Commissioner of Taxation v Sara Lee Household & Body Care

[1999] HCATrans 444

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Melbourne  No M57 of 1999

B e t w e e n -

THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

Appellant

and

SARA LEE HOUSEHOLD & BODY CARE (AUSTRALIA) PTY LTD

Respondent

GLEESON CJ
GAUDRON J
McHUGH J
HAYNE J
CALLINAN J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON THURSDAY, 9 DECEMBER 1999, AT 10.19 AM

Copyright in the High Court of Australia

MR R.A. BRETT, QC:   If it please the Court, I appear with MR S.J. SHARPLEY, for the appellant.  (instructed by the Australian Government Solicitor)

MR B.J. SHAW, QC:   If the Court pleases, I appear with my learned friend, MR J.W. DE WIJN, QC, for the respondent.  (instructed by Arthur Robinson & Hedderwicks)

GLEESON CJ:   Mr Shaw.

MR SHAW:   If the Court pleases we have a motion.

GLEESON CJ:   Is that opposed, Mr Brett.

MR BRETT:   No, it is not, your Honour. 

GLEESON CJ:   Yes, we will make the order sought in those terms. 

MR SHAW:   If the Court pleases.

GLEESON CJ:   Yes, Mr Brett.

MR BRETT:   If the Court pleases.  Your Honours should have our submissions and I would like to address those.  There are, as your Honours will be aware, basically three issues in this case.  One is whether the variation of a principal contract brings into existence a new principal contract made at the time of the variation.  The second is whether the disposal by the respondent in this case of its assets to the company, Nicholas Products, occurred under the principal contract within the meaning of section 160U(3) of the Income Tax Assessment Act.

The third issue is whether, in a case such as the present where a contract is entered into by an agent who has no authority to enter into it at the time when he purported to do so and his authority is subsequently ratified, whether that means that the date of the making of the contract is the date of ratification or the date upon which the agent executed the document.  There are in the respondent’s contentions in ground 4 some contentions in relation to a point relating to conditions precedent, so called, found in the contract.

There are no submissions about those in the respondent’s submissions.  I do not know whether that point had actually been abandoned but it appears not to be pressed, for the time being at any rate.  If I could just briefly remind your Honours of the most basic facts of this case.  It concerns a sale and purchase agreement made between a number of vendors and a single purchaser and it is to be found in appeal book beginning at page 221 in volume 1.

Your Honours will be familiar with the basic thrust of that contract.  It was entered into in order to effect the sale of what is called the OTC business of the Sara Lee group of companies in numerous countries to the company Roche Holding Limited and it was a very large sale and the consideration provided for simply as the consideration for the purchase and sale of assets was $US597,681,000.  There are provisions for adjustment of that.  Could I take your Honours to some of the relevant provisions of that agreement just to notice them rather than to spend any particular time on them at the moment because they are ‑ ‑ ‑

GLEESON CJ:   May I ask you, what was the type of law of this agreement?

MR BRETT:   I cannot answer that off the top of my head.  The contract says it is made under English law, your Honour, and I will check that. Page 284, I am told, which I think should be in volume 2 “Governing Law and Disputes Resolutions” clause 12.4, appeal book page 284, line 25:

shall be governed by and construed in accordance with the laws of England.  Disputes arising from this Agreement shall be finally settled by arbitration in accordance with the rules of the International Chamber of Commerce, which arbitration shall be held in London, England.

If I could go back to earlier on in the agreement, the first point that I would like your Honours to notice, more because a point is made of it by the other side, is on appeal book page 230 in volume 1, where there is a recital.  Unfortunately the contract is spread over two volumes of the appeal book.  Your Honours will notice that this page contains recitals, not operative provisions of the agreement.  At the top of the page the recital provides that:

the following Sellers will be selling the Assets (as defined below) of the Health Care Group:

and the third company listed there is:

Nicholas Kiwi Aus -

which is in fact the respondent.  There is then a recital which states that:

the following Sellers will be selling the Intangible Rights –

and Nicholas Kiwi Aus. does not appear there.

Could I take your Honours now to page 231 where there appears a definition of “assets”, and that defines “assets” as:

All of the assets, whether real, personal or mixed, tangible or intangible, absolute or contingent –

then there is a qualification upon that:

other than the Intangible Rights and assets that are owned by the Companies and their Subsidiaries (as defined in Section 4.4) – - -

GLEESON CJ:   May I interrupt you, sorry, to ask you whether Nicholas Kiwi Aus was a party to this agreement?

MR BRETT:   Yes, it is, your Honour.  All of the vendors were parties to the agreement, and the list of parties starts at 226 and Nicholas Kiwi – actually Nicholas Kiwi Pty Ltd is the name of the company.  That is at the top of 228.  It seems to be referred to in the contract as Nicholas Kiwi Aus, but I do not think there is any dispute it is the same company.

Going back to the definition of “assets”, the lead-in words refer to “all assets “tangible or intangible”.  There is an exception of “the Intangible Rights and assets” owned by what are described as the “Companies”.  Your Honours will no doubt be aware that what was being sold were a number of things.  There were some shares in companies, and then there were actual assets owned by companies.

The companies, the shares in which were being sold, are defined in the agreement as the “Companies”.  So what was happening in relation to those companies with a capital C was that their shares were being transferred to Sara Lee and of course the transfer of the shares would take with it all of the assets and liabilities which those companies had and to which they were subject.

In respect of the remaining assets comprising what is called the Health Care Group, they were disposed of by the particular companies which owned those assets agreeing to transfer them to Roche, so that is the reason for the exception in those lead in words of the intangible rights and assets owned by the companies and their subsidiaries.  There is no need to provide for them to be transferred to Roche because Roche is getting the shares in those companies which means it gets the assets indirectly.

I do not need to take your Honours to any further part of the definition, save to note that it goes over the following three or four pages, up to page 234, and it basically defines the assets as everything that in any way has anything to do with the Health Care Group.

On page 235, one sees the completion date of the contract, 31 July; one sees under heading “Intangible Rights” a reference to “All patents”, et cetera, “patent rights, patent licenses, patent applications” et cetera.  Then, if I could take your Honours to article 2.1 on page 236, 2.1 is the agreement for the sale and purchase of the shares in the companies whose shares were being sold.  Then 2.2 is a crucial provision in the case, at the top of page 237.  That is the provision – I had better read it to your Honours:

Subject to the representations and warranties contained herein and upon the terms and conditions hereof, at the Closing, Sellers shall sell to Buyer, and Buyer shall purchase from Sellers, free and clear of all liens, claims, options…..all right, title and interest in, to and under the Assets and the Intangible Rights (except to the extent that such Intangible Rights are owned by the Companies or their Subsidiaries).

