CGU v Zurich - [2003] NSWSC 951

No judgment structure available for this case.

CITATION: CGU v Zurich [2003] NSWSC 951 revised - 3/11/2003

HEARING DATE(S): 9/10/03, 10/10/03

JUDGMENT DATE:
31 October 2003

JUDGMENT OF: McDougall J at 1

DECISION: Refer paras 91-93 of judgment

CATCHWORDS: CONTRACT - transfer of shares upon termination of joint venture agreement - whether "fair value" of shares to be determined by reference only to second defendant's net tangible assets or whether other factors may also be considered - whether cl 5.02(b) of the joint venture agreement is void for uncertainty - severability of that clause - effect on cl 5.03 if cl 5.02(b) is void but not severable

LEGISLATION CITED: Estate Duty Assessment Act 1914-28 (Cth)

CASES CITED: Grifiths v W E & D T Cave Limited [1998] 78 P & CR 8
Kiraz v Classic Tiles Pty Ltd (unrep: CA 40024/94 18/8/95: BC 9505172)
McCathie v Federal Commissioner of Taxation (1944) 69 CLR 1, 6
Abrahams v Federal Commissioner of Taxation (1944) 70 CLR 23, 31
Holt v Cox (1994) 15 ACSR 313, (1997) 23 ACSR 590
Re Smith & Fawcett Ltd [1942] Ch 304, 306
Stillwell Trucks Pty Ltd v Nectar Brook Investments Pty Ltd (1993) 115 ALR 294, 301
GPI Leisure Corporation Ltd v Herdsman Investments Pty Ltd (No 1) (1990) ANZ Conv R 367
Polgara Pty Ltd v Vision Wise Holdings Pty Ltd (1996) NSW Conv R 55-781
Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, 902, 904

PARTIES :
CGU Insurance Limited
v
Zurich Australia Insurance Limited
Associated Marine Insurers Agents Pty Limited
Michael Arthur Hill
Geoffrey Gerald Gauci
Anthony Ernest Day
John Leonard Butler
Ian Forbes Brown
Robert John Wagstaffe

FILE NUMBER(S): SC 50086/03

COUNSEL: Plaintiff: M A Pembroke SC/T M Faulkner
Defendants: S Finch SC/L McCallum

SOLICITORS: Plaintiff: Mallesons Stephen Jaques
Defendants: Baker & McKenzie

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
COMMERCIAL LIST

McDOUGALL J

31 October 2003

INSURANCE LIMITED & ORS

JUDGMENT

HIS HONOUR:

Introduction

1 The plaintiff (“CGU”) and the first defendant (“Zurich”) are equal, and the only, shareholders in the second defendant (“Associated Marine”). The third to eighth defendants are directors of Associated Marine.

2 CGU and Zurich are also parties to a Joint Venture Agreement. That agreement was made on 1 December 1982 between CGU (under its former name, Commercial Union Assurance Company of Australia Limited) and GRE Insurance Limited (“GRE”). Zurich acquired GRE’s interest in the joint venture in about March 1993 and, by a “Deed of Accession” dated 22 June 1993, Zurich agreed to become a party to the Joint Venture Agreement.

3 The joint venture between CGU and Zurich will terminate on 31 December 2003, by operation of cl 5.01(g) of the Joint Venture Agreement. By cl 5.03 of that agreement, that event of termination operates as a “transfer notice” for the purposes of cl 23 of the Articles of Association of Associated Marine. That clause, which is a pre-emption clause in not unfamiliar terms, gives Zurich the right to be offered CGU’s shares in Associated Marine at “fair value”.

4 The primary question in dispute between CGU and Zurich is the proper construction of cl 23(9) of the Articles, which sets out how the fair value of CGU’s shares is to be determined. Does it prescribe the only matter to which reference may be had in determining fair value (as Zurich contends)? Or may reference be had to other matters (as CGU contends)?

5 If that question is answered as Zurich says it should be answered, then CGU says that cl 5.03 of the Joint Venture Agreement is void, because it forms part of a scheme of which cl 5.02(b) also forms part, and cl 5.02(b) is, so CGU asserts, void for uncertainty.

The agreed facts

6 CGU and Zurich prepared a statement of agreed facts. Each sought to supplement that statement by affidavit evidence. The evidence of CGU’s witnesses, Mr Robert John Wagstaffe (a director of Associated Marine and an employee of CGU) and Mr Goodwin Cullimore Allen Gower (a chartered accountant, whose report was relied on as expert evidence) was admitted subject to relevance. The evidence of Zurich’s witness, Mr Craig Edwards (a chartered accountant, whose report was also relied upon as expert evidence) was likewise admitted subject to relevance. I deal later with the question of relevance.

7 Associated Marine was incorporated on 26 November 1982. There has been a change of name, and a change to its Articles of Association, since then. Nothing turns on either of those matters.

8 As I have noted, CGU and GRE entered into the Joint Venture Agreement on 1 December 1982. On the same day they, and Associated Marine, entered into an “Agency Agreement”. The Agency Agreement regulates the basis upon which Associated Marine performs its obligations on behalf of the joint venturers. The Joint Venture Agreement has been amended several times, and the Agency Agreement has also been amended. The amendments do not bear on the issues that the parties have propounded for decision.

9 At all material times whilst they have respectively been parties to the Joint Venture Agreement, CGU, GRE and Zurich have been licensed general insurers (GRE ceased to be a licensed general insurer on 26 March 1993). Associated Marine has never been a licensed insurer.

10 From December 1982, CGU and GRE effectively pooled or combined their respective marine insurance operations. From that time, they sought, promoted, marketed and wrote marine insurance business through the agency of Associated Marine. That situation continued up until March 1993. Since then, it has continued as between CGU and Zurich.

11 Associated Marine employs specialist marine underwriters and marine claims management staff. Its role has always been to promote the marine insurance business of the joint venture (as constituted from time to time). It seeks such business, it accepts proposals to be underwritten by the joint venturers and issues (and renews) policies on their behalf. It receives and handles premiums payable on policies issued or renewed by it. However, each marine insurance policy that Associated Marine writes is written as agent for the joint venturers and identifies the joint venturers as underwriters of the risk.

