Bob Jane Corporation Pty Ltd v DSG Legal Pty Ltd
[2017] VSC 297
•19 June 2017
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
S ECI 2016 001229
| BOB JANE CORPORATION PTY LTD (ACN 005 870 431) AND ANOTHER (ACCORDING TO THE SCHEDULE ATTACHED) | Plaintiffs |
| v | |
| DSG LEGAL PTY LTD (ACN 132 836 616) AND ANOTHER (ACCORDING TO THE SCHEDULE ATTACHED) | Defendants |
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JUDGE: | KENNEDY J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 29 and 30 May 2017 | |
DATE OF JUDGMENT: | 19 June 2017 | |
CASE MAY BE CITED AS: | Bob Jane Corporation Pty Ltd & Anor v DSG Legal Pty Ltd | |
MEDIUM NEUTRAL CITATION: | [2017] VSC 297 | First revision: 23 June 2017 |
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CONTRACT – Construction and interpretation of contacts – Construction of a Priority Deed which provides for priority to apply until a ‘freezing order is fully discharged’ – Freezing order discharged - Whether priority continues to apply where relevant payment not made
EQUITY – Equitable remedies – Rectification – Whether the Priority Deed should be rectified so that the relevant priority continues to apply where the relevant amount has not been paid
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr I G Waller QC with Mr J S Mereine | HWL Ebsworth Lawyers |
| For the Defendants | Mr G R McCormick | Goldsmiths Lawyers |
HER HONOUR:
The proceeding concerns a Deed of Priority executed by the parties on 25 May 2015 (Priority Deed). The Priority Deed provided for an order of priority which was to operate if there was a payment of amounts out of any real property of Robert Frederick Jane (Robert Jane). Robert Jane is an undischarged bankrupt.
The priority was as between the plaintiffs (BJC) and the defendants (DSG Legal Pty Ltd and GDG Legal Pty Ltd together trading as ‘Goldsmiths Lawyers’) (Goldsmiths) in circumstances where BJC had obtained a freezing order against Robert Jane, and Goldsmiths had obtained a charge in respect of legal fees.
Absent termination of the Priority Deed, the express words of the Priority Deed provided for an order of priority - in BJC’s favour - but only until the Freezing Order was ‘fully discharged’.
It was not in contention that the Order was discharged by Order of Judd J on 12 August 2016. However, the plaintiffs contend that, on a proper construction of the Priority Deed, the order of priority continued to apply until their debt had been paid in full (which it has not). Alternatively, they seek an order for rectification so that the Priority Deed had this ‘effect’.
No issue arose as to whether the relief sought raised a hypothetical issue. Rather, both Counsel highlighted that, after the recent settlement of a property belonging to Robert Jane (at 1-57 Holden Road, Plumpton) (the Plumpton Property), in February 2017, the mortgagee had paid a surplus balance of $2,106,002.86 into Court after payment of the mortgage as well as relevant costs.
Rather, there were two issues in the case. First, whether as a matter of construction, the order of priority continued after the discharge of the freezing order even where there had not been full payment of the relevant amount the subject of that order. Second, whether a rectification order ought be made (if the answer to the first question was ‘no’).
The matter proceeded by way of affidavit evidence with no credit issues arising. There were some objections taken to the admissibility of the affidavit evidence, however most of these were resolved at the outset of the hearing.
There was one remaining issue - being the contents of paragraph 7 of an affidavit of Mr Gary David Goldsmith of 1 May 2017 - which will be resolved, below.
BACKGROUND
Preliminary
Both Counsel accepted that evidence surrounding the execution of the Priority Deed was relevant, although for different reasons.
Counsel for the plaintiffs submitted that the surrounding evidence (including earlier drafts) was relevant on construction given the Priority Deed was ambiguous. The plaintiffs also generally referred to this evidence on the rectification issue.
Counsel for the defendants made no objection to the evidence, and accepted that it was generally relevant on rectification. However, he rejected that the Priority Deed was ambiguous and submitted that, in relation to the construction point, consideration could only be given to the evidence for consideration of the genesis or purpose of the transaction.
I will therefore summarise the evidence adduced before turning to resolve the issues raised, including the relevant evidentiary issues.
Events leading up to execution
On 22 October 2013, Williams J made a Freezing Order against Robert Jane. The Freezing Order prohibited him from removing from Australia or in any way disposing of, dealing with or diminishing the value of any of his assets in Australia up to an unencumbered value of $640,928.09 (the Relevant Amount).[1] The assets included all of his assets including the Plumpton Property.[2] The order also provided for provision of information and provided for exceptions including the payment of ‘reasonable legal expenses’.[3] The order ceased to have effect if Robert Jane paid the Relevant Amount into Court, or a relevant joint account as agreed, or provided appropriate agreed security in that sum to be held subject to Court order.[4] He also needed to file and serve notice of the cessation of the order.[5]
[1]Freezing Order of Williams J, 22 October 2013, [6(a)]. The Freezing Order took the form of a standard freezing order under Order 37A, Form 37AA of the Supreme Court (General Civil Procedure) Rules2015.
[2]Ibid [7].
[3]Ibid [8], [10(b)].
[4]Ibid [12(a)].
[5]Ibid [12(c)].
The Relevant Amount related to outstanding costs orders pursuant to a number of proceedings involving Robert Jane. One of these was a proceeding issued by Robert Jane in this Court concerning an alleged loan account with BJC (the Loan Proceeding). The Relevant Amount varied over time because the quantum of costs altered as further costs orders were added to and/or amounts were paid. Given this, and given the Relevant Amount related to existing judgment debts (rather than a prospective judgment the subject of a substantive proceeding), the Freezing Order was revisited regularly. Thus it was amended on 19 February 2014, 10 April 2014, 18 June 2014, 30 September 2014, 31 October 2014, 20 February 2015, 28 August 2015, 26 November 2015, 5 February 2016 and 19 May 2016 when it was extended up until the date of 12 August 2016. The last Relevant Amount at the time of execution of the Priority Deed was $1,174,273.