That provision is of some significance in relation to two arguments made by the respondent, one relating to the variation and one relating to whether the disposition which ultimately took place, took place under this contract.

The reason it is of significance is that the assets sold by Nicholas Kiwi, ultimately disposed of by Nicholas Kiwi, included some patent rights and the respondent makes something of that.  What the respondent seeks to do with that, as we understand it, is to say that the sale by the respondent of its patent rights was something which did not take place until the amending agreement was entered into.  We rely upon clause 2.2 because we say that it placed the sellers, who included Nicholas Kiwi, each and every one of them, under an obligation to sell everything that it had which came within the definition of either an asset or an intangible right.

I will come back to that point.  At the moment, I will just ask your Honours to note at this point that clause 2.2, we say, requires each seller to sell everything.  Clause 2.3 requires the buyer to assume, as of the closing, certain liabilities of the various companies, the first one of which is Nicholas Kiwi Aus. Then Clause 2.4 provides for the purchase price and your Honours will first of all see that the amount of the purchase price is described in 2.4(a).

Then 2.4(b) carries or creates an allocation of the purchase price among the shares, assets and intangible rights in accordance with Schedule 2.4(b) of the disclosure schedules.  I will come back to that in a moment.  Closing is dealt with on page 242 and, again, this is of some significance in relation to the question of whether what occurred occurred under this contract or this contract as amended and your Honours will see that in 3.1 there is to be a closing meeting held in Chicago.  3.2 sets out the actions to be taken:

On the Completion Date against the payments specified in Section 2.5,

(a)  Sellers shall transfer to Buyer and Buyer shall acquire from Sellers the Shares, the Assets and the Intangible Rights by delivering such assignments, bills of sale, endorsements, deeds, leases and other instruments and documents of conveyance and transfer in recordable form for each jurisdiction –

and it goes on to include a number of specific things, which I do not need to take your Honours to. 

The next clause which I need to take your Honours to is in volume 2.  Your Honours, 8.1, page 272.  That is Article VIII and it is headed “EMPLOYEE MATTERS” and it basically provides for the transfer of employment of certain employees from their current employers to new employers and the second paragraph in clause 8.1 provides that:

As to the employees of Nicholas Kiwi Aus and –

another company who are listed in Schedule 8.1(a) the:

Buyer undertakes to offer to each of these employees employment at terms and conditions which are substantially comparable to and no less favorable in the aggregate than those currently applied to them by Nicholas Kiwi Aus –

There were 54 employees nominated in the relevant schedule at that time and your Honours will see that what is implicit in that provision is that their existing contracts of employment will come to an end; they are required to be offered new contracts of employment by the purchaser. 

I should just notice on page 274 the conditions precedent clause.  The relevant one that something was made of in the court below is 9.1(c), which is:

the receipt of all foreign investment approvals in Australia and France ‑ ‑ ‑

GLEESON CJ:   When were the Australian approvals received in fact?

MR BRETT:   They were received, yes.  I cannot remember the precise date.

GLEESON CJ:   In what tax year were they received?

MR BRETT:   It is the following one, I am told.  Yes, 20 August 1991.

GLEESON CJ:   Thank you.

MR BRETT:   That is at page 503.  Could I simply point out to your Honours clause 9.3.  That provides for what the rights of the parties are upon non‑fulfilment of conditions precedent:

Each party shall have a right to cancel this Agreement by giving written notice…..if all conditions precedent to the obligations of the party concerned as specified in Section 9.1 or 9.2, as the case may be, shall not have been fulfilled or waived in the meantime.  Notwithstanding the foregoing, no party may terminate this Agreement if at such time it shall be in breach of any of its representations, warranties, covenants or agreements contained in this Agreement.  Nothing in this Section 9.3 shall be deemed to release any party from any liability for any breach by such party of the terms and provisions –

et cetera.  The point I would like to make about that, your Honours, is that there is no automatic termination of the agreement upon non‑fulfilment of the conditions precedent.  What there is, in fact, is a conditional right in the injured party to terminate, if it wishes to do so ‑ ‑ ‑

GLEESON CJ:   So this was a condition precedent to performance rather than a condition precedent to a contractual commitment?

MR BRETT:   Yes.  Absolutely, your Honour, and it is not even an absolute right to terminate.  It is a right which can only be exercised if that party is not, itself, in default.  Clause 12.3 is on page 284 and that is headed “Assignment; Succession” and it was criticised in the Full Court for its drafting:

This Agreement shall not be assigned by any party hereto without the prior written consent of the other parties; provided, however, that Buyer may assign any of its rights or obligations hereunder to one or more of its subsidiaries or affiliates without the prior written consent of Sellers; provided further, however, the assignee shall agree to be bound by the terms and conditions of this Agreement and that such assignment shall in no way limit or relieve the assignor of any of the assignor’s obligations hereunder.

Now the structure of that clause is, first of all, to prohibit assignment without consent and then provide for some assignments on certain conditions.  That is point one.  Point two is when it speaks of the assignments that it does purport to permit it refers to assignments of rights or obligations but your Honours will see that it is provided that no such assignment shall, in any way, “limit or relieve the assignor” of any obligation.

GLEESON CJ:   It does not look like a novation.

MR BRETT:   It is not a novation and it is not an assignment, because an assignment involves the transfer of something from one person to another.  What seems to be provided for is the assignment of rights, that is to say Roche may assign its rights to a subsidiary provided the subsidiary agrees to be bound by the terms and conditions of the agreement, but there is not really a provision for the assignment of obligations or even for the novation of obligations.

GLEESON CJ:   I understand why you say it is not a novation.  I am not quite sure why you say it is not an assignment.

MR BRETT:   I am speaking only of obligations.  It does provide for an assignment of rights.  I think I probably said something a bit too widely before.  It does provide for assignment of rights.  It does not provide for the transfer of obligations.  If it did, it would not in any event be an assignment, it would be a novation, but in fact all it provides for is an additional party, an additional company or person becoming liable for the same obligations to which Roche is liable without discharging Roche from any liabilities. 

So we submit that really what clause 12.3 is providing for is the assignment of rights on condition that the assignee assumes concurrent liability with Roche for obligations.  The obligations which the assignee is required to assume appear to be all the terms and conditions of this agreement, although it is not 100 per cent clear, I suppose.  It could be only such of the terms and conditions as relate to the rights which are assigned, but certainly on the face of it it appears to be all the terms and conditions of the whole agreement.

