CLK Kitchens and Joinery Pty Ltd v Mayneline Kitchens and Joinery Pty Ltd

[2017] NSWSC 1737

Supreme Court

New South Wales

• Amendment notes

Medium Neutral Citation:	CLK Kitchens & Joinery Pty Ltd v Mayneline Kitchens & Joinery Pty Ltd [2017] NSWSC 1737
Hearing dates:	6 December 2017
Decision date:	14 December 2017
Jurisdiction:	Equity
Before:	Ward CJ in Eq
Decision:	(1) Order that, subject to agreement by the expert nominated by the Australian Disputes Centre Ltd (Mr Ross) that, for the purposes of cl 6.1, the Buyer’s General Counsel and Company Secretary, Mr Lonsdale, is not to be treated as a “legal adviser” who could be excluded from a meeting convened by the expert (if Mr Lonsdale seeks to attend that meeting in his capacity as company secretary representing the company), the defendant execute within 7 days  the Expert Determination Agreement a copy of which is Annexure “B” to the amended summons. (2) Otherwise dismiss the plaintiffs’ amended summons. (3) Order each party to pay its own costs of the proceedings. (4) Direct that if either party seeks a variation of order 3, that party serve brief written submissions within 3 days, with the other party to serve brief submissions within 3 days in response, with a view to the issue of costs being determined on the papers. (5) Liberty to apply on 3 days’ notice if Mr Ross does not agree to the carve-out from cl 6.1 contemplated in order 1 above.
Catchwords:	CONTRACT – Construction – Words and phrases – Whether “management accounts” means “accounting records” – Whether information requested by plaintiffs falls within the phrase “management accounts” – Whether proposed expert is the appointed “Expert” for the purposes of a business sale agreement – Significance of proposed expert’s reference to “rescinding” his appointment – Whether terms of proposed appointment are reasonable
Legislation Cited:	Civil Procedure Act 2005 (NSW), ss 56, 57, 58, 59, 60
Cases Cited:	1144 Nepean Highway Pty Ltd v Abnote Australasia Pty Ltd (2009) 26 VR 551; [2009] VSCA 308 Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99; [1973] HCA 36 Belvino Investments No. 2 Pty Limited v Australian Vintage Ltd [2014] NSWSC 978 Butt v M’Donald (1896) 7QLJ 68 Cherry v Steele-Park [2017] NSWCA 295 Equuscorp Pty Limited v Glengallan Investments Pty Limited (2004) 218 CLR 471; [2004] HCA 55 Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95; [2002] HCA 8 International Air Transport Association v Ansett Australia Holdings Ltd (2008) 243 CLR 151; [2008] HCA 3 Mackay v Dick (1881) 6 App Cas 251 Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37 Newey v Westpac Banking Corporation [2014] NSWCA 319 Pacific Carriers Limited v BNP Paribas (2004) 218 CLR 451; [2004] HCA 35 Redland Bricks Ltd v Morris [1970] AC 652 Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596 Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165; [2004] HCA 52 Watpac Construction NSW Pty Limited v Taylor Thompson Whitting (NSW) Pty Ltd [ 2015] NSWSC 780 Westpac Banking Corp v Tanzone Pty Ltd (2000) 9 BPR 17,521; [2000] NSWCA 25
Category:	Principal judgment
Parties:	CLK Kitchens & Joinery Pty Limited (First Plaintiff) Clint Lucky Karananos (Second Plaintiff) Mayneline Kitchens & Joinery Pty Limited (Defendant)
Representation:	Counsel: S Couper QC with C Bolger (Plaintiffs) S Robertson (Defendant)   Solicitors: Morgan Conley Solicitors (Plaintiffs) Clayton Utz (Defendant)
File Number(s):	2017/00251250
Publication restriction:	Nil

Judgment

1. HER HONOUR: By amended summons filed 19 September 2017 in the Commercial List of the Equity Division of this Court, CLK Kitchens & Joinery Pty Limited, the former owner of a cabinetry and joinery manufacturing business (the Seller) and the director and ordinary shareholder of the Seller (Mr Karananos) (together, the plaintiffs) have sought declaratory and other relief in relation to the construction and application of various terms of a business sale agreement dated 8 November 2016 (the Business Sale Agreement) pursuant to which the Seller sold the said business to the defendant – Mayneline Kitchens & Joinery Pty Ltd (the Buyer).

Issues

2. The relevant issues to be determined, as clarified in the course of argument before me, are:

1. whether, on the proper construction of cl 9.10 of the Business Sale Agreement, the Buyer is obliged to provide Mr Karananos and his nominated accountant with access to “the information listed in Annexure “A” to the amended summons”; and

2. whether, having regard to what has transpired since the nomination of an expert (Mr Andrew Ross) to determine a dispute between the parties as to the amount, if any payable by way of a Completion Adjustment under cl 9 of the Business Sale Agreement (as an adjustment to the purchase price), Mr Ross is the appointed “Expert” for the purposes of cl 9.8 of the Business Sale Agreement and, if so, whether the Buyer should now be compelled to execute an Expert Determination Agreement in the form of Annexure “B” to the amended summons, containing the terms on which Mr Ross will accept the appointment as Expert to determine the said dispute.

3. For the reasons that follow, I am of the view that the Buyer is not obliged pursuant to cl 9.10 of the Business Sale Agreement to provide Mr Karananos with the information he has requested (nor, for that matter, with access generally to the accounting records of the business); and that the Buyer should be compelled to execute the said Expert Determination Agreement. As both parties have had a partial success I am inclined to the view that each should bear its own costs and thus that there should be no order as to costs.

Background

4. The Business Sale Agreement was entered into on 8 November 2016. Pursuant to that agreement, the Buyer purchased not only the Seller’s cabinetry and joinery manufacturing business but also (from another entity, not joined as a party to these proceedings) all of the Business Intellectual Property (as defined) used in the said business. Mr Karananos, the sole shareholder and director of the Seller, was formerly involved in the management of the business and on completion of the sale entered into a consultancy agreement (the Consultancy Agreement) with the Buyer for the purpose, inter alia, of assisting with the transition and continuation of the business from the Seller to the Buyer (see [8] of the Commercial List Statement).

Relevant terms of the Business Sale Agreement

5. Completion of the purchase was to take place, in accordance with cl 7 of the Business Sale Agreement, at 4.30pm on the later of: the date 5 Business Days after all of the Conditions specified in cl 7.2 had been satisfied or waived in accordance with cl 2.4; and 18 November 2016 (cl 7.1).

6. The purchase price was to be payable in a number of components (see cl 5). The Initial Purchase Price payable on Completion for the Assets (which term included, among other things, the Business and the Business Intellectual Property) was $11 million, subject to adjustments to be made on determination of the Completion Adjustment under cl 9 (see cll 5.1-5.3).

7. There was also provision for the payment, in accordance with cl 10.1(b), of an amount of $2 million on account of the Purchase Price (in exchange for a Bank Guarantee to secure the obligations of the Seller and the IP Seller under the agreement, such Bank Guarantee to be provided by the Seller on 5 Business Days written notice). That amount is either to be set-off against the Deferred Payment Amount (as to which, see below) or repaid to the Buyer if no Deferred Payment Amount is payable (see cl 5.2(d)-(e)).

