C H Leaman Investments Pty Ltd v Tuesday Enterprises Pty Ltd as trustee for the Steele Investment Trust
[2024] WASCA 142
•13 NOVEMBER 2024
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
TITLE OF COURT : THE COURT OF APPEAL (WA)
CITATION: C H LEAMAN INVESTMENTS PTY LTD -v- TUESDAY ENTERPRISES PTY LTD as trustee for THE STEELE INVESTMENT TRUST [2024] WASCA 142
CORAM: BUSS P
VAUGHAN JA
LUNDBERG J
HEARD: 18 & 19 JANUARY 2024
DELIVERED : 13 NOVEMBER 2024
FILE NO/S: CACV 1 of 2023
BETWEEN: C H LEAMAN INVESTMENTS PTY LTD
Appellant
AND
TUESDAY ENTERPRISES PTY LTD as trustee for THE STEELE INVESTMENT TRUST
First Respondent
COMPLETE FIELD MAINTENANCE PTY LTD
Second Respondent
MATHEW ALLEN STEELE also known as HARRY STEELE
Third Respondent
FILE NO/S: CACV 42 of 2023
BETWEEN: C H LEAMAN INVESTMENTS PTY LTD
Appellant
AND
TUESDAY ENTERPRISES PTY LTD as trustee for THE STEELE INVESTMENT TRUST
First Respondent
COMPLETE FIELD MAINTENANCE PTY LTD
Second Respondent
MATHEW ALLEN STEELE also known as HARRY STEELE
Third Respondent
ON APPEAL FROM:
Jurisdiction : SUPREME COURT OF WESTERN AUSTRALIA
Coram: HILL J
Citation: C H LEAMAN INVESTMENTS PTY LTD -v- TUESDAY ENTERPRISES PTY LTD as trustee for THE STEELE INVESTMENT TRUST [2022] WASC 447
File Number : CIV 1323 of 2019
Jurisdiction : SUPREME COURT OF WESTERN AUSTRALIA
Coram: HILL J
Citation: C H LEAMAN INVESTMENTS PTY LTD -v- TUESDAY ENTERPRISES PTY LTD as trustee for THE STEELE INVESTMENT TRUST [2022] WASC 447 (S)
File Number : CIV 1323 of 2019
Catchwords:
Repudiation - Renunciation - Where one party incorrectly asserted agreement ceased to have effect - Correct interpretation of share purchase agreement - Objective assessment of conduct as a whole evinced intention not to be bound - Subjective intention of repudiating party irrelevant - No outward communication of honest misapprehension of construction of agreement - Turns on own facts
Damages - Correct measure of damages - Sale of the sole share in private company - Where market value cannot be determined because no market - Normal measure of damage inappropriate - Principles of compensatory damages dependent on commercial context - Damages to compensate for loss of performance of promise to transfer share - Correct measure of damage based on 'true' or 'real' value of share less purchase price - 'True' or 'real' value determined by discounted cashflow methodology - Available expert evidence as to net present value of likely future dividends
Damages - Quantum issues as to expert evidence - Turns on own facts
Appeals - Practice and procedure - Where leave to reopen sought - Leave to reopen refused - Turns on own facts
Appeal allowed in part - Cross-appeal allowed in part - Proceedings remitted to primary judge for limited rehearing
Legislation:
Corporations Act 2001 (Cth), s 260A, s 260B, s 260D
Result:
CACV 1 of 2023
Appeal allowed in part
Cross‑appeal allowed in part
Remitted to primary judge for limited rehearingCACV 42 of 2023
Appeal allowedCategory: A
Representation:
CACV 1 of 2023
Counsel:
Appellant : M L Bennett First Respondent : M C Goldblatt & A M Freund Second Respondent : M C Goldblatt & A M Freund Third Respondent : M C Goldblatt & A M Freund Solicitors:
Appellant : Bennett First Respondent : Lawton Gillon Second Respondent : Lawton Gillon Third Respondent : Lawton Gillon CACV 42 of 2023
Counsel:
Appellant : M L Bennett First Respondent : M C Goldblatt & A M Freund Second Respondent : M C Goldblatt & A M Freund Third Respondent : M C Goldblatt & A M Freund Solicitors:
Appellant : Bennett First Respondent : Lawton Gillon Second Respondent : Lawton Gillon Third Respondent : Lawton Gillon Case(s) referred to in decision(s):
Baltic Shipping Co v Dillon [1993] HCA 4; (1993) 176 CLR 344
Batoka Pty Ltd v Conocophillips WA-248 Pty Ltd [2006] WASCA 44
Bellgrove v Eldridge [1954] HCA 36; (1954) 90 CLR 613
Beverly Hills Concepts Inc v Schatz & Schatz (1998) 717 A.2d 724
C H Leaman Investments Pty Ltd v Tuesday Enterprises Pty Ltd [2022] WASC 447
C H Leaman Investments Pty Ltd v Tuesday Enterprises Pty Ltd [2022] WASC 447 (S)
Cessnock City Council v 123 259 932 Pty Ltd [2024] HCA 17; (2024) 98 ALJR 719
Chilukuri v RP Explorer Master Fund [2013] EWCA Civ 1307
Clark v Macourt [2013] HCA 56; (2013) 253 CLR 1
Connective Services Pty Ltd v Slea Pty Ltd [2019] HCA 33; (2019) 267 CLR 461
Dainford Ltd v Smith [1985] HCA 23; (1985) 155 CLR 342
DTR Nominees Pty Ltd v Mona Homes Pty Ltd [1978] HCA 12; (1978) 138 CLR 423
Gould v Vaggelas [1985] HCA 75; (1985) 157 CLR 215
Green v Sommerville [1979] HCA 60; (1979) 141 CLR 594
Hadley v Baxendale (1854) 9 Exch 341; 156 ER 145
Haines v Bendall [1991] HCA 15; (1991) 172 CLR 60
HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd [2004] HCA 54; (2004) 217 CLR 640
James Shaffer Ltd v Findlay Durham & Brodie [1953] 1 WLR 106
Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298
Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd [2007] HCA 61; (2007) 233 CLR 115
Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd [1989] HCA 23; (1989) 166 CLR 623
Milburn v Pivot Ltd (1997) 78 FCR 472
Morrison v Town of Victoria Park [2007] WASCA 164
Netline Pty Ltd v QAV Pty Ltd [2022] WASCA 131
Paciocco v Australia & New Zealand Banking Group Ltd [2016] HCA 28; (2016) 258 CLR 525
Payzu Ltd v Saunders [1919] 2 KB 581
Peters' American Delicacy Co Ltd v Heath [1939] HCA 2; (1939) 61 CLR 457
Photo Production Ltd v Securicor Transport Ltd [1980] AC 827
Potts v Miller [1940] HCA 43; (1940) 64 CLR 282
Progressive Mailing House Pty Ltd v Tabali Pty Ltd [1985] HCA 14; (1985) 157 CLR 17
R & A Cab Co Ltd v Kotzman [2008] VSCA 68
Radford v De Froberville [1977] 1 WLR 1262
Robinson v Harman (1848) 1 Ex Rep 850
Ross T Smyth & Co Ltd v T D Bailey Son & Co [1940] 3 All ER 60
Ruxley Electronics and Construction Ltd v Forsyth Laddingford Enclosures Ltd [1994] 1 WLR 650
Secretary, Department of Infrastructure v Williamstown Bay and River Cruises Pty Ltd [2011] VSC 191; (2011) 181 LGERA 195
Shevill v Builders Licensing Board [1982] HCA 47; (1982) 149 CLR 620
Sopov v Kane Constructions Pty Ltd [2007] VSCA 257; (2007) 20 VR 127
Spettabile Consorzio Veneziano di Armamento e Navigazione v Northumberland Shipbuilding Co Ltd (1919) 121 LT 628
Straits Engineering Contracting Pte Ltd v Merteks Pte Ltd [1996] 4 LRC 259
Summers v The Commonwealth [1918] HCA 33; (1918) 25 CLR 144
Sweet & Maxwell Ltd v Universal News Services Ltd [1964] 2 QB 699
Tabcorp Holdings Ltd v Bowen Investments Pty Ltd [2009] HCA 8; (2009) 236 CLR 272
The Commonwealth of Australia v Amann Aviation Pty Ltd [1991] HCA 54; (1991) 174 CLR 64
Wenham v Ella [1972] HCA 43; (1972) 127 CLR 454
Wertheim v Chicoutimi Pulp Co Ltd [1911] AC 301
Woodar Investment Development Ltd v Wimpey Construction UK Ltd [1980] UKHL 11; [1980] 1 WLR 277
Table of Contents
Overview
Factual background
Primary decision
Grounds of appeal, notice of contention and grounds of cross-appeal
Disposition: cross-appeal ground 1 - whether there was repudiation of the SPA
Repudiation: the primary judge's reasoning
Repudiation: the parties' submissions
Repudiation: applicable legal principles
Repudiation: consideration and determination
Disposition: cross-appeal ground 2 - whether appellant also in breach of the cl 2.4 'best endeavours' obligation
The sequence for consideration of the remaining issues before the court
Disposition: grounds 1 - 13 - the appellant's measure of damage
The appellant's measure of damage - the expert evidence
The appellant's measure of damage - the parties' submissions
The appellant's measure of damage - an initial observation
The appellant's measure of damage - the general compensatory principle
The appellant's measure of damage - Wenham v Ella
The appellant's measure of damage - consideration and determination
Disposition: grounds 14 - 17 - the alleged quantification errors
Ground 14: disallowance of adjustment to future profits by annual 5% growth
Ground 15: disallowance of residual value of Rexwells' share after 10 years
Ground 16: disallowance of future profits after 5 years
Ground 17: expert evidence as to franking credits irrelevant to determination
Disposition: notice of contention points and cross-appeal ground 3
Notice of contention grounds 1 - 3: the contingency arising in relation to the Rio Tinto contract
Notice of contention ground 4: whether the appellant failed to mitigate
Ground 17 and notice of contention ground 5: the dividend distribution and franking credit issue
Cross-appeal ground 3: the amount of the deduction on account of Mr Steele's replacement
Conclusion and orders
Annexure: grounds of appeal, notice of contention and grounds of cross‑appeal
Grounds of cross-appeal
Grounds of appeal
Notice of contention
Grounds of cross-appeal (cont.)
JUDGMENT OF THE COURT:
Overview
1In December 2018 the appellant entered into an agreement entitled 'Share Purchase Agreement' (SPA) with, among others, the first respondent to purchase the sole issued share in Rexwells Corporation Pty Ltd (Rexwells) for an initial purchase price of $3.9 million. The SPA was subject to a number of conditions precedent. These included, by cl 2.3, a condition that completion of the transaction was subject to and conditional upon financial assistance being approved under s 260B of the Corporations Act 2001 (Cth).
2The financial assistance condition was to be fulfilled by 30 January 2019. On 17 January 2019, by their then lawyers, the respondents gave notice that the financial assistance condition had become incapable of being satisfied. The respondents stated that: 'under clause 2.7 of [the SPA], the agreement ceases to have effect'.
3The appellant contended that the respondents thereby repudiated the SPA. On 22 January 2019, by its lawyers, the appellant accepted the purported repudiation and terminated the SPA. Following unsuccessful attempts to come to an alternate share purchase agreement the appellant commenced proceedings against the respondents. The appellant contended that it had suffered losses based on the revenue stream it would have obtained had the SPA been performed. This amounted to between $5.267 million and $6.049 million.
4After a seven-day trial the primary judge (Hill J) delivered written reasons[1] in which her Honour held that:
1.The respondents breached their obligation to use their best endeavours to satisfy the financial assistance condition: [5](a), [296] - [319].
2.The appellant did not breach its obligations to use its best endeavours to satisfy the financial assistance condition: [5](a), [290] - [295].
3.The respondents renunciated the SPA; and the appellant, as it was entitled to do, accepted the renunciation and terminated the SPA: [5](b), [320] - [350], [481].
