Australis Media Holdings Pty Ltd v Telstra Corporation Ltd
[1999] NSWSC 246
•30 March 1999
CITATION: Australis Media Holdings Pty Ltd v Telstra Corporation Ltd [1999] NSWSC 246 CURRENT JURISDICTION: Equity Division
Commercial ListFILE NUMBER(S): 50213/97 HEARING DATE(S): 17.3.99 and 18.3.99 JUDGMENT DATE:
30 March 1999PARTIES :
Australis Media Holdings Pty Ltd (Receivers and Managers Appointed) and Galaxy Network International Pty Ltd (Receivers and Managers Appointed) v Telstra Corporation Ltd and The News Corporation LtdJUDGMENT OF: Hunter J
COUNSEL : Plaintiffs: MJ Slattery QC
1st Defendant: SD Rares SC + K Rees
2nd Defendant: MA Pembroke SC + RJ DarkeSOLICITORS: Plaintiffs: Harper Watson
1st Defendant: Mallesons Stephen Jaques
2nd Defendant: Allen Allen & HemsleyCATCHWORDS: Contract - construction of terms - implied term - criteria for implication of term - distinction between term to be implied and rationale for implication. CASES CITED: BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266; Australis Media Holdings Pty Ltd v Telstra Corporation Ltd (1998) 43 NSWLR 104; Byrne v Australian Airlines Ltd (1995) 185 CLR 410; Nullagine Investments Pty Ltd v The Western Australian Club Incorporated (1993) 177 CLR 635; Hirsch & Co v Burns (1897) 77 LT 377 (HL); Forsayth Oil & Gas NL v Livia Pty Ltd (No 2) (1985) 9 ACLR 831. DECISION: The agreement between the parties of 9 March 1995 did not contain a term of the kind sought to be implied on the ground that it lacked clarity, was not an obvious implication and was unnecessary to give business efficacy to the agreement.
IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
COMMERCIAL LISTHUNTER J
TUESDAY 30 MARCH 1999
50213/97 AUSTRALIS MEDIA HOLDINGS PTY LTD & ANOR v TELSTRA CORPORATION LIMITED & ANOR
REASONS FOR JUDGMENT
1 By the amended summons, Australis Media Holdings Pty Ltd (Receivers and Managers Appointed) (Australis) and Galaxy Network International Pty Ltd (Receivers and Managers Appointed) (Galaxy), claimed damages for breach of contract in writing, being Heads of Agreement dated 9 March 1995 between Australis, Galaxy, Telstra Corporation Ltd (Telstra), The News Corporation Ltd (News) and a joint venture, TNC, formed by Telstra and News (the heads of agreement).
2 Under the heads of agreement, Australis warranted to procure the grant by Galaxy of exclusive cable rights of distribution of Galaxy’s programme channels through the TNC network feeding home entertainment subscription television broadcasting services by cable. Telstra warranted that it had commenced the requisite cable roll-out for TNC at the time of entry into the heads of agreement and further warranted that it would retain ownership and control of the cable, and would not permit third party rights to be created which were inconsistent with the heads of agreement.
3 TNC covenanted that it would ensure that the cable had passed a designated number of homes and premises and by a sequence of dates as follows:
4 Further, Telstra and News undertook and guaranteed that TNC would have the minimum number of subscribers to the TNC network designated from year to year as follows:
“6.3 TNC shall ensure that the TNC Network has passed the following number of homes and other premises (as the expression “homes passed” is commonly understood in the Australian telecommunications industry) by the following dates:
Date Number (Cumulative)
1 July 1995 50,000
31 December 1995 500,000
31 December 1996 1,000,000
31 December 1997 1,500,000
31 December 1998 2,000,000
31 December 1999 2,250,000
31 December 2000 2,500,000
Thereafter To be agreed between Galaxy and TNC, but not less than 2,500,000”
5 Payment for those services was calculated on a per subscriber basis. Galaxy also had a network which enabled it to distribute subscription television broadcasting services by satellite and MDS systems. For their part, Telstra, News and TNC covenanted to procure that TNC would grant exclusive satellite and MDS rights to Galaxy for distribution of the TNC channels through the Galaxy network.