8. There was also provision for adjustment to the purchase price (cl 8), under which a Deferred Payment Amount was payable dependent on whether certain performance conditions were satisfied in respect of the Deferred Payment Period (cl 8.2). The Deferred Payment Period was defined as the period starting at the Effective Time (4pm on the Completion Date) and ending at midnight at the end of the Deferred Payment Date (30 June 2017) (cl 1.1). The Deferred Payment Date was later extended by agreement between the parties to 16 October 2017 (and has in effect been further extended by reason of undertakings given by the Buyer in the course of these proceedings on 29 September 2017).

9. Clause 8.3 (headed “Deferred Payment Period protections”) placed certain obligations on the Buyer during the Deferred Payment Period, including to require it to conduct the business in a normal, proper and efficient manner and in the ordinary course and not materially change the nature or scale of the business or the manner in which it and its affairs are conducted and to conduct it “for the purpose of developing and enhancing the Business and ensuring that maximum profitability of the Business is achieved, consistent with prudent financial and business management”.

10. Clause 9 (headed “Financial Statements”) provided for the preparation and delivery by the Buyer (no later than 30 Business Days after Completion) of a “Draft Pro Forma Completion Balance Sheet” (see cl 9.1) and then made provision for that to be subject to analysis and review by the Buyer Accountants who were to prepare a report in relation thereto (cl 9.2). Clauses 9.4 and 9.5 similarly provided for the preparation and delivery of a Draft Pro Forma Income Statement for the Deferred Payment Period, which was to be subject to audit by a firm of accountants appointed by the Buyer.

11. Clause 9.6 made provision for the Seller (within 20 Business Days after the date of receipt of the relevant Draft Financial Statement to give the Buyer either a notice agreeing with the said statement or a dispute notice stating that the Seller does not agree with the statement and specifying: each idem disputed in the Draft Financial Statement, the grounds on which it disputes each Disputed Item; and the proposed adjustment to each Disputed Item (subject to the proviso that such a notice could not be given unless the amount of the proposed adjustment exceeded $25,000 and the aggregate of all proposed adjustments exceeded $50,000).

12. The Business Sale Agreement then specified the procedure to be followed if a dispute notice was given, commencing with the negotiation of disputed items and, if any Disputed Item was not resolved within a stated time period then either party was able to invoke the expert determination procedure under cl 9.8.

13. Clause 9.8, of particular relevance to the present dispute, provided as follows:

9.8   Expert determination

Any expert determination of a Disputed Item must be conducted in accordance with the following provisions:

(a)   the expert must be a person (or firm of accountants):

(i)   with experience and academic qualifications in the field of accounting; and

(ii)    agreed between the parties or failing agreement between the parties within 10 Business Days after the referral to expert determination, a person (or firm of accountants) nominated by the Chief Executive Officer of the Australian International Disputes Centre.

(Expert);

(b)   the Expert must make the determination in accordance with the terms of this agreement;

(c)   the Expert will act as an independent expert and not as an arbitrator;

(d)   the Expert must decide the procedure to be followed;

(e)   the Expert must make the determination within the shortest possible time but, in any event, within 20 Business Days after the date of appointment;

(f)   the Buyer and the Seller must provide the Expert with any information and assistance reasonably required by the Expert to determine the Disputed Items referred to the Expert;

(g)   all correspondence between a party and the Expert must be in writing and copied to the other parties;

(h)   the Buyer and the Seller must keep all information disclosed during the expert determination confidential;

(i)   the Expert must issue a written determination containing reasons;

(j)   the determination of the Expert will be final and binding in the absence of manifest error; and

(k)   the costs of the Expert are payable by the Buyer and the Seller in any manner decided by the Expert, having regard to the merits of the dispute.

14. Clause 9.9 then provided for the adjustment of the relevant Draft Financial Statement to reflect the resolution of any Disputed Items under cl 9.7 or cl 9.8 and that the adjusted statement “will constitute the Pro Forma Completion Balance Sheet or Pro Forma Income Statement (as the case may be) for the purposes of this agreement”.

15. The Completion Adjustment (if any) was to be calculated by reference to the Pro Forma Completion Balance Sheet and the Deferred Payment Amount (if any) was to be calculated by reference to the EBITDA (earnings before interest, tax, depreciation and amortisation) of the business as disclosed by the Pro Forma Income Statement).

16. Clause 9.10, the subject of the first of the issues raised in these proceedings, provided as follows:

9.10 Access to Financial Statements

Notwithstanding any other provision of the agreement, Clint Lucky Karananos and his nominated accountant will be entitled to have reasonable access to management, draft and final accounts of the Buyer as required by the Seller during the Deferred Payment Period.

17. Neither the compendious term “management, draft and final accounts”, nor any of its component parts, was defined in the definition clause (cl 1.1).

Events since completion of the contract

18. Completion of the contract occurred on 30 January 2017. At that time, cll 5.2, 5.3 and 9 of the contract were invoked so that the Completion Adjustment would be applied to the Purchase Price.

19. In the period from completion to 29 April 2017, pursuant to the terms of the Consultancy Agreement referred to above, Mr Karananos was engaged by the Buyer as a consultant. In that capacity he, and through him the Seller, had access to the accounting records (to use a neutral term) of the Buyer.

20. On 13 March 2017, pursuant to cl 9.1 of the Business Sale Agreement, the Buyer served on the Seller a Draft Pro Forma Completion Balance Sheet and an accountant’s report in support of that draft, in which the Completion Adjustment was calculated as a negative amount (-$59,220.98).

21. The Seller did not agree with that calculation. On 10 April 2017, pursuant to cl 9.6 of the Business Sale Agreement, the Seller served its response to the Draft Pro Forma Completion Balance Sheet (the Dispute Notice), in which the Completion Adjustment was calculated as a positive amount (in the sum of $6,066,735.62).

22. On 29 April 2017, the consultancy of Mr Karananos was terminated (at which time he, and hence also the Seller, ceased to have access to the accounting records of the Buyer). (The Commercial List Statement asserts at [13] that Mr Karananos remains a consultant to the Buyer and the Consultancy Agreement remains on foot, but the request for access to documents and information is not predicated on an acceptance of that contention.)

23. On 3 May 2017, the Seller, through its solicitors, requested “access to information” pursuant to cl 9.10 of the Business Sale Agreement, including:

[a]   total sales and invoice figures;

[b]   the awarded sales for the next 8 months;

[c]   a copy of all invoices (progress claims) both submitted and approved for this period;

[d]   a copy of the financial accounts of the business;

[e]   all new and current project values and expected completion dates for the next 8 months;

[f]   current completion programs on all projects (spreadsheet) for the next 8 months;

[g]   current value of completion percentage status on each project (spreadsheet) for the next 8 months;

[g]   tracking of production (spreadsheet).

24. In response to that request, the Buyer provided what it said were the available monthly management accounts. The Buyer’s position was that the balance of the request for information went beyond the Seller’s entitlements under cl 9.10.

25. On 9 May 2017, the Buyer served on the Seller a reply to the Dispute Notice.

26. On 17 May 2017, the Seller issued a notice of default to the Buyer for, inter alia, the Buyer’s failure to produce the information requested on 3 May 2017. The Seller invoked the provisions relating to expert determination, seeking the appointment of an Expert to determine the dispute in relation to the Pro Forma Completion Balance Sheet (the Completion Balance Sheet Dispute).

27. Further requests were made by the Seller of the Buyer in relation to the business: on 25 May and again on 14 June 2017, the Seller sought a monthly breakdown of the summary accounts which had been provided by the Buyer; on 27 June and 3 July 2017, the Seller sought a response concerning the production of the information requested on 3 May 2017; and on 11 July 2017, the Seller formally demanded the production of the requested information.