4.However, the appellant failed to prove that it suffered any loss. Accordingly, the appellant was only entitled to nominal damages: [5](c), [416] - [431], [481] - [482].
[1] C H Leaman Investments Pty Ltd v Tuesday Enterprises Pty Ltd [2022] WASC 447 (primary reasons).
5The primary judge entered judgment for the appellant, against the respondents, for nominal damages in the amount of $100. Subsequently, having delivered supplementary written reasons, the primary judge ordered that the appellant pay the respondents' costs of and incidental to the proceedings.[2]
[2] C H Leaman Investments Pty Ltd v Tuesday Enterprises Pty Ltd [2022] WASC 447 (S) [51.1].
6The appellant appeals against both the judgment and the costs order. However, the appeal against the costs order is entirely consequential and dependent on the appellant succeeding in its appeal against the damages award. There is no challenge to the costs order in the event that the appellant's challenge to the award of nominal damages fails.
7The respondents cross-appeal against the primary judge's adverse findings and, in any case, seek by notice of contention to uphold the result that any damages be no more than nominal in amount.
8For the reasons that follow the appeal should be allowed. The primary judge erred in holding that the relevant measure of damage was the 'normal' or 'usual' measure - one that relied on proof that the market value of the share exceeded its purchase price. The primary judge should have found that the appropriate measure of damage was the amount, if any, by which the 'true' or 'real' value of the share exceeded the purchase price of the share under the SPA. While there was no evidence of market value before the primary judge there was sufficient available evidence to determine the 'true' or 'real' value of the share. The appellant discharged its onus of proof in relation to the loss it suffered by reason of the respondents' repudiatory breach of the SPA. The appellant should not have been confined to an award of nominal damages.
9The cross-appeal fails so far as the respondents challenged the primary judge's finding that they repudiated the SPA. So too the cross-appeal fails in as much as the respondents challenged the primary judge's finding that the appellant was not in breach of the best endeavours obligation. However, the cross-appeal succeeds in relation to one of the primary judge's provisional findings relevant to the quantification of damages.
10The proceedings should be remitted to the primary judge for assessment of damages in accordance with the reasons of this court. There are, in this regard, two outstanding matters. One might have been addressed with short supplementary submissions on judgment delivery. However the other is concerned with notice of contention grounds 1 - 3. As this will require a limited rehearing before the primary judge it is convenient that the primary judge also finalise the assessment of damages.
Factual background
11The primary judge made comprehensive factual findings as to the parties' dealings: [6] - [30], [129] - [231]. While, as will be seen, there are numerous challenges to her Honour's application of the law to the facts as found, there are very few challenges on appeal to the primary findings of fact. What follows is taken from the primary reasons and is supplemented, where appropriate, with extracts from the documentary record. It is limited to the matters and events that are critical to the issues in the appeal.
12It may be useful to identify relevant persons in the litigation at the outset of this recitation of the factual background. They comprise:
1.The appellant, C H Leaman Investments Pty Ltd, an investment company of Christopher Leaman (its sole director): [7].
2.The third respondent, Matthew Steele (known as Harry Steele), who is the sole director of the first respondent (Tuesday Enterprises Pty Ltd), Rexwells and the second respondent (Complete Field Maintenance Pty Ltd): [9], [11]. The first respondent is the sole shareholder of Rexwells: [9]. The second respondent owns certain intellectual property rights used by Rexwells in its business: [12].
3.Lark Lawyers, through two solicitors - Peter Lark and Alan Pocock - who acted for the appellant in the commercial transaction between the parties: [21]. Later, when the transaction became disputatious, Bennett + Co acted for the appellant in relation to the dispute: [27].
4.Zilkens Lawyers, through two solicitors - Alex Zilkens and Sidd Jain - who acted for the respondents in the commercial transaction between the parties: [20] - [21]. However, from late January 2019 the respondents were represented by Lawton Gillon: [28].
13Rexwells carried on business under the name 'Complete Field Maintenance' providing products for the supply of parts, services and maintenance of mobile and fixed plant and equipment for the mining industry including blast hole drilling rigs: [8]. Among other things it sold specialised built and designed service kits for machinery of original equipment manufacturers.[3] There was said to be minimal competition in its market.[4] The business was profitable: [10]. The primary judge characterised the business as 'a high cash generating business with few physical assets': [276]. In this respect:
It was not in dispute that Rexwells was a business with low capital and assets, and had a good revenue stream. In [the third respondent's] evidence, he confirmed that the sale of Rexwells was essentially the sale of a revenue stream together with a minimal amount of assets [390].
[3] GAB 457, 459, 461.
[4] GAB 472.
14The limited physical assets held by Rexwells is emphasised by the primary judge's observation that Rexwells' balance sheet disclosed that it had property, plant and equipment assets of only $105,293 out of net assets of a little over $4 million: [276]. The balance sheet that her Honour was referring to was a balance sheet as of 30 June 2018.[5] As well as the property, plant and equipment, the balance sheet disclosed inventories of $316,218. But otherwise the assets consisted of cash and cash equivalents of $882,714 and trade and other receivables (both current and non-current) of slightly over $3.070 million. Rexwells' total liabilities were a mere $305,740.
[5] GAB 292.
15In terms of profitability, the primary judge recorded that Rexwells had recorded net profit before tax as follows ([10]):
1.Year ended 30 June 2015 - $646,563.
2.Year ended 30 June 2016 - $1,510,530.
3.Year ended 30 June 2017 - $1,847,782.
4.Year ended 30 June 2018 - $2,065,943.
5.Year ended 30 June 2019 - $1,795,104.
16In 2017 the third respondent decided to sell Rexwells' business: [13].
17At the appeal hearing, counsel for the appellant relied on various aspects of an information memorandum that was prepared to solicit interest in the purchase of Rexwells' assets and undertaking.
18The information memorandum repeatedly described Rexwells' key features as:
·High gross Profit margin of 45%.
·Essential products.
·Established 2007.
·Fixed price contracts with all major customers ensure stability of revenues no matter what the state of the economy.
·Low staff (3 fulltime and one part time).
·Self-propelled sales.
·Easy to operate.
·Low advertising budget.
·Huge potential to expand, just through marketing and sales.[6]
[6] GAB 451 - 513.
19Consistently with Rexwells' balance sheet, the information memorandum put little value on the company's plant and equipment. It described two vehicles, a truck, office equipment, toro cutter and a Komatsu wheel loader with a total value of $200,000.[7] However, the information memorandum suggested a purchase price of $5.9 million. This was justified in two ways. First, by applying a 30% return on investment to a net profit of $1.775 million. Second, by aggregating plant ($200,000), stock ($450,000) and goodwill ($5.250 million).[8]
[7] GAB 495.
[8] GAB 451, 481.
20Over 2017 and 2018, Mr Leaman made offers to purchase, at least two of which were accepted, but the purchase did not then proceed. In December 2018 Mr Leaman obtained approval from his bank, NAB, for a $4 million business loan to fund the purchase of the share in Rexwells. The offer required that a number of assets be provided as security. Also, NAB required that Rexwells provide a guarantee and indemnity supported by a security interest and charge over its property and undertaking. The finance offer also required a 'whitewash certificate' before any drawdown of the loan: [14] - [17].
21The parties entered into the SPA on 21 December 2018: [1], [18].
22Relevantly, the appellant agreed to purchase the sole issued share in Rexwells from the first respondent: [1], [254]. The purchase price was $3.9 million (referred to as the 'Initial Payment'), a 'Final Payment' and all accounts receivable until 31 January 2019: [256]. The Final Payment was quantified by the primary judge as being - $410,663.75: [480]. In practical terms this meant that the Final Payment resulted in a reduction of the purchase price.
23The other respondents were also parties to the SPA. The second respondent agreed to transfer the intellectual property rights used in the business for a nominal consideration: [254]. The third respondent (Mr Steele) agreed to provide various warranties and indemnities and otherwise agreed to certain ongoing arrangements in the business post-completion: [254].
24The completion date for settlement under the SPA was defined to be 31 January 2019 or such further date as the appellant and the first respondent agreed: [18], [257].
25Some other features of the SPA should be mentioned:
1.The SPA contemplated Rexwells declaring and paying a dividend to the first respondent (to be franked to the full extent permitted by Rexwells' franking account) immediately before completion. The dividend was to be of an amount equal to all retained profits after allowing for the value of stock and plant and equipment (cl 5.2, cl 6.2(a)(i)).
2.At completion the first respondent, as seller, was required to provide documentation to the satisfaction of the appellant confirming that there was no indebtedness owed by Rexwells to any third-party other than as allowed in a schedule attached to the SPA (cl 6.2(a)(ii)(A)(1)). The schedule is difficult to interpret. In substance, however, as the third respondent confirmed in cross-examination,[9] this meant that Rexwells' only debts left following completion would be ordinary trading debts with suppliers.
3.The SPA contemplated the third respondent entering into an 'Executive Services Agreement' with Rexwells. The form of the Executive Services Agreement was annexed to the SPA. It provided that the third respondent was to be employed part-time 7.5 hours per week (or 30 hours per month) for 12 months at an annual salary of $35,000 per annum commencing from 1 May 2019 (cl 6.2(a)(ii)(D), annexure A). The post-completion commencement date is explained by the circumstance that the SPA contained a separate obligation that the third respondent assist with the management of Rexwells' business at no charge for 7.5 hours per week from completion to 30 April 2019: cl 18.6.
4.The SPA contained a specific disclosure in relation to Rexwells' supply contract with Rio Tinto. It was disclosed that the contract had expired on 5 October 2018 and that a new contract was 'presently under review' by Rio Tinto: sch 4.
[9] ts 491.
26Accordingly, the SPA contemplated the first respondent, as seller of the single share in Rexwells, receiving the purchase price. The purchase price included all accounts receivable payments (ie the value of accounts receivable as at completion). The first respondent would also receive a dividend, franked to the full extent possible, in respect of Rexwells' retained profits after allowing for the value of stock and plant and equipment. In effect, post-completion the appellant, as the incoming shareholder of Rexwells, would be the sole member of a company that retained Rexwells' business, stock and plant and equipment. It will be recalled that the value of the physical stock and plant and equipment was relatively modest (see [13] - [14] above). Rexwells' net assets were largely comprised of cash and cash equivalents and trade and other receivables. In that respect the value of the accounts receivable and the bulk of Rexwells' retained profits would have been received by the first respondent under the transaction effected by the SPA.
27Clause 2 of the SPA is important to the proper disposition of the appeal. It is entitled '[c]onditions precedent to completion' and provides ([255]):
2.1Condition - due diligence
(a)Completion of the transactions contemplated by this agreement is subject to and conditional upon the Purchaser [ie the appellant] being satisfied at its sole discretion with its due diligence investigations relating to the Company, the Business, the Shares and the transactions occurring under this agreement.
(b)The duration of this due diligence process will be limited to 30 January 2019.
(c)If the Purchaser has not advised the Seller [ie the first respondent] by 30 January 2019 that this condition 2.1 has not been satisfied, this condition is deemed to be satisfied and cannot be used by the Purchaser to terminate this agreement.
2.2Conditions - general
Completion of the transactions contemplated by this agreement is subject to and conditional upon:
(a)execution of employment agreements by all Employees on terms satisfactory to the Purchaser;
(b)no material breach of the Warranties;
(c)the Purchaser entering into the New Lease over the Premises on terms acceptable to Purchaser;
(d)consents being obtained to change in control in connection with each material Business Contracts identified during due diligence on terms acceptable to the Purchaser at its sole discretion; and
(e)the Purchaser being satisfied at its absolute discretion that a new contract has been entered into with Rio Tinto Limited on terms acceptable to the Purchaser; and that if the new contract has a change of control clause Rio Tinto Limited has provided to the Purchaser assurance to the satisfaction of the Purchaser at its absolute discretion that Rio Tinto Limited will not seek to terminate this new contract as a consequence of the change in control of the Company which will occur should the sale and purchase of the Shares under this agreement Complete.