“6.4 Each of Telstra and News undertakes and guarantees to Australis and Galaxy that TNC will have the following minimum number of average subscribers to the TNC Network in each calendar month of the years commencing on the following dates:
Date Number (Cumulative)
1 July 1995 (6 months only) 10,000
1 January 1996 75,000
1 January 1997 175,000
1 January 1998 262,500
1 January 1999 425,000
1 January 2000 475,000
1 January 2001 550,000
Thereafter To be agreed between Galaxy and TNC, but not less than 550,000”
6 There was also provision in the heads of agreement for mutual investment of capital in the enterprises in which the parties had commercial interests. In the case of News and Telstra, obligations were created for Telstra or, in substitution for Telstra, News, to subscribe for shares in the capital of Australis Media Ltd (Australis Media), a related corporation to Australis and to Galaxy. The terms of that equity participation are set out below as I think they have some bearing on the construction question posed in these proceedings:
7 By way of contrast, the envisaged equity participation in TNC by Australis was expressed in clause 7.6 of the heads of agreement as follows:
“7. EQUITY PARTICIPATION
7.1 Within 7 days of the satisfaction of the conditions set out in Clauses 1 and 7.5, Telstra or a related body corporate (or, failing them, News or a related body corporate) shall subscribe for 25.5 million ordinary shares in the capital of ALM at A$1.40 per ordinary share. Such shares shall rank pari passu with and shall have rights identical to all existing ordinary shares.
7.2 Within 7 days of the satisfaction of the conditions set out in Clauses 1 and 7.5, News or a related body corporate shall subscribe for 25.5 million convertible notes in the capital of ALM at A$1.40 per convertible note. Such notes shall rank pari passu with and shall have rights identical to all existing convertible notes.
7.3 Within 7 days of the satisfaction of the conditions set out in Clauses 1 and 7.5, Australis shall procure that ALM shall grant to Telstra or a nominee related body corporate an option to subscribe for a further 25.5 million ordinary shares in the capital of ALM at A$1.40 per ordinary share. Such option shall be exercisable in whole and not in part at any time from the date of grant until the date 27 months after the date of grant. Relevant shares shall rank pari passu with and shall have rights identical to all existing ordinary shares.”
8 It is the interest under this subclause which underpins the claimed implication of terms in the heads of agreement relied upon by Australis in these proceedings. I think it is sufficient to observe that, whereas in the case of the equity participation by Telstra or News, which was couched in terms of obligation, the equity participation by Australis was expressed in terms of an obligation on the part of Telstra, News and TNC to offer to Australis the right to “subscribe for up to 10% of the ordinary equity of TNC” and also to offer to Australis the option “to subscribe for a further 10% of the ordinary equity of TNC…”
“7.6 Within 7 days of the satisfaction of the conditions set out in Clause 1, Telstra, News and TNC shall offer to Australis/TCI the right for Australis/TCI or its nominee to subscribe for up to 10% of the ordinary equity of TNC at cost plus interest at TNC’s bank rate from the date on which Telstra and News contribute their funds to TNC and shall also offer to Australis/TCI the option for Australis/TCI or its nominee to subscribe for a further 10% of the ordinary equity of TNC at cost plus a premium of 10% plus interest at TNC’s bank rate from the date on which Telstra and News contribute their funds to TNC. Such option shall be exercisable in whole and not in part at any time from the date of grant until the date 27 months after the date of grant.”
9 In relation to a sports joint venture between Australis and another entity known as Prime, it was contemplated that Telstra and News would each acquire a 25% share in that joint venture with Australis and Prime for the price calculated in accordance with clause 3 of the heads of agreement.
10 Clause 1 of the heads of agreement stipulated certain conditions precedent in the following terms:
11 No “long form” agreement has been entered into by the parties as at the hearing of these proceedings. The parameters of the operation of the heads of agreement were expressed in clauses 7.7 and 10.3. Clause 7.7 was in the following terms:
“1. CONDITIONS PRECEDENT
1.1 Subject to Clause 1.2, this is a legally binding Agreement.
1.2 Clauses 3 to 9 are not to have any operation or legal effect unless and until:
(a) the parties receive an authorisation, approval or notification from the Trade Practices Commission that it has no objection to the Agreement; and
(b) the compliance by News and Australis with their obligations under Clause 2.