Goldsmiths acted for Robert Jane in relation to these proceedings and were retained by him during October 2013 to July 2015. They took a charge in relation to their legal fees and lodged a caveat over the Plumpton Property on 1 March 2014 claiming as chargee pursuant to a deed of charge dated 8 May 2013.
By correspondence of 27 April 2015 from HWL Ebsworth Lawyers (HWL Ebsworth) for BJC, HWL Ebsworth challenged the equitable charge being relied upon by Goldsmiths. In particular, they claimed that there was no right to maintain the caveat given the charge only secured fees in relation to the Loan Proceeding rather than the outstanding fees relied upon (which did not relate to the Loan Proceeding). Further, they maintained that Robert Jane was not permitted to diminish his assets below the amount in the Freezing Order in order to pay legal fees in matters other than the Loan Proceeding. In the absence of an agreement with this position, they said they would ‘raise this issue with His Honour’. They further suggested that Goldsmiths knew or ought to have known that the Freezing Order restricted the ability of Robert Jane to deal with his assets and stated:
In those circumstances, you and your firm have not been at liberty to rely on the Equitable Charge to secure legal fees relating to matters other than the Proceeding because to do so would assist Robert Frederick Jane to deal with, or diminish, the remaining equity in the Property below the amount specified in the Freezing Order. To the extent that you or your firm have done so, or intend to do so, we consider that the Equitable Charge is potentially void for illegality and unenforceable. Accordingly, in due course, our clients will object to you or your firm receiving any of the proceeds from the sale of the Property to satisfy any legal fees owed in relation to matters other than the Proceeding.
They requested confirmation that Goldsmiths would not rely on the charge and that the caveat be removed.
By correspondence of 1 May 2015, Goldsmiths generally denied the allegations in the letter of 27 April 2015 and noted that the scope of the charge was not restricted to the costs associated with the Loan Proceeding. Further, that paragraph 10(b) of the Freezing Order exempted all legal expenses from the scope of the Freezing Order (not just those the subject of the Loan Proceeding). They concluded with an offer (open for 14 days) as follows:
Notwithstanding the above, to avoid the costs and time involved in a protracted dispute regarding any standing your client may assert to apply to the court or as to the validity of the caveat, particularly as we are now in the lead up to the trial in the Family Court, our firm as caveator is prepared to enter into a Deed of Priority with your client whereby the amount secured by the Freezing Order is given priority over our caveat if or when the property is sold. We will separately send you our proposed Deed once you have indicated your client’s in principle acceptance.
By correspondence of 14 May 2015, HWL Ebsworth observed that the letter of 1 May 2015 did not deal adequately, or at all, with the matters set out in their previous letter. However, notwithstanding the foregoing, they enclosed for execution a Deed of Priority in respect of the caveat. They requested return of the executed Deed of Priority by 5.00 pm on 25 May 2015.
The Deed of Priority attached (the first HWL Ebsworth draft) was a lengthy document of over 20 pages. The plaintiffs were together the ‘First Creditor’ with Goldsmiths the ‘Second Creditor’. The Recitals record that the parties had agreed to ‘regulate the order of priorities between the (defined) Securities as provided in this Deed’. The Deed then provided for the following ‘Order of Priority’ in respect of these defined ‘Securities’ at cl 2.1 as follows:
Order of priority
(a) The order of priority in respect of the Securities is:
(i) first priority: the First Securities for the First Creditor First Priority Debt;
(ii) second priority: the Second Securities for the Second Creditor Debt; and
(iii) third priority: the First Securities for the balance, if any, of the First Creditor Debt.
(b) The rights of the Second Creditor under the Second Securities are postponed to the rights of the First Creditor under the First Securities to the extent necessary to give effect to this Deed.
‘First Creditor First Priority Debt’ meant that part of the ‘First Creditor Debt’ which was owing under the First Creditor Document[6] or the First Securities and which did not exceed the Relevant Amount as defined in the Freezing Order. However, ‘First Creditor Debt’ was defined broadly to mean all ‘Secured Debt’ of the First Creditor which was defined to include all debts owing by the Debtor to the Creditor secured by that Creditor’s Securities. ‘First Securities’ (for the First Creditor) was also defined broadly as including the Freezing Order, but also any other present or future Security Interest, Guarantee or other document or agreement created or entered into as security for the payment of any of the First Creditor Debt. The inclusion of the Freezing order as a form of security was inaccurate[7], but, as will be seen below, appears to have been taken up by both parties.
[6]‘First Creditor Document’ was defined as any court order or other document pursuant to which the Debtor owes money to the First Creditor for legal costs.
[7]LexisNexis Butterworths, Civil Procedure: Victoria, vol 1 (at Service 251) [37A.01.25]; Jackson v Sterling Industries (1987) 162 CLR 612, 619.
The concept of the ‘Second Securities’ (which related to the Second Creditor) was confined to the equitable charge.
Clause 2.2 then provided for the duration of the operative priority as follows:
Term of priorities
The Order of Priority applies until the later of:
(a) the date the First Creditor Debt is fully paid; and
(b) the date the First Securities are fully discharged or cease in accordance with their terms,
or until this Deed is terminated by agreement in writing between the Creditors.
By correspondence of 18 May 2015, Goldsmiths responded to the letter of 14 May 2015 as follows:
We note that the Deed goes substantially further than simply ensuring priority of the amount secured by the Freezing Order over the debt secured by our caveat over the property in the event that the property is sold, as was outlined in our letter of 1 May 2015.
They then make a number of comments regarding the Deed of Priority, noting that it should be confined to the matters outlined in their earlier letter. They conclude:
We consider our letter and your acceptance of our letter is sufficient to constitute an agreement. Therefore we expect you to enter into an agreement which reflects the wording and intent of our offer to you of 1 May 2015.