There is an entire agreement clause on page 285, clause 12.6, and the signatures begin at page 288 and the signature of Mr Patten on behalf of Nicholas Kiwi is at 291, the first signature on the page.  The disclosure schedules commence at page 295 of the appeal book.  They are not all reproduced.  This is only a selection of them.  The employees are at 309.  That is where the schedules commence dealing with employees, and the particular schedule dealing with Australian employees is at 317 through to 321.  Those are the 54 employees that I referred to before.

The next one, your Honours, is – if I could take your Honours to page 344, that is where we find schedule which deals with the allocation of the purchase price.  Your Honours will recall ‑ ‑ ‑

HAYNE J:   And to which clause is this related?

MR BRETT:    2.4.(b), which is on page 237.  Your Honours will recall that what clause 2.4 does is to provide that there is to be total purchase price of $US597,681,000.  It then provides in a separate subclause that the price shall be allocated among the shares, the assets and the intangible rights in accordance with Schedule 2.4.(b).  It does not actually say what consequence follows from allocation, but presumably it means that the named company will receive the amount opposite its name and your Honours will see Nicholas Kiwi about two-thirds or three-quarters of the way down the page, under the heading “Allocation of Assets/Intangibles Sold By”.  Then the fifth company is Nicholas Kiwi Aus and the amount is $61,461,000.

Now, what then happened was that there was an amending agreement on 30 August and that agreement commences at page 383 and if I could draw your Honours’ attention to page 384, the amending agreement is made:

between SARA LEE CORPORATION, a company organized and existing under the laws of the State of Maryland, United States of America (“SLC”), on behalf of itself and the other Sellers (as defined below), and ROCHE HOLDING LTD., a company organized and existing under the laws of Switzerland (“Buyer”) –

It goes on to state that it:

amends the Purchase and Sale Agreement, dated May 31, 1991 (the “Agreement”) –

and in the recital it is stated that:

the parties to the Agreement –

that is the original agreement –

desire to amend, clarify and supplement the provisions of –

that original agreement.

There are certain matters that are relevant to Australia.  First of all, on page 386 there is a clause headed “Certain Employee Matters” and at page 387 at line 30, there is a reference to Australia and the substance of what is there provided is that instead of the purchaser being obliged to offer employment to 54 employees, it is only obliged to offer new employment to 14.  On page 389 in (e), there is a consequential deletion of certain employees from the original Schedule 8.1.  There is, on page 390, an amendment to the purchase price.  It is reduced by the sum of $296,000 and your Honours will see that the clause goes on to refer to the purchase price as the “aggregate consideration”.

Then, at the top of the next page, there is a re‑allocation of that purchase price:

Schedule 2.4(b) is hereby amended and restated in its entirety as set forth on Schedule 9 attached hereto.

Just so that your Honours want to make a note of where that is, it is at page 412.  I will come to that in a moment.  Just on the way there, if I could take your Honours to page 393, near the top of the page, item 3.  This is in a section which is actually amending the agreement making verbal alterations to the agreement.  Nicholas Kiwi is:

added as a Seller of Intangible Rights to the second WHEREAS clause on page 5 -

of the original agreement.  So it amends the recital.  We say that has no effect.  A recital is a recital, it is not an operative provision of the agreement.  It was not in the original agreement and it is not in the agreement as amended.  All that that is doing is adding a description to the preamble.  Clause 11, at the bottom of that page, 393, provides:

This Amendment to Purchase and Sale Agreement shall be deemed an amendment of the Agreement for the purposes of Section 12.6 of the Agreement.  Except as provided in this Amendment and in any other agreement executed by the parties on or after May 31, 1991, the Agreement remains in full force and effect.

HAYNE J:   The reference to 12.6 is a reference to the whole agreement clause.

MR BRETT:   It is a reference to the – there can only be amendments in writing the clause.

HAYNE J:   Yes.

MR BRETT:   Then, if I could take your Honours to the new Schedule 9.  I do not know why it is renumbered 9 when the original one was 2.4(b) but 2.4(b) disappears and Schedule 9 replaces it.  That is on page 412.  Your Honours will see there a summary of what is headed “ACQUISITION NICHOLAS” and the total purchase price is divided up as between the shares, the assets, the trademarks and patents, and a covenant not to compete.  I have not taken your Honours to the covenant not to compete; I do not believe there is anything material that arises out of that.  It was in the May 31 agreement.  It stayed in the agreement after amendment.  It required a separate payment of $200,000 over a period of five years in payment for a covenant by the vendors not to compete with the purchasers of their business.

The total of those figures is $797,385,000.  That is $296,000 less than the original consideration provided for in the May 31 agreement when one takes into account the $200 million for the covenant not to compete.

The bank debt that is referred to underneath that, that is provided for.  It reflects 2.6 of the original agreement.  It also was always in there.  The reference to South Africa shows a figure of $296,000 next to it.  Effectively, what happened was that the acquisition of the South African assets was taken out of the overall purchase and sale agreement.  A separate agreement was entered into in relation to those for a price of $296,000.  The total amount that ended up being paid, the very bottom line on the page, was the same as it was always going to be.

I need also to take your Honours to the remainder of this schedule, and particularly at page 414, just below line 15, what you have on the page is a table ‑ ‑ ‑

GLEESON CJ:   What is the meaning of the heading to the left-hand column?

MR BRETT:   I do not know, your Honour.  I presume it means that it will actually be providing the funds itself, I just do not know.  It does not appear in the materials as far as I am aware.

The next column is the “Net Assets of” and then there is the vendor company, and Nicholas Kiwi, Australia appears just below line 15.  Your Honours will see that in the fourth column, headed “Price US$” the consideration has, in fact, changed.  It has gone up by a million dollars.  Your Honours will also see that the final column is headed “Purchaser” and that is a column which had no corresponding column in the earlier agreement, and it appears to identify the recipient of the assets ‑ ‑ ‑

GLEESON CJ:   That company, I understand, was not in existence as at 30 June 1991.

MR BRETT:   Not incorporated.  It was in existence at 30 June.  It was not a Roche company as at 30 June.  It was incorporated, I think, on 26 June.  It was not in existence on 31 May.  It came into existence on 26 June; came under Roche control on about 20 August, a date in August, I cannot remember the precise date.  Then there are actually a couple of extra references to Nicholas Kiwi here.