12 Associated Marine handles claims under policies issued, renewed or administered by it on behalf of the joint venturers. This extends to the contesting (where necessary) and settlement of claims.

13 Associated Marine does not operate a bank account in its own name. It meets its obligations by virtue of an authorisation from the joint venturers, which gives it access to a bank account held in their names.

14 The result is, and I would infer has always been, that the joint venturers provide, and Associated Marine does not provide, in their respective financial accounts, for the receipts, outgoings and liabilities of the marine insurance business that is underwritten by the joint venturers through the agency of Associated Marine.

15 Associated Marine does not charge, and has never charged, the joint venturers any fee, brokerage or commission for contracts of insurance written on their behalf. Nor does it charge, nor has it ever charged, the joint venturers any fee or commission for the claims handling and settlement services that it provides. The result is that Associated Marine cannot and does not make any profit for itself and cannot and does not pay dividends. However, that situation arises not under Associated Marine’s Articles, but under the Joint Venture Agreement.

16 The board of Associated Marine comprises six directors, two appointed by each of CGU and Zurich, and two executive directors, who are employees of Associated Marine. At board meetings, each of the directors appointed by CGU and Zurich has two votes, and each of the executive directors has one vote. The chairman of the meeting has a casting vote. The result is that, subject to the chairman’s casting vote, neither CGU nor Zurich can be, as it were, outvoted by a coalition of the other and the executive directors.

17 Prior to 2 January 2003, CGU was wholly owned by CGU Insurance Australia Ltd. That company in turn was wholly owned by CGNU Australia Holdings Ltd. On 2 January 2003, CGNU Australia Holdings Ltd transferred all of the issued shares in CGU Insurance Australia Ltd to Insurance Australia Ltd (then called NRMA Insurance Ltd), which was and is a wholly-owned subsidiary of Insurance Australia Group Ltd.

18 Insurance Australia Ltd and Insurance Australia Group Ltd carry on marine insurance business.

19 On 17 April 2003, Zurich informed CGU that Zurich would not give its consent to the continuation of the Joint Venture Agreement after the acquisition of CGU by Insurance Australia Ltd. The significance of that will become apparent when I set out the provisions of cl 5.01(g) of the Joint Venture Agreement. However, the parties are agreed that the result is that, as I have stated, the joint venture will terminate on 31 December 2003.

The Joint Venture Agreement

20 It is clear, both from the recitals to the Joint Venture Agreement and, in particular, from cl 1.02, that the joint venturers (then CGU and GRE) had caused Associated Marine to be incorporated as the entity through which they would carry out their joint venture. By cl 1.01 of the Joint Venture Agreement, that venture was expressed to be one to:

“… comprise the pooling and combining by the Participants of their respective marine insurance departments and operations, jointly seeking, promoting, marketing and writing marine insurance business through the agency of the Venture Company [i.e., Associated Marine] …”.

21 By cl 3, the joint venturers provided for the structure and organisation of Associated Marine. They were required to subscribe capital (both immediately and, if needed, in the future) in equal shares. If it were decided that Associated Marine needed to borrow money from them, they were to lend it in equal shares and on identical terms. Provision was made for appointments to the board and for other matters.

22 By cl 4, the joint venturers agreed to direct all their marine insurance business into the joint venture, and “jointly and equally [to] underwrite Marine Insurance risks proposed to and accepted by or renewed by the Venture Company, charging therefor equal premiums and accepting in their own names as underwriters under the Policies written or renewed by the Venture Company joint and equal liability” (cl 4.03).

23 The parties laid stress on the wording of cls 4.08 and 4.09 and I set them out in full:

“4.08 From moneys received by it as mentioned in Clause 4.06, the Venture Company shall retain any amounts payable to it as provided in Clause 4.07 (to be utilised to meet the normal operating expenses of the Venture Company) and shall also retain amounts required to pay related reinsurance premiums on the Participants’ behalf and to pay claims, on behalf of Participants, under Policies issued, renewed or administered by the Venture Company (the amounts to be retained by the Venture Company for such claims payments to be determined monthly by the Participants). Subject to such retentions, all moneys so received by the Venture Company shall be paid over by the Venture Company to the Participants in equal amounts at such times (and in any event not less frequently than monthly) as shall from time to time be determined by the Participants. It is acknowledged that it is the Participants’ aim and intention that the Venture Company should at all times hold the minimum practicable amounts of cash funds due to the Participants; any such cash so held may be invested on short-term deposits with corporations approved by the Board of the Venture Company.

4.09 The Venture Company shall, in accordance with general and any particular instructions, directions or guidelines jointly given by the Participants, and subject thereto, receive, process, assess, contest where required, settle and generally handle all claims under Policies issued, renewed or administered by it and for such purposes may engage and pay such assessors and other experts and consultants as it considers necessary or desirable. The Participants shall, as and when required, provide (in equal shares) the Venture Company with all funds required (over and above moneys already held by the Venture Company as contemplated in Clause 4.08) to pay claims under Policies issued, renewed or administered by it.”

24 Clause 5 dealt with termination, and I set it out in full:

Termination

5.01 The joint venture shall terminate on the 31st day of December next following the occurrence of any of the following events:

(a) the giving by either of the Participants to the other, not less than six months previously, of a written Notice of Termination pursuant hereto;

(b) either of the Participants committing a breach of its obligations and such breach not being remedied or compensation [sic] to the reasonable satisfaction of the other paid to it within three months of such other having given written notice to the Participant in breach specifying the breach in question;

(c) the Participants mutually agreeing in writing that the joint venture should be terminated;

(d) the parties being unable, for a period exceeding three months, to agree upon any matter on which their agreement or joint decision is required by and under the terms of this Agreement and, in consequence thereof, the Board of Directors of the Venture Company resolving that the Venture Company is thereby unable to continue effectively to perform the functions and activities contemplated for it hereunder;

(e) the appointment of a Receiver or Receiver and Manager of the whole or any part of the property or assets of either of the Participants and such appointment not being terminated within one month;

(f) either of the Participants entering into liquidation;

(g) more than one-half of the issued shares of either Participant being acquired by or becoming beneficially owned or controlled by another company carrying on Marine Insurance Business and the other Participant not giving its consent to the continuation of this Agreement in writing before or within one month after such acquisition.