28. On 25 July 2017, the Buyer provided to the Seller and Mr Karananos a copy of a profit and loss summary and balance sheet for the business for the period from January 2017 to June 2017, which it maintains constitute the “management accounts” to which the Seller was entitled to have access. (Similar accounts for the period from June 2017 to the expiry of the Deferred Payment Period were said also to be available.)

29. The Seller disputed that the provision of the profit and loss summary constituted compliance by the Buyer with its obligations under cl 9.10 to provide access to the management accounts (though it accepts that the summary may form part of the business management accounts).

Appointment of Mr Ross as Expert and the Expert Determination Agreement

30. Meanwhile, after the Seller invoked the expert determination clause, the parties were unable to reach agreement on the appointment of an expert and on 5 June 2017 the Seller (pursuant to cl 9.8(a)(ii) of the Business Sale Agreement) requested the Chief Executive Officer of the Australian Dispute Centre Ltd (formerly known as the Australian International Disputes Centre Ltd) (ADC) to nominate an expert. The parties duly paid their respective fees to the ADC for that purpose.

31. On or about 17 August 2017, the ADC “appointed” Mr Ross of KordaMentha as expert to determine the Completion Balance Sheet Dispute. There is no suggestion that Mr Ross does not have the qualifications to act as an expert as required by cl 9.8(a)(i). (Nor has there been any submission made to the effect that Mr Ross would not be a suitable expert to conduct the expert determination for any other reason.)

32. On 17 August 2017, Mr Ross forwarded to the parties a letter of engagement dated 17 August 2017, a document headed “General Terms and Conditions” and an Expert Determination Agreement.

33. The Buyer objected to certain of those terms. There followed an exchange of communications between the parties and Mr Ross, the upshot of which was that the Buyer still did not agree to sign the Expert Determination Agreement.

34. Relevantly, the Buyer’s objection to the Expert Determination Agreement, as at the time of the hearing, was to a term relating to representation by legal or other advisers at any conference conducted by the Expert (see cl 6.1 of the draft agreement set out below) and a term providing an indemnity and release in favour of the Expert (see cl 13 of the draft agreement; and cl 8 of the document headed “General Terms and Conditions”) (the disputed terms).

35. Clause 6.1 of the draft agreement was in the following terms:

Unless expressly agreed by the Expert, at any conference between the Expert and the parties conducted under this Agreement, neither party may be represented or accompanied by its legal and other advisers.

36. Clause 13 provided:

13.1   Except in the case of fraud:

(a)   the Expert shall not be liable to the parties or any of them upon any cause of action whatsoever for anything done or omitted to be done by the Expert;

(b)   the parties jointly and severally hereby release and indemnify and keep indemnified the Expert against all actions, suits, proceedings, disputes, differences, accounts, claims, demands, costs, expenses and damages of any kind whatsoever (hereafter “claims”), (including for, but not limited to defamation, bias or other misconduct, whether such cause of action or claims arise:

(i)   under or in connection with contract;

(ii)   in tort for negligence, negligent advice or otherwise;

(iii)   otherwise at law (including by statute to the extent it is possible so to release, exclude or indemnify) and in equity generally, including without limitation for restitution for unjust enrichment;

arising out of, or in connection with, the Expert Determination.

13.2   The parties’ joint and several releases and indemnities to the Expert under clause 13.1 include without limitation claims by third parties upon any of the bases set out above (or otherwise):

(a)   against the parties, or any of them; and

(b)   against the Expert arising out of, or in any connection with, the Expert Determination;

13.3    This document may be produced and relied upon as a complete defence to any such claim.

37. It seems safe to conclude from the comprehensive nature of the above clause that Mr Ross was not prepared to accept any potential liability in relation to the undertaking of the Expert Determination except in the case of fraud. Clause 8 of the KordaMentha standard terms provided for an indemnity in favour of KordaMentha (though not applying to any loss arising from any matter finally determined to have been caused by their fraud, dishonesty or gross negligence). It is not necessary here to set out that clause.

38. Mr Ross’ position in relation to cl 6.1, as stated in an email to the parties in the morning of 23 August 2017, was that:

[The solicitor for the Buyer] states that not allowing legal representation at any conference between the Experts and the parties “might” be a departure from the requirements of procedural fairness. Whether that is the case would depend on the circumstances. The clause as originally drafted is designed to leave that question for me to determine. The particular circumstances of each party would, of course, be a factor I would consider in making any decision in relation to attendance at any meeting. In my experience in conducting expert determinations, questions of procedural fairness require a balancing of both parties’ interests. That would not be achieved by the parties having complete control over who and how many representatives (legal or otherwise) attend meetings with me. …

39. In that email, Mr Ross indicated that it was his intention to direct that attendance at the initial meeting be limited to no more than two representatives of each party; that his preference was that at least one representative of each party would be a decision maker from within the party; but that he would leave it to the parties to determine who best they consider should attend; and that “[f]or clarity, I confirm that this direction permits either party including legal (internal or external) or other advisers amongst their two representatives”.

40. The Buyer did not agree to the disputed terms and at 3.40pm on 23 August 2017, Mr Ross advised the parties’ legal representatives that given the Buyer’s solicitors responses in relation to cl 13 of the Expert Determination Agreement and cl 8 of KordaMentha’s standard terms and conditions he would not be able to undertake the determination and that he was going to inform the ADC that he had been unable to reach a suitable agreement with the parties as to the terms of the determination and would therefore need to rescind his acceptance of the ADC’s appointment to the role of Expert in the matter.

41. In the course of that communication, Mr Ross indicated that the removal of cl 13 was the “more difficult” of the two issues. As to the drafting of the representation clause he said:

As I have already explained, the drafting of the representation clause provides me with the ability to appropriately balance the needs of both parties to be represented at any meetings. As is evident from the way in which I have proposed dealing with this issue in relation to the Initial Meeting, there is no sense in which it is my intention to leave either party in a position in which their views cannot be expressed, including, if necessary, by legal representatives. However, for the effective conduct of the Determination, I need to retain the ability to manage the conduct of any meetings which do occur to provide the procedural fairness to which [the solicitor for the Buyer] refers.

42. By email two minutes later, copied to the parties’ representatives, Mr Ross advised that:

… as I have been unable to negotiate appropriate terms for the conduct of the Expert Determination in this matter with both Parties, I hereby rescind my acceptance of the ADC’s appointment of me as the Expert in this matter.

43. On 30 August 2017, the ADC communicated with the parties, noting that ADC’s own Rules for Expert Determination contained similar (liability and indemnity) provisions, setting out those provisions.

44. On 14 September 2017, the Buyer advised the Seller and Mr Karananos that in light of Mr Ross’ decision to “rescind [his] acceptance of the ADC’s appointment of [him] as the Expert”, the Buyer considered Mr Ross’ nomination by the ADC to be spent and offered to cooperate in procuring a fresh nomination.

Commencement of proceedings

45. Meanwhile, on 17 August 2017, these proceedings were commenced; at that stage confined to the Seller’s complaint at the fact that the requested information had not been provided to it. The relief sought at that stage included an order that the Buyer forthwith provide Mr Karananos and his nominated accountant “access to the information listed in Annexure “A” to this Summons” (prayer 3) and an order that the Buyer provide them with “reasonable access to the information” listed in Annexure “A” “during and at the conclusion of the Deferred Payment Period” as defined in the Business Sale Agreement (prayer 4).

