute resolution agreement.
Our clients elect to accept the repudiation and treat the dispute resolution agreement as being at an end.
Our clients reserve the right to make a counterclaim in the existing proceeding, or to issue separate proceedings, as they elect, for all of the costs of the dispute resolution process, which have now been wasted.
Analysis
There are two principal issues in this proceeding: first, whether any circumstances that occurred between 11 September 2013 and 30 July 2014 entitled Alphater to terminate Mr Stout’s retainer; and secondly, whether, in terminating Mr Stout’s retainer, Alphater evinced an intention not to be bound by the dispute resolution agreement.
Was Alphater entitled to terminate Mr Stout’s retainer?
Alphater relied on two matters in particular in support of its argument that Mr Stout had breached his retainer. He had read material which he was not permitted by the retainer to read, including the Deloitte Private Report and material relating to the period after 30 June 2010. And he had invited the parties to make submissions on any matter they saw fit, rather than only making specific requests for material of a factual nature. It may be assumed for present purposes, without deciding, that some of the material provided to Mr Stout and to which Alphater took objection lay outside Mr Stout’s retainer, and that he was confined to making requests for factual information. What is more important, however, is that there was a genuine dispute between the parties about those matters and that Mr Stout was seeking to resolve it.
In our view, Alphater was not entitled to terminate Mr Stout’s retainer. Mr Stout’s engagement with the parties during the course of his retainer shows no more than conduct that might reasonably be expected to be engaged in by an independent expert retained on behalf of the parties. At various points in time, Mr Stout attempted to clarify his instructions, to determine the precise boundaries of the material he was expected to rely upon, and to define the precise task he was required by the parties to undertake.
In the letter of 11 September 2013, Mr Stout was told that he could ‘take into account any additional factual material which [he] request[ed] to be provided by the parties, provided it [was] relevant to resolving the differences between [the relevant valuations]’. On 28 October 2013, Mr Stout was told that he could take into account ‘all information (past and future) … in valuing the business as at the relevant date [30 June 2010]’. Issues then arose:
(w) as to whether Mr Stout could make a request of the parties for all information that they regarded as relevant, or whether his requests were required to be confined to specific matters;
(x) as to whether Mr Stout could take into account ‘events which took place after the valuation date of 30 June 2010’; and
(y) as to whether Mr Stout could take into account, or receive, ‘argumentative submissions’ (whether ‘accounting’ or ‘legal’ or otherwise).
The question whether Mr Stout was confined to making specific requests on the one hand, or was permitted to make a general request of the parties to provide material they considered relevant on the other hand, is one that can be debated. Plainly, the initial correspondence to Mr Stout did not contain an express prohibition upon him making any ‘general’ requests. In the circumstances, it is difficult to see how Alphater could be critical of Mr Stout wanting to tease this matter out in a meeting (or meetings) between the parties. Similarly, it is difficult to see how one might have been critical of Mr Stout even if he had come to a conclusion adverse to Alphater — namely, that he was permitted to make a general request for material that either side considered was relevant to his task. Just why an expert might be barred from taking a position, that he or she might be assisted about the provision of material about which he or she had insufficient knowledge to make a specific request, is unclear.
As to the relevance of events that occurred after 30 June 2010 (and whether those events could be taken into account by Mr Stout), Alphater’s position, as set out in Lennon Mazzeo’s letter of 21 November 2013, was:
All past and future information should be taken into account as you see fit.
Again, it is difficult to be critical of Mr Stout in respect of his endeavours to clarify precisely what events and material he was required or permitted to take into account in undertaking his task. That said, one could be somewhat critical of the respondents for providing the accounts of the business in the years after 30 June 2010 (and after Mr Parisi had ceased to be involved) together with the Deloitte Private Report.