If your Honours go to page 415, the very last item in the table, the second column in that table is headed “Intangibles” and the second last item in the table in the second column simply says “Patents (b)” – and I will come back to (b) in a moment.  The price is $70,000 and the buyer is described as Roche Nicholas Ltd Geneva.  If one then looks at footnote (b), it says:

A further description of the Patent transactions is set forth on a separate page.

If one then turns over the page to 416, one sees that Nicholas Kiwi is shown as the owner before closing of the first two patents on that page, “Ibuprofen taste masking”, whatever that is, and “Aspro Fast Clear”, $10,000 and $31,000 respectively.  If your Honours go down that column, there is the total of $70,000 that is referred to on the previous page.  So, that is the kind of separate allocation of $41,000 worth of intangible assets owned by the respondent immediately prior to closing.

Before we go to volume 3, if I could just ask your Honours to note there was no amendment to clause 2.2 of the 31 May agreement, which is the clause which required all of the sellers to transfer all of their assets and intangible rights.  That clause was not amended - to Roche.

If I could then take your Honours to volume 3 just to note a couple of things.  First of all, at page 517 there is a letter addressed to Sara Lee Corporation, “Re: Purchase and Sale Agreement”.  It is dated 30 August.  It refers to the purchase and sale agreement dated 31 May as amended.  Your Honours will recall that the amending agreement was, in fact, made on the same date, 30 August, among Sara Lee et cetera.  The operative paragraph is the second one:

In accordance with Section 12.3 of the Agreement, Buyer has assigned its rights and obligations under the Agreement to certain of its subsidiaries and affiliates as set forth in Schedule A…..and the Assignees have agreed to be bound by the terms and conditions of the Agreement.

That, your Honours, is signed by, or on behalf of “Roche Holding Ltd”.  It is not executed by what I would purport to be executed by any of the subsidiaries or affiliates who might be acquiring any part of the assets or intangible rights.

The relevant part of the schedule is at 521 where, under the heading “Australasian Buyers – Nicholas Products Pty. Ltd.”, is described as a purchaser of:

Assets, Assumed Liabilities and Assigned Contracts from Nicholas Kiwi Pty. Ltd.

So that is a notice of an assignment made pursuant to section 12.3 of the agreement.

We then come to the documents which actually affect the dispositions of ownership.  At page 536 there is a patent assignment and the actual document starts at 537.  It is by Nicholas Kiwi.  At line 7 your Honours will see it is made to Roche Nicholas, the company in Switzerland, and it is thus in accordance with that second minor bit of the disclosure schedule that I took your Honours to before.  It also recites just above line 20 that Roche has assigned certain rights and obligations to the buyer and the operative provision is on page 538 starting at line 3:

in consideration of the sum of US$41,000 paid by the Buyer to the Seller pursuant to the terms of the Agreement…..the Seller does hereby sell, assign, transfer, set over and convey –

et cetera.  If your Honours go to the execution provisions on page 540, your Honours will see it is executed by Nicholas Kiwi.  It only purports to be acknowledged by the recipient of the assets, Roche Nicholas.  There is a further patent assignment at 548 and that is a joint assignment by Nicholas Kiwi and an American corporation called Saramar Corporation.  Again, the assignment is to Roche Nicholas of Switzerland and, again, the provision is pretty much the same.  Then we have what is the major assignment document at page 555.  It is a deed of assignment by Nicholas Kiwi to Nicholas Products.  It is expressed to be made:

pursuant to a Purchase and Sale Agreement…..dated May 31, 1991, as amended –

It uses terms, capitalised terms, which are given the meanings ascribed to them in the main agreement.  It recites that:

the conditions precedent provided in the Agreement have been satisfied or waived –

It recites that:

the Agreement provides for the Seller to assign and transfer to Roche all of its interests in the Assets and the Intangible Rights;

And:

for the Seller to assign and transfer to Roche all of its rights under the Assigned Contracts;

At the top of page 556 that:

Roche has assigned to the Buyer pursuant to Section 12.3 of the Agreement certain of its rights and obligations –

and then the operative clause begins at line 4 on 556 -

in consideration of the sum of U.S. $62,461,000 –

which is the revised consideration –

paid by the Buyer to the Seller…..at or before the execution –

A couple of lines further on:

the Seller does hereby sell, convey, assign, transfer and deliver to the Buyers…..all of the Seller’s right, title and interest in and to the Assets, the Intangible Rights (excluding any letters patent, patent applications and the inventions covered thereby) –

I am not sure what that actually means.

HAYNE J:   Assumedly, it takes account of the patent assignment you earlier took us to.

MR BRETT:   It may well do.  Yes, it must, your Honour.  It must, of course, yes.  Your Honours will notice that is expressed to be a sale, transfer, et cetera by the seller to the buyer.  The buyer does not purport to do anything in that clause.  It is simply identified as the recipient of the assets.  The last two lines of the page recite that it is of accord, that it:

is delivered pursuant to the Agreement and it shall not alter, supersede, augment, abridge or affect any provision of the Agreement.

And over the page, in so far as there is any conflict:

the terms of the Agreement shall be controlling.

Page 559 there is then a “Deed of Assumption of Liabilities” made by Nicholas Products in favour of Nicholas Kiwi pursuant to the sale agreement.  The operative provision starts at line 9 on page 560.  Again, it is expressed to be “pursuant to the Agreement” and at line 14:

the Buyer hereby assumes, undertakes and agrees to pay, perform and discharge, in accordance with their terms, all of the Assumed Liabilities of the Seller.

On page 561 at line 6 contains the similar clause stating that it does not supersede the agreement itself and again, it is executed by Nicholas Products and merely acknowledged by Nicholas Kiwi.

I will not take your Honours to the receipt or anything of that nature.  The final thing I will take your Honours to is page 635 where there are some minutes of a meeting of directors of Nicholas Kiwi held on 20 August which ratify the execution by the company of the contracts dated 31 May.

I think, your Honours, that that is all I need to take your Honours to in relation to the facts.  You need to notice the legislation, which is the old 1936 Income Tax Assessment Act.  Your Honours should have extracts of various provisions of that Act commencing with section 160M.  The basic scheme, your Honours will see, is that section 160M(1) provides that:

Subject to this Part, where a change has occurred in the ownership of an asset, the change shall be deemed, for the purposes of this Part, to have effected a disposal of the asset by the person who owned it immediately before the change and an acquisition of the asset by the person who owned it immediately after the change.