46. Annexure “A” to the summons is as follows:

The information that the plaintiff requires access to in respect of the defendant’s management accounts:

(a)   the total sales and invoice figures for the period from the date of completion of the Contract to the expiration of the Deferred Payment Period (the “DPP”);

(b)   a copy of all invoices (progress claims) both submitted and approved from the date of completion of the Contract to the expiration of the DPP;

(c)   a copy of the financial accounts of the business covering any part of the DPP;

(d)   all new and current project values and expected completion dates for the DPP;

(e)   current completion programs on all projects (spreadsheet) from the date of completion of the Contract to the expiration of the DPP;

(f)   current value of completion percentage status on each project (spreadsheet) from the date of completion of the Contract to the expiration of the DPP;

(g)   tracking of production (spreadsheet) from the date of completion of the Contract to the expiration of the DPP.

47. It therefore largely mirrored the request that had been made for information in May 2017.

48. In the amended summons filed on 19 September 2017, the relief sought was expanded to include declaratory relief and orders relating to Mr Ross’ status as the appointed Expert and to compel the execution of the expert determination agreement on the terms that Mr Ross had agreed (Annexure “B” to the amended summons).

49. Following commencement of the proceedings, at the request of the Seller that he confirm his position, Mr Ross confirmed (in a letter dated 5 September 2017 to the Seller’s solicitors) that:

1.   I remain prepared to be appointed as the expert under the Business Sale Agreement entered into between CLK Kitchen & Joiner [sic] Oty Ltd A.C.N 110 815 828, Mayneline Kitchen & Joinery Pty Ltd A.C.N 614 891 315 and Anor on 8 November 2016.

2.   It remains that my appointment would be conditional on the retention of Clauses 6.1 and 13 of the draft Expert Determination Agreement and Clause 8 of the terms and conditions attached to the draft Engagement Letter.

3.   I am prepared to be appointed by order of the Supreme Court of NSW or as a consequence of the nomination of the Australian Dispute Centre.

50. The Buyer’s position, as made clear in its solicitors’ letter dated 21 September 2017 was that, Mr Ross having “rescinded” his acceptance of his appointment as expert, Mr Ross was no longer the appointed expert and, as a result, if the expert determination were to proceed it would be necessary for a fresh appointment to be made (in the making of which the Buyer had offered to co-operate).

51. As to the request for access to the information specified in the amended summons the Buyer’s position is that, although the Deferred Payment Period has now ended (and there are no continuing rights under cl 9.10), if the Court were to conclude that the May request for information (or the service of the summons) constituted a valid request for the purposes of cl 9.10 of the Business Sale Agreement, the Buyer will provide access to the requested material.

52. I note at this stage that at the hearing before me the relief sought by the Seller in the amended summons in relation to the expert determination issues was not pressed in the form set out in the amended summons. Rather, what the Seller now seeks is a declaration that Mr Ross remains the “appointed” Expert and an order compelling the execution by the Buyer of Mr Ross’ expert determination agreement (T 30.2-4). Objection was raised by the Buyer to the change in the Seller’s case in this regard. However, the Buyer pointed to no prejudice arising from the late change to the terms or nature of the relief sought in this regard and I am of the view that the Seller should be permitted to re-cast its case, so to speak, in order to seek the particular relief now sought in relation to the expert determination issue.

First issue – the dispute as to the Seller’s claim for access to the information and documents sought in Annexure A to the amended summons (the Management Accounts Dispute)

Plaintiffs’ submissions

53. The plaintiffs’ contention is that the term “management accounts”, which is not defined in the Business Sale Agreement, means “accounting records”.

54. The plaintiffs contend that the purpose of cl 9.8 of the Business Sale Agreement was to provide them with access to the management accounts “for the purpose of observing and monitoring the performance of the business during the Deferred Payment Period”. They contend that the information and documents to which access is sought: are part of or fall within the description of the management accounts for the business; and are reasonable and necessary for the purpose of observing and monitoring the performance of the business.

55. Emphasis is placed by the plaintiffs on the need, when construing the Business Sale Agreement, to consider not only the text of the relevant document, but also the surrounding circumstances known to the contracting parties and the purpose and object of the transaction (though not the parties’ subjective beliefs) (citing Pacific Carriers Ltdv BNP Paribas (2004) 218 CLR 451; [2004] HCA 35 (at [22]) per Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ; Toll(FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165; [2004] HCA 52 at [40]; International Air Transport Association v Ansett Australia Holdings Ltd (2008) 243 CLR 151; [2008] HCA 3 (at [8]) per Gleeson CJ).

56. In that regard, the plaintiffs submit that the purpose and object of cl 9.10 are to be read in the context of cll 5.1, 5.2, 5.3, 8.2, 8.3 and 8.4 of the Business Sale Agreement.

57. By reason of the fact that the period of access is limited to the “Deferred Payment Period”, the plaintiffs argue that it logically follows that the purpose of access to the “management, draft and final accounts” is to enable them to monitor the performance of the business during that period and specifically whether the Buyer is complying with its obligations under cl 8.3 (the clause headed “Deferred Payment Period Protections”). They emphasise that the obligations imposed on the Buyer by cl 8.3 are strict and argue that, if they were not provided with the requisite access to the said accounts, then they would not be able to determine or be informed as to whether the Buyer has complied with those strict obligations.

58. The plaintiffs further point to the specificity required (by cl 9.5) of a notice disputing line items in a Draft Pro Forma Income Statement for the Deferred Payment Period (relevant to the determination as to whether a Deferred Payment is made under cl 8.2) and say that the capacity to assess line items in a Pro Forma Income Statement and to form a view as to whether the Seller agrees or disagrees (and the grounds on which there is any disagreement) necessarily depends upon having access to the underlying accounting documents of the business. Thus the plaintiffs argue that another evident purpose of cl 9.10 is to ensure that the Seller has, during the Deferred Payment Period, access to the documents required to enable it to form a view about the accuracy or otherwise of the pro forma income statement within a confined period. (Pausing here, the present dispute is about the Draft Pro Forma Completion Balance Sheet, in respect of which the Seller has in fact served a response; not about any Draft Pro Forma Income Statement which would be of relevance to the calculation of any Deferred Payment Amount.)

59. What the plaintiffs are seeking (as made clear in their submissions) is “access to the physical accounts, records and information” of the business. They argue that it is for the Seller to determine, pursuant to cl 9.10 what access is required (not the Buyer), saying that Mr Karananos (as the former principal of the business) is best placed to determine what information and management accounts access is required to determine or be informed as to whether the Buyer has complied with the obligations under cl 8.3 and for assessment for the purposes of cl 9.6. The plaintiffs argue that this is reflected in the fact that cl 9.10 entitles Mr Karananos personally to such access (on behalf of the Seller).

60. In essence, therefore, the plaintiffs contend, first, that cl 9.10 was designed to give the Seller, through Mr Karananos and an accountant, access to the accounting material which would enable the Seller meaningfully to invoke cl 9.6 (arguing that access to profit and loss accounts or balance sheets, draft or otherwise, could not enable the Seller ever to be in a position to identify with specificity the basis and grounds of dispute about the final Pro Forma Income Statement and the proposed adjustment which should be made; rather, one would need to have the underlying accounting records); and, second, that the meaning of cl 9.10 is informed by cl 8.3 (in that access to the accounting records would be necessary for the Seller to ascertain whether there has been a breach of cl 8.3.