5.02 When it has become established in terms of Clause 5.01 that the venture is to terminate on the next following 31st day of December -

(a) each Participant may, during the period of two months leading up to such 31st day of December, canvass those brokers, agents and direct clients whose business it had initially directed to the joint venture with a view to thereafter regaining that business for its own account;

(b) the Participants shall consult together to determine the most effective and appropriate means of achieving and giving effect to the results and treatment of business in force through the joint venture and other arrangements to apply upon and from termination as outlined in Appendix B hereto, it being hereby agreed that such results, treatment and arrangements are those to be achieved and given effect to upon termination.

5.03 In the event of termination resulting from any of the events mentioned in paragraphs (a), (b), (e), (f) or (g) of Clause 5.01 the Participant which (as the case may be) gave the notice of termination or committed the breach or entered receivership or liquidation or whose shares were acquired shall be deemed thereby (unless the other Participant determines by notice in writing to the Venture Company that this Clause 5.03 shall not apply) to have given with respect to its shares in the Venture Company, as at the date being six months prior to the termination date, a transfer notice as mentioned in the Articles of Association of the Venture Company.”

25 Appendix B, referred to in cl 5.02(b), provided as follows:

Termination of Joint Venture

Introduction

It is thought that the joint venture is most likely to be terminated by one of the Participants deciding that -

It is considered that the Participant giving notice and leaving the joint venture would be at a disadvantage, whilst the Participant retaining the ownership of the Venture Company would be in a very strong position, as the Venture Company would be the only vehicle recognised in the market. The continuing Participant would thus be likely to retain most of the business. The intention of this Appendix is to go part of the way, even though in an arbitrary fashion, to correct that imbalance.

The circumstances mentioned in (a) and (b) above

All business written through the agency before the termination date will continue to be run-off for the equal benefit of the two Participants. The leaving Participant’s share of all the expenses incurred in running off the business from the termination date will be reimbursed by that Participant. This reimbursement will continue until the run-off is completed, even if more than two years after the termination date, or until a compensation figure can be mutually agreed.

The circumstances mentioned in (c) above.

In this situation although the terminating Participant is selling its share of the marine portfolio, it is still the underwriter up to the termination date. Therefore all business written through the agency before the termination date will continue to be run-off for the equal benefit of the two Participants. The expenses incurred in running off the business from the termination date will be reimbursed by the terminating Participant until all the claims are settled.

Note

The Agency Agreement

26 Recital A of the Agency Agreement stated that Associated Marine was to undertake its duties of “promotion, marketing and writing of [marine insurance] business … on the Underwriters’ behalf”. By cl 1(2), Associated Marine agreed to perform those obligations which were, by the Joint Venture Agreement, specified or otherwise indicated as being its responsibility or which the joint venturers intended that it should perform. By cl 2(1) the joint venturers authorised Associated Marine to perform those obligations on their behalves.

27 Clause 3(1) provided, so far as relevant, “that in conducting and carrying on marine insurance business and particular transactions, activities, operations and dealings involved therewith or pertaining thereto (in accordance with [Associated Marine’s] obligations under Clause l hereof), [Associated Marine] will be, and will be acting as, the Agent and/or Attorney of the Underwriters jointly”.

28 Clause 3(2) contemplated that the joint venturers might grant Associated Marine a separate Power of Attorney. That was done.

The Deed of Accession

29 Zurich, CGU and Associated Marine were parties to the Deed of Accession. Recital D noted the wish of the parties to the Deed “to continue the joint venture conducted under the [Joint Venture] Agreement and through [Associated Marine] by substituting [Zurich] in the place of GRE under the [joint venture] agreement and the [Agency] Agreement”.

30 By cl 1, CGU agreed: to become a party to the Joint Venture Agreement and the Agency Agreement; to be bound by their terms as if a party; and to perform all the obligations undertaken, and to confirm all the authorities given, by GRE under those agreements.

The Articles of Association

31 The principal clause of the Articles that was debated before me was cl 23, and I set it out:

“23. The following rules shall apply upon receipt by the Company of a transfer notice:

(1) The directors shall thereupon and thereby be constituted the agents of the proposing transferor for the purpose of the sale of the shares to which the transfer notice relates at a fair value to be determined as provided in paragraph (9) of this Articles [sic].

(2) The directors shall, following receipt of the transfer notice, takes steps to have the fair value of the shares to which the transfer notice relates determined (in manner provided in paragraph (9) of this Article) as at the thirty-first day of December which next follows the expiration of six months from the date of the transfer notice (such thirty-first day of December being hereinafter referred to as “the effective date”).

(3) Upon the determination of such fair value as at the effective date the directors shall give written offers of the said shares to the other members in the proportion as nearly as may be to the shares, of whatever class, held by them respectively for sale to them at the fair value. Any such offer shall be given by notice specifying the number of shares offered and the fair value thereof and stating that if such offer not be accepted within sixty days it shall be deemed to be declined and after the expiration of that time or on the receipt of any intimation from the company or person to whom the offer is made that it or he declines to accept the shares offered for purchase at the fair value the company shall be free and shall endeavour to dispose of those shares to some other member.

(4) If within the period aforesaid the directors shall be unable to find a member or members willing to purchase all of the said shares, they may seek some other person or persons acceptable to them wishing to purchase at the fair value the shares not accepted by members of the Company.

(5) If the directors shall find a member or members or other person or persons willing to purchase the said shares they shall give notice thereof to the member giving the transfer notice who shall thereupon be bound upon payment of the fair value as at the effective date to transfer the shares to the purchaser or purchasers and to deliver to him or them the scrip certificates for the said shares.