If I could ask your Honours to notice section 160M(2):

A reference in subsection (1) to a change in the ownership of an asset is a reference to a change that has occurred in any way, including any of the following ways:

(a) by the execution of an instrument;

(b) by the entering into of a transaction;

(c) by the transmission of the asset by operation of law;

(d) by the delivery of the asset;

(e) by the doing of any other act or thing;

(f) by the occurrence of any event.

I draw your Honours attention to the word “by” which repeatedly appears there.  What section 160M(2) is doing is identifying certain changes of ownership, which are affected in certain ways.

What I then need to take your Honours to is section 160U, which your Honours should also have, which is headed “Time of Disposal and Acquisition”.  It is necessary to go through the whole section – not the whole section, but the first parts of it:

Subject to the provisions of this Part other than this section, where an asset has been acquired or disposed of, the time of acquisition or disposal for the purposes of this Part shall be ascertained in accordance with this section.

If I could pause there.  Whether there has been a disposal or acquisition is covered by section 160M.  This section deals merely with the time of acquisition or disposal.  Section 160U(2):

If the time of acquisition or disposal as ascertained under a sub‑section of this section is different from the time of acquisition or disposal as ascertained under a subsequent sub-section of this section, the time of acquisition or disposal shall be taken to have been the time of acquisition or disposal as ascertained under that subsequent sub-section.

Your Honours, section 160U(3) is the one that applies in the present case, in our submission:

Where the asset was acquired or disposed of under a contract, the time of acquisition or disposal shall be taken to have been the time of the making of the contract.

Section 160U(4):

Where the asset was acquired or disposed of otherwise than under a contract, the time of acquisition or disposal shall be taken to have been the time when the change in the ownership of the asset that constituted or gave rise to the acquisition or disposal occurred.

I do not think I need to take your Honours to any further provisions of that section.  So, we have had 160M(1) identifying whether there has been a disposal or acquisition.  We have 160U dealing with the time.  We then have in Division 3 of this part, starting at 160Z, which your Honours should also have, provisions for determining the amount of any consequent capital gain or capital loss.

In particular, we have 160ZD which, in subsection (1) – I do not think I need to go beyond (1)(a):

Subject to this Part, for the purposes of this Part, the consideration in respect of a disposal of an asset is –

a)  if the taxpayer has received or is entitled to receive an amount or amounts of money as a result of or in respect of the disposal – that amount or the sum of those amounts.

So, the operation of Part IIIA is divided into three distinct parts:  we say the identification of a disposal or acquisition, the fixing of the time and then the ascertainment of the capital gain or loss relevant to that, which, in the case of a contract depends upon the consideration in respect of the disposal ascertained under 160ZD.

If I could come directly to the issues in the present case.  We deal first with the variation point in paragraph 17 through to 43 of our submissions, and our case is, we submit, relatively straightforward.  We submit that section 160U(3) requires the identification of the time of the making of the contract under which the disposal took place.  I should, perhaps, just pause here for a moment and say I am assuming in what I am saying about variation that the disposal is taking place under the contract of May 31 as amended.  Logically, that point arises prior to the variation point.  I am dealing with it first because that was the point on which we have appealed and on which we lost below.  If your Honours wish me to deal with it in a different order I will.

GLEESON CJ:   No, you take it whatever order suits.

MR BRETT:   Yes.  So we say 160U(3) requires the identification of the time of the making of the contract under which the disposal took place.  The disposal took place under a contract which was originally made on 31 May and which was varied as to some of its terms on 30 August and the question is whether, for the purposes of 160U(3), the fact that some variations took place in August means that the time of the making of the contract was the later date rather than the earlier date.

GLEESON CJ:   The relevant variations being to the consideration and the identity of the acquirer of the asset?

MR BRETT:   That is the considerations which the other side principally rely upon.  As we apprehend their argument, it would mean that any variation to the contract, whether it directly affected the assets disposed of or the consideration paid for them or anything else to do with those assets, it would not matter because any variation to the contract, as we understand their submission, makes it a new contract, that is to say a contract which did not previously exist.  That is how we understand their submissions, which are principally put at around paragraphs – I am sorry, your Honours; I was going to mention these later on and I have just lost my place – yes, at around paragraphs 18 through to 23, particular at 20 to 23.             I was going to come to that in detail later on.

Coming back to where I was, we say that 160U(3) requires a time to be identified.  It does not provide us a solution in the present case to say, well, the contract was made partly on 31 May and partly on 30 August, therefore, there are two days on which that particular contract was made.  For the purposes of 160U(3) we have to identify one time.  It has got to be either 31 May or 30 August. 

Now, we rely principally on two propositions. One is that not every variation of a principal contract operates to rescind the principal contract and substitute a whole new principal contract.  The second is that where there has been a variation which has not operated to rescind the whole principal contract and substitute a new one, then the contract as varied remains nevertheless a contract which was made at the time at which it was entered into, originally entered into, that is to say when the rights and obligations of the parties were originally created, and we rely for that proposition principally on some remarks by Chief Justice Dixon and Mr Justice Fullagar in Tallerman’s Case, which I will take your Honours in a moment.

Just before I do that could I ask your Honours to note two things.  First of all, it is, as we understand it, common ground in this case that the amendments that were made by 30 August agreement, amending agreement, did not operate to entirely rescind the 31 May agreement and replace it with an entirely new agreement.

CALLINAN J:   Mr Brett, just before you go on.  I am sorry, you put this contract in terms of 160M(2)(b), do you, by the entering into of a transaction?

MR BRETT:   Yes, your Honour.

CALLINAN J:   Why not (a)?

MR BRETT:   Well, it could be both.  I take your Honour’s point, I am sorry.

CALLINAN J:   The definition is inclusive in any event.

MR BRETT:   Yes, your Honour.  I am sorry, your Honour.  I answered your Honour’s question incorrectly.  The actual transfer of ownership, in our submission, occurred by the execution of the deeds of assignment on 30 August 1991 and those are the deeds which I described as the deeds which carried the contract into effect.  They were the ‑ ‑ ‑

CALLINAN J:   The change of legal ownership?

MR BRETT:   The change of legal and of beneficial ownership, your Honour.

CALLINAN J:   Well, is that right?  Why could you not say that on the execution of the contract the purchaser became the beneficial owner?

GLEESON CJ:   And you, the person who acquired the asset, was not in existence at the date of the execution of the contract.

MR BRETT:   That is a problem.