61. The plaintiffs also rely upon cl 8.4 of the Business Sale Agreement as informing the meaning of cl 9.10. That clause, in substance requires the Buyer, if it wishes to take any steps in relation to the business which are inconsistent with cl 8.3, to negotiate in good faith matters such as an appropriate adjustment of the calculation of annualised revenue and EBITDA. The plaintiffs ask, rhetorically, “how could the seller be informed so as to carry out a meaningful negotiation in good faith and make adjustments to those figures with no access to any accounting material which would cast any light upon the impact of changes under cl 8.3 to the revenue EBITDA et cetera”. It is submitted that absence of information renders the Seller’s rights meaningfully to negotiate nugatory.

62. The plaintiffs thus argue that the refusal of the Buyer to provide access to “the management accounts including the documents and information sought in Schedule A to the Amended Summons” amounts to a breach of cl 9.10.

63. The plaintiffs also point to the genesis of cl 9.10, to which Mr Karananos deposed in his affidavit. In particular, and in the context where it was then contemplated that Mr Karananos would be appointed as a director of the Buyer, Mr Karananos said to the director of the Buyer, Ms Shipley, that being a director would allow him to satisfy himself of the performance of the business and provide him with comfort that he would have access to the information he needed (which he used presently) to ensure that the Buyer “performs to protect the deferred payment”; Ms Shipley confirmed that as a director he would have access to the accounts of the business; and Mr Karananos asked what would happen if he were removed or resigned as a director (see [14]) whereupon Ms Shipley said that she would ask the lawyers to insert an access clause into the sale contract to ensure his access to records of the company and the clause so inserted into the Business Sale Agreement was cl 9.10. (Mr Karananos was not ultimately appointed as a director; as already noted he became a consultant. Moreover, the clause in its terms gives access to “accounts”; it was for Mr Karananos to specify what particular accounts he required at the time the agreement was negotiated.)

Buyer’s submissions

64. The Buyer argues that the “information” requested by the plaintiffs does not comprise “management accounts” within the meaning of cl 9.10 of the Business Sale Agreement.

65. It points to Schedule 8 to the Business Sale Agreement (which contains various warranties), cl 4.3 of which refers to management accounts, and argues that the term “management ... accounts” in cl 9.10 must be read as meaning documents of the kind that the parties themselves described as management accounts in Schedule 8 to the Business Sale Agreement.

66. The Buyer also points to the description in Attachment 3 to the Business Sale Agreement (the index of due diligence materials) of certain documents as “management accounts”, a copy of one of which is attached to the Buyer’s submissions. (The plaintiffs argue that the description of documents in the due diligence materials says nothing as to the parties’ common intention or understanding of the term and may simply reflect the terminology used by whoever organised the due diligence materials. I agree.)

67. The Buyer contends that the construction advanced by the plaintiffs as to the meaning of “management accounts” (that it means accounting records of the business) is not available on the contractual language chosen by the parties. It points to the distinction drawn in the Business Sale Agreement between “Records” on the one hand and “financial statements” and “accounts” on the other.

68. “Records” is defined as including:

(a)   books of account, trading and financial records, employee records, tax returns and related correspondence,

(b)   customer lists, supplier lists, price list, pricing models and sales and marketing materials,

(c)   title deeds and other documents of title, and

(d)   originals and copies of all Contracts and Authorisations, other than Excluded Records 31

69. The Buyer maintains that the terms “financial statements” and “accounts”, though not defined, are of much narrower import. The Buyer argues that those terms are used in the Business Sale Agreement in a way which indicates that the parties considered that those words would not encompass “Records” generally but would instead refer to a small class of documents ordinarily prepared by bookkeepers or accountants (principally, balance sheets and profit and loss statements). In this regard, the Buyer points to cl 1.1 of the Business Sale Agreement in which the term “Last Accounts” is defined to mean:

the financial statements of the Seller for the financial year ended on [30 June 2016] comprising

(a)   a balance sheet or statement of financial position,

(b)   an income statement or statement of comprehensive income,

(c)   a statement of changes in equity, and

(d)   the notes to those financial statements

70. The Buyer notes that Attachment 1 to the Business Sale Agreement (which attaches the “Last Accounts”) contains a balance sheet and profit and loss statement but does not include “underlying” material of the kind which the plaintiffs now contend form part of an “account’.

70. The Buyer maintains that it is not a reasonably arguable construction of cl 9.10 to read it as conferring on Mr Karananos a general right to access to “Records” during the Deferred Payment Period. It points out that the parties could easily could have conferred on Mr Karananos a right to access the Buyer’s “Records” during the Deferred Payment Period but did not do so, cl  9.10 being limited to the “accounts” (management, final and draft). It argues that this is consistent with the role that cl 9.10 plays in the scheme of cl 9 of the Business Sale Agreement. It argues that access to the management, draft and final income statements (profit and loss statements) and balance sheets prepared by the Buyer during the Deferred Payment Period would enable Mr Karananos to assess (from time to time during the Deferred Payment Period) what the Draft Pro Forma Income Statement required by cl 9 4 of the Business Sale Agreement was likely to show (and thus to note whether a Deferred Payment Amount was likely to be payable).

71. The Buyer argues that the plaintiffs’ submission (that cl 9.10 goes further by enabling Mr Karananos to “monitor” whether the Buyer is complying with its obligations under cl 8 3) misconceives the related but distinct roles played by cll 8.2-8.4 of the Business Sale Agreement on the one hand and cl 9 on the other.

72. It argues that cl 8.2 (read with cl 5.4(d)) confers on the Seller the chance to receive a Deferred Payment Amount depending on the financial performance of the sold Business; and cll 8.3 and 8.4 seek to protect that chance by prohibiting the Buyer from doing certain things that could adversely impact on the Business’s financial performance (such as changing the nature and scale of the Business). The Buyer says that, in contrast, cl 9 of the Business Sale Agreement is mechanical in nature. It says that its effect is to require that the Deferred Payment Amount (if any) be calculated “not by reference to some kind of first principles determination of the theoretical profitability of the Business during the Deferred Payment Period but rather to the result of a calculation performed by reference to an income statement (profit & loss statement) prepared in accordance with identified accounting principles and policies”.

73. The Buyer argues that, in an expert determination concerning Disputed items of a Draft Pro Forma Income Statement, it would not be open to the plaintiffs to argue that the Business would have been sufficiently profitable to enliven a right to a Deferred Payment Amount had there been full compliance with cl  8.3. It is submitted that consideration of such an argument would be beyond the jurisdiction of an accountant engaged to conduct an expert determination under cl 9, which it says is concerned only with the accounting exercise of determining whether the Seller is entitled to a Deferred Payment Amount in the circumstances which have actually occurred.

74. The Buyer also points to the agreement by the parties to provide the Expert with “any information and assistance reasonably required by the Expert to determine the Disputed Items referred to the Expert”. It says that, in the event that the plaintiffs dispute the Draft Pro Forma Income Statement and that dispute proceeds to expert determination, the Expert will be entitled to call for any information in the possession of the Buyer that the Expert reasonably requires, including any documents referred to in the May request that the Expert reasonably requires.

75. Complaint is also made that the prayers for relief at 1-4 of the amended summons are not drafted with sufficient precision to support a grant of relief, noting that an injunction (particularly a mandatory injunction) must be crafted with sufficient precision so as to ensure that the person the person the subject of the injunction knows exactly what he, she or it is required to do or not do (see Redland Bricks Ltd v Morris [1970] AC 652 at 666 (Lord Upjohn)).