2.3Financial assistance condition
Completion of the transactions contemplated by this agreement is subject to and conditional upon that assistance being approved by Shareholders under section 260B in compliance with required advance notice to the ASIC.
2.4Best endeavours
The parties must use their best endeavours to satisfy the conditions set out in clauses 2.2 through 2.3.
2.5Notice
A party must promptly notify the other parties in writing if it becomes aware that any of the conditions in clauses 2.2 through 2.3 are satisfied or become incapable of being satisfied.
2.6Waiver
(a)The conditions in clauses 2.2 [sic] may only be effectively waived if waived by the Purchaser.
(b)The condition in clauses 2.3 [sic] may only be effectively waived if waived by both of the Purchaser and the Seller.
2.7Non-fulfilment of conditions
If the conditions in clauses 2.2 through 2.3 are not fulfilled before 30 January 2019 then, this agreement shall cease to have effect and thereafter no party shall have any claim of any nature against the other in relation to this agreement.
28It is convenient, at this point, to depart from the chronology and say something about the financial assistance condition in cl 2.3 of the SPA.
29Clause 2.3 is concerned with financial assistance by Rexwells for the purchase of the sole share in the company. Historically, driven by a concern with the maintenance of capital, corporations legislation had prohibited a company providing financial assistance for the acquisition of shares in the company.[10] Now, however, the Corporations Act permits such financial assistance provided that certain conditions are met.[11] By implication, if none of the permitted circumstances apply, the giving of financial assistance is prohibited.
[10] The legislative history is discussed in Connective Services Pty Ltd v Slea Pty Ltd [2019] HCA 33; (2019) 267 CLR 461 [9] - [20].
[11] Corporations Act s 260A.
30It remains important to comply with the conditions that permit the provision of financial assistance. Where a company provides financial assistance in contravention of s 260A of the Corporations Act any person who is involved in the company's contravention of s 260A contravenes s 260D of the Corporations Act.[12] Such a contravention exposes the person to a pecuniary penalty order for contravention of a civil penalty provision.[13] It should also be remembered that a director is not relieved from his or her statutory or fiduciary duties as a director in connection with a transaction merely because the transaction is approved by a resolution approving the giving of financial assistance.[14]
[12] Corporations Act s 260D(2).
[13] Corporations Act s 1317E, s 1317G.
[14] Corporations Act s 260E.
31Section 260A of the Corporations Act contemplates three permissible means by which a company may financially assist a person to acquire shares in the company:
1.If giving the assistance does not materially prejudice: (a) the interests of the company or its shareholders; or (b) the company's ability to pay its creditors (s 260A(1)(a)).
2.If the assistance is approved by shareholders under s 260B (s 260A(1)(b)). This, according to the primary judge, is commonly referred to as 'financial assistance whitewash' or 'whitewash approval': [234]. Accordingly, it was this form of financial assistance that was required by the appellant's NAB business loan.
3.If the assistance is exempted under s 260C (s 260A(1)(c)).
32Exempted assistance under s 260C is of no relevance to the present appeal. There only needs to be further consideration of the two permissible means for financial assistance under sub-pars (1)(a) and (1)(b) of s 260A.
33Permitted financial assistance under sub-pars (1)(a) and (1)(b) of s 260A operates in two distinct circumstances. In the former case, s 260A(1)(a) requires no shareholder approval to the giving of the financial assistance. Rather, the implied prohibition on a company giving financial assistance to acquire its own shares simply does not apply where giving the financial assistance does not cause material prejudice to the interests of the company or its shareholders or to the company's ability to pay its creditors. By contrast, s 260A(1)(b) is based on shareholder approval to the financial assistance under s 260B. Unlike s 260A(1)(a) it is not preconditioned by a lack of material prejudice (as a matter of fact) to the interests of the company or its shareholders and to the company's ability to pay its creditors. But, as will be seen, s 260B prescribes various safeguards that must be observed in obtaining the requisite shareholder approval.
34Austin and Black explain that:
[B]anks and other financiers, traditionally concerned to avoid being involved in the contravention of the financial assistance prohibition, may not be comfortable in relying on the absence of material prejudice except in a very clear case, and may therefore insist upon a 'whitewashing' special resolution procedure under s 260B if there is doubt as to the application of the prohibition.[15]
[15] Austin and Black's Annotations to the Corporations Act [2J.260A].
35The primary judge held, and it is not in issue on the appeal, that the reference to 'Shareholders' in cl 2.3 of the SPA was to the first respondent as the owner of the sole share in Rexwells: [274]. Her Honour also concluded, uncontroversially for the purposes of the appeal, that so far as the text of cl 2.3 referred to 's 260B' (meaning s 260B of the Corporations Act) and 'advance notice' to the ASIC, cl 2.3 contemplated the giving of financial assistance in accordance with s 260A(1)(b) of the Act by the mechanism prescribed by s 260B of the Act: [275].
36It is not necessary to reproduce the terms of s 260B. There was only one shareholder of Rexwells (the first respondent). Accordingly, the financial assistance shareholder approval could be given by a resolution agreed to at a general 'meeting' of that shareholder (s 260B(1)(b)). (We will assume that a single person may relevantly 'meet' insofar as no one contended to the contrary on the appeal.) However, the notice of the meeting had to be accompanied by a statement setting out all the information known to the company (Rexwells) that was material to the decision on how to vote on the resolution (s 260B(4)). Also, before the notice was sent to the member, the company had to lodge with the ASIC the notice of meeting and the statement that was to accompany the notice (s 260B(5)). A prescribed notice stating that financial assistance had been approved under s 260B had to be lodged by the company with the ASIC at least 14 days before giving the financial assistance (s 260B(6)).
37The primary judge found, and it is not in issue on appeal, that for completion under the SPA to occur on 31 January 2019 the prescribed notice as to financial assistance approval had to be provided to the ASIC by 17 January 2019. Her Honour said that, although 'tight', the required draft documents could be lodged with the ASIC on 17 January 2019, and thereafter, on that same day, there might be notice of the meeting and the meeting itself (the first respondent, as sole shareholder, consenting to short notice). This would permit lodgement of the resolution with the ASIC later on 17 January 2019 - allowing for the 14-days post-lodgement to expire on 31 January 2019: [279] - [280].
38Neither at trial, nor on appeal, was there any consideration of whether the 14-day requirement under s 260B(6) might be abridged by an order pursuant to s 1322(4)(d) of the Corporations Act. As this is the basis on which the litigation proceeded we will not examine this possibility. For the purpose of the appeal it must be accepted that the prescribed notice under s 260B(6) had to be lodged with the ASIC by or on 17 January 2019 if completion was to occur on 31 January 2019 in accordance with the terms of the SPA.
39An issue might be thought to arise as to the scope and content of the financial assistance which was to be approved under cl 2.3 of the SPA. The clause says only that completion of the transactions contemplated by the SPA is subject to and conditional upon 'that assistance' being approved. What was included within 'that assistance' does not appear to have been the subject of consideration at trial. Nor was it raised for consideration on appeal. The matter is not unimportant. Only 'that assistance' within the scope and meaning of that term in cl 2.3 need be approved to satisfy the financial assistance condition precedent.
40One possibility is that the financial assistance simply concerned that component of the purchase price constituted by the accounts receivable payment so far as it was based on collections by Rexwells. The remittance of such collections might be thought to meet the description of 'assistance' as to the transactions contemplated by the SPA. However, as will become apparent from the facts and the way the litigation was contested, the parties must be taken to have accepted that the financial assistance obligation extended to an approval that Rexwells grant security over its assets and undertaking to secure repayment of $4 million to be borrowed by the appellant to fund the payment of the purchase price.
41Since, on appeal, the respondents accepted the primary judge's finding that they were in breach of cl 2.4's best endeavours obligation to satisfy the financial assistance condition in cl 2.3,[16] there is no need to consider this issue any further. Instead, consistently with the parties' approach to the trial and the appeal, we will proceed on the basis that the contemplated financial assistance under cl 2.3 of the SPA extended to Rexwells granting security over its assets and undertaking to secure repayment of $4 million to be borrowed by the appellant to fund the payment of the purchase price for the Rexwells' share.
[16] Appeal ts 152, 171 - 172. See primary reasons [296] - [319].
42One further aspect of the cl 2.3 financial assistance condition precedent should be emphasised. The condition is concerned with approval of financial assistance rather than the actual giving of any financial assistance. That distinction is important. Given the strictures of s 260B - in particular the requirement of the ASIC lodgement at least 14 days before giving the financial assistance - the approval of the financial assistance precedes the giving of the financial assistance by at least two weeks.
43Apart from the temporal difference, there is difference between who approves and who gives the financial assistance. Where the mechanism under s 260A(1)(b) and s 260B is employed the company's shareholders approve the giving of the financial assistance by passing a resolution to that effect in accordance with either s 260B(1)(a) or (b). However, it is the company - not the shareholders - who in fact eventually gives the financial assistance after the shareholders' approval.
44Ordinarily, subject to well established exceptions, a shareholder may vote in its own interests.[17] In considering whether or not to approve the giving of proposed financial assistance the shareholders are not subject to any statutory or fiduciary duties. And, as should now be appreciated, shareholder approval does not itself effect the giving of financial assistance - it merely provides permission for the company to give financial assistance in due course. So understood it is difficult to see how liability may be visited on a shareholder merely for its participation in a resolution under s 260B of the Corporations Act approving the company financially assisting a person to acquire shares in the company.
[17] Peters' American Delicacy Co Ltd v Heath [1939] HCA 2; (1939) 61 CLR 457, 481 - 482, 504.
45It might, in the circumstances, be thought that shareholder approval in accordance with cl 2.3 of the SPA would be a relatively simple matter. The first respondent, as sole shareholder of Rexwells, was in a position to pass such shareholder resolutions as it thought fit to satisfy the cl 2.3 financial assistance condition precedent. By virtue of cl 2.4 of the SPA the first respondent was subject to a best endeavours obligation to so satisfy the condition precedent.
46Where, following shareholder approval, a company gives financial assistance, it will ordinarily act by its directors. The directors are subject to their usual statutory and fiduciary duties in determining whether or not the company should give the financial assistance even if it has been authorised by the shareholders' approval. Also, a company's giving of financial assistance to acquire shares in the company is deemed to constitute the incurring of a debt for the purpose of the directors' duty to prevent insolvent trading as provided for by s 588G of the Corporations Act.[18] So the giving of financial assistance may expose a director to a contravention of s 588G where the various integers in s 588G(1) and (2) are satisfied. Accordingly, unlike shareholder approval for financial assistance, the company's subsequent giving of financial assistance to a person to acquire shares in the company has the potential to visit liability on those officers of the company who bring about the giving of the financial assistance.
[18] Corporations Act s 588G(1A) item 6.
47The cl 2.3 financial assistance condition precedent was solely concerned with approval of financial assistance rather than the actual giving of any financial assistance. That had implications for what had to be done, and by when it had to be done, for satisfaction of the condition precedent. It also had implications for what the parties had to do in terms of cl 2.4 of the SPA in using best endeavours to satisfy the financial assistance condition precedent.
48The SPA did not expressly deal with the giving of any financial assistance. The matter was not explored at trial and received only cursory attention on appeal when the court directed counsel's attention to the apparent omission in the SPA. Counsel for the appellant suggested, in effect, that the provision of the security to NAB fell within a 'further assurance' type obligation assumed by the first respondent in respect of completion; counsel for the respondents disputed that the further assurance obligation extended that far.[19] It was not suggested that the issue needed to be determined for the purposes of the appeal. That must be correct where the condition precedent is itself only concerned with the approval of the proposed financial assistance. In the circumstances it is not necessary to examine the mechanism by which the eventual giving of the contemplated financial assistance was to be effectuated.
[19] Appeal ts 194 - 195.