CALLINAN J:   I may have misunderstood something.  There were no different assets included, were there, as a result of the variation from the assets, the subject of the agreement?

MR BRETT:   No, there was not.

CALLINAN J:   So it was contemplated by the May agreement that all of the assets would be transferred.

MR BRETT:   Yes.

CALLINAN J:   The only change was, apart from some minor financial details - in the financial detail, a different purchaser, or a different transferee or assignee was substituted for one of the proposed transferees.

MR BRETT:   Yes.  Two different purchasers were substituted for one of them.

CALLINAN J:   So there was an enforceable agreement.

MR BRETT:   Yes, we would ‑ ‑ ‑

CALLINAN J:   On 31 May, enforceable against the parties to it as purchasers.

MR BRETT:   Enforceable against ‑ ‑ ‑

GLEESON CJ:   Subject to a condition precedent that had not been fulfilled.  Could specific performance of this contract have been obtained on 31 May?

CALLINAN J:   I must say I looked at the conditions precedent which were in the contract and it did not seem to me, with the exception perhaps, of the requirement of approvals from anti‑trust authorities in various companies, that there was anything remarkable about any of them.  In other words, that they stated no more than what is the obligation of any party to a contract to do what it is reasonably necessary to carry it into effect.

MR BRETT:   Yes.

CALLINAN J:   With that possible one exception they are properly described as condition precedents.  They state no more than relevant contractual obligations.  On pages 47 and 48 of the agreement – I cannot remember what page of the record they are.

MR BRETT:   That will be in volume 2.

CALLINAN J:   I am asking you this because of the proposition that I think probably the Chief Justice also had in mind that with an unconditional contract certainty, a form of beneficial ownership immediately passes to the purchaser.

GLEESON CJ:   Would that be right, unless and until the time arrives when the contract is specifically enforceable.

MR BRETT:   In my submission, it is not until the contract is specifically enforceable that beneficial ownership could be said to pass.  Prior to that time, it may be that there was an equitable interest something short of full beneficial ownership which the purchaser had in the particular assets.

CALLINAN J:   The matter is discussed in K.L.D.E. Pty Ltd v Commissioner of Stamp Duties (1983) 155 CLR, particularly at pages 295 to 298.  There is also some reference to it in Legione v Hateley which is also referred to there.

MR BRETT:   Yes.

HAYNE J:   This may invite attention to a logically prior question.  Why does the nature of the rights acquired on execution of what I will call the first repository of the agreement matter for taxation, for the application of these provisions of the Act?

MR BRETT:   Because if we are to succeed in the contention that what ultimately occurred to transfer ownership occurred under that contract, then there would need to be ‑ ‑ ‑

HAYNE J:   But the specific enforceability or otherwise of that contract at the moment of its execution, is that a matter that is relevant to the taxation consequences, or not?

MR BRETT:   We would say no, your Honour.

HAYNE J:   Why?

MR BRETT:   Well, we would say, sorry, yes.  If the contract were specifically enforceable so as to amount to a change in beneficial ownership, then – I am sorry, I am just trying to think this through – if that were the case, I am sorry ‑ ‑ ‑

HAYNE J:   No, no.  Let it be assumed for the purposes of argument that the first repository of the agreement was not at the moment of its execution specifically enforceable, for whatever reason.

MR BRETT:   Yes.

HAYNE J:   Let it be assumed, therefore, that no equitable ownership of the assets passed at the moment of execution, but in circumstances, the nature of which does not presently matter, it became so in the later tax year.

MR BRETT:   Yes, your Honour.

HAYNE J:   On the contract becoming specifically enforceable or perhaps on the contract being performed, there is undoubtedly then a change in ownership.  That being so, having, in Mrs Beaton’s terms, first caught one’s change of ownership, is there any further inquiry that is relevant or required other than the inquiry dictated by 160U to identify the time that is relevant for taxation purposes?

MR BRETT:   In our submission, no.

GLEESON CJ:   But if you were able, as you accept you are not, to demonstrate that this was a case in which there was a change of equitable ownership in May, we could all go home.

MR BRETT:   Yes, precisely.

GLEESON CJ:   Because, presumably, this is concerned with changes in beneficial ownership rather than legal title.

MR BRETT:   Yes, that is specifically said actually in section 160M(1A):

It is declared for the avoidance of doubt that a change in the legal ownership of an asset does not constitute a change in the ownership of the asset for the purposes of this Part unless there is also a change in the beneficial ownership of the asset.

GLEESON CJ:   But conversely, if there were a change in the beneficial ownership, the occurrence of a disposition would not have to await a change in the legal ownership.

MR BRETT:    Yes, your Honour, and that is made clear by the subsequent provisions, which deal with declarations of trust and things of that nature.

CALLINAN J:   Well they are very special provision, a declaration of trust, they have got no operation to a contract which might produce a title and equity in the purchaser.  Could I just ask you this?  If you go to page 274, they are the conditions, and, for example, 9.1(b) and (c) on page 274 and perhaps (c) on page 275; they are the conditions that would prevent you from being able to say that you could specifically enforce the contract.  Just for my own satisfaction, is there any evidence as to when those conditions were satisfied?

MR BRETT:   Yes, they were satisfied in the later tax year and the FIRB approval is in 20 August, or thereabouts ‑ ‑ ‑

HAYNE J:   You said it was appeal book page 503.

MR BRETT:    Yes.  In fact there are two approvals because two applications were submitted, but they both occurred in the later tax year at around about page 503. 

To go back to the question that I think your Honour Justice Hayne was raising before, we would submit that once the change in beneficial ownership has occurred, it automatically follows that there has been a disposal of the asset.  That is what section 160M says.  One then has to ask, when did that disposal take place and that is when one goes to section 160U and one is directed by section 160U(3) to ask, “Did the disposal occur under a contract?” if so, what is the time of the making of that contract?”

We submit that, in this case, the actual change of ownership occurred by the operation of the deeds of assignment which were executed by the assignors on 30 August.  We say those deeds were precisely what they purported to be.  They purported to be deeds of conveyance or transfer executed pursuant to the principal agreement and we say that, therefore, the dispositions occurred under that contract.

GLEESON CJ:   You say the time of the making of the contract under which the acquisition and disposition occurred, which, in this case was the same time, was in the first tax year, May, the date of the contract?

MR BRETT:   Yes, and we say that the fact that it was subsequently varied does not alter that and I was making my submissions to your Honour as to why that is.  I think I got to the point of noting or asking your Honours to note that it is common ground that the amending agreement did not rescind the principal agreement of 31 May.  It is absolutely crystal clear on that point and we understand it is common ground with the respondent.