Determination

77. The parties were not in dispute as to the applicable principles when construing a commercial contract (see Equuscorp Pty Limited v Glengallan Investments Pty Limited (2004) 218 CLR 471; [2004] HCA 55 (at [34]) per Gleeson CJ, McHugh, Kirby, Hayne and Callinan JJ; Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95; [2002] HCA 8 (at [25]) per Gaudron, McHugh, Hayne and Callinan JJ; Pacific Carriers Ltd; Toll (at [40]); see also Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37).

78. Those principles were recently considered by the Court of Appeal in Cherry v Steele-Park [2017] NSWCA 295. It was observed that “[t]he starting point and the ending point of the construction of a written commercial contract is the language chosen by the parties to record their bargain” (at [72]) and that the “ultimate question” is whether the written language, “when considered in light of legitimately relevant surrounding circumstances, permits a constructional choice” between “different legal meanings” (at [75]). Whether, in truth, there is such a constructional choice “cannot be determined without first at least considering evidence of surrounding circumstances” (at [76], Leeming JA there noting that three intermediate appellate decisions have concluded that Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7 at [35] contained an endorsement of the view that it is not necessary first to identify “ambiguity” (properly understood – see Cherry v Steele-Park at [68]-[71]; [76]-[86]; [123]-[124]) before regard may be had to evidence of surrounding circumstances).

79. In circumstances where “management … accounts” is not defined in the Business Sale Agreement, the meaning of that term must be determined objectively by reference to the whole of the document, the purpose and object of the agreement, and relevant surrounding circumstances.

80. The most reliable pointer, in my opinion, to what, objectively ascertained, the parties meant by the reference to management accounts in cl 9.10 is to be found in the warranties given in relation to management accounts in cl 4.3 of Schedule 8. That does not support the contention of the plaintiffs that management accounts has the extended meaning of “accounting records” of the business or of the Buyer.

81. Reference to the commercial purpose of access to the management accounts does not in my opinion assist the Buyer. The plaintiffs’ complaint is that access to the material that has been provided (monthly profit and loss summaries and balance sheets) does not permit them to ascertain the matters necessary to determine if there is a dispute as to the Draft Financial Statement(s) and, if so, to identify with specificity the grounds of that dispute (and the amount of the adjustment for which they contend). However, the templates for the draft pro forma documents in question make clear that what is there envisaged is an accounting exercise, not an enquiry into the running of the business itself during the Deferred Payment Period. If the latter is to be the subject of complaint, then that may well fall to be determined otherwise than by an accounting expert (and in such circumstances there would be avenues, such as an application for preliminary discovery, by which the plaintiffs would be able to ascertain whether there is such a claim without the need for words to be read into cl 9 for that purpose).

82. The weakness of the plaintiffs’ position in this regard is highlighted by the fact that what was requested (with minor exception) in the May letter was “information” about various matters, not an identification of particular documents to which access was sought. The plaintiffs have approached the issue as one of an entitlement to interrogate the Buyer about various matters in relation to the conduct of the business; not as a request for management accounts as such. The response when this was put to Senior Counsel in the course of argument was that the matter should be approached on the basis that the request was to have access to the accounting records that would disclose the information that had been requested, i.e., “You give us these figures, what we ask for was what the clause contemplated, access, access to the records to enable us to have access to those figures contained within the records” (T 11); it being said that access to the computerised records to which Mr Karananos had access would enable access to the records containing those particular matters.

83. Reliance was placed on what was said in Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99; [1973] HCA 36 and Westpac Banking Corp v Tanzone Pty Ltd (2000) 9 BPR 17,521; [2000] NSWCA 25 for the proposition that the Court will give effect to the evident purpose of the agreement and, if a different construction of the language gives an unreasonable or uncommercial result, the Court will construe the provision to give it the result which the evident purpose suggests.

84. However, the fact that the Seller’s construction may produce an outcome that would facilitate more meaningful negotiation of steps required under the Business Sale Agreement or would provide more information from which the Seller could satisfy itself as to the manner in which the Buyer has conducted the business, does not in my opinion warrant re-writing cl 9.10 by reading into it an expanded notion of accounting records, when the clause is on its face clearly intended to be limited to particular accounts “management, final and draft”. As was said in Newey v Westpac Banking Corporation [2014] NSWCA 319, giving commercial agreements a “commercial and business-like interpretation” is “constrained by the language used by the parties” (at [91] (Gleeson JA, with whom Basten and Meagher JJA agreed)). I am not persuaded that the construction of “management accounts” for which the Buyer contends is one that gives an unreasonable or uncommercial result; nor is it one that makes the agreement unworkable or inconsistent with the evident purpose underlying the provision of the “management accounts” (that being, from an accounting perspective, to form a view as to the matters relevant to the determination of the Completion Adjustment Amount and Deferred Payment Amount, if any).

85. In my opinion it would be an impermissible approach to the construction of cl 9.10 of the Business Sale Agreement to read into it the words “accounting records of the business”. Such an approach is not warranted by the principles applicable to the construction of commercial contracts to which I was taken in the course of argument.

Second issue – Expert determination procedure issues

Submissions

86. In their written submissions the plaintiffs contended that the Buyer’s refusal to accept the indemnity and release clause(s) proffered by Mr Ross had frustrated the appointment of the Expert under cl 9.8 of the Business Sale Agreement and that it will frustrate any future appointment. They argued that the Buyer’s position had made cl 9.8 unworkable. Hence the relief sought in the amended summons as filed: namely, orders and declarations that Mr Ross be appointed as the Expert for the purpose of cl 9.8 of the Business Sale Agreement in respect of the dispute over the Draft Financial Statement (prayer 6) and that the parties be required to accept the terms of his retainer so that the expert determination can proceed (prayer 7); or, in the alternative, orders that the parties accept or are bound to accept the standard terms of the ADC for the appointment of an Expert for the purpose of the determination required under cl 9.8 of the Business Sale Agreement (prayer 8).

87. The Buyer’s response to that was, in effect, that this Court has no power to appoint Mr Ross as an expert and that, even if it did, the parties were not bound by cl 9.8 to accept a determination by a Court appointed expert and hence such relief would lack utility. The Buyer denies that the agreement in cl 9.8 has been frustrated, professing its willingness to co-operate in the process for the nomination by ADC (and subsequent appointment) of a fresh expert (though seemingly, in its written submissions at least, seeking to reserve to itself the ability to object yet again to whatever terms might be proposed by that further expert).

88. In oral submissions, the plaintiffs did not seek to press the relief that had been sought in the amended summons in this regard and instead pressed for a declaration that Mr Ross is the appointed Expert (for the purposes of cl 9.8 of the Business Sale Agreement) and for a finding that, the terms proffered by Mr Ross being reasonable, there is an implied obligation on the part of the Buyer to agree to those terms, with an order that the Buyer execute the Expert Determination Agreement on those terms.

89. Both parties accept that in circumstances where the Business Sale Agreement is silent as to the terms of engagement of the Expert, there will be implied into the Business Sale Agreement a term to the effect that the appointment of the Expert will be on terms which are reasonable (referring to the decision of the Victorian Court of Appeal in 1144 Nepean Highway Pty Ltd v Abnote Australasia Pty Ltd (2009) 26 VR 551; [2009] VSCA 308 at [29]). It also appears to be accepted that, if the terms on which the Expert seeks to be engaged are reasonable, then the parties will be taken to have accepted those terms as part of their obligation to do all that is necessary to be done on its part to secure the appointment of the Expert, in circumstances where the parties have agreed that an Expert is to be appointed but the appointment cannot occur until both parties accept the Expert’s terms (see 1144 Nepean Highway at [36]-[38]; Belvino Investments No. 2 Pty Limited v Australian Vintage Ltd [2014] NSWSC 978 at [58]-[70]).