We therefore enclose a Deed of Priority which reflects the wording and intent of our offer to you of 1 May 2015.
The Deed of Priority enclosed (the Goldsmiths draft) is a much more condensed version of the Deed. Recital B records that ‘for the purposes of avoiding litigation, both parties have agreed to enter into this Deed to prioritise the debts of First Creditor the subject of the Freezing Order’. Clause 2.1 then provides for an Order of Priority whereby the first priority is given to the debt of the First Creditor ‘secured by’ the Freezing Order with the second priority given to the debt of Goldsmiths ‘secured by the Charge’.
Clause 2.2 then provides that the Order of Priority applies ‘until the amount secured by the Freezing Order is paid in full or until this Deed is terminated by agreement in writing between the parties’.
By correspondence of 19 May 2015, HWL Ebsworth then relevantly respond as follows:
Our letter dated 14 May 2015 did not accept any offer contained in your letter dated 1 May 2015. To the contrary, our letter reserved our clients’ rights and contained a counteroffer in the form of our proposed Deed of Priority which you rejected. Accordingly the suggestion that our letter was ‘sufficient to constitute an ‘agreement’ is untenable.
Your proposed Deed of Priority is not acceptable to our clients.
We have amended our proposed Deed of Priority to take into account the comments in your letter dated 18 May 2015.
They then attach a copy of a further Deed of Priority (the second HWL Ebsworth draft). Clause 2.1 provides that the Order of Priority for payment of any amount out of any asset of the debtor is such that the first priority is for ‘the Relevant Amount which is the subject of the Freezing Order’ with the second priority for the amount which is ‘the subject of the Equitable Charge and Caveat’.
However, a new form of cl 2.2 is inserted relating to the duration of the relevant priority as follows:
The Order of Priority applies until the:
(a) the Freezing Order is fully discharged; or
(b)this Deed is terminated by agreement in writing between the First Creditor and Second Creditor,
whichever occurs first.
No commentary was provided as to why this clause was inserted in this form, however it is not subsequently amended and ultimately constitutes the final form of cl 2.2 in the Priority Deed executed by the parties.
By correspondence of 22 May 2015, Goldsmiths advised that they were content to enter into the Priority Deed with some minor amendments. These did not relate to cl 2.2 but included removal of the words ‘any asset of the debtor’ and also a challenge to the limitations on their rights of enforcement in cl 2.3. They noted:
the purpose of our charge is to secure payment of our legal fees against real property and the Plumpton Property is the only real property. Accordingly the Deed of Priority should only apply to proceeds of the sale of the Plumpton Property if or when they become available. This has always been our understanding of the purpose of this Deed of Priority. Subject to our client not breaching the existing order he is entitled to pay our fees and it is our intention not to give up that right.
They then attach a further version of the draft Priority Deed which contains proposed amendments to cls 2.1 (as to the assets covered) and 2.3 but leaves cl 2.2 in the identical form as that contained in the second HWL Ebsworth draft.
By correspondence of 25 May 2015, HWL Ebsworth then provided a final draft with further amendments as to the scope of the ‘property’ covered in cl 2.1, and the scope of cl 2.3. They reiterated that it was incumbent on Goldsmiths to ascertain the provenance of any money received from Robert Jane to ensure they were not involved in a breach of the Freezing Order. [8]
[8]It should be noted that the Court was not asked, and was not in a position, to resolve whether Goldsmiths had in some way transgressed the Freezing order
This final draft is then executed by the parties on 25 May 2015.
Priority Deed as executed
The Priority Deed was between the plaintiffs together as the ‘First Creditor’ and the defendants trading as Goldsmiths as the ‘Second Creditor’. The ‘debtor’ was Robert Frederick Jane (though he was not a party).
The recitals recorded:
A.The First Creditor has the benefit of the Freezing Order made against the Debtor.
B.The Second Creditor claims to have the Equitable Charge which is the subject of the Caveat.
C.The First Creditor disputes the validity of the Equitable Charge and Caveat.
D.To avoid litigation, the parties have agreed to enter into this Deed to give priority to the First Creditor for the Relevant Amount which is the subject of the Freezing Order.
Clause 2 then provided for ‘Priorities’ as follows:
2.1 Order of Priority
(a) As between the First Creditor and the Second Creditor, the order of priority for payment of any amount out of any real property of the Debtor, whensoever and howsoever acquired, including the Plumpton Property and the proceeds of sale of that real property, is as follows:
(i)first priority: the Relevant Amount which is the subject of the Freezing Order;
(ii) second priority: the amount which is the subject of the Equitable Charge and Caveat.
(b) To the extent necessary to give effect to this Deed the rights of the Second Creditor under the Equitable Charge and Caveat are postponed to the rights of the First Creditor under the Freezing Order.
2.2 Term of Priorities
The Order of Priority applies until the:
(a) the Freezing Order is fully discharged; or
(b) this Deed is terminated by agreement in writing between the First Creditor and Second Creditor,
whichever occurs first.
2.3 Enforcement of Equitable Charge or Caveat
The Second Creditor must not enforce or attempt to enforce or exercise or attempt to exercise any power under the Equitable Charge or Caveat without first giving the First Creditor seven business days’ written notice.
‘Relevant Amount’ meant ‘the amount as defined in paragraph 6(a) of the Freezing Order from time to time, which as at the date of the Priority Deed was $1,174,273’.
The ‘Freezing Order’ was defined as the ‘“freezing order” made against the Debtor on 22 October 2013 by Justice Williams in the Supreme Court of Victoria, which was amended on 19 February 2014, 10 April 2014, 18 June 2014, 30 September 2014, 31 October 2014 and 20 February 2015 (and any extension of that order from time to time), in respect of the Debtor’s assets’, including all of his assets and specifically including the Plumpton Property.