49Returning to the narrative, the parties' solicitors discussed the financial assistance condition prior to execution of the SPA. On 13 November 2018, at a meeting at Lark Lawyers' offices, Mr Lark told Mr Zilkens that he (Mr Lark) would prepare the financial assistance documents: [132] - [137]. After execution of the SPA, on 4 January 2019, Mr Leaman raised the financial assistance condition with the third respondent. Mr Leaman said that it needed to be done 'ASAP' as it took a minimum of 14 days to be processed and needed to be cleared prior to settlement: [139]. There was then some debate between the parties' lawyers as to preparation of the necessary documents in relation to financial assistance: [144], [146] - [148], [151]. However, following the discussions, on 10 January 2019 Lark Lawyers agreed to prepare initial draft documents to be provided to Zilkens Lawyers for them to review and finalise on behalf of the first respondent: [23], [153].
50On 11 January 2019 (a Friday) Lark Lawyers sent Zilkens Lawyers an email attaching five draft documents ([156] - [168]). They comprised:
1.A draft timetable - this, among other things, noted that the prescribed notice had to be lodged with the ASIC at least 14 days before the giving of the financial assistance.
2.A draft disclosure statement - this, among other things, recorded that the appellant was borrowing $4 million from NAB to purchase the Rexwells' share and that NAB required Rexwells to provide securities for the loan. The draft also stated that:
4.The above transactions do not lead to any solvency concerns[.]
…
6.To the best of the knowledge and belief of [the first respondent] the proposed assistance will not materially prejudice [Rexwells'] ability to pay its creditors.
7.[The first respondent] is fully cognisant of the financial position and assets and liabilities of [Rexwells].
3.A draft resolution of the third respondent as the director of the first respondent. This, in substance, consented to and gave approval for the first respondent to approve a resolution that Rexwells provide financial assistance to the appellant to purchase the share in Rexwells. The nature of the financial assistance was specified as the provision of a security over the assets and undertaking of Rexwells for the loan of $4 million. Among other things the draft resolution recited that the transaction as contemplated did 'not lead to any solvency concerns'.
4.A draft resolution of the first respondent as the sole member of Rexwells under s 260B of the Corporations Act (the resolution was said to be a special resolution made under s 260B(1)(a) rather than s 260B(1)(b)).
5.A draft covering letter to the ASIC.
51Lark Lawyers' email emphasised that it was 'important' that the documents were completed and lodged with the ASIC by no later than 15 January 2019: [157].
52It should be apparent from our earlier discussion of the financial assistance provisions in the Corporations Act that the draft documents as prepared by Lark Lawyers exhibited a degree of confusion. In particular, while designed to secure shareholder approval under s 260B, the draft documents employed many of the concepts in s 260A(1)(a); for example, the reference to the proposed assistance not materially prejudicing Rexwells' ability to pay its creditors. It will be necessary to return to this feature of Lark Lawyers' draft documents when considering cross-appeal ground 2.
53Zilkens Lawyers reviewed the draft documents. Mr Zilkens gave evidence that he was concerned that the documents referred to there not being any solvency issues and that the proposed financial assistance would not cause any material prejudice to Rexwells' creditors: [170]. On 14 January 2019, in the afternoon, Zilkens Lawyers wrote to Lark Lawyers requesting further information in order to make an assessment as to whether there would be material prejudice under s 260A of the Corporations Act: [24], [175]. Lark Lawyers responded on 15 January 2019 giving further details as to the proposed NAB loan including additional security being provided by the appellant (one of the additional securities being a mortgage over a Kewdale property valued at approximately $4 million): [24], [178].
54Lark Lawyers' email dated 15 January 2019 went on to state:
[U]nless your client lodges the relevant documentation today and passes the resolution tomorrow (and otherwise complies with the requirements of section 260 [sic]) the provisions of condition 2.3 (ie the condition regarding financial assistance) will not have been satisfied prior to 31 January 2019.
Could you please confirm that the appropriate steps will now be taken and provide us with copies of the documents prepared and lodged and confirmation that the provisions of section 260 [sic] have been complied with [179].
55Mr Leaman and the third respondent, with another, met later on 15 January 2019 to discuss the cl 2.3 financial assistance condition: [183].
56On 16 January 2019, at 11.10 am, Zilkens Lawyers responded to Lark Lawyers: [25], [184]. The email noted that the respondents did not know what plans the appellant had for the business in the future or NAB's intentions regarding how it would enforce security in the event of a default. The email requested a repayment schedule for the loan and concluded:
4Accordingly, our client is of the view that based on the information currently available to it, our client cannot form the view and, accordingly, resolve to approve that the provision of financial assistance by Rexwells to the buyer will not materially prejudice the interests of the creditors of Rexwells.
5As it is our client that has to approve the financial assistance but the consequences of doing so are solely in the control of your client, our client requires your client (C H Leaman Investments [ie the appellant]) and Chris [ie Mr Leaman] (personally) to provide an indemnity indemnifying Tuesday [ie the first respondent] and Harry [ie the third respondent] for any liability they may [sic] as a result of approving the financial assistance.
Given that the deadline to lodge the necessary documents with ASIC is about to pass, our client proposes that the completion date be pushed back to 14 February 2019.
Please let us have the additional information that our client requires to allow it to give the necessary approval as well as whether we should proceed with preparing the indemnity and varying the completion date in the share purchase agreement [184].
57Mr Pocock (of Lark Lawyers) and Mr Jain (of Zilkens Lawyers) spoke by telephone on the morning of 17 January 2019. The primary judge accepted Mr Pocock's evidence that he (Mr Pocock) on behalf of the appellant offered an indemnity in lieu of the additional information that the respondents were seeking and that Mr Jain on behalf of the respondents said this was 'acceptable': [188] - [189]. However, Mr Jain said that he would have to take instructions on whether the effective date of the sale was to remain 1 February 2019: [188]. Subsequently, that afternoon, Lark Lawyers sent Zilkens Lawyers an email confirming that 'to simplify matters and get the approval completed your client [ie the respondents] will accept an indemnity'. The email attached a draft indemnity deed. It also informed Zilkens Lawyers that the appellant was prepared to agree to the completion date being after 1 February 2019 on condition that the effective date of the sale would remain 1 February 2019: [25], [190] - [191].
58There was no response to Lark Lawyers' email of 17 January 2019: [193]. But, at 4.47 pm on 17 January 2019, Zilkens Lawyers sent the communication relied on by the appellant as constituting the renunciation of the SPA: [26], [194]. In a letter sent to Lark Lawyers by email Zilkens Lawyers referred generally to the correspondence between the two firms on the cl 2.3 SPA condition and specifically to the request for information in the email of 16 January 2019. Zilkens Lawyers stated that the information was required by the respondents to allow them to consider and, if possible, resolve to approve the giving of financial assistance for the purpose of the appellant borrowing $4 million from NAB to enable it to pay the purchase price for the Rexwells' share.[20]
[20] GAB 345.
59The 17 January 2019 letter then continued:
We note that your client has refused to provide the information requested and, in the circumstances, our client has concluded that it has insufficient information to be able to resolve that the provision of the financial assistance (to the extent that the details of same are known to our client) will not materially prejudice Rexwells' ability to pay its creditors.
Accordingly, and in light of the fact that notice to ASIC had to be given by 15 January for settlement to occur on 31 January, our client hereby gives notice that the condition in clause 2.3 of the share purchase agreement has become incapable of being satisfied and, under clause 2.7 of the agreement, the agreement ceases to have effect [194]. (emphasis added)
60After receiving the Zilkens Lawyers' letter of 17 January 2019, Mr Leaman sought to contact the third respondent. A number of attempts were made over 17 and 18 January 2019. However, the third respondent did not respond until Monday, 21 January 2019. The third respondent apologised for not being in contact but said he thought it best to withdraw from the process as he was receiving conflicting advice: [197] - [199].
61The parties arranged to meet on Friday, 25 January 2019: [200] - [201].
62In the meantime, on 22 January 2019, Bennett + Co (for the appellant) wrote to Zilkens Lawyers (for the respondents): [27], [202]. The letter stated:
It is plainly the case, in my opinion, that your client's conduct in purporting to rely upon clause 2.3 in the circumstances set out in the correspondence constitutes a wrongful repudiation of the contract. This is particularly the case where:
1the business being sold but conducted by Rexwells Corporation Pty Ltd, is a solvent profitable business (a matter I deal with below);
2your client was notified that CH Leaman Investments Pty Ltd [ie the appellant] and its principal Chris Leaman would provide an indemnity for your client as shareholder; and
3your client was informed that the security to be taken over the shares [sic] in Rexwells Corporations to be purchased by my client and over the assets of Rexwells by way of charge, were part of an extensive portfolio of security which included a charge over my client's other assets, a mortgage over a property in Kewdale valued at approximately $4 million and that my client would make a cash injection of $2 million into Rexwells, of which $1 million was to be held in term deposit with its banker for 12 months as a reserve for Rexwells Corporation Pty Ltd.
In the circumstances my client accepts your client's repudiatory breach and terminates the Deed [ie the SPA] [202].
63Bennett + Co also sent without prejudice correspondence the same day: [203]. It is not necessary to refer to the contents of that correspondence.
64There was a series of discussions and communications between the parties between 24 January 2019 and 15 February 2019: [204] - [231]. The details of that conduct are recounted in the primary reasons. It suffices to note that:
1.On 28 January 2019 the third respondent emailed Mr Leaman proposing a sale in which the purchase price was reduced by $400,000 and his (ie the third respondent's) involvement was limited to a three-month handover: [209]. Discussions and communications about an alternate transaction ensued: [211] - [213].
2.Zilkens Lawyers ceased to act for the respondents on 29 January 2019: [214]. Thereafter Lawton Gillon were appointed to act for the respondents: [215].
3.Lark Lawyers sent Lawton Gillon a marked up draft amended sale purchase agreement on 6 February 2019: [28], [223]. This was unacceptable to the third respondent because, among other things, $1 million of the purchase price was deferred for 1 year: [224]. Further discussions ensued: [225] - [228].
4.Lawton Gillon corresponded with Lark Lawyers on 15 February 2019. Among other things Lawton Gillon stated that ([29], [229] - [230]):
(a)the respondents denied that they had repudiated the SPA;
(b)the appellant was 'advantageously seizing' on the 17 January 2019 letter to 'manufacture an artificial legal position' to achieve more favourable terms than agreed in the SPA; and
(c)the respondents offered to reduce the purchase price by $400,000 and for the parties to treat the SPA as if it were on foot with completion on 28 February 2019.
65The respondents' offer was open for acceptance until 4 pm on 22 February 2019: [29]. It was not accepted. Instead, on 21 February 2019, the appellant commenced the primary proceedings [30], [231].
Primary decision
66The primary judge briefly summarised the parties' pleaded cases and identified the issues for determination: [36] - [44], [46] - [48].
67Essentially, the appellant alleged that the first and third respondents had failed to use their best endeavours to satisfy the financial assistance condition in cl 2.3 of the SPA. Moreover, the appellant alleged that the respondents had repudiated the SPA (by Zilkens Lawyers' letter dated 17 January 2019) and it (the appellant) had elected to accept the repudiation. The appellant said that it had thereby suffered loss and damage. This was particularised as follows:
The plaintiff [ie the appellant] has lost the opportunity to acquire all of the issued shares [sic] in Rexwells and thereby [the] benefit thereof [sic] of owning Rexwells.[21]
[21] Amended statement of claim dated 9 March 2020 (ASC) par 23(a) BAB 154.
68The appellant now accepts, however, that the present case is not a loss of opportunity case in the strict sense - it says, instead, that the loss of opportunity cases provide a 'reference point' on which the court ought to determine damages flexibly based on an unusual set of facts.[22] Thus the appellant's damages case is put more simply than the conventional loss of opportunity case. The appellant contends that it suffered a loss based on the revenue stream it would have obtained had the SPA been performed.[23] The appellant says that this is a proper measure of loss in circumstances where the parties treated the commercial benefit of owning the Rexwells' share as being ownership of a future income flow.[24]
[22] Appellant's submissions in answer to notice of contention par 7 WAB 175.