90. The debate before me turned on the consequence of the fact that Mr Ross had “rescind[ed] his acceptance” of the appointment and the reasonableness of the terms he had proposed.

91. As to the first, the Buyer says that in these circumstances Mr Ross is no longer properly regarded as the Expert responsible for conducting the Completion Balance Sheet Dispute Expert Determination because, properly construed, cl 9.8(a) does not regard as an “Expert” a person who has declined to accept a nomination as Expert or who has accepted a nomination but subsequently withdrawn that acceptance.

92. The Buyer argues that such a construction is necessary and appropriate in order to avoid the expert determination procedure in cl 9.8 reaching a “dead- end”. The Buyer argues that it is not to be supposed that the parties intended that they would lose the right to resolve their disputes by expert determination if, for example, a person accepted a nomination as Expert in good faith but subsequently found (for reasons of illness, disability or otherwise) that he or she could not discharge his or her duties as Expert.

93. In response, the Seller argues that the use of the verb “rescind” by the Expert has no legal consequence, as there is nothing to be “rescinded”. It notes that use of the word rescind has no role to play where used not in the legal context of rescission of a contract and emphasises that Mr Ross has made plain from 5 September 2017 that if the terms of his agreement are accepted he will act as an expert. So the Seller says one has an appointment and a person prepared to act provided that the terms are accepted.

94. I agree. Although the ADC speaks of his appointment as an expert, the proper characterisation is that the ADC has nominated Mr Ross and the parties have agreed to accept that nomination.

95. As to the second, the Buyer argues that Mr Ross’ proposed clause in relation to legal representation (cl 6.1) is unreasonable insofar as it would require the Buyer to give up, in futuro, any ability to claim that the ultimate expert determination is vitiated by a lack of procedural fairness if its legal representative were to be denied to attend or participate in a relevant meeting with the expert.

96. The Buyer did not seek to make any submissions as to the release/indemnity clause (though having objected to it in the correspondence with the expert), not surprisingly, faced with the difficulty that just such a clause is put forward in the ADC’s own standard terms (and was considered reasonable by White J in Belvino – see below).

97. The plaintiffs submit that Mr Ross’ clause is not unreasonable and emphasise that under cl 9.8 the parties have agreed that the Expert “must” determine the procedure to be adopted for the expert determination. The Buyer argues that denial of an ability to rely upon an argument of the kind foreshadowed above goes beyond a matter of procedure.

98. Finally, as to discretion, the Buyer submits that if the plaintiffs wish to pursue their right to have the Completion Balance Sheet Dispute resolved by expert determination, then it is available to them now to approach the CEO of the ADC and request that she nominate a person to conduct that expert determination; and emphasises that the Buyer has offered its cooperation in procuring such a nomination.

99. The Buyer submits that the question of frustration of any future “appointment” of an Expert to conduct the Completion Balance Sheet Expert Determination does not arise since the Buyer accepts that it would (subject to due exceptions) be bound to accept any reasonable terms proffered by any properly nominated Expert. It accepts that, if it be necessary, that obligation could be enforced by mandatory injunction requiring the execution of an expert determination agreement proffered by an Expert (referring to Watpac Construction v Taylor Thompson Whitting [2015] NSWSC 780 at [71] per Ball J).

100. The Buyer says:

For example, if a freshly nominated Expert was to proffer terms of engagement which (unlike those proffered by Mr Ross) permitted the parties to be legally represented in the Completion Balance Sheet ED, it may be that those terms can and will be executed by both parties without further disputation. Alternatively, if there is some dispute regarding the reasonableness of any (as yet unspecified) terms by the (as yet unidentified) Expert, that could be resolved expeditiously by an application of the kind considered in Watpac v TTW at [71] per Ball J. [my emphasis]

101. This is said to provide a strong discretionary reason for refusing relief even if it were otherwise available. The Buyer’s stated position does, however, give rise to the concern expressed by the plaintiffs that a request for a further nomination by the ADC (assuming it will make a further nomination having regard to its correspondence) will simply lead to a “merry-go-round” of nomination followed by objection to the terms proffered by the expert and so on, making the expert determination process unworkable. Such a “merry-go-round” is not consistent with the mandate provided under the Civil Procedure Act 2005 (NSW) (ss 56-60) for the just, quick and cheap resolution of the real issues in dispute between the parties.

Determination

102. It is not necessary to embark on the debate as to the power of the Court to appoint an expert (in the circumstances of this case) or the utility of such relief having regard to the provisions of the Business Sale Agreement, as such relief is no longer sought by the plaintiffs.

103. Rather, as adverted to above, the argument turned on the status of Mr Ross’ appointment as Expert having regard to his “rescission” of his acceptance of the appointment (whatever that might mean) and the reasonableness of the terms on which he says he will accept the appointment.

104. I have concluded that the letter from Mr Ross advising that he was “rescinding” his acceptance of the appointment as expert should be read as no more than his advice to the parties that (in light of the refusal of the Buyer to accept his terms of engagement) he was no longer prepared to accept the appointment as expert. The ADC’s nomination of him as expert did not of itself bring into existence any contract between Mr Ross and the parties that would have been capable of rescission in any technical sense. Mr Ross’ advice to the effect that he was no longer prepared to accept an appointment as expert similarly had no relevant legal consequence. It simply meant that, if Mr Ross remained of that position, then the nomination procedure had not worked and it would be necessary for a fresh nomination to be made. The “dead end” envisaged by the Buyer if the plaintiffs’ arguments as to the status of Mr Ross as “Expert” are accepted does not in my opinion arise.

102. The real question here is as to the effect of Mr Ross’ subsequent indication that he would be prepared to accept the appointment if the parties agree to his standard terms and execute the Expert Determination Agreement he has put forward.

103. In my opinion, the fact that ADC nominated (or in its terms “appointed”) Mr Ross as the expert to determine the relevant dispute is not changed in any way by the fact that Mr Ross was, for a time, not prepared to accept that appointment. That position has now been clarified with Mr Ross. He is still the person who the ADC nominated as the expert. The nomination is not “spent”, as the Buyer has asserted, in circumstances where Mr Ross has now conveyed his preparedness to accept the appointment.

104. The question then is as to whether the terms of the Expert Determination Agreement that Mr Ross has put forward are reasonable (such as to give rise to the conclusion that the Buyer should be compelled to execute the Expert Determination Agreement, having regard to its implied obligation to do what is necessary to make the agreement in relation to the expert determination of the dispute workable).

105. In Belvino, White J, as his Honour then was, found (at [59]) that there was a term implied by law, or as a matter of construction, that required the parties in that case to accept the terms of the expert’s release and indemnity, citing Mackay v Dick (1881) 6 App Cas 251 at 263; Butt v M’Donald (1896) 7QLJ 68 at 70-71; Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596 at 607 and 1144 Nepean Highway at [29]. His Honour considered that the clause in question was reasonable, having regard to the terms of the release and indemnity there proposed and comparing it to various standard or pro forma agreements for the appointment of experts put forward by organisations such as the New South Wales Bar Association, the Law Society of New South Wales, the Queensland Law Society, the Institute of Arbitrators and Mediators, the Australian Commercial Dispute Centre, the Centre for Effective Dispute Resolution, and the Academy of Experts (London) (see [66]).