‘Equitable charge’ was defined as ‘the equitable charge granted by the Debtor to the Second Creditor pursuant to the Second Creditor Agreement’ (which was a retainer agreement dated 8 May 2013).
Clause 3 dealt with how the Second Creditor was to account to the First Creditor if it received amounts exceeding its entitlements under the Priority Deed, while cl 4 provided for various undertakings.
Clause 5 was entitled ‘Savings provisions’ and provided as follows:
5.1 Non-avoidance:
The Order of Priority applies despite:
(a) the respective times and dates upon which, or the order in which, the Freezing Order, Equitable Charge and Caveat were made, executed, delivered or registered;
(b) the respective times and dates upon which, or the order in which, the debts and monetary liabilities comprising all or any part of any of the debts are incurred or become due;
(c) the repayment from time to time of all or any part of the debts;
(d) the fluctuation (including any reduction and subsequent increase) from time to time of all or any part of any debt, whether by the variation of the Freezing Order, the provision or further provision of financial accommodation or other services, or otherwise;
(e) all or any part of any of the debts being contingent or prospective;
(f) the insolvency of the Debtor;
(g) the service of a bankruptcy notice on the Debtor;
(h) appointment of a trustee or other similar officer to the Debtor;
(i) the sequestration of the Debtor’s property;
(j) any provision of any statute or any rule of law or equity to the contrary;
(k) any other thing whether or not of the same kind as any of the above (emphasis added)
Events subsequent to the execution of the Priority Deed
On 8 July 2016, Robert Jane became bankrupt by the filing of a debtor’s petition.
On 12 August 2016, Judd J made an Order that the Freezing Order be discharged with the plaintiffs released from the undertakings given to the Court in respect of that Freezing Order. It was not in contention that this was done at the instance of the plaintiffs who allege that it was necessary following the bankruptcy of Robert Jane (although this is disputed by the defendants). The proceeding was otherwise dismissed.
Then on 16 September 2016, Hargraves Secured Investments Ltd, in its capacity as mortgagee in possession, sold the Plumpton Property.
By correspondence of 27 September 2016,[9] HWL Ebsworth then wrote to Goldsmiths noting that the amount owed to their clients by Robert Jane had not been paid and requesting that, pursuant to cl 3 of the Priority Deed, they would notify the plaintiffs of any amounts received and pay the amount necessary to give effect to the Priority Deed.
[9]Insofar as this evidence included subjective positions or views of the parties expressed post contract, it was not generally admissible on the construction issue: N Seddon, R Bigwood and M Ellinghaus, Cheshire and Fifoot’s Law of Contract (LexisNexis, 10th ed, 2012) 428 – 432 [10.13] and [10.16].
By correspondence of 29 September 2016, Goldsmiths stated that, pursuant to cl 2.2 of the Priority Deed, the order for priority only applied until the Freezing Order was discharged. Further, that they understood that it had been discharged by Order made on 12 August 2016.
By correspondence of 29 September 2016, HWL Ebsworth suggested that, on a proper construction of the Priority Deed, cl 2.2 only applied if the Relevant Amount outstanding under the Freezing Order was fully discharged. Alternatively, that it was the common understanding of the parties that cl 2.2 of the Priority Deed only applied if the Freezing Order was discharged on payment of the Relevant Amount.
On 4 October 2016, Goldsmiths responded, denying the ‘spin’ HWL Ebsworth had placed on the plain words in the Priority Deed, alleging that:
· There was no common understanding for the interpretation they now sought to place on the Priority Deed.
· The Priority Deed was drawn by HWL Ebsworth, and if it did not reflect the clients’ instructions, his rights were against HWL Ebsworth and not for a re-writing of the Priority Deed.
· This was a deed for the purpose of priority in respect of validly enforceable debts. HWL Ebsworths’ interpretation would suggest Goldsmiths had ‘handed over’ their entitlement to their debt to HWL Ebsworth’s client. This was never the common intention.
· The consequence of the bankruptcy was clear to their client who was a supporting creditor.
The current proceeding was then issued on 10 October 2016.
ISSUE 1 – CONSTRUCTION OF PRIORITY DEED
Principles
In determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable businessperson would have understood those terms to mean.[10] The determination is made objectively, by reference to the text, context (the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract) and purpose of the contract.[11]
[10]Mount Bruce Mining v Wright Propsecting Pty Ltd (2015) 256 CLR 104, 116 [47]; Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd (2017) 91 ALJR 486, 496 [45], 502 [73] (Ecosse); Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640, 656 [35] (Electricity Generation Corporation).
[11]Mount Bruce Mining (2015) 256 CLR 104, 116 [46].
This process of construction is ordinarily possible by reference to the contract alone.[12]
[12]Ibid 116 [48].
In Mount Bruce Mining v Wright Prospecting Pty Ltd (Mount Bruce Mining), the High Court considered, without unanimously deciding, the circumstances in which recourse might be had to matters external to the contract. Thus, French CJ, Nettle and Gordon JJ stated that:
if an expression in a contract is unambiguous or susceptible of only one meaning, evidence of surrounding circumstances (events, circumstances and things external to the contract) cannot be adduced to contradict its plain meaning.[13]
[13]Mount Bruce Mining (2015) 256 CLR 104, 116 [48]; Cf Kiefel and Keane JJ at 132 [111], and Bell and Gageler JJ at 134 [118].
They did, however, go on to state that:
sometimes, recourse to events, circumstances and things external to the contract is necessary. It may be necessary in identifying the commercial purpose or objects of the contract where that task is facilitated by an understanding ‘of the genesis of the transaction, the background, the context [and] the market in which the parties are operating’.[14]
[14]Ibid 117 [49] citing Electricity Generation Corporation (2014) 251 CLR 640, 657 [35], citing Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337, 350, in turn citing Reardon Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989, 995-6; [1976] 3 All ER 570, 574. See also Simicv New South Wales Land and Housing Corp (2016) 339 ALR 200, 206 [18] (French CJ) (Simic).