(6) If the directors shall not within a period of three calendar months after the determination of the fair value as at the effective date as aforesaid find a member or members or other person or persons willing to purchase all of the said shares at such fair value they shall forthwith advise the member giving the transfer notice accordingly who shall then be at liberty to sell to some other person or persons the shares not accepted pursuant to the foregoing provisions at the fair value or for a higher (but not a lower) price; if he decide [sic] that he is prepared to accept a lower price the shares shall in the first place be offered to existing members of the Company in the manner aforesaid at such lower price.

(7) If in any case the member giving the transfer notice after having become bound as aforesaid makes default in complying with his obligations under paragraph (5) hereof the directors shall thereupon cause the name of each purchaser to be entered in the register as the holder of the shares and shall cancel any scrip certificates issued in respect thereof. The receipt of the directors for the purchase money shall be a good discharge to each purchaser and after his name has been entered in the register in purported exercise of the aforesaid power the validity of the proceedings shall not be questioned by any person.

(8) The directors shall not be at liberty to refuse to register any Transfer of Shares tendered to them following due compliance with the provisions of this Article 23.

(9) The fair value of any shares specified in a transfer notice shall be the amount which is determined to be, as at the effective date, the true and fair value thereof (by reference to the value of the Company’s net tangible assets as at its effective date) by agreement between the directors [sic: clearly, the word “and” has been omitted] the proposing transferor or in default of agreement thereon by some third party agreed upon by the directors and the proposing transferor or in default of agreement thereon also, by the President or other senior officer for the time being of the Institute of Chartered Accountants in Australia (or other similar body succeeding thereto) or his nominee. Any such third party, President, officer or nominee shall be acting as an expert and not an arbitrator and his costs shall be borne by the Company”.

32 However, Mr Pembroke SC, who appeared with Mr Faulkner of Counsel for CGU, laid stress on other provisions of the Articles, including cls 7, 9, 35, 50 and 55-60. Mr Pembroke submitted that those Articles showed an expectation that Associated Marine could make profits and could pay dividends out of those profits.

The issues for determination

33 On 15 August 2003, Nicholas J ordered, pursuant to Pt 31 r 2, that there be decided separately from and before all other issues in the proceedings the questions raised by the first, third and fifth prayers for relief of the amended summons, and the first, second and third prayers for relief of the cross-claim.

34 As the parties put their cases at hearing, the essential issues arising for determination under those questions were:

1. Is the determination of the fair value of CGU’s shares in Associated Marine to be made only by reference to the value of Associated Marine’s net tangible assets as at 31 December 2003 (as Zurich contends), or by reference to that and other factors (as CGU contends)?

2. Is cl 5.02(b) of the Joint Venture Agreement void for uncertainty on the grounds that it is a bare agreement to consult, or that it is incomplete, or that its language is so obscure to be incapable of certain meaning (as CGU contends)?

3. If cl 5.02(b) is void for uncertainty, is it severable from the scheme of cl 5?

Fair value: clause 23 of the Articles

35 For the plaintiff, Mr Pembroke submitted that the primary requirement of cl 23 was to determine “fair value”. This, he said, was the invocation of a well known concept, the conventional meaning of which was “real value to the seller”. He submitted that the reference, in cl 23(1), to a determination “as provided in paragraph (9) of this Articles” was no more than a machinery provision to be applied in performing the primary task, namely the determination of fair value.

36 It followed, Mr Pembroke submitted, that the extent of the primary task should not be cut down by the machinery provided for its performance. Specifically, in context, this meant that the words “by reference to” did not prescribe the only matters that could be considered in performing that primary task.

37 Mr Pembroke supported his primary submission by reference to a number of matters, including:

(1) The contractual context in which cl 23 appears (at least initially, he limited this to the Articles themselves);

(2) The commercial purpose sought to be achieved by cl 23 (namely, in context, a mechanism for determination of a fair price payable whenever a right of pre-emption is exercised);

(3) That Associated Marine was capable of earning profits, declaring dividends and capitalising profits (by reference, in particular, to cls 56-60 of the Articles);

(4) That cls 20-23 of the Articles restricted the “fundamental proprietary right” of each shareholder to transfer its shares in Associated Marine; and, further, that “[a]n integral part of that fundamental right is the right to transfer shares at a fair price”;

(5) What were said to be capricious, unreasonable and unjust results if the concept of fair value were to be determined as Zurich submits it should be (including, that shares could not be transferred “other than at a nominal price”; he noted that cl 23 applied in all cases of compulsory transfer but that not all cases of compulsory transfer might be subject to the compensation regime set out in Appendix B of the Joint Venture Agreement);

(6) The fact that the reference to net tangible assets appears in parentheses in cl 23(9);

(7) If it were intended that fair value of the transferring party’s shares should be equated with net tangible assets, then cl 23 is a verbose and circuitous method of expressing that intention; and

38 Mr Pembroke laid stress on the fact that, whilst the joint venture might come to an end at any time in accordance with its terms, Associated Marine would continue to exist after termination of the joint venture (unless, of course, it were wound up for some reason). He therefore submitted that a construction of cl 23 that took into account, and gave effect to, what might be thought to be the commercial “policy” underlying the Joint Venture Agreement, would be inappropriate.

39 Mr Pembroke relied on the decision of the English Court of Appeal in Griffiths v W E & D T Cave Limited [1998] 78 P & CR 8. That was a case where a grant of option provided that the price payable upon exercise should be, in the events that happened, “16 per cent of the open market value of the subject land by reference to the existing agricultural use subject to the agricultural tenancy”. Clause 3 provided that the price determined in accordance with the relevant provisions “shall be as agreed between the parties or in default of agreement fixed by a chartered surveyor” who was required to “have regard to all the circumstances of the situation, including the specific terms of this Agreement …”.

40 The court held that the surveyor was to have regard to all circumstances, including any potential development value, but in determining value was to take into account firstly the existing agricultural use and secondly the existing agricultural tenancy. The court rejected the appellant’s submission that the valuation had to be made by reference only to agricultural use and as tenanted.