106. In the present case, there was evidence before me of the current standard terms put forward by the ADC for the appointment of experts (Exhibit 1). Those terms, relevantly, include an indemnity and release clause (cl 8) in very similar terms to that proposed by Mr Ross (though a very different clause relating to the issue of legal representation at meetings with the expert; cl 6).

107. I am of the opinion that the indemnity and release clause (cl 13) and related clause (cl 12) of Mr Ross’ standard expert determination agreement are reasonable, having regard to the standard terms put forward by the ADC and noting that such clauses are not unusual (as is apparent from the decision in Belvino). As noted above, Counsel for the Buyer did not seek to persuade me otherwise.

108. As to the clause in relation to legal representation (cl 6.1), I am of the view that it is not unreasonable in circumstances where the parties have expressly agreed that the expert “must” determine the procedure to be followed. The proposition put forward by the Buyer was in essence that for the Buyer to be required as a condition of the appointment of an expert in futuro to give up any right to make an argument that there was a denial of procedural fairness by reason of the exclusion of a legal adviser from a particular meeting is unreasonable. Counsel for the Buyer accepted that there may be a particular meeting that the expert may wish to convene in respect of which he or she could properly exclude legal representatives in such a way as would not lead to the invalidity of the expert determination but emphasised that what the Buyer was being required to give up was the ability to argue to the contrary if legal representatives were to be excluded.

109. The Buyer accepts that there is no general rule that no matter what expert determination process is agreed one has an absolute inalienable right to legal representation; and accepts that there will be at least some meetings that an expert could conduct in which he or she could exclude legal representatives without vitiating an ultimate determination. However, it says that it is not reasonable as a condition for accepting a nomination as expert for the expert to require a party in futuro to give up any “right” the party might have in a broad sense in that context, to be represented or accompanied by its legal or other advisors. The Buyer accepts that the parties have agreed that the expert has a general power to conduct the procedure in the way she or he wishes to do but says cl 6.1 goes beyond this by saying in advance and before the expert determination process that the expert will decide if legal representatives are to be excluded (see T 28-29).

110. Complaint was also made that the expert might seek to exclude the Buyer’s company secretary (who is also the company’s general counsel) under cl 6.1 (though this was not sought to be clarified with Mr Ross at the time objection was being raised to the clause, as I understand it).

111. I accept that the ADC has put forward a different procedure in relation to legal representation in its standard terms but I do not accept that this means that Mr Ross’ suggested procedure is not also a reasonable one. The plaintiffs emphasise that the expert is being required to determine a dispute as to line items in a Draft Pro Forma Completion Balance Sheet (an accounting exercise). They also point to the correspondence from Mr Ross (to which I have referred above) in which he expressly contemplated that there would be an initial meeting at which the parties might choose to be accompanied or represented by a lawyer. (Pausing there, however, that correspondence rather suggests that Mr Ross would regard an internal legal adviser as open to be excluded by him from meetings. That said, the indication from the Seller was to the effect that it would have no difficulty with the proposition that the Buyer’s general counsel and company secretary be permitted to attend any meeting with the expert.)

112. Subject to it being clear that the Buyer’s general counsel cannot be excluded from attending meetings in his capacity as company secretary, I am not persuaded that the impugned term of the proposed expert determination agreement is not reasonable in the circumstances of this case.

113. As to the discretionary argument raised by the Buyer, this must be considered in light of the fact that agreement ultimately could not be reached as to an appropriate regime to take forward the appointment of a fresh expert. The Buyer, when pressed as to what its position would be in relation to entry into a standard term agreement of the kind put forward by the ADC, was prepared to confirm that to the extent that it was necessary it would cooperate in a fresh appointment and treat that fresh nomination as the nomination for the purposes of cl 9.8(a)(ii) but appeared to reserve the question as to the reasonableness of any terms such an expert might put forward (though accepting “that to the extent that that expert proffers terms that [are] reasonable, in the sense that they’ve been understood in the authorities”, it would be bound to sign them; and that if it did not then the relief granted in the Watpac case could be granted).

114. Counsel for the Buyer ultimately proffered an undertaking to the Court to the effect that it would cooperate in the procuring of a fresh nomination to give effect to 9.8(a)(ii) and to confirm that should that occur the person so nominated is to be regarded for all purposes as the person nominated for the purposes of cl 9.8(a)(ii); and to undertake, if the person so nominated as expert requested the execution of an expert agreement in the standard form of the ADC, then subject to some clauses said to be inconsistent with the terms of the Business Sale Agreement, the Buyer would execute that document. The plaintiffs, however, raised as issues the provision for fees and as to what the position would be if the fresh expert nominated his or her firm’s standard terms and conditions. The plaintiffs were not ultimately prepared to accede to the matter being dealt with by acceptance of the proffered undertaking.

115. Thus, there seems to me to be some force to the concern expressed by the plaintiffs that invoking the nomination procedure afresh would be embarking on a course that might be described as getting back on the merry-go-round (though criticism may be made against both parties in that regard).

116. The Buyer contended that the fact situation in the present case is different from that in the 1144 Nepean Highway and Belvino decisions because here it was not the case that, absent agreement to the terms put forward by Mr Ross, there could be no expert determination. However, I consider that the reasoning in those cases as to the implied obligation to co-operate in the expert determination process is equally applicable in the present case.

117. I do not see the need for a declaration as to the status of Mr Ross’ “nomination” or “appointment” by the ADC. My conclusion on that issue has been set out in these reasons and there is no utility in my opinion in the making of a formal declaration to that effect.

118. I have, however, concluded that an order should be made compelling the Buyer, in compliance with its implied obligation to do what is necessary to make the expert determination procedure workable, to execute the Expert Determination Agreement which is Annexure “B” to the amended summons, subject to the expert’s agreement that, for the purposes of cl 6.1, the Buyer’s General Counsel and Company Secretary, Mr Lonsdale, is not to be treated as a “legal adviser” who could be excluded from a meeting convened by the expert (if Mr Lonsdale seeks to attend that meeting in his capacity as company secretary representing the company).

Costs

122. The Buyer has succeeded on the first issue raised for determination in this Court; the Seller on the latter. In those circumstances I would be inclined to the view that each party should pay its own costs of the proceedings. If either party seeks to argue otherwise, I will make a direction for brief written submissions to be provided and will determine that issue on the papers.

Orders

123. The orders that I make are as follows:

1. Order that, subject to agreement by the expert nominated by the Australian Disputes Centre Ltd (Mr Ross) that, for the purposes of cl 6.1, the Buyer’s General Counsel and Company Secretary, Mr Lonsdale, is not to be treated as a “legal adviser” who could be excluded from a meeting convened by the expert (if Mr Lonsdale seeks to attend that meeting in his capacity as company secretary representing the company), the defendant execute the Expert Determination Agreement a copy of which is Annexure “B” to the amended summons.

2. Otherwise dismiss the plaintiffs’ amended summons.

3. Order each party to pay its own costs of the proceedings.

4. Direct that if either party seeks a variation of order 3, that party serve brief written submissions within 3 days, with the other party to serve brief submissions within 3 days in response, with a view to the issue of costs being determined on the papers.

5. Liberty to apply on 3 days’ notice if Mr Ross does not agree to the carve-out from cl 6.1 contemplated in order 1 above.

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Amendments

15 December 2017 - Typographical amendments to [78], [99], [104]

14 December 2017 - typographical error

Decision last updated: 15 December 2017