In giving contracts a businesslike interpretation, the Court approaches the task on the assumption that the parties intended to produce a commercial result and, accordingly, a commercial contract is to be construed so as to avoid ‘making commercial nonsense or working commercial inconvenience’.[15] Accordingly, if there are reasonably open competing constructions, the preferred construction is the one that avoids capricious, unreasonable, inconvenient or unjust consequences.[16]
[15]Electricity Generation Corporation (2014) 251 CLR 640, 656-7 [35], adopting the observations of Arden LJ in Re Golden Key Ltd [2009] EWCA Civ 636 [28], recently cited in Knowledge Pathways Pty Ltd v TBM Training Pty Ltd [2016] VSC 434, [33].
[16]Australian Broadcasting Commission v Australasian Performing Rights Association Ltd (1973) 129 CLR 99, 109; recently cited in Knowledge Pathways Pty Ltd v TBM Training Pty Ltd [2016] VSC 434, [33].
Nevertheless, the task of interpreting a contractual term begins with the words. Thus, as Lord Mustill observed in Charter Reinsurance Co Ltd v Fagan:
There comes a point at which the court should remind itself that the task is to discover what the parties meant from what they have said, and that to force upon the words a meaning which they cannot fairly bear is to substitute for the bargain actually made one which the court believes could have been made. This is an illegitimate role for a court.[17]
[17][1997] AC 313, 388. This passage was cited by Nettle J in His Honour’s dissenting judgment in Ecosse.
Submissions of the plaintiffs
The plaintiffs sought a declaration that their construction of the Priority Deed was correct. Thus, (pursuant to paragraph B of their prayer for relief) the plaintiffs sought a declaration that, on a proper construction of the Priority Deed, despite the appointment of a trustee in bankruptcy or the sequestration of Robert Jane’s property, Goldsmiths were not entitled to retain any amount recovered or received by them from the sale of the Plumpton Property until:
(a) the Relevant Amount, the subject of the Freezing Order, has been paid in full to BJC resulting in the Freezing Order being fully discharged; or
(b) the Priority Deed is terminated by agreement in writing.
In the alternative, (pursuant to paragraph C) they sought an order for rectification.
Finally (pursuant to paragraph D and in the event of success on B or C) they sought an order that Goldsmiths account to them pursuant to the Priority Deed.
By examination of the written instrument alone the plaintiffs submitted that recital D suggested the commercial object was ‘for the defendants to avoid litigation … by giving the plaintiffs the right to have their debt, which was the subject of the Freezing Order, repaid ‘first’. Further, that cl 5.1 made it plain that the priority was to continue despite the insolvency or bankruptcy of Robert Jane.
They also suggested that the surrounding circumstances also suggested that the plaintiffs’ debt was to be paid ‘first’.
To construe the Priority Deed as coming to an end simply because the Freezing Order was discharged without payment made no commercial sense because:
· Such a construction would result in the defendants avoiding litigation and being entitled to payment;
· Such a construction ignores the words ‘fully discharged’. A Freezing Order can only be partially discharged by part payment. Accordingly, a reasonable businessperson would understand ‘fully’ to mean a discharge following full payment of the Relevant Amount;
· Given s 58(3) of the Bankruptcy Act 1996 (Cth) (Bankruptcy Act) prevented the Order being extended beyond 12 August 2016, such a construction is inconsistent with cl 5.1;
· Such a construction would permit a third party (for example Robert Jane) to apply to have the Order discharged without payment.
In oral submissions, the plaintiffs highlighted again Recital D, cl 5 and the word ‘fully’ (which referred to the full payment of the plaintiffs’ debt’). They also noted that the parties were described as ‘creditors’ and drew attention to the word ‘payment’ in cl 2.1(a).
They highlighted that it was commercially inconvenient, unjust and capricious to suggest that the priority provided for should terminate in circumstances outside their control, namely the bankruptcy of Robert Jane in circumstances where they did not get paid.
They further highlighted that there was ambiguity in relation to the Priority Deed in two respects. Firstly, that the word ‘discharge’ was ambiguous having a myriad of reasons.[18] To this end, they withdrew earlier submissions to the effect that a freezing order could be anything other than fully discharged. Secondly, that the word ‘fully’ was ambiguous (despite the earlier suggestion as to its meaning, above) and was inapposite to describe the freezing order.
[18]Relying on an extract said to be from the Macquarie Dictionary.
This then suggested that other materials were admissible which showed that the focus was always on payment such that it would be a commercial nonsense for the priority to fall away without any payment.
Submission of the defendants
The defendants submitted that the words of cl 2.2 were unambiguous and left no room for reading as if the extra/different words sought by the defendants were there.
They further suggested that reference to context and purpose supported this construction. Thus, although a priority was granted it was linked to the Freezing Order. This was apparent from the Recitals as well as cl 2.1, particularly cl 2.1(b), which linked the priorities to alleged ‘rights’ under the Freezing Order.
Finally they submitted that the version executed could be contrasted with the different priority under former drafts (which had been rejected).
In oral submissions, the defendants denied any ambiguity. The concept of ‘fully’ discharged was to be contrasted with situations where the order was discharged in respect of some of the assets covered or where there was a part payment which resulted in a partial discharge only. The concept of a ‘discharge’ was clearly used in the context of discharge of an order of the Court and was also unambiguous.
Insofar as purpose and genesis is concerned, Counsel highlighted the correspondence of HWL Ebsworth of 27 April 2015 and submitted that the genesis of the transaction lay in a dispute as to competing claims said to arise under the Freezing Order and under the equitable charge. It therefore made commercial sense to tie the priority to the continued existence of the Freezing Order and charge.