In that connection, we notice that the respondent in paragraph 15 of its submissions appears to place some reliance upon the extent of the changes that were made by the amending agreement.  It describes the amending contract as making “a significant number of amendments”.  It speaks of “Very important changes” and it goes on to describe them.

We are not quite sure of the point that is sought to be made there.  We simply ask your Honours to bear in mind that while the changes that were made may have, if considered in isolation, appeared to involve considerable amounts of money or a considerable number of people or whatever, but in the context of the agreement it is common ground that they were not so sufficient, not so large as to bring about a termination of the old agreement and a substitution of a new agreement.

CALLINAN J:   What was the net change in the price?

MR BRETT:   $US296,000.

CALLINAN J:   Out of 821 million?

MR BRETT:   821 million.

CALLINAN J:   De minimus.

MR BRETT:   If somebody offered me $US296,000, I do not think I would say it was de minimus but in the context of the agreement, yes.

HAYNE J:   It is USD not AD.

CALLINAN J:   If you were weighing it against 821 million.

MR BRETT:   I would certainly rather have the 821.

GLEESON CJ:   Being myself more of a casher than a cashee, it seems large.

MR BRETT:   It does seem large.  Your Honours, I had said I rely on Tallerman ‑ ‑ ‑

HAYNE J:   Before you come to Tallerman, can I ask you to grapple with the relevant provision.  Can we come to the relevant provision which, in the end, is what we have to construe.

MR BRETT:   Section 160U.

HAYNE J:   U(3) is what you rely on.

MR BRETT:   Yes, it is, your Honour.

HAYNE J:   Firstly, it would seem to require identification of the subject matter of the contract, that the subject matter of the contract is the asset.

MR BRETT:   Yes.

HAYNE J:   Next it would seem to require identification of at least one party, but is it more than one party?

MR BRETT:   In our submission, no.

HAYNE J:   Why is that?

MR BRETT:   Because there is no need for it to be and because – I will perhaps amend my answer a little bit and say we submit first of all that that question obviously does not arise in the present case.

HAYNE J:   But it may, because the answer made against you is the acquirer of this asset did not exist, was not there, et cetera, until the next taxed year.  What my eyes light on is the apparently disjunctive drafting of 160U(3).  What, if anything, turns on that?

MR BRETT:   Your Honour, it is clear that there can be either an acquisition under a contract without there being a corresponding disposal or a disposal without there being the corresponding acquisition.  For example, the creation of shares, the allotment of shares, in a company pursuant to a contract is specifically provided to be not a disposition of shares by the company.

HAYNE J:   This seems to me, if I may say so, to be taking a degree of complication in the answer which at least my mind is not yet ready to accommodate.  It reads as though – at first blush you could read it as, “Where the asset was disposed of under a contract, the time of disposal shall be taken to have been the time of the making of the contract”, and that the relevant statutory inquiry therefore is on that reading:  find the contract whose subject matter is the asset by which the disposer contracted to dispose of it.

MR BRETT:   That is what we say is the correct way of interpreting the provision, your Honour.

GLEESON CJ:   That approach is supported, is it not, by the consideration that the reason it is referring to acquisition or disposal is that it has work to do.  Apart from telling you what amount is brought to tax as the consideration for a disposal, it might also be important to know when the asset was acquired by somebody and what the consideration for the acquisition was, because it is the gain that is brought to tax.

MR BRETT:   Yes, your Honour.

HAYNE J:   Thus, to take the ordinary nomination clause, contract of sale of land, where the party nominated is the company incorporated a month after the signing of the contract of sale, the disposal on this analysis might occur at one time but acquisition at the later time.  I do not know but ‑ ‑ ‑

MR BRETT:   Yes, it could.

HAYNE J:   - - - we have to grapple with the words before we dive into Tallerman, it seems to me.

GAUDRON J:   Of course, the part applies in respect of the disposal of assets, not the acquisition as such.  Acquisition is used to constitute a disposal in certain circumstances.

MR BRETT:   It is used to fix the amount of the capital gain or loss.

GAUDRON J:   An acquisition may also, if there is no separate disposal, constitute a disposal under the capital gains provisions, as I understand it.

MR BRETT:   As I understand it, your Honour, there can be an acquisition without a disposal, as, for example, in a situation where shares are created or something is made.

GAUDRON J:   That is right.  Then it is treated as a disposal.

MR BRETT:   When it is subsequently disposed of it is treated as a disposal, that is right.

GLEESON CJ:   But this is not only concerned with the one transaction.

MR BRETT:   No, it is not.

GLEESON CJ:   In the present case, for example, the question whether any capital gains tax was attracted at all would have depended, I presume, on whether the taxpayer acquired this asset after a date in 1985.

MR BRETT:   Yes, your Honour.

GLEESON CJ:   So, you might have to use section 160U to find out whether this is a transaction that has anything to do with capital gains tax.

MR BRETT:   Absolutely, yes.  We say that the “or” in 160U(3) is disjunctive, that it applies separately to acquisitions and to disposals.  It fixes the time of an acquisition if there has been an acquisition under a contract; it fixes the time of a disposal if there has been a disposal under a contract, and that there is nothing in it that suggests that you cannot have one without the other, and there is nothing in it to suggest that where, in fact, you do have an acquisition under a contract and a disposal under a contract they must necessarily occur at the same time.

CALLINAN J:   The acquisition not only may be relevant to determine whether it had been acquired before October 1985, but also to fix the date for the commencement of indexation.

MR BRETT:   That is precisely correct, with respect, your Honour, yes.  It is always necessary - in order for there to be a liability to capital gains tax, there has to be a fixed date of acquisition, either to bring it within the operation of the Act at all, or else to fix the price or the cost base of the asset.  But then tax is not incurred until a disposal takes place.  A disposal, of course, can take place either by some form of transfer or simply by the asset ceasing to exist.  It can be transmuted into a different form, perhaps, or it could be totally destroyed.

GLEESON CJ:   Well, some day if Nicholas Products Pty Ltd disposes of these assets, people may be interested to know when Nicholas Products Pty Ltd acquired the assets.  But the question at issue in the present case is when the taxpayer disposed of them.

MR BRETT:   Yes, your Honour.  I think your Honour Justice Hayne was interested in considering that question that the Chief Justice just referred to:  what happens when Nicholas Products disposes of its asset.