The above conditions are for the benefit of Australis and may be waived by Australis at any time in its sole and absolute discretion. Australis agrees not to waive the condition contained in Clause 1.2(a) in the face of serious objection from the Trade Practices Commission. If the conditions are not satisfied or waived by Australis by 30 April 1995, this Agreement may be terminated by Australis in its sole and absolute discretion, without limitation to any other remedies available to any party for prior breach of this Agreement. The parties agree to use their best endeavours (including under Clause 12.10) to satisfy the above conditions.
1.3 The parties shall embody the terms of this Agreement in appropriate long form Agreements. The parties shall negotiate in good faith and use their best endeavours to enter into such long form Agreements as soon as possible after satisfaction or waiver of the conditions set out in Clause 1.2.”
12 By clause 10.3, it was declared that the heads of agreement related to “subscription broadcasting and/or narrowcasting services” for home video and/or audio entertainment regulated under the Broadcasting Services Act 1990 (Cth).
“7.7 Australis acknowledges that Telstra and News intend to establish other joint ventures that will utilise the TNC Network for services other than those described in Clause 10.3. Australis further acknowledges that it will have no rights in relation to those joint ventures.”
13 Clause 8 of the heads of agreement contemplated expansion into further fields of pay television and other joint venture arrangements to be negotiated in good faith by TNC and Galaxy.
14 By clause 9 the parties agreed to cooperate to develop “business opportunities in New Zealand and other Pacific Rim territories” and contemplated expanded business relations between the parties.
15 Clause 11 dealt with confidentiality and of particular note is clause 11.4 which was in the following terms:
16 During the course of the hearing I referred to that clause as a blindfold clause as I infer from it that, until such time as Australis entered into the heads of agreement, it was not to receive details of TNC’s business plan or of the TNC joint venture agreement.
“11.4 Following exchange of this Agreement, Telstra, News and TNC shall provide to Australis full details of the TNC business plan and a copy of the TNC Joint Venture Agreement.”
17 In relation to the terms upon which Australis could acquire an equity interest in TNC, it was further provided by clause 7.6 as follows:
18 Except for the description of TNC in the heads of agreement as a “joint venture formed between Telstra and News for the establishment of a business for the distribution of home entertainment subscription television services throughout Australia”, the heads of agreement do not describe the nature of that joint venture.
“7.6 … Relevant equity shall rank pari passu with and shall have rights identical to all existing ordinary equity, except that Australis/TCI acknowledges that to pass a board or member resolution requires the affirmative vote of Telstra and News. In conjunction with Australis/TCI or its nominee making the initial investment, Australis/TCI or its nominee shall become a party to the TNC Joint Venture Agreement, with Telstra, News and TNC. Australis/TCI or its nominee shall have proportional representation on the board of TNC. The TNC Joint Venture shall continue to be managed as agreed between Telstra and News. Without limitation, the following matters relevant to the TNC Joint Venture shall require the unanimous consent of all holders of ordinary equity in the TNC Joint Venture:
(a) amending the TNC Joint Venture Agreement;
(b) admitting other participants to the TNC Joint Venture or redeeming the share of any existing participant in the TNC Joint Venture;
(c) extending the business of the TNC Joint Venture beyond the services described in Clause 10.3;
(d) terminating or dissolving the TNC Joint Venture other than in accordance with its terms;
(e) permitting or requiring additional capital or other contributions to be made to the TNC Joint Venture which are not scheduled under the approved budgets or business plans;
(f) incurring any indebtedness in the name or for the account of the respective participants in the TNC Joint Venture;
(g) issuing any equity, debt or other securities of the TNC Joint Venture, other than as provided under the approved budgets and business plans, provided that Australis/TCI has the right to participate on the best terms offered from time to time to any person;
(h) approving distributions of property of the TNC Joint Venture, other than as provided under the approved budgets and business plans, provided Australis/TCI has the right to participate in proportion to its holding;
(i) commencing, settling or abandoning any litigation or dispute for an amount in excess of A$10 million relevant to the TNC Joint Venture (other than against one of the participants); and
(j) entering into any contractual obligation or commitment under which the TNC Joint Venture will incur a liability (contingent or otherwise) in excess of A$2,500,000, other than as provided under the approved budgets and business plans.”