That genesis was also supported by a reading of the Recitals A and B, as well as the language of cl 2.1 which provided for priorities depending on whether the amount was ‘the subject of the Freezing Order’ (cl 2.1(a)(i)) or ‘the subject of the Equitable Charge and Caveat’ (cl 2.1(a)(ii)). It was further consistent with the language of cl 2.1(b) which made provision for the ‘rights of the First Creditor under the Freezing Order’. One of those rights (as asserted by the plaintiffs) was to stop the defendant (third parties) from taking action to dissipate assets the subject of the Freezing Order.[19]
[19]See Peter Biscoe, Freezing and Search Orders: Mareva and Anton Pillar Orders (LexisNexis Butterworths, 2nd ed, 2008) 405 [9.40] and [9.47].
The defendants also highlighted that the ‘Relevant Amount’ in cl 2.1(a)(i) already incorporated a description of the Freezing Order. It followed that the words ‘the subject of the Freezing Order’ were operative with substantive work to do.[20]
[20]On 30 May 2017, Counsel for the defendants provided a form 2.1(a)(1) with the definition inserted as follows: the [amount as defined in paragraph 6(a) of the Freezing Order from time to time, which as at the date of this Deed is $1,174,273] which is the subject of the Freezing Order (emphasis added).
Further, although one purpose of the Priority Deed was for the plaintiffs to be paid first, the real issue in the case was for how long that priority was to last.
Resolution
Firstly, I do not consider that there is any ambiguity in the words used in the Priority Deed.
A statement may be said to be ambiguous when it has two (or more) primary meanings, each of which may be adopted without distortion of the language. A statement may also be ambiguous where its meaning is, for some reason, doubtful.[21]
[21]Sir Kim Lewison and David Hughes, The Interpretation of Contracts in Australia, (Lawbook Co, 1st ed, 2012) 345 [8.01].
Although the concept of ‘discharge’ may have a multitude of possible meanings, it needs to be considered in context. It is significant in this regard that the word is used in conjunction with a court order and not a debt.
According to the Shorter Oxford Dictionary (6th edition), the first meaning of ‘discharge’ is to ‘relieve of (an obligation etc); exonerate; release from; relieve (a bankrupt) of residual liability.’ In the particular context of a court order it also means to ‘cancel’ or ‘annul.’
The phrase ‘fully’ discharge therefore suggests a complete or total relieving of any obligations under the Order. Given the express reference to the full discharge of the Freezing Order, I can also find no basis for the suggestion that there is a different more limited meaning confined to circumstances where there was a payment of the debt. Thus, although a discharge might follow from a full payment, the express words naturally incorporate any discharge of the Order (including the clear discharge which occurred on 12 August 2016).
I also do not consider the meaning to be ‘uncertain’. Rather, the concept of a ‘full’ discharge was clearly intended to avoid termination in circumstances where Robert Jane was only partially relieved of his obligations under that order: for example, where the assets the subject of the Freezing Order were reduced or only partial payment was received. The use of the word ‘fully’ would avoid such a consequence, particularly in circumstances where cl 1.2(b)(v) provided that a reference to anything otherwise generally included a ‘part’ of that thing.
To the extent necessary, cl 5.1(c) puts beyond doubt that payment is not the determinant of the duration of the priority. Thus, cl 5.1(c) expressly provides that the Order of Priority continues to apply despite the ‘repayment from time to time of all or any part of any of the debts’. Thus, even if there was a payment, it would need to be in the manner provided for in paragraph 12 of the Freezing Order such that the Order actually ceased to have effect and was ‘discharged’.
The focus is hence on the operation of the Freezing Order and not the payment.
I therefore consider that a reasonable businessperson would have understood the ordinary words of cl 2.2 to mean that the order of priority expired on the discharge of the freezing order on 12 August 2016. To find otherwise would effectively involve the rewriting of the actual language used by the parties.
The purpose and genesis of the transaction further supports this construction without need for further reference to previous drafts and correspondence. As the Recitals record, the Priority Deed was entered into to give a general priority to the First Creditor for the amount the subject of the Freezing Order ‘to avoid litigation’. (Recital D). This was in circumstances where the First Creditor was asserting ‘the benefit of the Freezing Order’ (Recital A) and the Second Creditor was asserting an Equitable Charge (which was disputed) (Recital B).
It is consistent with these Recitals that the parties sought to define the duration of that priority by reference to the duration of the Freezing Order. It is also significant that the Priority Deed was executed by way of settlement of a negotiated solution. In this context there is nothing ‘capricious, unreasonable, inconvenient, or unjust’ in formulating a solution whereby the plaintiffs were given a priority, but only for a limited amount, and for a limited time.
In terms of context generally, the reference to ‘creditors’ and the concept of ‘payment’ was unexceptional and shed no light on the duration of the priority. More significant was that cl 2.1 again focused attention on the Freezing Order. Thus, first priority is given to the Relevant Amount - as defined by reference to the Freezing Order - and which is also ‘the subject of’ that Order. Clause 2.1(b) further provides that, to the extent necessary, the rights of the Second Creditor are postponed to the rights of the First Creditor ‘under the Freezing Order’. Again, then, the Priority Deed, consistent with Recital A, focuses on the plaintiffs’ status by reference to alleged benefits given by the Freezing Order.
Insofar as cl 5.1(i) is concerned, the plaintiffs relied on the decision in Talacko v Bennett[22] in support of the proposition that they could not apply to extend the Freezing order. This was said to involve an act in aid of execution of a judgment contrary to s 58(1)(a) of the Bankruptcy Act 1966 which provided that it was not competent for a creditor to ‘enforce any remedy’ against the person or property of the bankrupt in respect of a provable debt. Alternatively, they relied on s 58(3)(b) which provided that it was not competent to take any fresh step in a legal proceeding in respect of a provable debt other than by way of leave. The fact that the priority was to apply irrespective of bankruptcy (pursuant to cl 5.1) therefore allegedly supported the plaintiffs’ construction.
[22][2017] HCA 15 (Talacko).