[23] Appellant's submissions par 7 WAB 24.
[24] Appellant's submissions par 57 WAB 35.
69The appellant went on to provide extensive particulars as to how the value of its loss was calculated.[25] The appellant sought $5.267 million (low case) to $6.049 million (high case) calculated as the net present value as at 31 January 2019 of ([376]):
1.The likely future net profits after tax of Rexwells (this was assumed to be fully distributable as dividends). The likely future net profits after tax was calculated for a period of 10 years commencing 1 February 2019.
2.The residual value of the Rexwells' share assuming a sale of the business after 10 years.
3.The financial advantage from the appellant's long term bank financing.
4.Less: the purchase price payable by the appellant.
5.Less: a $1 million working capital advance to be injected by the appellant into the Rexwells' business at the start of the 10-year period.
[25] ASC pars 23(b) - (f) BAB 154 - 156; appellant's further and better particulars of loss and damage dated 2 July 2020 BAB 157 - 172.
70The appellant's damages case was supported by the expert evidence of an accounting expert, Barry Honey. The respondents called a Darryn Hockley (a chartered accountant and partner of the forensic consulting division of a major accounting firm). The substance of the expert evidence is summarised in the primary reasons: [92] - [95], [397] - [415]. Among other things, Mr Honey quantified the net present value of the likely future net profit after tax of Rexwells over a 10-year period had the sale of the Rexwells' share proceeded in accordance with the SPA. However, given the primary judge's conclusion as to the proper measure of damage, her Honour considered that the expert accounting evidence was of no practical utility in assessing the appellant's damages: [96].
71It will be necessary to refer to some aspects of the expert evidence before addressing the appellant's grounds of appeal (see [217] - [225] below).
72The respondents advanced a number of grounds on which they said that the appellant was not entitled to relief. In terms of things that are relevant to the issues now raised on appeal, the respondents said that:
1.The 17 January 2019 letter, on its proper construction, did not convey a repudiation of the SPA: [42].
2.As at 22 January 2019 the appellant was not ready, willing and able to perform the SPA and was not entitled to accept any repudiation of the agreement: [43]. Among other things this was because the appellant was also in breach of the best endeavours obligation in cl 2.4 of the SPA: [4].
3,The appellant failed to mitigate its loss by not accepting the offer from the respondents to treat the SPA as if it were on foot with a discount to the purchase price of $400,000: [44].
4.The appellant had not proved that it suffered any loss let alone damages in the amount claimed: [4], [377].
73A further issue arose that was not addressed by the primary judge other than in passing when dealing with an admissibility dispute: [120] ‑ [127]. The respondents contended that, so far as cl 2.2(e) of the SPA introduced a condition precedent that the appellant be satisfied in its absolute discretion that a new contract had been entered into with Rio Tinto on terms acceptable to the appellant, the condition precedent would not have been fulfilled or waived and the SPA would not have completed in any event. The issue was pressed in the respondents' written[26] and oral[27] closing submissions and dealt with in the appellant's written closing submissions.[28] It was not expressly pleaded in the respondents' defence, but her Honour ruled that it was not a matter that was required to be specifically pleaded: [126].
[26] Respondents' outline of closing submissions pars 1.4, 137 - 149 BAB 272, 304 - 306.
[27] ts 725, 729 - 733, 783 - 785.
[28] Appellant's closing submissions pars 121 - 123 BAB 256 - 257.
74The primary judge held, and it is not in issue on the appeal, that it was necessary under cl 2.4 of the SPA for the appellant to use its best endeavours to provide the respondents with the necessary information about the proposed financial assistance which would be material to a decision by the first respondent to approve it. Once this was provided, cl 2.4 required the respondents to use their best endeavours and do all they reasonably could to achieve satisfaction of the financial assistance condition precedent in cl 2.3: [288].
75Where the parties parted company at trial was whether the other party was in breach of its obligation to use best endeavours to satisfy the financial assistance condition in cl 2.3.
76The primary judge was not satisfied that the appellant had breached its obligation to use best endeavours to satisfy cl 2.3: [293] - [295]. This finding is challenged by cross-appeal ground 2. By contrast, the primary judge held that the respondents had failed to use their best endeavours to satisfy the financial assistance condition in cl 2.3. As of 17 January 2019 the respondents were in breach of their obligations under cl 2.4 of the SPA: [296] - [319]. As this finding is not challenged on appeal it is not necessary to develop her Honour's reasons for this conclusion.
77The primary judge also held that, by the Zilkens Lawyers' letter of 17 January 2019, the respondents evinced an intention not to be bound by the SPA and thereby repudiated the SPA: [320] - [337]. This finding is challenged by cross-appeal ground 1.
78The appellant established that it was ready, willing and able to perform its obligations under the SPA. This included, in the primary judge's view, that the appellant would have been ready, willing and able to complete the purchase of the Rexwells' share under the SPA by payment of the purchase price had there been no renunciation and termination: [338] - [350].
79The primary judge rejected the respondents' mitigation case: [358] - [372]. However, more critically to the outcome of the litigation, her Honour also rejected the appellant's case on the assessment of damages: [421] - [431]. The primary judge accepted that the Rexwells' share was not a fungible asset and it was not possible to purchase an alternative share on market: [428]. But nonetheless the appellant's damages case failed for the following reasons:
1.The SPA, on its face, was a share sale agreement: [422].
2.As a share sale agreement, the 'usual' measure of damage was the difference between the price of the share under the SPA and the market value of the share at the date of termination: [422].
3.The rules which apply to cases where a purchaser has paid money for something that has not been delivered cannot be applied where a purchaser has not paid money (here referring to Wenham v Ella)[29]: [423]. In this respect, her Honour stated:
The share in Rexwells was not transferred nor did [the appellant] pay the purchase price to [the respondents]. As a result, I do not consider that [the appellant] is entitled to damages for the loss in not receiving the share in Rexwells, as well as the profit it would have earned from operating Rexwells. [The appellant] is, in my view, only entitled to the loss in not receiving the share [424].
4.It was open to the appellant to prove an alternate basis for its loss. For example, it might have been that the appellant deployed its funds to purchase another business with a lower level of profitability. Alternatively, it was open to seek reliance damages. However, the appellant did not adduce any evidence as to such alternative measures. There was, for example, no evidence of the expenditure the appellant had wasted in respect of the SPA: [425], [427], [429].
5.The conclusion reached as to the appropriate measure of damage was supported by the approach taken where a seller fails to complete a sale of land or fails to supply goods under a contract: [426].
6.There were no authorities on which the appellant relied which supported its contention that the basis on which it sought damages was the appropriate measure - all of the cases on which the appellant relied were contracts for the provision of services where the usual measure of damage is the net profit that would have been realised from the performance of the contract: [426].
[29] Wenham v Ella [1972] HCA 43; (1972) 127 CLR 454.
80The primary judge summarised her conclusion on the damages issue as follows:
[The appellant] has not adduced any evidence of the market value of the share in Rexwells as at 22 January 2019 or on 31 January 2019 when Completion was due to occur. None of the expert evidence that has been adduced in this case assists the determination of this issue. The evidence adduced by [the appellant] went solely to the issue of what profits [it] may have earned from the purchase of Rexwells. This might have been relevant if the purchase price had been paid and the benefit not received, however that is not what occurred.
In these circumstances, having not proved the market value of the share in Rexwells as at 22 January 2019, or any alternative amount, [the appellant] is only entitled to nominal damages [430] - [431].
81While, for these reasons, the appellant's damages case failed, her Honour proceeded to make some provisional findings going to quantification issues: [432] - [480]. Some of these are challenged on appeal. However, given the nature of the findings, it is enough for present purposes to briefly describe the various provisional findings. The basis for the findings will be developed as necessary in dealing with the issues arising on appeal.
82The primary judge made provisional findings that:
1.In calculating Rexwells' likely future net profit after tax there should not be a deduction of a full salary of $200,000 for anyone to replace the third respondent: [435]. This finding is challenged by cross-appeal ground 3.
2.No growth rate should be applied for the purpose of the likely future net profit after tax calculations notwithstanding that both parties' experts allowed a growth rate of 5% per annum: [436]. This finding is challenged by appeal ground 14. Moreover, although the experts' calculations were for a 10-year period, her Honour was not satisfied on the balance of probabilities that the appellant had proved any loss beyond a 5-year period. In this respect the primary judge accepted the respondents' expert's evidence that forecasting for more than a 3 - 5 year period is unreliable, particularly in a volatile industry: [440]. This finding is challenged by appeal ground 16.
3.No allowance should be included in the appellant's loss for the residual value of the Rexwells' share at the end of the 10-year period: [437]. This finding is challenged by appeal ground 15.
4.To the extent that counsel for the appellant submitted that the appellant intended to distribute its profit by way of franked dividends there was no evidence of the extent of any franking credits or whether it was possible or likely for Rexwells to pay all dividends as fully franked dividends: [441]. This finding is the subject of appeal ground 17 and notice of contention ground 5.
5.The 'Final Payment' was negative $410,663.75 (ie the Final Payment resulted in a reduction of the purchase price): [480] (see also [443] - [480]).
Grounds of appeal, notice of contention and grounds of cross-appeal
83The parties showed little discernment in their challenges to the primary judge's reasoning. The appellant relies on 17 grounds of appeal. The respondents rely on five grounds by way of notice of contention and three grounds of cross-appeal. The grounds of appeal, grounds of contention and grounds of cross-appeal are unnecessarily prolix and repetitive. With minor exceptions the parties conspicuously failed to comply with the requirement to state grounds and contentions succinctly and to give concise particulars.[30] Rather than reproducing the grounds and contentions in full at this point it is convenient to describe the issues raised. For completeness the grounds of appeal, the grounds by way of notice of contention and the grounds of cross-appeal are set out in an annexure to these reasons.
[30] Compare Supreme Court (Court of Appeal) Rules 2005 (WA) r 32(4)(b), r 33(7).
84The respondents say that the cross-appeal is raised in the event of the court upholding any of the appellant's grounds of appeal and finding that the appellant was entitled to damages calculated on the basis that the appellant contends for.[31]
[31] Respondents' grounds of cross-appeal WAB 215.
85This suggests, somewhat unconventionally, that the cross-appeal is only pressed if the appellant succeeds in its appeal, ie the cross-appeal is dependent on the appellant succeeding in the appeal. Indeed at the appeal hearing counsel for the respondents said that the respondents did not require the cross-appeal to be decided if the judgment below was upheld on appeal.[32] However, as will become apparent, the issues raised by the cross-appeal are logically anterior to the issues raised by the appeal. Accordingly, the issues in the cross-appeal should be stated at the outset.
[32] Appeal ts 153.
86The cross-appeal raises two relevant issues:
1.Whether the primary judge erred in mixed fact and law in finding that the respondents repudiated the SPA by renunciation thereof (cross-appeal ground 1).
2.Whether the primary judge erred in mixed fact and law in finding that the respondents alone were in breach of the 'best endeavours' obligation in cl 2.4 of the SPA (cross-appeal ground 2).
87On cross-appeal ground 2 the respondents did not challenge the finding that they were in breach. The gravamen of the ground was that the primary judge was in error in finding that the respondents alone were in breach. In substance the respondents contended that the appellant was also in breach such that there was a mutual breach of cl 2.4.[33]
[33] Appeal ts 121, 152, 171 - 172, 175, 191.
88There is a third ground of cross-appeal. However, the third ground of cross-appeal is directed to quantum issues if the appellant's appeal succeeds; it cannot affect the correctness of the primary judge's order allowing the claim and awarding nominal damages. Accordingly, it is convenient to refer to the third ground of cross-appeal when dealing with the issues raised by the notice of contention (see [103.5] below).
89The appellant's grounds of appeal are confused and confusing.