As to Alphater’s complaints concerning the provision of, or possible reliance upon, ‘argumentative submissions’, a distinction needs to be drawn between the provision (or attempted provision) of additional accounting opinions (in this case, specifically, the Deloitte Private Report) to Mr Stout, and the provision of submissions made by the various parties’ retained lawyers to Mr Stout about the bases upon which Mr Stout was to undertake his task and/or material that Mr Stout should or should not accept in performing his task.
Alphater submitted that neither the terms on which Mr Stout was retained nor the terms of the dispute resolution agreement permitted the respondents to provide to Mr Stout, or Mr Stout to have regard to, additional accounting opinions that sought to cavil with or explain the opinions already expressed by Mr Bala or Mr Richardson. We agree. The task required of the independent expert (Mr Stout) in performing stage 3 was for Mr Stout to use his own expertise (rather than relying upon the expertise or opinion of some other accounting expert) to perform the required valuation as at 30 June 2010. In this regard, it was wrong for the respondents to provide the Deloitte Private Report to Mr Stout. However, the mere provision of the Deloitte Private Report or any other objectionable accounting opinion did not mean that either party was entitled to unilaterally terminate Mr Stout’s retainer. Mr Stout, in the performance of his retainer, was entitled to seek a meeting or meetings with the parties in order to receive from them their submissions as to what (if anything) he should do with material that had been provided by one party and which was objected to by another party. It was this very step that Mr Stout was attempting to engage in when Alphater terminated his retainer.
As to the provision to, or receipt by, Mr Stout of ‘legal submissions’ or ‘legal opinions’, one needs to look more closely at the content of the material alleged to be objectionable before one can conclude whether or not it was legitimate for any such material to be provided to, or received by, Mr Stout. Plainly, submissions as to the scope of Mr Stout’s retainer and the nature of precisely what was expected of him were, and would have been, permissible. On the other hand, if accounting opinion was copied into a solicitor’s letter, then this would have been objectionable. Again, however, the issue becomes whether the mere provision of objectionable material to Mr Stout, in circumstances where Mr Stout was seeking the submissions of the parties as to what he could or could not do with such material, could, without more, justify the unilateral termination of Mr Stout’s retainer by the party objecting to the material in question.
Alphater contended that the process Mr Stout was required to undertake had been irrevocably infected by the regard he had had to the material to which Alphater objected. Evidence was led by Alphater from a chartered accountant, Russell Munday, to the effect that the provision of post 30 June 2010 material could prejudice the independent expert, and that it was a contamination of the whole process for Mr Stout to ask for, or receive, post 30 June 2010 material. The short answer to this contention is that Mr Stout had said that he had not considered the material. Alphater’s submissions in this regard rely on a spurious assumption, or assertion, that, when Mr Stout stated in the same letter that he had not considered the material ‘in any detail’, he had in fact considered it. The whole thrust of the letter, and Mr Stout’s request for a meeting to resolve the issue as to what he should do with the material, is to the contrary. The assumption or assertion on the part of Alphater provided no foundation for terminating Mr Stout’s retainer.
In our view, there was no basis for Alphater to unilaterally terminate Mr Stout’s retainer. The termination of Mr Stout’s retainer by Alphater constituted a breach of that retainer and the dispute resolution agreement. The proposed grounds of appeal contending to the contrary should be rejected.[2]
[2]It also follows that it is unnecessary to consider the issues raised in the notice of contention filed by the respondents.
Did Alphater repudiate the dispute resolution agreement?
The judge commenced his analysis of the question whether Alphater repudiated the dispute resolution agreement by referring to Finn J’s summary of the principles governing repudiation set out in GEC Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd,[3] as follows:
(i)A party will have repudiated a contract if, by words or conduct, it evinces an intention no longer to be bound by it or if that party shows it intends to fulfil the contract only in a manner substantially inconsistent with its obligations and not in any other way: Shevill v Builders Licensing Board; Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd.
(ii)The party’s conduct is to be judged objectively by reference to the effect it would be reasonably calculated to have upon a reasonable person: Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd; Satellite Estate Pty Ltd v Jaquet.