The decision in Talacko was concerned with whether s 58(3) came within the meaning of s 15(3) of the Foreign Judgments Act 1991 (Cth) (specifically whether it constituted a ‘stay of enforcement of the judgment’). In that context the High Court held that s 58(3)(a) acted as a stay of enforcement by execution.
The decision is therefore not concerned with an application for a freezing order. Further, although a freezing order might be described as being in ‘aid of execution’ (in circumstances where orders are made to disclose assets)[23] it is, not strictly, a form of execution.[24]
[23]LexisNexis Butterworths, Civil Procedure: Victoria, vol 1 (at Service 275) [37A.01.90].
[24]LexisNexis Butterworths, Civil Procedure: Victoria, vol 1 (at Service 251) [37A.01.30].
In any event, regardless of whether an extension would constitute the enforcement of a remedy for the purposes of s 58, I accept that there would be a significant risk that the Court would not grant an extension of a freezing order in circumstances where the underlying judgment itself could not be enforced. In such circumstances bankruptcy may well have led to a discharge of the Freezing Order (as in fact occurred in this case).
However, although there may be a relationship between bankruptcy and the Freezing Order, the parties have chosen to make the order of priority operate independently of, and separate from, bankruptcy or even payment. Instead, the parties have clearly chosen to constitute the Freezing Order as the determinant of duration as was evident in this case wherein the priority actually extended post-bankruptcy between 8 July 2016 and the discharge of the Freezing Order on 12 August 2016.
Clause 5, then, does not provide a justification for distorting the ordinary words of cl 2.2.
The fact that the contract as properly construed may lead to an undesirable result for the plaintiffs (e.g. a discharge without payment) is also not to the point given the clear parameters chosen by the parties. In particular, where the parties have expressly made provision for the duration of a priority in the context of a settlement, there is no basis to substitute other words ‘for the bargain actually made’.
When consideration is given to the language, context, and purpose of the Priority Deed by reference to the Priority Deed itself, I am therefore satisfied that the order of priority expired on discharge of the Freezing Order on 12 August 2016.
It is unnecessary to go further and examine the other background materials. They should also not be used to contradict the plain words of the Priority Deed.[25]
[25]Mount Bruce Mining (2015) 256 CLR 104, 116 [48].
Nevertheless, those materials fortify a position that the purpose of the Priority Deed was focused on the Freezing Order. Thus, as highlighted by the defendants, the genesis of the transaction arose given the plaintiffs were asserting that the Freezing Order curtailed the defendants’ rights under the charge (from the outset in the correspondence of 27 April 2015).
Even if I was wrong as to ambiguity, I also do not consider that the other materials undermine the construction I have found. Although there were references to a general priority in payment in the course of the correspondence, these references shed little light on the duration of such a priority in the context of a fluid settlement process. If anything, the course of negotiations tends to support the construction as found. In particular, the fact that HWL Ebsworth expressly rejected the Goldsmiths draft (which appears to have given priority until payment) supports the construction as found.
I am therefore not satisfied that the order of priority provided in the Priority Deed continued after the discharge of the Freezing Order on 12 August 2016. It follows that the plaintiffs are not entitled to the declaration sought in paragraph B of their prayer for relief.
ISSUE 2 - RECTIFICATION
If the Court did not accept the plaintiffs’ submissions as to construction, the plaintiffs sought an order for rectification (pursuant to paragraph C of their prayer for relief) so that it ‘had the effect’ set out in paragraph B above.
Principles
The relevant principles are summarised in Simic v New South Wales Land and Housing Corp by Gageler, Nettle and Gordon JJ as follows:
Rectification is an equitable remedy, the purpose of which is to make a written instrument ‘conform to the true agreement of the parties where the writing by common mistake fails to express that agreement accurately’. For relief by rectification, it must be demonstrated that, at the time of the execution of the written instrument sought to be rectified, there was an ‘agreement’ between the parties in the sense that the parties had a ‘common intention’, and that the written instrument was to conform to that agreement. Critically, it must also be demonstrated that the written instrument does not reflect the ‘agreement’ because of a common mistake. Unless those elements are established, the ‘hypothesis arising from execution of the written instrument, namely, that it is the true agreement of the parties’ cannot be displaced.
The issue may be approached by asking — what was the actual or true common intention of the parties? There is no requirement for communication of that common intention by express statement, but it must at least be the parties’ actual intentions, viewed objectively from their words or actions, and must be correspondingly held by each party.[26]
[26]Simic (2016) 339 ALR 200, 223 [103] – [104] (citations omitted).
The rationale for the remedy is the prevention of unconscionable conduct.[27]
[27]Ibid 207 [20]; Ryledar Pty Ltd v Euphoric Pty Ltd (2007) 69 NSWLR 603, 665-7 [305]–[315] (Ryledar); Patrick Stevedores Operations (No 2) Pty Ltd v Port of Melbourne Corporation [2016] VSC 528, [38] (Patrick Stevedores Operations).
In CA & CA Ballan Pty Ltd v Oliver Hume (Australia) Pty Ltd & Ors, the Court of Appeal comprehensively reviewed the development of the law of rectification and concluded ‘what is clear from the cases concerning rectification is that the precise scope of the intention of the parties is critical to whether the remedy is available in the form sought’.[28]
[28][2017] VSCA 11, [75].
Finally, there must be ‘clear and convincing evidence’ adduced that the actual or true common intention has failed to be embodied in the written contract.[29] This intention must also continue up to the time the deed is executed.[30]
[29]Patrick Stevedores Operations [2016] VSC 528, [38].
[30]Ibid; Ryledar (2007) 69 NSWLR 603, 655 [259].
Submissions of the plaintiffs
The plaintiffs suggested that the actual common intention of the parties was for the Order of Priority to apply until the plaintiffs’ debt had been repaid. They submitted that this was ‘clear’ from the correspondence.