41 That decision is distinguishable for at least two reasons. Firstly, cl 3 expressly required the surveyor, when fixing the open market value of the land, to have regard to all the circumstances of the situation. Secondly, the matters to which reference was to be had (namely, existing agricultural use and the agricultural tenancy) are not of themselves capable of expression in monetary terms. In the present case, the matter to which reference is to be had (namely, net tangible assets) is something capable of expression in monetary terms. It could be said (and Zurich submits) that, in the present case, the parties chose something that was readily capable of being evaluated in money as the referent. That could not be said of the agreement that the court considered in Griffiths.

42 One matter of possible significance does emerge from the judgment of Aldous LJ. His Lordship said, at 14, that the use of the words “open market value” was inconsistent with the proposition that the exercise of valuation was to be conducted only by reference to the criteria of existing agricultural use and agricultural tenancy. He said that those words “show an intention that the valuer should value the land in the real world so as to produce a value of the land that it would obtain upon the open market, of course subject to the qualifications in the clause”, but that the construction for which the appellant contended would “require the valuer to conduct a totally artificial valuation to arrive at the figure which would be less than the land is actually worth”.

43 In the present case, of course, what is required is not the assessment of open market value, but the assessment of “fair value” or “true and fair value”. However, whilst it will usually, if not always, be the case that, as Aldous LJ recognised, a valuation of land by reference to some only of a number of relevant criteria might produce a value that was not the real world, or open market, value, it is by no means certain that the equivalent conclusion would follow in the present case if the valuation were conducted only by reference to the net tangible assets of CGU’s shares. That is because it is by no means clear, in the present case, that the shares in Associated Marine have any value apart from that ascribable to their asset backing – i.e., to the value of the net tangible assets of Associated Marine.

44 It is clear in this case, as it was clear in Griffiths (as Morritt LJ recognised: 78 PCR at 15) that there will be anomalies whichever of the competing constructions is adopted.

45 For Zurich, Mr Finch SC (who appeared with Ms McCallum of Counsel for Zurich) submitted that, on a plain reading of cl 23(9), the prescribed and only measure of fair value (or true and fair value) was (the value of) net tangible assets. If the parties had intended that net tangible assets be one only of several referents then, he submitted, there was no reason for identifying it and not the others.

46 Mr Finch supported his primary submission by reference to a number of matters, including:

(1) Clause 23 of the Articles should be construed having regard to the provisions of the Joint Venture Agreement (because, as recital A and cl 1.02 of that Agreement recognised, CGU and GRE had caused Associated Marine “to be incorporated as the entity and vehicle through and by which” their joint venture activities would be carried out);

(2) The risks and benefits of the joint venture accrued to the joint venturers through the Joint Venture Agreement, and not in their capacity as shareholders in Associated Marine. Associated Marine was not intended to make any profit on its own account and was to retain only such cash as was necessary to meet claims, pay reinsurance premiums, refund commissions and fund its operating expenses (the parties agreed in paragraph 24 of the Statement of Agreed Facts that this was the case); and

(3) The Joint Venture Agreement provided, through cl 5.02(b) and Appendix B, for a mechanism by which the departing party (in this case CGU) would be compensated, although in an admittedly arbitrary and probably incomplete fashion, for the loss of its interest in the joint venture;

(4) A construction of cl 23(9) of the Articles that attributed value to the business carried on by Associated Marine could, and in most cases would, mean that the departing party would be doubly compensated (because in most cases it would also be entitled to be compensated under cl 5.02(b) and Appendix B of the Joint Venture Agreement); and

47 I do not think that the words “by reference to” necessarily indicate either that the referent is to be the only matter to which reference may be had for the purpose of carrying out the assigned task, or that it is but one such matter. Those words are, I think, inherently capable of accommodating either construction. Their construction in any given case must depend upon their context. This approach is, I think, consistent with that adopted by the Court of Appeal (admittedly, in a context far removed from that presently under consideration) in Kiraz v Classic Tiles Pty Ltd (unrep: CA 40024/94, 18 August 1995: BC 9505172). See in particular the judgment of Sheller JA (with whom Clarke JA agreed, and with whose conclusions Mahoney AP also agreed), at BC 9505172 at 5.

48 In the present case, the context includes at least the whole of cl 23. In sub cl (1), the concept of fair value, where it first appears, is linked with sub cl (9): “a fair value to be determined as provided in para (9) of this Articles” [sic]. The wording of sub cl (2) is similar: “the fair value of the shares … determined (in manner provided in paragraph (9) of this Article) …”. Those references are consistent with the view that the thing to be determined – fair value – is something that exists, apart from the manner of its determination: compare the observations of Aldous J in Griffiths, referred to in para [42] above. However, in sub cl (9), the concept of fair value is expressed to be “the amount which is determined to be … the true and fair value … (by reference to the value of the Company’s net tangible assets) …)”. Those words seem to me to be apt to equate the thing to be determined with the method of its determination. They show that the fair value that is to be paid is the amount determined by application of the described process.

49 Thus construed, cl 23(a) is a recognition by the joint venturers that shares in Associated Marine have no value apart from that referable to their net tangible asset backing. If it were otherwise, the choice of net tangible assets as a referent (rather than the referent) would be very difficult to understand: on CGU’s argument, the minor referent would have been highlighted, and the major referent (namely, what was loosely referred to as “goodwill”) ignored.

50 Further, for the purposes of this case, one cannot ignore the circumstance that Associated Marine was set up as the vehicle through which the joint venturers agreed to conduct their joint venture business. It is correct to say, as Mr Pembroke submitted, that the company could survive termination of the joint venture. However, it does not follow that the company would survive with the benefit of the intangible asset that, he submitted, it had built up by virtue of its carrying on business as the agent of the joint venturers.

51 Mr Pembroke submitted that Associated Marine could be expected to have substantial goodwill. That followed, he said, because it had carried on its business for over 20 years. In so doing, it had built up a body of experience and contacts, and employed staff who were capable of exploiting those contacts.

52 However, I do not think that it follows from this that Associated Marine had (or, viewed objectively, was intended or expected, at the time it was incorporated, to have) substantial goodwill that was its rather than the joint venturers’. The business of Associated Marine was carried on as agent and attorney for the joint venturers. To the extent that the business carried on by Associated Marine had any intangible value (whether one describes that as goodwill or by some other name), its intangible value was not the beneficial property of Associated Marine, but the beneficial property of Associated Marine’s principals, the joint venturers. The alternative view would be inconsistent both with the fiduciary obligations of Associated Marine as agent and attorney and with the evident intention of the joint venturers that the profits and risks of the joint venture were accrue to them in their capacity as joint venturers and not in their capacity as shareholders in Associated Marine.