(iii)A party that acts on a genuine but erroneous view of its obligations under the contract will not for that reason alone have repudiated it. That party may still be willing to perform the contract according to its tenor; to recognise its heresy; or to accept an authoritative exposition of the contract: DTR Nominees Pty Ltd v Mona Homes Pty Ltd; Woodar Investment Development Ltd v Wimpey Construction UK Ltd. But persistence in an untenable construction will ordinarily be regarded as repudiatory: Summers v The Commonwealth; and see Chitty on Contracts.[4]
[3][2003] FCA 50 (‘Marconi’).
[4]Ibid [889]–[891] (citations omitted).
Additionally, the judge set out a passage of Ashley JA’s judgment[5] in R & A Cab Co Pty Ltd v Kotzman,[6] as follows:
[5]In respect of which Osborn JA agreed.
[6][2008] VSCA 68.
The appellant’s case rested, as I have said, solely upon the submission that the respondent had repudiated the contract. I should shortly state some of the key principles which emerge from the authorities.
First, in Shevill and Anor v The Builders Licensing Board Wilson J said that –
Repudiation of a contract is a serious matter and is not to be lightly found or inferred: Ross T Smyth & Co Ltd v T D Bailey, Son & Co. In considering it, one must look to all the circumstances of the case to see whether the conduct “amounts to a renunciation, to an absolute refusal to perform the contract”: Mersey Steel and Iron Co v Naylor, Benzon & Co.
In the same case, Gibbs CJ observed that a binding contract –
… may be repudiated if one party renounces his liabilities under it — if he evinces an intention no longer to be bound by the contract (Freeth v Burr) or shows that he intends to fulfil the contract only in a manner substantially inconsistent with his obligations and not in any other way.
Second, whether a party’s conduct amounts to repudiation is not ascertained by an inquiry into the subjective state of the mind of the party in default; it is to be found in the conduct, whether verbal or other, of the party in default which conveys to the other party the defaulting party’s … intention not to perform it or to fulfil it only in a manner substantially inconsistent with his obligations, and not in any other way.
Third, it has been stated very often that the whole circumstances of the case must be examined in order to see whether there was repudiation. Lord Keith of Kinkel put it this way in Woodar Investment Development Ltd v Wimpey Construction UK Ltd:
My Lords, in deciding the issue of repudiation which arises in this appeal, the guiding principle is that enunciated by Lord Coleridge CJ in Freeth v Burr.
“In cases of this sort, where the question is whether the one party is set free by the action of the other, the real matter for consideration is whether the acts or conduct of the one do or do not amount of an intimation of an intention to abandon and altogether to refuse performance of the contract.”
The matter is to be considered objectively — per Bowen LJ in Johnstone v Milling:
“The claim being for wrongful repudiation of the contract it was necessary that the plaintiff’s language should amount to a declaration of intention not to carry out the contract, or that it should be such that the defendant was justified in inferring from it such intention. We must construe the language used by the light of the contract and the circumstances of the case in order to see whether there was in this case any such renunciation of the contract.”
The importance of looking at the whole circumstances of the case was emphasised by Lord Selborne LC in Mersey Steel & Iron Co Ltd v Naylor, Benzon & Co and by Singleton LJ in James Shaffer Ltd v Findlay Durham & Brodie.
Fourth, qualifying to some extent the principle noted at [47], in some circumstance, ‘a mere honest misapprehension, especially if open to correction, will not justify a charge of repudiation’. The proposition has typically fallen for consideration where the defaulting party has acted in reliance upon an erroneous interpretation of the contract. In that particular context, the bona fides (or otherwise) of the defaulting party is a relevant factor. In Australia, as in England, it has been suggested that an aggrieved party should take steps to persuade the mistaken party of its error if it wishes to rely upon that other party’s conduct as a repudiation of the contract.[7]
[7]Ibid [44]–[49] (citations omitted).