19 Expressions such as “the right … to subscribe for … 10% of the ordinary equity of TNC”; that the “equity shall rank pari passu with … existing ordinary equity”; and the acknowledgment by Australis that the passing of “a board or member resolution of (TNC required) the affirmative vote of (Telstra and News)”, all imply that TNC was, or was intended to be, a corporate vehicle.
20 So, the heads of agreement tell the reader very little about that entity and nothing at all about its business plan, nor of the joint venture agreement, except to name the parties to it and the general area in which it planned to operate. There is no suggestion that any of the details of TNC’s business plan or of the joint venture agreement relating to TNC was communicated to Australis prior to the execution of the heads of agreement, or that the subject matter of the business plan or of the TNC business agreement formed some common substratum in the formation of the heads of agreement which was known to each of the parties. On the contrary, clause 11.4 of the heads of agreement I read as evincing the intention of News, Telstra and TNC that that information would not be available to Australis or Galaxy prior to the execution of the heads of agreement.
21 While the heads of agreement made detailed provision in clause 7.6 for the manner in which Australis, as a minority shareholder, could control the operations of TNC, the heads of agreement was silent on any ability of Australis to control the operations of TNC in the period after execution of the heads of agreement and prior to Australis taking up equity in TNC. It is in that contractual context that Australis contended that there was an implied term of the heads of agreement as follows:
22 Australis and Galaxy alleged a breach of that implied term by an agreement between Telstra and News in mid 1997 “that the cable roll-out by Telstra would be permanently reduced to pass approximately only 2,000,000 to 2,500,000 homes”. Particulars of damage said to flow from that breach were given as follows:
“ C9. It is and was an implied term of the Heads of Agreement that until a reasonable time has elapsed after the Defendants have offered Australis the right to subscribe for equity in the TNC Joint Venture in accordance with their obligations under clause 7.6 of the Heads of Agreement, the Defendants may not amend or cause or permit to be amended the agreements creating and governing the TNC Joint Venture so as to materially reduce their respective obligations pursuant to those agreements or to render nugatory or worthless or to seriously undermine the right of Australis under the Heads of Agreement to subscribe for equity in the TNC Joint Venture.”
“ Particulars
(a) The number of potential subscribers to the TNC Network was significantly reduced and Australis and Galaxy have lost the opportunity of receiving additional payments pursuant to the express terms of the Heads of Agreement referred to at C8 above.(b) The Plaintiffs presently estimate that the additional homes passed would have resulted in a penetration rate for new subscribers of at least 25%. On that basis, the Plaintiffs presently estimate their damages referred to at particular (a) above as follows:
Period Reduction in Lost payments Total
Homes Past calculated using a
net gain to Australis
of US$4.70 per
subscriber per
month30 September 1997 - 200,000 200,000 x 25% x US$705,000
31 December 1997 US$4.70 x 3 months31 December 1997 - 400,000 400,000 x 25% x US$1,410,000
31 March 1998 US$4.70 x 3 months31 March 1998 - 13 700,000 700,000 x 25% x US$1,167,950
May 1998 US$4.70 x 1.42
monthsUS$3,282,950
23 It is noted that those damages are not expressed as damages incurred as a result of the right of Australis to acquire equity in TNC being rendered “nugatory or worthless”.
========== ”
24 On their application and by consent of the parties, on 4 December 1998 Rolfe J made the orders and noted the agreement of the parties as follows:25 The documents exhibited to the affidavit of Andrea Martignoni are the heads of agreement and a deed of release dated 25 July 1997 (the deed of release).
1. The following questions shall be heard separately and prior to the hearing of all other questions:
“BY CONSENT, the Court makes the following orders:
2. The Court notes that the parties agree that:
(a) whether the Heads of Agreement referred to in the Amended Summons contains the implied term contended for in paragraph C9 (where second appearing) of the Amended Summons;
(b) if yes to (a), whether on a proper construction of the Heads of Agreement any entitlement which the First Plaintiff has or may have under Clause 7.6 of the Heads of Agreement to subscribe for equity in the TNC Joint Venture could arise prior to entry by the parties into long form agreements as contemplated by Clause 1.3 of the Heads of Agreement.