53 I therefore see nothing capricious, unreasonable or unjust, in the proposition that the fair value of a joint venturer’s shares in Associated Marine should be limited to the value of that company’s net tangible assets at the relevant date. On the contrary, I think that the ascription to those shares of a value that included a component for “goodwill” that was not, and (objectively viewed) would not have been expected to be, the property of Associated Marine, would be capricious, unreasonable or unjust.

54 This construction of cl 23 is, I think, supported by a reading of the provisions of the Joint Venture Agreement. Clause 5.02(b) contains an agreement that the terms of Appendix B are to be achieved and given effect to upon termination of the joint venture. Appendix B itself recognises that, on termination, the departing joint venturer would be at a disadvantage, whereas the remaining joint venturer (which would retain the ownership of Associated Marine) would be in a very strong position. The intention of the parties was stated in the Appendix as being “to go part of the way, even though in an arbitrary fashion, to correct that imbalance”.

55 There are two points to make about this. Firstly, the parties recognised that termination of the joint venture, in a manner that left one of them as the owner of Associated Marine, would put the other of them in a position of disadvantage. That would not be the case if, as the price of becoming owner, the remaining joint venturer were compelled to pay a sum that included not only the appropriate percentage of the value of Associated Marine’s net tangible assets, but also the appropriate percentage of its intangible assets (including goodwill). Secondly, it indicates that the departing joint venturer was to be compensated, although in a way that was admitted to be rough and ready and perhaps incomplete, for the loss of its interest in the joint venture. The first of these considerations is inconsistent with the proposition that, in cl 23 of the Articles, the parties intended fair value to encompass matters such as goodwill. The second suggests that, if cl 23 is so construed, the departing joint venturer is likely to receive double, or at least excessive, compensation.

56 As I have said, I accept that, whichever construction is favoured, anomalies will arise. However, I do not see the anomalies to which Mr Pembroke pointed as being sufficiently serious to render untenable the conclusion to which I have come.

57 I should however refer specifically to some of the cases upon which Mr Pembroke relied.

58 Firstly, Mr Pembroke referred to the decisions of Williams J in McCathie v Federal Commissioner of Taxation (1944) 69 CLR 1, 6 and Abrahams v Federal Commissioner of Taxation (1944) 70 CLR 23, 31, for the proposition that “fair value” means “real value to the seller”. Those cases were concerned with s 8 of the Estate Duty Assessment Act 1914-28 (Cth), which provided that estate duty should be levied and paid upon the value, as assessed under the Act, of the estates of deceased persons dying after the commencement of the Act. It was that value that Williams J stated was “to be ascertained [as] the value to the seller of the property in its actual condition at the relevant time … with all its existing advantages and all its possibilities” (his Honour’s emphasis). Those decisions did not in terms deal with the concept of “fair value”. Further, as Williams J pointed out in Abrahams at 29-30, the Act did not “direct any particular method of estimating the value of the assets”. Where the assets were shares in a company, the Articles of Association of which contained restrictions on transfer, then (His Honour said) “the Court should endeavour to ascertain (as in the case of property compulsorily acquired) the price that a willing but not anxious vendor could reasonably expect to obtain and a hypothetical willing but not anxious purchaser could reasonably expect to have to pay for the shares if the vendor and purchaser had got together and agreed on a price in friendly negotiation, the basis of the bargaining being that the purchaser would be entitled to be registered as the owner of the shares but when registered would hold them subject to the provisions of the Memorandum and Articles of Association … including any restrictions on transfer which they might obtain”.

59 It does not seem to me that either McCathie or Abrahams dictates that “real value to the seller” is anything other than the concept of value derived by hypothetical arms’ length negotiation of the kind described by Williams J in the passage just quoted.

60 Mr Pembroke pointed to the comment of Williams J in Abrahams at 35 that “a company and not its shareholders is the legal and equitable owner of its assets”, so that “the value of its assets must necessarily be reflected in the value of its shares”. However, that does not seem to me to take the matter any further. It leaves open for decision the question of what, in any given case, are the assets of which the company is the legal and equitable owner.

61 Mr Pembroke relied on the decisions of Santow J and the Court of Appeal in Holt v Cox (1994) 15 ACSR 313, (1997) 23 ACSR 590. He submitted that those decisions show that the concept of fair value “encompasses what is fair, just and equitable in the circumstances”. That case concerned shares issued to the defendant, as an employee of a company in which the plaintiffs were the only other shareholders. The shares were issued on terms that upon termination of the defendant’s employment, they were to be offered to the plaintiffs “at a fair price determined by the auditor of the company”. There was no specification of the matters to which the auditor was to have regard in carrying out his task. If cl 23(9) of the Articles of Associated Marine did not limit the matters to which reference should be had in determining fair value, then the observations of Santow J and the Court of Appeal would be of greater relevance. But if, as I think it does, cl 23(9) limits the matters to be taken into account, then considerations of “what is fair, just and equitable in the circumstances” must acknowledge the express intention of the parties.

62 Mr Pembroke further submitted, relying on Re Smith & Fawcett Ltd [1942] Ch 304, 306 and Stillwell Trucks Pty Ltd v Nectar Brook Investments Pty Ltd (1993) 115 ALR 294, 301, to support the proposition that if it is intended to cut down the “fundamental right” of a shareholder to transfer its shares, then that must be done with clear language, and not “by uncertain language or doubtful implication”. That may very well be so; but it has not been suggested, in the present case, that the language of cls 20-23 of Associated Marine’s Articles is insufficiently clear to achieve the purpose of cutting down the rights of its shareholders to transfer their shares.