The judge then identified the critical question as being whether, in terminating (or purporting to terminate) Mr Stout’s retainer, Alphater evinced an intention no longer to be bound by the dispute resolution agreement or an intention only to fulfil that agreement in a manner substantially inconsistent with its obligations. In concluding that, in all the circumstances of the case, Alphater evinced an intention no longer to be bound or only to fulfil the dispute resolution agreement in a manner substantially inconsistent with its obligations, the judge said:
Stage three of the dispute resolution agreement prescribed the referral of outstanding issues to ‘an independent expert’ (emphasis added) and contemplated that the parties ‘would be bound by the determination of such expert and the resulting valuation.’ The purpose of the dispute resolution agreement, and Mr Stout’s appointment in particular, was to ‘effectively finalise the dispute between the parties.’ Mr Stout’s appointment went to the heart of the dispute resolution agreement. In terminating his appointment, the plaintiff prevented its performance.
The termination of Mr Stout’s appointment amounted to a renunciation of the dispute resolution agreement that could not be remedied by the substitution of a new independent expert. Stage three was designed to finalise the parties’ dispute. So much is evident in the parties’ express agreement to be bound by the expert’s determination. In these circumstances, I cannot accept that there existed an implied term or agreement (for which Alphater seeks specific performance) that the parties should be entitled or required to appoint a new independent expert in circumstances where one party has unilaterally terminated Mr Stout’s appointment. There is no term to this effect in the dispute resolution agreement. If the agreement operated in this manner, the appointment of the independent expert itself (let alone the obligation to abide their decision) would not be meaningfully binding on the parties. If there was to be an arrangement between the parties to appoint a new independent expert, this would be a fresh agreement.
In this case, the relevant circumstances that should be taken into account in assessing whether Alphater repudiated the dispute resolution agreement also include the fact that the parties had already been to court for directions on the construction of their dispute resolution agreement in a proceeding that was still before the court and were able to do so again. I deal with this further below.
Further, the action of Alphater in terminating the appointment of the independent expert in circumstances where he had not read the material to which the plaintiff objected in any detail and had offered to call a meeting to resolve the use of the material, displayed an intention by Alphater to get rid of the duly appointed independent expert rather than an intention to comply with the contract.
The failure of Alphater to avail itself of the assistance of the court is a significant matter in my view. The independent expert was not intending to make a decision. He offered a meeting on whether the material was relevant or not. The independent expert was not about to do something that threatened the proper exercise of his functions. He had been told not to read the material objected to and he said that he would not. There was no good reason why the defendants could not have been consulted about the issues Alphater had and the matter resolved in court. Further, even if Mr Stout made a final determination, it would have still been open for either party to come to the court and make submissions regarding that final determination.
The actions taken by Alphater were not open to correction. Mr Stout’s termination went to the heart of the dispute resolution agreement. The parties had agreed on the independent expert and gone to the trouble and expense of presenting material to Mr Stout.
I find that Alphater’s conduct in all the circumstances conveyed to the defendants that Alphater no longer intended to be bound by the dispute resolution agreement and use, as required by the third step of that agreement, the independent expert agreed to by the defendants.[8]
[8]Reasons [155]–[161].
As the judge stated correctly, repudiation occurs when a party evinces an intention no longer to be bound by the contract, or to fulfil it only in a manner substantially inconsistent with that party’s obligations. An actual intention to repudiate is not necessary. The issue is resolved objectively by reference to the effect that the breaching party’s conduct would have on a reasonable person.[9] Further, as has been said many times before, repudiation is a serious matter and is not lightly to be found.[10]
[9]Penola Trading Co Pty Ltd v Sunny Springs Pty Ltd [2009] VSCA 161.
[10]Shevill v Builders Licensing Board (1982) 149 CLR 620, 633–4; Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17, 32; Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd (1989) 166 CLR 623, 633, 643 and 657.