(c) If yes to (a) and no to (b), does the implied term described in 1(a) have any legal effect prior to the entry by the parties into long form agreements as contemplated by clause 1.3 of the Heads of Agreement;
(d) if yes to (a) and (b); or if yes to (a), no to (b) and yes to (c); whether, in agreeing to, making and implementing the Agreement, as defined in the attached Statement of Assumed Facts, the Defendants:
(i) materially reduced their respective obligations under the agreements creating and governing the TNC Joint Venture; or
(ii) rendered nugatory or worthless or seriously undermined the entitlement of the First Plaintiff under Clause 7.6 of the Heads of Agreement to subscribe for equity in the TNC Joint Venture.
(a) The separate questions shall be determined on the basis of the attached Statement of Assumed Facts. The parties may not depart from or dispute the assumed facts for the purposes of any appeal from the determination of the separate questions.
(b) If the separate questions are answered as follows:
(i) question (a) is answered no;
or(ii) question (a) is answered yes, but question (b) and (c) are answered no;
(iii) question (d), if reached is answered no;
or
then the Defendants are entitled to have judgment entered in their favour.
(c) If as a result of the determination of the separate questions, judgment is not entered in favour of the Defendants, then the parties are not bound by the determination of the separate questions and/or the facts assumed for the purposes of that determination.
(d) The evidence required for the hearing of the separate questions is:
(i) the documents exhibited to the affidavit or (sic) Andrea Martignoni affirmed 22 October 1998;
(ii) the Umbrella Agreement made between the Defendants on 9 March 1995.”
26 The parties to that deed included News, Telstra and Australis Media. The “Statement of Assumed Facts” was as follows:
27 I treat paragraph (a) of the statement of assumed facts as a statement of the relevant effect of the deed of release. I also infer from paragraph (a), that the reference to the “obligation to use best efforts to meet the … timetable” set out in that paragraph is a reference to the obligations of the parties to the Umbrella Agreement of 9 March 1995: being the document referred to in paragraph 2(d) of the agreement of the parties accompanying the orders of Rolfe J.
“(a) On 25 July 1997 the Defendants amended the agreements creating and governing the TNC Joint Venture by making an agreement (“the Agreement”) that the cable roll-out by the First Defendant would be permanently reduced so that it passed only approximately 2.5 million homes by 31 December 1997 in lieu of an obligation to use best efforts to meet the following timetable:
Date Home Passed
30 June 1995 0.400 million
30 September 1995 0.550 million
31 December 1995 0.750 million
31 March 1996 1.000 million
30 June 1996 1.300 million
30 September 1996 1.500 million
31 December 1996 1.700 million
31 March 1997 2.000 million
30 June 1997 2.489 million
30 September 1997 2.700 million
31 December 1997 2.900 million
31 March 1998 3.200 million
30 June 1998 3.489 million
30 September 1998 3.600 million
31 December 1998 3.700 million
31 March 1999 3.800 million
30 June 1999 4.000 million
(b) Since 25 July 1997 the Agreement has been implemented in that at all times since 25 July 1997 the cable roll-out by the First Defendant has passed only approximately 2.5 million homes.
(c) The terms of the Heads of Agreement have not been embodied in long form agreements as contemplated by Clause 1.3 of the Heads of Agreement.”
28 While the deed of release and the umbrella agreement are clearly relevant to issues relating to breach and damages as alleged by Australis, objection was taken to the admission of those documents in aid of construction of the heads of agreement. Those documents have been admitted only as relevant to the issue of breach and, in my view, recourse to those documents is not permissible in aid of construction of the heads of agreement for the purpose of determining whether the implication relied upon by Australis should be made.
29 It may be permissible to have recourse to that material in order to identify, for example, the business plan or the joint venture agreement referred to in the blindfold clause 11.4 of the heads of agreement if it became necessary as a matter of construction to understand the meaning of those terms. However, that is not the case and I am satisfied that the manner in which Australis has sought to have recourse to the umbrella agreement and its attachments in aid of the construction of the heads of agreement upon which it relies in these proceedings cannot be justified. I doubt if authority is required for that proposition.