63 Mr Pembroke relied on GPI Leisure Corporation Ltd v Herdsman Investments Pty Ltd (No 1) (1990) ANZ Conv R 367, for the proposition that a contract that takes away from a person involuntarily some of the person’s property is to be construed strictly. The general principle may be accepted. However, its application in the present case is less than clear. Under the Articles, it is CGU that is the seller of the shares. In the ordinary way, one would not describe a sale by a shareholder in a proprietary company as involuntary expropriation. Any expropriatory quality can arise only because the sale has been prompted by the operation of cl 5.01(g) of the Joint Venture Agreement. It must be assumed that, when CGU became a party to the Joint Venture Agreement, it recognised the circumstances in which the joint venture must come to an end. It must also be assumed that CGU was aware that, if cl 5.01(g) were activated, it could be forced to divest itself of its shares in Associated Marine, even though, subjectively, it would not want to do so. In my view, the circumstances presently under consideration are well removed from cases of true involuntary expropriation.

64 Mr Pembroke submitted that cl 23(9) “was intended only as a machinery provision”. This, he said, was confirmed by cl 23(2). He relied on the decision of Young J in Polgara Pty Ltd v Vision Wise Holdings Pty Ltd (1996) NSW Conv R ¶ 55-781. That case concerned an option for renewal in a lease, which provided that the rent for the first year of the renewed term, if not agreed, was to be “calculated or determined in the manner provided in clause 67 …”. His Honour said, at 55-986, that “the word ‘manner’ may have a narrower or wider meaning depending on its context”, but that “it tends to denote the method by which a matter is handled rather than the result achieved”. However, as his Honour acknowledged, it was important to look at the use of the word in its context.

65 Mr Pembroke further submitted that the words “(by reference to the value of the Company’s net tangible assets as at its effective date)”, which he described as “being no more than a parenthetic interpolation”, should not govern the meaning of the rest of the sentence: relying on Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, 902, 904. However, it is necessary to note that Lord Lloyd of Berwick, at each point, laid stress, not just upon the fact that the relevant words were parenthesised, but upon the fact that, as he put it at 902-3, “the parenthesis starts with the word ‘whether’ and ends with the words ‘or otherwise’.” It was for that reason that his Lordship said, at 904, that “words in brackets are often otiose” because: “[t]hey show that the general words which precede the parenthesis are not limited to any particular kind of claim, but cover all claims …”. There is no basis for thinking that the parenthesised words in sub cl (9) were, or were seen to be, otiose. I do not think that his Lordship’s observations upon the significance of parenthesised words in one form of document can be generalised so that they should be taken to apply to all parenthesised words in all documents.

Clause 5.02(b)/Appendix B

66 My conclusion on cl 23(9) of the Articles makes it necessary to consider the submission for CGU that cl 5.02(b) of the Joint Venture Agreement is void for uncertainty.

67 The first thing to notice about cl 5.02(b) is that it purports to give contractual effect to Appendix B. Somewhat strangely, this is done at the conclusion of cl 5.02(b), and not at its beginning. However, it is quite clear, from the words used, that the parties intended that the provisions of Appendix B should have contractual effect according to their terms.

68 The parties also intended that, if Appendix B were enlivened, they should consult together to find the most appropriate way of carrying out what it was that Appendix B required to be done. Mr Pembroke submits that this is a mere agreement to agree - indeed, something even more nebulous, namely, an agreement to consult.

69 If cl 5.02(b) is void for uncertainty, it can only be so because Appendix B, to which it seeks to give contractual force, suffers from that vice. If Appendix B is sufficiently certain to be enforceable, then the other obligation imposed by cl 5.02(b) – namely, for the parties to consult together to determine (if the need should arise) upon the appropriate method of implementing Appendix B – is no more than one would expect reasonable business entities, acting in good faith, to do in that eventuality.

70 Further, any failure in the obligation to consult – either because the parties do not carry it out, or because they cannot determine what it is that they are to carry out, or because, having consulted, they get nowhere – would not vitiate or detract from whatever contractual force Appendix B may have by reason of the concluding words of cl 5.02(b).

71 I therefore conclude that cl 5.02(b) is not in itself uncertain. It will only be uncertain if Appendix B, to which it seeks to give contractual effect, is uncertain. I now turn to that question.

72 Appendix B consists of three distinct sections, one of which (headed “Introduction”) is clearly prefatory. The other two sections set out alternative bases on which the departing joint venturer will be compensated.

73 It is clear that Appendix B is not intended to be exhaustive. Firstly, this is recognised within the Appendix itself. Secondly, if one compares it with the termination events set out in cl 5.01, it is clear that not all terminations will give rise to an entitlement to compensation. However, those considerations do not mean that Appendix B is unenforceable. They simply mean that the parties have, by agreement, limited the circumstances in which a departing joint venturer will be entitled to receive compensation.

74 The first group of circumstances relates to the situation where the terminating joint venturer remains an authorised insurer. Although those circumstances are summarised by reference to paras (a) and (b) of the introductory section, it may be legitimate to construe them as applying to all terminations where the departing joint venturer remains an authorised (i.e., licensed) insurer. But even if this be incorrect, it does not matter, for the reasons given in the preceding paragraph.

75 The first benefit to be provided is “a 25 per cent quota share of the business” that is written in the two years following termination and obtained through Associated Marine. That reinsurance “is to be on normal market terms”. If the parties cannot agree on what those normal market terms are, a mechanism is provided for a binding determination.

76 Clearly, the parties, being experienced in the insurance industry, thought that there would be something capable of identification as “normal market terms” for the relevant business. I see no reason why the Court should second guess the parties. In any event, the provision for expert determination seems to me to remove any potentiality for uncertainty.

77 There is a further possible benefit available under this rubric. Existing business is to be run off for the equal benefit (and risk) of the joint venturers. That continues until the run off is complete, or until a compensation figure is agreed. Again, I see nothing uncertain in this.

78 The other circumstance in which compensation is payable is that where the departing joint venturer is no longer an authorised insurer. In those circumstances, as the parties realised, it could not reinsure business written through Associated Marine. The Appendix therefore provides for the calculation of a capital sum, and again provides for binding expert determination if the parties cannot agree. I see nothing uncertain in this.