More particularly, insofar as the correspondence from HWL Ebsworth of 19 May 2015 inserted the relevant cl 2.2, they submitted:
the deed had been simplified by, inter alia, removing the definitions of ‘First Securities’, ‘First Creditor Debt’, ‘Second Securities’ and ‘Second Creditor Debt’. Consequently, cl 2.2 of the First HWL Priority Deed had also been simplified by collapsing sub-paragraphs (a) and (b) into one another as payment of the plaintiffs’ debt would necessarily coincide with the Freezing Order being fully discharged. Accordingly, the plaintiffs’ intention in the Second HWL Priority Deed was for the order of priority to apply until their debt, which was the subject of the Freezing Order, was repaid in full.[31]
[31]Plaintiffs’ Outline of Opening Submissions, 22 May 2017, [44.5].
They also highlighted that it was significant that Goldsmiths did not object to cl 2.2 in their letter of 22 May 2015.
When questioned as to the time at which the common intention arose, the plaintiffs submitted (in oral submissions) that it was manifested by Goldsmiths from the start, as highlighted by the terms of their open offer of 1 May 2015. The intention then became common between the parties by reason of the provision of the Priority Deed by HWL Ebsworth of 19 May 2015 at which time they agreed that they would not make the Priority Deed relate to an unspecified number of debts and securities.
They further highlighted the common purpose (evident in Recital B and cl 2.1 of the Goldsmiths draft and Recital D and cl 2.1 of the second HWL Ebsworth draft). This purpose was to avoid litigation by prioritising the relevant debt of the first creditor the subject of the Freezing Order. In so prioritising, that priority must remain in place until payment.
They submitted that it was unconscientious for the defendants to seek the benefit of what was ‘perhaps a poorly expressed deed’.
Submissions of the defendants
The defendants highlighted that, given HWL Ebsworth rejected the Goldsmiths draft of 18 May 2015 and reworded cl 2.2, there was no common intention and any previous common intention was discontinued before the Priority Deed was executed.
In oral submissions it was suggested that what was being argued was a case about the consequences of the discharge which was not a case for rectification.
The defendants also submitted that the absence of objection by Goldsmiths to the 19 May 2015 draft did not suggest they accepted the plaintiffs’ construction.
Resolution
As indicated already, the plaintiffs objected to the contents of paragraph 7 of an affidavit of Mr Gary David Goldsmith of 1 May 2017 where he stated :”At no time was it the intention of the Defendants to give up their entitlement to receive their legal fees.’ This was said to be contrary to the statements in the authorities that the Court is to examine the parties’ actual intentions viewed ‘objectively.’
However, although the Court is to examine the manifestation of the alleged intention by reference to actual words and actions, as highlighted by Tobias JA in the decision in Ryledar Pty Ltd v Euphoric Pty Ltd, no basis existed in any of the relevant authorities ‘which suggests that the subjective intention of the parties is irrelevant’.[32] I therefore reject the objection.
[32]Ryledar (2007) 69 NSWLR 603, 641 [180].
Having determined this, the suggestion that ‘at no time was it the intention of the defendants to give up their entitlement to receive their legal fees’ is a self-serving conclusory statement and fails to address the critical issue as to the duration of the relevant priority.
There was no direct evidence from the plaintiffs. However, both sides made reference to the correspondence subsequent to the making of the Priority Deed wherein different views are expressed about the common intention. These non-contemporaneous views however were also of little assistance.
Rather, consistent with the authority above, I have determined whether there was the relevant common intention by reference to the contemporaneous words and actions of the parties.
In this context it is highly significant that, although the Goldsmiths draft proffered a clause whereby the Order of Priority applied until the relevant amount was ‘paid in full’ this was said to be ‘unacceptable’ by HWL Ebsworth (in their correspondence of 19 May 2015). They instead chose to proffer a completely different form of cl 2.2 which made explicit provision for the duration of the relevant priority until the discharge of the Freezing Order.
There was also no evidence to suggest that HWL Ebsworth actually intended a different duration clause from that explicitly contained in cl 2.2 (e.g. by ‘collapsing’ sub-paragraphs (a) and (b) of the first HWL Ebsworth draft and/or by the generalised references as to purpose). Rather, the intention of HWL Ebsworth, viewed objectively, as at 19 May 2015 (and thereafter) was that the relevant priority was to terminate on discharge of the Freezing order (absent a termination).
In relation to Goldsmiths, even if they originally held the intention alleged (that priority applied until payment), it is illogical to suggest that their ‘silence’ on 19 May 2015 was somehow helpful to the plaintiffs. In their correspondence of 22 May 2015 Goldsmiths stated that they were ‘content to enter into the Deed’ - with the new form of cl 2.2 (their objection being to other aspects). This then was consistent with their agreement to a new basis for the duration of the priority. From that time, then, the objective evidence suggests they also had an intention that the priority was to terminate on discharge of the freezing order.
I am therefore unable to find that the parties shared a common intention up to the date of execution that the relevant priority would endure until payment.
The question of ‘unconscientiousness’ does not therefore arise as it is crucial for rectification that there be a common intention in existence. In any event, there is no ‘unconscientiousness’ in a party acquiescing to an improved position in the context of a settlement of a dispute.
I am therefore not satisfied that the Priority Deed should be rectified.
CONCLUSION
As a matter of construction, the Order of Priority provided in the Priority Deed does not continue after the discharge of the Freezing Order. It follows that the plaintiffs are not entitled to the declaration sought.
They are also not entitled to an order for rectification.
It follows that the plaintiffs’ claim should be dismissed.
I will hear from the parties on the question of costs.
SCHEDULE OF PARTIES
| BETWEEN: | |
| BOB JANE CORPORATION PTY LTD (ACN 005 870 431) | First Plaintiff |
PORT 471 PTY LTD (ACN 005 870 431) | Second Plaintiff |
| - AND - | |
DSG LEGAL PTY LTD (ACN 132 836 616) | First Defendant |
GDG LEGAL PTY LTD (ACN 132 838 469) | Second Defendant |
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