30 It is not suggested that the contents of the umbrella agreement were made known to Australis or Galaxy prior to execution of the heads of agreement. On the contrary, clause 11.4 of the heads of agreement would appear to have deprived Australis of access to the umbrella agreement prior to execution of the heads of agreement.
31 It is common ground that to succeed in these proceedings, Australis must satisfy the five criteria for the implication of a term of a contract as expressed in the joint opinion of the majority in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 at 283 as follows:
32 It is not intended as any disrespect of the law or of those who make it to observe that I know of no other body of legal principles which are as self delusionary as the expression of the degree of certainty required for the implication of terms in contracts. While expressed as implications of necessity to give business efficacy to an agreement, as implications that are so obvious that they go without saying, the reality is that the long history of case law seeking to give expression to those concepts is littered with reversed and majority decisions of which BP Refinery is as good an example as any and one in which Lord Wilberforce was a dissentient.
“… (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.”
33 In that case, the implication of the subject agreement by the Full Court of the Supreme Court of Victoria was rejected by the Privy Council as being “wholly unreasonable and inequitable”. Their Lordships devised a substitute implied term. Of that term Lord Wilberforce and Lord Morris of Borth-y-Gest were of the opinion that it could not “be justified under the normal principles. It (was) not necessary in order to produce business efficacy, (and was) inconsistent with the expressed terms of the … agreement …” (at 294).
34 In this case I am in the felicitous position of being presented with no such difficulties of construction. In my view, there is no warrant in reasonableness, nor in necessity, to import the term sought to be relied upon. Moreover, it is a term which, in my view, falls far short of the requirement that it must be capable of clear expression.
35 The heads of agreement has been the subject of prior litigation in this court leading to the decision of the Court of Appeal reported in (1998) 43 NSWLR 104 (the Court of Appeal’s decision). That was an appeal from a decision of McLelland CJ in Eq in which his Honour relied upon implied terms of the heads of agreement to support injunctions granted against Australis and Galaxy: implications which were not supported by the Court of Appeal.
36 Of the second of the implications found by McLelland CJ in Eq, the Court of Appeal observed as follows:
“In his “alternative way of approaching the matter”, the learned trial judge referred to implied obligations:
“… not voluntarily to do anything to cause or permit the enjoyment by the plaintiffs of the benefits contemplated in the above quoted parts of clause 3, 5.1, 5.4, 8.1, 8.2 and 9.6 of the agreement to be rendered nugatory or worthless or seriously undermined.”
His Honour cited Byrne v Australian Airlines Ltd and Breen v Williams . We are of the view that his Honour erred in taking this alternative approach, first because it is not supported by the authorities cited, and secondly because it lacks the “necessity” required before a term may be implied. Many terms now said to be implied by law in various categories of contract reflect the concern of the courts that, unless such a term be implied, the enjoyment of the rights conferred by the contract would or could be rendered nugatory, worthless, or, perhaps, be seriously undermined. It would be, however, fallacious to elide the purpose of implying such terms with the terms themselves. To do so would replace necessity with desirability. The passages cited from Nullagine Investments Pty Lid (sic) v WA Club Inc (1993) 177 CLR 635 at 647-648, 659, Byrne and Breen, show the High Court as drawing a clear distinction between the term implied and its rationale . A contract may “contemplate” many benefits for the respective parties, but each can only call on the other to provide, or co-operate in the providing of, benefits promised by that party. For example, in the absence of an express covenant, a landlord is not bound in contract to repair the demised premises.”(Emphasis added)
(at 124-125)
37 It is clear that the form of the implied term advanced on behalf of Australis had been extracted from observations made by McHugh and Gummow JJ in Byrne v Australian Airlines Ltd (1995) 185 CLR 410 at 450, citing Nullagine Investments Pty Ltd v The WesternAustralian Club Incorporated (1993) 177 CLR 635 at 647-448, 659. McHugh and Gummow JJ said of terms to be implied by law that such implications “in various categories of case reflect the concern of the courts that, unless such a term be implied, the enjoyment of the rights conferred by the contract would or could be rendered nugatory, worthless, or, perhaps, be seriously undermined”: the passage repeated in the Court of Appeal’s decision.