79 Again, existing business is to be run off for the potential benefit of both joint venturers, with the departing joint venturer liable for expenses incurred in that process until all claims are settled. There is nothing uncertain in this.

80 Finally, Appendix B (under the heading “Note”) contains a warning to the non-terminating joint venturer. It was not submitted that this section rendered the Appendix uncertain.

81 I therefore conclude that Appendix B is not void for uncertainty. It follows that neither is cl 5.02(b).

Clause 5.03

82 In view of the conclusion to which I have come – that cl 5.02(b) is not, either in itself, or in so far as it gives effect to Appendix B – void for uncertainty, it is unnecessary for me to consider the question of severability.

Rulings on admissibility of affidavit evidence

83 The affidavit of Mr Wagstaffe sought to prove, firstly, that CGU did not wish “at this time” to sell its shares in Associated Marine and, secondly, the last special purpose financial report for Associated Marine (for the year ended 31 December 2002).

84 Evidence as to the former matter – the subjective intention of CGU – does not seem to me to have any relevance. I therefore reject para 3 of the affidavit.

85 The financial report may have been relevant: it demonstrates that the report date for Associated Marine was 31 December, and not 30 June. It will be remembered that 31 December was also the date on which termination under cl 5.01 occurs, and is therefore the date at which the fair value of the terminating joint venturer’s shares in Associated Marine is to be determined under cl 23 of the Articles.

86 That circumstance adds some force to the submission of Mr Pembroke that the determination of the value of net tangible assets is a mechanical matter and hardly one that would require the process of expert determination for which cl 23(9) of the Articles provides. I therefore admit para 4 of Mr Wagstaffe’s affidavit, and I admit Exhibit RJW 1 thereto.

87 Mr Gower’s evidence was given by reference to six questions that are set out in para 4 of the report that is Annexure “A” to his affidavit. None of those questions was expressed to relate specifically to November 1982 (when Associated Marine was incorporated), or to December 1982 (when the Joint Venture Agreement was executed).

88 None of the questions posed to, or answered by, Mr Gower seem to me to bear on the question of construction. They do not seek to explain technical terms, or terms of art. They do not deal with any aspect of the factual matrix relating to the making of the relevant agreements. They do not address what in my opinion is a key question, namely, the circumstance that Associated Marine carried on its business activities as agent and attorney for the joint venturers. This last consideration is particularly relevant to the fifth (and therefore the sixth) of those questions.

89 In my opinion, Mr Gower’s affidavit is irrelevant, and I reject it on that ground.

90 For essentially similar reasons, I reject the affidavit of Mr Edwards.

Conclusions

91 At the conclusion of the hearing, CGU did not press prayer 1 of its amended summons (and consideration of the issues raised by prayers 2 and 4 did not, having regard to the order referred to in para 33 above, arise). The parties agreed that, if I construed cl 23 of the Articles in the manner advocated by CGU, then it would be appropriate to make a declaration in accordance with prayer 3 of the amended summons and that, if I did not, it would be appropriate (subject to my views on the question of uncertainty) to make a declaration in accordance with prayer 1 of the cross-claim.

92 In view of the conclusions to which I have come, I make the following declaration:

fair value”

93 I shall hear the parties on costs, and on such other orders or directions (if any) as may be necessary.

******

Last Modified: 11/06/2003

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Citations

CGU v Zurich [2003] NSWSC 951

Most Recent Citation

CGU Insurance Ltd v Zurich Australian Insurance Ltd [2003] NSWCA 366

Cases Citing This Decision

1

CGU Insurance Ltd v Zurich Australian Insurance Ltd [2003] NSWCA 366

Cases Cited

9

Statutory Material Cited

1

Trustees Executors and Agency Co Ltd v Commissioner of Taxes (Victoria) [1941] HCA 18

Perpetual Trustee Company (Limited) v Federal Commissioner of Taxation [1942] HCA 4

CITATION:	CGU v Zurich [2003] NSWSC 951 revised - 3/11/2003
HEARING DATE(S):	9/10/03, 10/10/03
JUDGMENT DATE:	31 October 2003
JUDGMENT OF:	McDougall J at 1
DECISION:	Refer paras 91-93 of judgment
CATCHWORDS:	CONTRACT - transfer of shares upon termination of joint venture agreement - whether "fair value" of shares to be determined by reference only to second defendant's net tangible assets or whether other factors may also be considered - whether cl 5.02(b) of the joint venture agreement is void for uncertainty - severability of that clause - effect on cl 5.03 if cl 5.02(b) is void but not severable
LEGISLATION CITED:	Estate Duty Assessment Act 1914-28 (Cth)
CASES CITED:	Grifiths v W E & D T Cave Limited [1998] 78 P & CR 8 Kiraz v Classic Tiles Pty Ltd (unrep: CA 40024/94 18/8/95: BC 9505172) McCathie v Federal Commissioner of Taxation (1944) 69 CLR 1, 6 Abrahams v Federal Commissioner of Taxation (1944) 70 CLR 23, 31 Holt v Cox (1994) 15 ACSR 313, (1997) 23 ACSR 590 Re Smith & Fawcett Ltd [1942] Ch 304, 306 Stillwell Trucks Pty Ltd v Nectar Brook Investments Pty Ltd (1993) 115 ALR 294, 301 GPI Leisure Corporation Ltd v Herdsman Investments Pty Ltd (No 1) (1990) ANZ Conv R 367 Polgara Pty Ltd v Vision Wise Holdings Pty Ltd (1996) NSW Conv R 55-781 Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, 902, 904
PARTIES :	CGU Insurance Limited v Zurich Australia Insurance Limited Associated Marine Insurers Agents Pty Limited Michael Arthur Hill Geoffrey Gerald Gauci Anthony Ernest Day John Leonard Butler Ian Forbes Brown Robert John Wagstaffe
FILE NUMBER(S):	SC 50086/03
COUNSEL:	Plaintiff: M A Pembroke SC/T M Faulkner Defendants: S Finch SC/L McCallum
SOLICITORS:	Plaintiff: Mallesons Stephen Jaques Defendants: Baker & McKenzie