90Grounds 1 - 13 are directed to the primary judge's conclusion that the appellant did not make out its case for non-nominal damages. The primary judge identified the relevant issue in simple terms: '[d]id [the appellant] suffer any loss and damage and if so, what is the quantum of any damage?'.[34] It is, in the circumstances, remarkable and somewhat perplexing that the appellant challenges her Honour's ultimate conclusion on this issue by 13 different grounds of appeal that traverse some nine pages (all the more so when the primary judge's dispositive reasoning is contained in 11 paragraphs over three pages).[35]
[34] Primary reasons [48](c).
[35] Primary reasons [421] - [431].
91Many of the appellant's grounds of appeal complain about observations that were immaterial to the primary judge's ultimate conclusion when, as they ought to be, the primary judge's reasons are read fairly and as a whole (see eg grounds 1, 6). Alternatively, the grounds of appeal are concerned with matters which, if established, cannot alone suffice to make out the appellant's case on damages (see eg grounds 2, 5, 7, 8, 10, 11). More critically, some six of the 13 grounds are essentially directed to establishing the same fundamental proposition, namely, that the primary judge should have held that the proper measure of damage in the circumstances of the case was either of two possibilities (see grounds 1, 3, 4, 9, 12.2, 13.2 - 13.3).
92The two possibilities contended for by the appellant as an appropriate measure of damage comprise:
1.The difference between the purchase price of the Rexwells' share and the 'true' value of the share.
2.Alternatively, the discounted net present value of: (a) future net profits after tax of Rexwells over a term of 10 years; (b) plus the residual value of the Rexwells' share; (c) less expenses (including the purchase price).
93However, although saying at one point that the proper measure is the difference between the purchase price and the 'true' value (ground 3.2), the appellant later goes on to say that the 'true' value is to be calculated or assessed on the basis of the discounted net present value of Rexwells' future net profits after tax over a term of 10 years plus the residual value of the Rexwells' share (grounds 4.1, 9.1). The appellant is driven to do so because of the limited evidence adduced as to the 'true' value of the Rexwells' share.
94Separately, on multiple occasions the appellant says that there was no market for the Rexwells' share (grounds 9.1, 9.2) and a determination of market value was not possible on the facts (grounds 10, 11, 12.1, 13.1). Inconsistently, by ground 10, the appellant also alleges that the primary judge erred in finding that the appellant had not adduced any evidence of the market value of the Rexwells' share. In that respect ground 10 is plainly without merit and must fail. None of the expert evidence was directed to market value, something accepted in the terms of ground 12.2. The remaining part of ground 10 is then subsumed within a complaint made in various other grounds (eg grounds 11, 12.1, 13.1) that the market value of the share was not a relevant consideration in determining the proper measure of damage.
95Further confounding the issues with the grounds of appeal, the appellant's written submissions deal with grounds 1 - 13 on an aggregated basis. The appellant seeks to deal with these grounds together, saying that:
[T]he primary judge erred in fact and law by concluding that the appropriate measure of damages in the present case was the difference between the purchase price contained in the Agreement and the market value of the share in Rexwells.
The primary judge ought to have found that the appellant's claim required a more sophisticated approach to the assessment of the proper measure of damages and concluded that the proper measure of damages in the present case was:
16.1the difference between the purchase price and what has variously been described as the 'true value', 'fair value', 'real value', 'actual value', or ' intrinsic value' of the share in Rexwells' at the date of termination; alternatively
16.2the discounted net present value of Rexwells' future profits over a term of 10 years plus its residual value, less expenses (including the purchase price contained in the Agreement) that would have been incurred by the appellant had the Agreement been performed.[36] (citations omitted)
[36] Appellant's submissions pars 15 - 16 WAB 26 - 27.
96It is of little assistance to the court to lump together without discrimination the written submissions for 13 grounds of appeal. The Court of Appeal rules are clear as to the requirements for the appellant's written submissions in an appellant's case. The appellant must for each ground of appeal set out its submissions so as to convey the substance of the submissions clearly and succinctly.[37] This requires, ordinarily, that the appellant's submissions address the grounds of appeal individually ground-by-ground. Sometimes it may be necessary or convenient to address two or more grounds together. And, on many occasions, what has been said for an earlier ground may apply equally to a subsequent ground. But that is not to countenance the aggregated approach to submissions in an appellant's case unilaterally adopted by the appellant in this appeal.
[37] Supreme Court (Court of Appeal) Rules r 32(5)(a).
97The way in which the appellant has supported grounds 1 - 13, and the issues that are otherwise manifest in those grounds, mean that it is appropriate to consider and determine grounds 1 - 13 by reference to the appellant's description as reproduced at [95] above.
98Counsel for the appellant explained that the real point of grounds 1 - 13 was to provide individual building blocks to identify the error as summarised in the written submissions and accepted that the appellant needed to make out the propositions reproduced at [95] above if it was to succeed in the appeal.[38] The appellant's restatement of the combined effect of grounds 1 - 13 is admirably succinct and concisely describes the alleged error and the critical issue for determination on appeal. To the extent that there are discrete alleged errors identified in grounds 1 - 13 they are appropriately considered within the rubric of the general proposition advanced by the restated grounds 1 - 13.
[38] Appeal ts 7 - 8.
99In addition to the restated grounds 1 - 13, and on the assumption that the restated ground succeeds, the appellant relies on four grounds concerning the quantification of the appellant's loss. The appellant claims that the primary judge erred in mixed fact and law in finding that:
1.The appellant had not proven that the calculation of Rexwells' future profits should be adjusted by a percentage for growth - the appellant contends that a 5% growth percentage should be applied (ground 14).
2.The damages as calculated should not include an allowance for the residual value of the Rexwells' share after 10 years - the appellant contends that the court should determine that a residual value in the amount of $1.181 million is applicable (ground 15).
3.The damages as calculated should be based on Rexwells' future profits being capped after a period of 5 years post-termination - the appellant contends that the discounted net present value of Rexwells' future profits over a term of 10 years is appropriate (ground 16).
4.Expert evidence as to franking credits was relevant to determining the damages - the appellant contends that evidence relating to the allocation of franking credits is irrelevant to calculating the damages (ground 17).
100These grounds 14 - 17 are advanced on the 'basis that grounds 1 to 13, or some of them, are upheld'. Accordingly, they fall away if the appellant does not establish the restated grounds 1 - 13.
101In respect of each ground of appeal, other than grounds 1 and 8, the appellant provided details in a PD 7.4 schedule as if what was being challenged was a finding of fact. Possibly this was because the various grounds were said to constitute errors in fact and law. It is plain, however, that what the appellant was challenging was the primary judge's application of the law to the facts as found - the appellant asserted errors of mixed fact and law. The respondents' responsive Practice Direction 7.4 schedule (PD 7.4 Schedule) recognised as much.
102There is, in the circumstances, nothing of substance to be derived from either the appellant's or the respondents' PD 7.4 schedules. All that needs to be said is that the appellant sought to emphasise:
1.First, various aspects of the information memorandum (for example, that Rexwells 'works on extremely low capital, good revenue, a positive cash flow and excellent profits').[39]
2.Second, the third respondent's acceptance - in cross-examination - that the sale of the Rexwells' share was effectively the sale of a revenue stream together with a minimal amount of assets.[40]
[39] GAB 459.
[40] ts 485.
103The respondents rely on five grounds by way of a notice of contention, and a third ground of cross-appeal, to uphold the primary judge's decision if the appellant establishes the restated grounds 1 - 13. The respondents say that:
1.The primary judge should have found that the non-fulfilment of the condition precedent as to the Rio Tinto contract was so certain to occur that no damages should be awarded to the appellant other than nominal damages (notice of contention grounds 1 and 2).
2.The primary judge erred in finding that Mr Leaman accepted that he had not received advice from Lark Lawyers for the new agreement not to be executed until Rio Tinto had renewed its contract with Rexwells (notice of contention ground 3).
3.The primary judge erred in mixed fact and law in finding that it was not unreasonable for the appellant not to mitigate its loss by rejecting the respondents' offer dated 15 February 2019 (notice of contention ground 4).
4.The primary judge erred in finding that the assessment of the net present value of the likely net profits of Rexwells was not materially different from the assessment of the appellant's loss in the event that the primary judge had erred in rejecting the measure of damage propounded by the appellant (notice of contention ground 5). Curiously, this contention was made in response to the same finding that was the subject of the appellant's ground 17 - both related to [441] of the primary reasons. In circumstances where both parties sought to challenge the same finding it is convenient to consider ground 17 and notice of contention ground 5 together.
[366] Exh 1.45, p 10.
[367] J, [335].
1.3the primary judge placed reliance on the Letter asserting the respondents' view as a fact and not seeking to discuss what was required by cl 2.3 of the Agreement,[368] instead of the primary judge asking and determining:
[368] J, [336].
1.3.1whether there was an honest apprehension by the respondents as to the terms of the Agreement;
1.3.2whether the respondents had acted otherwise than in accordance with a bona fide belief as to the correctness of the interpretation which they sought to place upon the Agreement;
1.3.3whether the respondents' apprehension as to the terms of the Agreement were open to correction; and
1.3.4whether any attempt was made by the appellant, CH Leaman Investments Pty Ltd, (CH Leaman) to persuade the respondents of the error of their ways or give them any opportunity to reconsider their position in the light of an assertion of the correct interpretation.
1.4the primary judge relied, in error, upon there being nothing in the Letter which suggested the respondents were prepared to perform their obligations under the Agreement, even if they were wrong in their construction of its terms;[369] and
[369] J, [336].
1.5the primary judge found, in error, that whether the respondents believed that their action in giving notice of termination under the Letter was justified by the terms of the Agreement was not relevant because the test of whether conduct is repudiatory or a renunciation is objective.[370]
[370] J, [334].
The primary judge ought to have found that the respondents did not, by the Letter, renunciate the Agreement, in that:
1.6there was an honest apprehension by the respondents as to the terms of the Agreement;
1.7the respondents had not acted otherwise than in accordance with a bona fide belief as to the correctness of the interpretation which they sought to place upon the Agreement;
1.8the respondents' apprehension as to the terms of the Agreement were open to correction;
1.9no attempt was made by CH Leaman to persuade the respondents of the error of their ways or give them any opportunity to reconsider their position in the light of an assertion of the correct interpretation; and
1.10the contents of the Letter did not, in the circumstances, evince an intention, which would convey to a reasonable person, in the situation of CH Leaman, no longer to be bound by the terms of the Agreement.
Cross-appeal ground 2
2.The primary judge erred in fact and law in finding that the respondents alone were in breach of the best endeavours clause (clause 2.4) in the Agreement,[371] in that the finding was against the evidence or the weight of evidence.[372] The primary judge ought to have found that CH Leaman and the respondents were in mutual breach of the best endeavours clause (clause 2.4) in the Agreement and, as a consequence, that CH Leaman was precluded from recovering any damages said to arise from the respondents' renunciation of the Agreement or their breach of clause 2.4 of the Agreement.
[371] Exh 1.45, p 10.
[372] J, [319]; [294]; [295].
Particulars
2.1The primary judge failed to take into account, or give sufficient weight to, the following circumstances:
2.1.1on 7 November 2018 and 13 November 2018, Peter Lark, of Lark Lawyers, CH Leaman's then solicitors, said to Sidd Jain and Alex Zilkens, respectively, of Zilkens Lawyers, the respondents' then solicitors, that he, or his firm, would draft the financial assistance documents;
2.1.2by 9 January 2019, Mr Lark and Lark Lawyers had taken no steps to prepare the financial assistance documents;
2.1.3on 9 January 2019, Lark Lawyers notified Zilkens Lawyers, as if Zilkens Lawyers were to draft the financial assistance documents, that CH Leaman expects to be able to service and repay the borrowings, referring to the $4m loan from NAB which CH Leaman was using to fund the purchase price for the share in Rexwells under the Agreement;[373]
[373] J, [21]; Exh 1.55.