38 Although this case is not concerned with implication by law, Australis has picked up that expression of the rationale for the implication of terms by law in the terms of the implication formulated by it. There is a real problem with that approach which I think has been noticed in the Court of Appeal’s decision; that is, the confusion of the terms to be implied with the rationale for the implication.
39 In Byrne, their Honours were expressing the rationale for the implication, namely equating it with the requirement of necessity in implying a term in a contract, in those cases, by implication of law. I have emphasised in the passage quoted above from the Court of Appeal’s decision the observations of the Court of Appeal pointing out the confusion between the term to be implied and the rationale for the implication.
40 By way of contrast, it might be said that the consent of Australis in the operation of TNC, as laid down in clause 7.6(a)-(j), is designed to avoid the degrading of Australis’ interest in TNC. Each of them could be seen as acts which, if taken without the consent of Australis, could render the Australis investment “nugatory or worthless”.
41 In this case there has been no attempt by Australis to formulate any implication in terms in the nature of clause 7.6(a)-(j) for the period prior to investment by Australis in TNC. Rather, Australis has proffered the rationale for the implication of some unidentified term. I think it is this confusion which robs the suggested implication of clarity and requires its rejection for that reason alone.
42 However, in my view, Australis faces an impossible task in satisfying the test of necessity in seeking to imply some right to control the operation of TNC, whatever that entity was, from the time of the execution of the heads of agreement up to the acquisition of an equity interest in TNC by Australis. I think the alleged breach by Telstra and News of the proffered implied term illustrates that difficulty. The relevant assumed fact is the amending of the umbrella agreement by the deed of release so as to “permanently reduce” the number of homes to be passed in the cable roll-out to the figure of 2,500,000 by 31 December 1997.
43 Why is that a breach of any implied term to protect Australis’ future interest in TNC? Australis and Galaxy had the benefit of covenants by TNC that it would ensure that the number of homes passed would reach 1,500,000 by 31 December 1997 and 2,500,000 by 31 December 2000. Thereafter, the number was to be determined by some unspecified mechanism, but so as never to drop below 2,500,000. Further, Australis had the benefit of the undertaking and guarantee by Telstra and News that the minimum number of subscribers would reach 550,000 by 1 January 2001 and, thereafter, not to drop below that number.
44 So, in terms of homes to be passed and, inferentially, of subscribers to the TNC network, the “permanent” reduction under the deed of release represented an advance on what was guaranteed to Australis under the heads of agreement.
45 How is it said that the deed of release reduced the number of homes to be passed, as contemplated under the umbrella agreement, in a way which degraded the putative interest of Australis in TNC? There is no suggestion that the reduction in roll-out was agreed to otherwise than in the legitimate pursuit of the commercial interests of Telstra and News, leaving aside Australis’ claim based on the supposed implication of terms. Who is to say that the deed of release has not benefited Telstra, News and TNC and, in turn, Australis by agreeing to a reduction in the extent of required cable roll-out? The costs associated with the task of cable roll-out may have proved financially crippling to Telstra and News and, in turn, made the acquisition of an equity interest in TNC by Australis “at cost plus interest” or “at cost plus a premium of 10% plus interest” prohibitively expensive.
46 It simply does not follow that reduction in cable roll-out has any effect financially on the state of TNC. It could be beneficial, it could be detrimental, it could be neutral. In other words, without more, it would not be possible to say that entry into the deed of release was precluded by any entitlement of Australis to have the financial attractiveness of TNC preserved in the period after execution of the heads of agreement and prior to its acquisition of an equity share in TNC. This is compounded by the absence from the heads of agreement, or from admissible surrounding circumstances, of any relevant description of TNC’s financial or business structure.
47 Moreover, if Australis was to be regarded as holder of a bare option or as holder of the benefit of an obligation to be offered the right to participate in the equity of TNC, the cases strongly point to the exclusion of any implication of terms in the form of the proffered implied term. See Hirsch & Co v Burns (1897) 77 LT 377 (HL) at 378-382 and Forsayth Oil & Gas NL v Livia Pty Ltd (No 2) (1985) 9 ACLR 831 at 834.