There can be little doubt that in terminating Mr Stout’s retainer, Alphater repudiated the parties’ agreement with Mr Stout. That, however, is not to say that Alphater repudiated the dispute resolution agreement.
The dispute resolution agreement was an agreement that settled the earlier dispute that arose between the parties when Mr Parisi was removed as a director of VCG. But for the dispute resolution agreement, the parties would have had to find some other way to resolve their earlier dispute (for example, running and fighting to judgment the oppression proceeding in relation to the conduct and operation of VCG at the time Mr Parisi was removed as a director of VCG). The respondents submitted that Alphater should have approached the Court, and that its failure to do so revealed an intention not to be bound by the dispute resolution agreement. It was submitted that, where valuation machinery breaks down, the Court may substitute other machinery so that the valuation agreement may be carried out.[11]
[11]Sudbrook Trading Ltd v Eggleton [1983] AC 444, 483–4.
The dispute resolution agreement was, as we have said, a three-stage process designed to value relevant interests and to separate the conflicting parties from each other. At the time of Mr Stout’s termination, two-thirds of the agreement had been performed. Plainly, Alphater was dissatisfied with the way in which the third part of the dispute resolution agreement was then being performed, and it had communicated that dissatisfaction to the respondents and Mr Stout.
There is nothing in the dispute resolution agreement that made Mr Stout’s continued involvement in the dispute resolution process an essential step so far as the performance of that agreement was concerned. One could well envisage circumstances where Mr Stout (or indeed any independent expert retained by the parties) might become unavailable or unable to complete the task in respect of which they had been engaged. In our view, there is no reason to conclude other than that the dispute resolution agreement (while not containing an express term) would have permitted the parties in such circumstances to appoint another independent expert. In these circumstances, while Alphater could also have approached the Court in order to seek to have the issues resolved, there was at least one other way of proceeding consistently with the continued operation of the agreement. The engagement of Mr Stout, rather than another expert, was not demanded by the agreement. The fact that Alphater took the course of terminating Mr Stout’s retainer, albeit unilaterally and wrongly, does not demonstrate an intention to renounce the wider dispute resolution agreement.
With great respect to the trial judge, we are unable to conclude that Alphater’s wrongful termination of Mr Stout’s retainer involved a repudiation of the dispute resolution agreement. Nothing in Alphater’s correspondence suggests that it would no longer perform the dispute resolution agreement, or that it regarded itself as not bound by the terms of the dispute resolution agreement. Rather, Alphater’s correspondence was all to the effect that Mr Stout had been improperly influenced by the provision of objectionable material and/or had shown himself as unwilling to perform the terms of his retainer. Whatever damages or other consequences might flow from a wrongful termination of Mr Stout’s retainer, we are unable to see how it could objectively be concluded that the termination of Mr Stout’s retainer constituted a repudiation of the dispute resolution agreement.
Having regard to our conclusion on the issue of repudiation, it is not necessary for us to address Alphater’s argument that it had an honest misapprehension regarding its obligations and duties under the dispute resolution agreement. There would be an air of artificiality about doing so. If we had concluded that there had been a repudiation, any honest misapprehension regarding Alphater’s rights and obligations under the dispute resolution agreement would have been relevant to that finding. Such a misapprehension could not undo the finding. In other words, once it had been concluded that the agreement was repudiated, that conclusion would not be affected by revisiting the question of Alphater’s apprehensions as to its rights and obligations.
Conclusion
The application for leave to appeal will be granted and the appeal allowed. The orders made below will be set aside and it should be declared that the dispute resolution agreement was not validly terminated by the respondents and that it remains on foot. Subject to hearing further argument, we would remit the proceeding to the Trial Division for rehearing and determination in accordance with these reasons. The question of damages and all issues concerning the further performance of the dispute resolution agreement, including the appointment of an independent expert (who, subject to his consent, could theoretically be Mr Stout) are matters more suitable to be dealt with in the Trial Division after the calling of such further evidence, if any, as the judge hearing the matter considers appropriate.
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