2.1.4after a telephone conversation and email correspondence between Lark Lawyers and Zilkens Lawyers, it was agreed, as originally arranged, that Lark Lawyers would prepare the financial assistance documents;[374]
[374] J, [20] ‑ [23]; Exhs 1.59 and 1.60; Ts 411 (2nd para).
2.1.5on 11 January 2019, Zilkens Lawyers sent draft financial assistance documents to Zilkens Lawyers;[375]
[375] J, [23]; Exhs 1.61 - 1.65.
2.1.6Lark Lawyer's [sic] email of 11 January 2019 warned that the requisite documents had to be duly completed and lodged with ASIC by no later than 15 January 2019;[376]
[376] Exh 1.61.
2.1.7the draft resolution of the third respondent, Mr Steele, as the sole director of the first respondent, Tuesday Enterprises Pty Ltd (Tuesday Ents), prepared by Lark Lawyers, to approve it resolving to approve the provision by Rexwells Corporations Pty Ltd (Rexwells) of financial assistance to CH Leaman, provided that the financial assistance transaction did not lead to any solvency concerns for Rexwells;[377]
[377] Exh 1.61.1.
2.1.8the draft resolution of the sole shareholder of Rexwells, Tuesday Ents, to approve the provision of financial assistance by Rexwells to CH Leaman, prepared by Lark Lawyers, provided that the financial assistance transaction did not lead to any solvency concerns for Rexwells and for it to be passed in accordance with s 260B(1)(a) of the Corporations Act 2001 (Cth) (Act) as a special resolution;[378]
[378] Exh 1.61.2.
2.1.9the draft disclosure statement, in accordance with s 260B(4) of the Act, prepared by Lark Lawyers, provided that the transactions did not lead to any solvency concerns for Rexwells and [t]o the best of the knowledge and belief of Tuesday Enterprises, the proposed financial assistance to be provided by Rexwells would not materially prejudice Rexwell's [sic] ability to pay its creditors;[379]
[379] Exh 1.61.3.
2.1.10the condition in clause 2.3 of the Agreement[380] required approval by the shareholders under s 260B of the Act and s 260B(1)(b) did not require a special resolution or any issues as to solvency or prejudice to creditors to be resolved and the primary judge found that the requisite documents had to be duly completed and lodged with ASIC by no later than 17 January 2019, rather than 15 January 2019;[381]
[380] Exh 1.45, cl 2.4, p 10.
[381] J, [279].
2.1.11on 14 January 2019, Zilkens Lawyers sought financial information from CH Leaman in order for the respondents and Rexwells to determine whether the provision of financial assistance by Rexwells would materially prejudice the ability of Rexwells to pay its creditors, as they were enjoined to do by Lark Lawyers' draft documents;[382]
[382] Exh 1.65.
2.1.12on 15 January 2019, the date Lark Lawyers had previously said was the deadline for completing and lodging the documents with ASIC, Lark Lawyers told Zilkens Lawyers that CH Leaman expected NAB to be flexible with regard to repayments under their $4m loan until Rexwells' income reached a sustainable level; the security which NAB was taking; if additional funds were required, they would be sourced from CH Leaman's other resources; and the documents had to be lodged with ASIC that day and the resolution passed the next day;[383]
[383] Exh 1.69.
2.1.13in relation to the finding at J [293], the explanation, on 16 January 2019, provided by Zilkens Lawyers, of the continuing concerns of the respondents and why the financial information provided by CH Leaman was inadequate; and the request for further information from CH Leaman to enable the respondents and Rexwells to form the requisite view (required according to Lark Lawyers) as to the absence of prejudice to Rexwells' ability to pay its creditors;[384]
[384] Exh 1.70.
2.1.14on 17 January 2019, in lieu of providing further information, which it was said would take too long,[385] despite CH Leaman having just secured a $4m loan from NAB, Lark Lawyers sent to Zilkens Lawyers an indemnity from CH Leaman and Mr Leaman for Mr Steele. The recitals to the draft indemnity deed provided that the Act required that, before financial assistance was provided, it had to be approved by the members of the company on the basis that the proposed financial assistance would not materially prejudice the company's ability to pay its creditors and that Mr Steele was so satisfied on the information provided to him;[386]
[385] Ts 394 (4th and 5th full paras).
[386] Exhs 1.72 and 1.72.1 (cls 2.5 ‑ 2.7, p 1).
2.1.15Mr Pocock, of Lark Lawyers, gave evidence that his understanding, when he drafted the recitals to the draft indemnity deed, was that it would be inappropriate for Tuesday Ents to pass a resolution approving the provision of financial assistance, unless Mr Steele was satisfied that the proposed financial assistance would not materially prejudice Rexwells' ability to pay its creditors;[387] and
[387] Ts 392.6 - 393.
2.1.16Mr Leaman and Lark Lawyers knew that Zilkens Lawyers and Mr Steele were relying on Lark Lawyers to guide them through the s 260B process.[388]
[388] Exhs 1.59 (top) and 1.67; Ts 272 (4th para); 383 (5th para).
Grounds of appeal
Ground 1
1The primary judge erred in law (at [385]) in concluding (implicitly) that the first limb of the rule in Hadley v Baxendale (1854) 9 Exch 341; 156 ER 145 (Hadley v Baxendale) limited the appellant's ability to recover damages for breach of contract to the difference between the purchase price and the market value of the asset the subject of the contract. The primary judge ought to have found that the first limb of the rule in Hadley v Baxendale contemplated a flexible approach to determining the proper measure of damages reasonably in the contemplation of the parties at the date they entered into the contract, alternatively at the date of termination, which could include (amongst other things) either:
1.1the difference between the purchase price and the 'true' value of the asset the subject of the contract;
1.2alternatively, on the facts as found by the primary judge, the discounted net present value of future profits of the second respondent over a term of 10 years plus its residual value, less expenses (including the purchase price contained in the Agreement) that would have been incurred by the appellant had the Agreement been performed.
Ground 2
2The primary judge erred in fact and law (at [421] to [422]) in concluding that the Agreement was, in substance, a share sale agreement. The primary judge ought to have found that the Agreement, having regard to (amongst other things) the express provisions for the adjustment of the purchase price, was, in substance, for the purchase of a profitable business as a going concern, purchase of the single share being a mechanism for the sale of the business.
Ground 3
3The primary judge erred in fact and law by concluding (at [382], [421], and [422]) that the 'ordinary', or 'normal' or 'usual' measure of damages for a share sale agreement is the difference between the price of the share under the agreement and the market value of the share at the date of the contract, alternatively the date of the termination, and that that measure of damages was appropriate in the present case. The primary judge ought to have found that:
3.1in determining the proper measure of damages, the Court was required to be flexible and identify an appropriate amount to place the injured party in the position it would have been in had the contract been fully performed and thus the Court was required to identify the actual loss suffered by the innocent party; and
3.2the proper measure of damages in the present case was the difference between the purchase price and the 'true' value of the share at the date of termination;
3.3in the alternative to paragraph 3.2 above, the appropriate measure of damages was the discounted net present value of the second respondent's future profits over a term of 10 years plus its residual value, less expenses (including the purchase price contained in the Agreement) that would have been incurred by the appellant had the Agreement been performed.
Ground 4
4The primary judge erred in fact and law by concluding (at [423] to [424]) that the appellant was not entitled to damages for the loss in not receiving the share in the second respondent as well as the profit it would have earned from operating the second respondent and that the appellant was only entitled to its loss for not receiving the share. The primary judge ought to have found that:
4.1the proper measure of the appellant's damages, based on its loss in not receiving the share in the second respondent, was the difference between the purchase price and the 'true' value of the share, calculated or assessed on the basis of the discounted net present value of the second respondent's future profits over a term of 10 years plus its residual value; alternatively
4.2the proper measure of the appellant's damages was the discounted net present value of the second respondent's future profits over a term of 10 years plus its residual value, less expenses (including the purchase price contained in the Agreement) that would have been incurred by the appellant had the Agreement been performed.
Ground 5
5The primary judge erred in fact and law by concluding (at [423] to [424]) that the appellant was not entitled to recover damages for both its loss in not receiving the share in the second respondent and the profit it would have earned from operating the second respondent, implicitly finding that the appellant was, in fact, seeking both heads of damage. The Primary Judge ought to have found that the appellant was only seeking damages on the basis of either its loss in not receiving the share in the second respondent or the profit it would have earned from operating the second respondent, but not both.
Ground 6
6The primary judge erred in fact and law by concluding (at [425]) that it was open to the appellant to prove an alternative basis of its loss by adducing evidence that it had deployed its funds to purchase another business which had a lower level of profitability and seeking the difference between the profit it would have received from the purchase of the second respondent's share and the alternative business. The primary judge ought to have found:
6.1consistent with her Honour's observations in [425], that a loss of profits was an appropriate measure of damages; and
6.2in the absence of any evidence as to an alternate use of the purchase funds (for which the primary judge should have held the defendants bore an evidential onus to adduce), there should be no reduction to the calculation of the appellant's losses.
Ground 7
7The primary judge erred in fact and law by concluding (at [426]) that in determining the appropriate measure of damages in the present case, the facts relied upon by Her Honour were analogous to authorities in which a seller fails to complete a sale of land or fails to supply goods under a contract. The primary judge ought to have found that, to the extent that any analogy with authority could be drawn, the present case was analogous to authorities relating to contracts for the provision of services or the sale of a business as a going concern.
Ground 8
8The primary judge erred in law by concluding (at [426]) that there were no authorities that supported the appellant's contention that the basis on which it sought damages was the appropriate measure. The primary judge ought to have found that the relevant authorities prescribed a flexible approach to assessing damages for breach of contract including the measure of damages asserted by the appellant and the appellant's contention was consistent with the applied relevant principles, being the assessment necessary to put the appellant in the position the appellant would have been in had the contract been performed.
Ground 9
9The primary judge erred in fact and law by concluding (at [427] to [428]) that, notwithstanding that the share in the second respondent was not a fungible asset and it was not possible to purchase an alternative share on market, as the plaintiff had failed to adduce evidence of the market value of the share in the second respondent; alternatively the lesser amount of profits it would have earned from the purchase of an alternative business; alternatively its wasted expenditure, the appellant had failed to prove it had suffered any loss. The primary judge ought to have found that:
9.1as the share in the second respondent was not fungible and there was no market for the share, the appropriate measure of damages was the difference between the purchase price and the 'true' value of the business, valued by a discounted net present value of future profits of the second respondent over a 10 year period, plus its residual value;
9.2in the alternative to 9.1 above, as the share in the second respondent was not fungible and there was no market for the share, the appropriate measure of damages was the discounted net present value of future profits of the second respondent over 10 years plus its residual value, less expenses (including the purchase price contained in the Agreement) that would have been incurred by the appellant had the Agreement been performed.
9.3as there was no evidence of an alternative business purchased by the appellant, no deduction should be made from the true value of the second respondent; alternatively no deduction should be made from the discounted net present value of future profits of the second respondent;
9.4the Court was satisfied by the evidence before it that the appellant had discharged its onus to prove its damages (on the basis of either the measure of damages outlined in 9.1, alternatively 9.2) beyond nominal damages;
9.5the appellant correctly sought and proved its damages on the basis set out in 9.1, alternatively 9.2 above, to the exclusion of claiming any wasted expenditure, as it would not be entitled to recover both.
Ground 10
10The primary judge erred in fact and law by finding (at [430] to [431]) that the appellant had not adduced any evidence of the market value of the share in the second respondent as at 22 January 2019 or 31 January 2019. The primary judge ought to have found that a determination of market value of the share in the second respondent was neither possible on the facts, nor a relevant consideration in determining the proper measure of damages.
Ground 11
11The primary judge erred in fact and law by finding (at [430] to [431]) that the appellant's failure to adduce evidence of market value was relevant or material to the determination of damages. The primary judge ought to have found that a determination of market value of the share in the second respondent was neither possible on the facts, nor a relevant consideration in determining the proper measure of damages.