48 In this case, as it happens, I do not regard the rights of Australis under clause 7.6 as that of a holder of a bare option. I think the right under clause 7.6 has to be read in the context of the mutual engagement of the parties in their respective business activities which involved mutual investment in the other’s business enterprise.
49 However, the form of the right to take up an equity remains important. For example, in the case of News and Telstra, the heads of agreement imposed obligations upon one or other of them to make capital investments in Australis Media. Their position I would see to be much stronger than the one occupied by Australis in these proceedings were they contending for the implication of a term to control Australis Media’s business activities in the interim between the execution of the heads of agreement and acquisition of equity participation in Australis Media. In Australis’ case, it has no obligation to acquire an interest in TNC. It has the right to effect such an acquisition through the obligation of TNC to offer Australis equity participation and it has the option conferred by clause 7.6 to acquire further equity interest in TNC.
50 In that context, one may ask, as at the time of execution of the heads of agreement, what was the entity whose business operations were to be placed under constraint by implication of Australis’ implied terms? What was the business plan of that enterprise and what were the terms of the agreement under which it operated? None of these things were known to Australis outside the terms of the heads of agreement and that told Australis precious little. In the circumstances, I think it would be almost impossible to formulate an implied term that was so obvious and which was so necessary to give business efficacy to the agreement between Australis, News and Telstra.
51 Certainly, in my view, a term along the lines of that relied upon by Australis would be almost meaningless. What acts would it prohibit that would not be caught by the express terms of the heads of agreement?
52 This is not a case where the proffered implied term suffers from a remediable criticism. In such a case, notwithstanding the rigidity of the separate questions to be determined, I would pursue a course which permitted amendment to the implied term to meet particular criticisms. No such application has been made on behalf of Australis and I am of the view that none would have been available to cure what I believe to be the fatal deficiencies in the implied term contended for by Australis.
53 In my view, question 1(a) should be answered “no” and, accordingly, the defendants are entitled to judgment in accordance with the agreement noted by Rolfe J in the order of 4 December 1998.
54 Although it is unnecessary to go further, I would express the view that upon the proper construction of clause 7.6, the obligation to make the offer to Australis arose within seven days of the satisfaction of the conditions set out in clause 1 of the heads of agreement, they being the conditions so referred to in clause 1: namely, the authorisation, approval or notification from the Trade Practices Commission that it had no objection to the heads of agreement and the compliance by News and Australis with their obligations under clause 2, the terms of which are irrelevant to the issues arising on this hearing.
55 Although clause 7.6 refers to the conditions set out in clause 1, so that it is in terms wide enough to embrace the provisions of clause 1.3, I do not regard clause 7.6 as one requiring clause 1.3 to be satisfied for the purposes of the operation of clause 7.6. Indeed, when one looks at the whole of clause 1, it is significant, I think, that it expresses the understanding of the parties that the heads of agreement was a legally binding document, subject only to clause 1.2, and when one goes to clause 1.2, it is clear that clauses 3 to 9 have legal effect upon satisfaction of the conditions referred to in clauses 1.2(a) and (b). I think it follows from that provision that clause 7.6 comes into operation once those conditions precedent in clause 1.2 have been satisfied. There is no reason, in my view, to put a gloss upon clause 1.2 so as to cause clause 7.6 to be dependent upon satisfaction of clause 1.3.
56 Had I been of the view that Australis was entitled to the benefit of the proffered implied term, or one of a similar kind, I would not have proceeded to answer question 1(d)(ii) of the questions for separate determination, largely for the reasons earlier advanced. There is no way, in my view, upon the evidence presented which would enable me to make any finding in relation to that question other than that the effect of the deed of release may have been neutral, prejudicial or beneficial to the value of Australis’ right to acquire an equity interest in TNC.
57 It is agreed that costs should follow the event. Accordingly, the questions for separate determination are answered as follows:1(a) No.
58 Accordingly, I give judgment for the defendants in the proceedings and order the plaintiffs to pay the defendants' costs.
1(b)-(d) These questions do not arise.
oOo
2
3
0