Ground 12
12The primary judge erred in fact and law by finding (at [430] to [431]) that the expert evidence led by the appellant would only have been relevant had the purchase price been paid and the benefit not received. The primary judge ought to have found that:
12.1a determination of market value of the share in the second respondent was neither possible on the facts, nor a relevant consideration in determining the proper measure of damages; and
12.2the expert evidence was relevant to determining either the true value of the share of the second respondent, alternatively the discounted net present value of the second respondent's future profits over a term of 10 years plus its residual value, less expenses (including the purchase price contained in the Agreement) that would have been incurred by the appellant had the Agreement been performed.
Ground 13
13The primary judge erred in fact and law by concluding (at [431]) that, as the appellant had not proved the market value of the share in the second respondent, or any other amount, the appellant was entitled to only nominal damages. The primary judge ought to have found that:
13.1a determination of market value of the share in the second respondent was neither possible on the facts, nor a relevant consideration in determining the proper measure of damages;
13.2the proper measure of damages was the difference between the purchase price and the 'true' value of the share in the second respondent;
13.3in the alternative to paragraph 13.2 above, the proper measure of damages was the discounted net present value of the second respondent's future profits over a term of 10 years plus its residual value, less expenses (including the purchase price contained in the Agreement) that would have been incurred by the appellant had the Agreement been performed;
13.4the expert evidence adduced by both parties was sufficient to determine the appellant's damages based on the measures outlined in either paragraph 13.2 or 13.3 above.
Ground 14
14Upon the basis that Grounds 1 to 13, or some of them, are upheld, the primary judge erred in fact and law by concluding (at [436]) that the appellant had not proven that the calculations of the second respondents' [sic] future profits should be adjusted by a percentage for growth. The primary judge ought to have found that, as the respondents had conceded that a growth percentage of 5% should be applied, in the absence of evidence to the contrary, a growth rate of 5% could and should have been applied to the calculation of the second respondent's future profits.
Ground 15
15Upon the basis that Grounds 1 to 13, or some of them, are upheld, the primary judge erred in fact and law by concluding (at [437]) that the calculation of the appellant's loss and damage should not include an allowance for the residual value of the second respondent after 10 years. The primary judge ought to have found that the residual value or terminal value was an appropriate head of damage when quantifying loss and damage based on either the true value of the share in the second respondent, alternatively, the discounted net present value of the second respondent's future profits over a term of 10 years plus its residual value, less expenses (including the purchase price contained in the Agreement) that would have been incurred by the appellant if the Agreement had been performed, and there was sufficient evidence before the Court to determine that that residual or terminal value would have been in the amount of $1,181,000.
Ground 16
16Upon the basis that Grounds 1 to 13, or some of them, are upheld, the primary judge erred in fact and law by concluding (at [440]) that any assessment of the second respondent's future profits should be capped after a period of 5 years following termination. The primary judge ought to have found that, as the period of 10 years loss of profits was a period agreed between the parties, and that a significant (cumulative) discount rate had been applied by both of the experts in calculating loss of profits up to 10 years, that it was appropriate for the second respondent's losses to be assessed up to 10 years from the date of termination.
Ground 17
17Upon the basis that Grounds 1 to 13, or some of them, are upheld, the primary judge erred in fact and law by concluding (at [441]) that expert evidence relating to franking credits was relevant to a determination of the appellant's loss and damage. The primary judge ought to have found that the evidence before the Court was sufficient to determine that the loss of profit (as assessed by the expert evidence) of the second respondent was sufficiently connected to the loss and damage suffered by the appellant (as the sole shareholder) and that evidence of relating to the allocation of franking credits was irrelevant to the calculation of that loss and damage.
Notice of contention
Notice of contention ground 1
1.The primary judge omitted to determine the question of whether, as a result of the termination of the Agreement, the appellant had lost the opportunity to acquire all of the issued shares in Rexwells and, thereby, the benefit thereof of owning the shares, such that such opportunity had some value, other than a nominal value.
Particulars
(a)The appellant provided particulars of the loss and damage it pleaded it had suffered, as a result of the termination of the Agreement, namely, that it had lost the opportunity to acquire all of the issued shares in Rexwells and thereby the benefit of owning the shares.[389]
[389] Amended statement of claim (ASOC), [23] and particular (a).
(b)The appellant further particularised the value of the loss and damage it alleged it suffered, as a result of the termination of the Agreement, in the following respects:
(i)it lost the likely net present value, as at 22 January 2019, (the date of notice of termination)[390] of the likely future profit of Rexwells from 1 February 2019 (the completion date under the Agreement was 31 January 2019)[391] for a period of 10 years, 'if the sale had been completed in accordance with the' (emphasis added) Agreement;[392]
[390] ASOC, [22].
[391] Exh 1.45, p 3 (defn of 'Completion Date').
[392] Plaintiff's further and better particulars of damage, [1] and [4] and Annexures A and B.
(ii)plus the residual capital value of Rexwells at the end of the 10[-]year period;
(iii)less the purchase price under the Agreement;
(iv)less bank financing and financing costs; and
(v)less the appellant's investment.
(c)Completion of the Agreement was subject to and conditional upon, inter alia, the appellant being satisfied, at its absolute discretion, that a new contract had been entered into by Rexwells with Rio Tinto Ltd (Rio Tinto) on terms acceptable to the appellant, at its sole discretion (Condition Precedent).[393]
[393] J, [255]; ex 1.45, p 10 (cl 2(e)).
(d)The respondents raised in opening address,[394] in cross‑examination[395] and in their written[396] and oral[397] closing submissions, for determination the issue of whether or not the sale of the share in Rexwells pursuant to the Agreement would have completed, but for the appellant's termination of the Agreement.[398] The appellant itself, in its opening address, stressed the importance of the fact that Rexwells had not entered into the Rio Tinto contract when the parties were trying to resurrect the Agreement after the notice of termination had been issued by the appellant.[399]
[394] Ts 220 (penult para); 221.5; 253 (foot).
[395] J, [126].
[396] Respondents' closing submissions, [14.18] - [14.22]; [137] - [149].
[397] Ts 725.8; 729 - 733; 783.3 - 785.8.
[398] Respondents' written closing submissions, [137] - [149], pp 33 - 36; Ts,
[399] Ts 132 (1st para).
(e)The primary judge found, in effect, that an issue for determination was whether the appellant had lost the opportunity it relied upon and that such opportunity had some value, with particular reference to the Rio Tinto contract.[400]
[400] J, [120] - [128].
(f)The primary judge failed to determine the issue of whether, pursuant to the Agreement, the sale of the share in Rexwells would have completed, or what contingency should be applied in that regard, but for the appellant's termination of the Agreement.
Notice of contention ground 2
2.If the primary judge had determined the issue of whether, pursuant to the Agreement, the sale of the share in Rexwells would have completed, but for the appellant's termination of the Agreement, the primary judge should have found that:
2.1the Condition Precedent would not have been fulfilled, but for the termination of the Agreement;
2.2had the appellant proved that it had suffered any loss as a result of a loss of opportunity, or otherwise as a result of the termination of the Agreement, the primary judge was required to take into account, in the assessment of damages, the contingency in relation to the non‑fulfilment of the Condition Precedent; and
2.3had the appellant proved that it had suffered any loss as a result of a loss of opportunity, or otherwise as a result of the termination of the Agreement, the contingency in relation to the non‑fulfilment of the Condition Precedent was so certain to occur, that no damages should be awarded to the appellant, other than nominal damages.
Notice of contention ground 3
22.The primary judge erred in finding that Mr Leaman accepted that he had not received advice from Lark Lawyers for the Agreement, as varied, not to be signed until Rio Tinto had renewed the agreement with Rexwells.[401] The primary judge should have found that the correct version was, as noted contemporaneously by Mr Leaman in his email to Mr Steele, dated 31 January 2019 (the completion date) at 10:05am,[402] that Lark Lawyers' advice was to delete the condition precedent as to the entry into of the Agreement, as varied, with Rio Tinto, but the Agreement, as varied, should not be signed until Rio Tinto had entered into the agreement with Rexwells.
[401] J, [217].
[402] Exh 1.87 (3rd bullet point)
Notice of contention ground 4
31.The primary judge erred in fact and law in finding that it was not unreasonable for the appellant not to mitigate its loss by rejecting the respondents' offer, dated 15 February 2019,[403] to reduce the purchase price of the sole issued share in Rexwell[s] by $400,000 and for the parties to treat the Agreement as if it were on foot with completion on 28 February 2019, in that the finding was against the evidence or the weight of evidence.[404] The primary judge ought to have found that, in not accepting the respondents' offer, set out in an open letter from the respondents' solicitors, Lawton Gillon, to the appellant's then lawyers, Lark Lawyers, the appellant failed to take all reasonable steps to mitigate the loss consequent on the termination of the Agreement.
[403] Ex 1.94; 1.94.1.
[404] J [362]; [372]
Notice of contention ground 5
44.The primary judge erred in finding that the assessment of the net present value of the likely net profits of Rexwells was not materially different to the assessment of the loss of the appellant, in the event that the primary judge had erred in rejecting the measure of damages propounded by the appellant.[405] The primary judge should have rejected the appellant's submission that the calculation of the loss of the appellant was not materially different to the calculation of the loss of Rexwells, on the basis that, aside from the franking credits issue, there was no evidence to support the appellant's submission that the appellant intended that Rexwells would distribute all of its profit by way of dividends, franked or otherwise, to the appellant.
[405] J, [441].
Grounds of cross-appeal (cont.)
Cross-appeal ground 3
3.If the Court upholds CH Leaman's appeal in relation to the measure of damages, the primary judge erred in fact and law in finding, obiter, that a deduction of only $50,000.00 should be made from the gross profit of Rexwells for the costs associated with the replacement of Mr Steele by Mr Leaman in the conduct of Rexwells' business (Business) after completion of the Agreement.[406] The primary judge ought to have found that a deduction of a full salary of $225,000.00 per annum for Mr Leaman, or some other person, in managing the business of Rexwells after completion of the Agreement, should be made.
[406] J [435].
Particulars
3.1The primary judge stated at J [435] that her Honour accepted the evidence of Mr Leaman that he did not intend to employ anyone to replace Mr Steele in the Business.[407] The primary judge relied upon exh 1.108E for the finding, which did not support it.
[407] J, [435].
3.2The primary judge also stated at J [435] that her Honour accepted that Mr Leaman would have taken payments from the Business in the form of dividends as opposed to a full salary.
3.3In making those findings, the primary judge appeared to accept the assumption made by CH Leaman's expert, Mr Barry Honey,[408] that Mr Leaman would have himself replaced Mr Steele in the Business and taken payments from the Business in the form of dividends. There was no evidence to either of those effects. Such evidence as there was to the latter effect, which the primary judge failed to take into account, was that Mr Leaman intended to expand Rexwells' business and, for that purpose, reinvest profits and distribute relatively nominal dividends.[409]
[408] J, [400].
[409] Exhs 108D, pp 5, 8, 12 and 13; and 108E.
3.4In finding that a deduction of only $50,000.00 should be made for the employment of Mr Leaman in the Business the primary judge erred because:
(a)there was no evidence supporting the findings referred to in sub‑paragraphs 3.1 and 3.2 above;
(b)there was no evidence supporting the assumption made by Mr Honey, referred to in sub‑paragraph 3.3 above, which assumption appeared to underpin the primary judge's findings referred to in sub‑paragraphs 3.1 and 3.2 above;
(c)in any event, the question of the loss suffered by CH Leaman, by reason of the Agreement having been renunciated (if the Court so finds), by the respondents, is to be assessed objectively and the findings referred to in sub‑paragraphs 3.1 to 3.3 above are subjective matters and ought not to have been taken into account by the primary judge.
I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.
CG
Associate to the Hon Justice Vaughan
13 NOVEMBER 2024
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