HAYNE J:   Sufficient unto the day is the evil thereof, Mr Brett.

MR BRETT:   Yes.  I do have something I could say about it.  It involves an additional consideration which is that Nicholas Products never actually became a party to the principal contract.

GLEESON CJ:   But the problem that we have to deal with is that the language of section 160U(3) is more simple than the problem to which it is addressed.

MR BRETT:   Yes.

HAYNE J:   It is an unusual feature of Commonwealth drafting.

GLEESON CJ:   And it is a common feature of plain English.

MR BRETT:   Yes, that is correct and the complicating fact is that you have a contract which was made and then varied and the question is - well, we have submitted that 160U(3) requires the identification of the time at which a contract was made.  You cannot identify two different times.  You cannot identify two different contracts.  You have to decided what contract, if any, was this asset disposed of under and at what one and only time was that contract made?

GLEESON CJ:   Now, section 160Z(1) fastens onto the consideration as the critical issue.

MR BRETT:   Yes, critical for the purpose of calculating whether there has been a capital gain or a capital loss but not critical for the purpose of determining whether there has been a disposal, nor, we would submit, for the purpose of determining the time at which the disposal took place.

GLEESON CJ:   Well, what is brought to tax is the amount of the consideration less the cost.

MR BRETT:   Yes, your Honour.

GLEESON CJ:   Does that have a bearing on the way section 160U(3) works when the consideration for which the asset was disposed is different from the consideration provided for in the contract?

MR BRETT:   We acknowledge that the consideration for which this asset was disposed of was $62.461 million, not 61.461.  In other words, we are not saying to this Court or to the taxpayer, “Disregard the amending agreement.”  The Commissioner has assessed on the basis that the consideration was amended by the 30 August amending agreement.

GLEESON CJ:   You have not assessed the taxpayer on the basis – let me assume these assets cost nothing, only for simplicity of arithmetic.

MR BRETT:   Yes.

GLEESON CJ:   You have not assessed the taxpayer on the basis that it made a capital gain of $61 million in year one and a further capital gain of $1 million in year two?

MR BRETT:   No, we have not.  We have assessed it on the basis that it made a capital gain and the consideration received as a result or in respect of that disposal was $62.461 million, that is to say the amended consideration, and that that disposal took place under the contract which was made in May, notwithstanding the subsequent variation of the consideration.  We say that the operation of the provisions for determining the amount of consideration is not tied to the provision for determining the time at which the disposal took place.

GLEESON CJ:   Are they the only two choices open to us?  That is to say, again assuming the assets cost nothing, either there was a capital of $62 million in year one or there was no capital gain at all in year one and a capital gain of $62 million in year two.  You could not construe the statute to produce the result that there was a capital gain of $61 million in year one and a capital gain of $1 million in year two?  I just want to clear that possibility away.

MR BRETT:   In the context of this case I do not think your Honours can do that because we have assessed on a particular basis, and the assessment has been challenged.

GLEESON CJ:   It does not sound like a completely mad result.

MR BRETT:   No, not if one looks at it in the abstract.

CALLINAN J:   Mr Brett, 160ZD(1)(b) fixes the value, if it is property or monies worth rather than money, as at the date of the disposal.

MR BRETT:   Yes.

CALLINAN J:   So that may be a different time for the fixing of the consideration in the case of satisfaction by a property transfer rather than by payment of money, if one reads 160U(3) disjunctively as has been suggested.

MR BRETT:   I am sorry, I am not quite sure that I followed that, your Honour.

CALLINAN J:   Well, 160ZD(1)(b) focuses for the fixation of the value of the consideration upon the date of the disposal if the consideration is to be discharged by property rather than money.  So that if, for example, the price here were to be satisfied by an exchange of assets, then the disposal would have occurred, or rather the consideration would have been calculable as at the date of the contract, on your argument, 31 May rather than later.

MR BRETT:   Yes, your Honour.

CALLINAN J:   And I am wondering whether that provision really means that you have to look for the purposes of ZD(1)(a) at the date of the entitlement to receive when the consideration is in money.

MR BRETT:   What we draw attention to in both 160ZD(1)(a) and (b), and indeed it is also in (c), is that all of those paragraphs require an assessment or calculation or valuation to be made of amounts of money or value of property or both received as a result of or in respect of a disposal.  Now, it is certainly possible to contemplate disposals occurring under a contract where the contract itself provides for a particular amount to be paid or a particular piece of property to be transferred by way of consideration and for other amounts or items of property to be received outside the contract but, nevertheless, in respect of the same disposal; and, again, there is no reason to suggest or to conclude that if there is some such other amount, it must have been an amount which was known simultaneously with the execution of the contract under which the actual disposal ultimately took place.

GLEESON CJ:   Mr Brett, you treated the assessment, the consideration as 62 million.

MR BRETT:   Yes, your Honour.

GLEESON CJ:   That is $US62 million?

MR BRETT:   Yes, your Honour.

GLEESON CJ:   At what date was the rate of exchange established?

MR BRETT:   That is dealt by 160K(5) which is, in fact, on the front page of the extracts that your Honours have.  The foreign exchange is converted as at the time of the disposal of the assets which again gets you to look at 160U(3).  So the answer to your Honour’s question is it is calculated as at, we submit, 31 May 1991.

GLEESON CJ:   Thank you.

MR BRETT:   Your Honours, the basic point we make about 160U(3) is that it says what it says, it directs attention to the time of the making of a contract under which an asset was disposed of and it says that the time of the making of the contract is deemed to be the time at which the disposal actually occurred.  Such a disposal is not tied in 160U to the consideration in respect of or resulting from that disposal, nor is it tied to the time of the actual transfer of ownership of the asset, or destruction of the asset, if that is what has occurred.  It is simply a provision which stands on its own fixing the time of acquisition or disposal.

Our friends try to read into the Act a scheme which would require, as we understand it, that if there is a disposal under a contract there must also be an acquisition under a contract, and they would seek to then say that because Nicholas Products, which was the company which ultimately acquired the asset, did not exist at the time the contract was made, they seek to find some absurdity in deeming the acquisition to have - deeming the disposal and simultaneous acquisition - to have been at a time before Nicholas Products was incorporated.  We simply say that is not what the Act says; it involves reading qualifications into various provisions of the Act, particularly section 160U, which there is simply no warrant for reading.

I had got to a point where I was going to take your Honours to Tallerman.

GLEESON CJ:   What is the reference to that?

MR BRETT:    That is 98 CLR 93.

McHUGH J:   It has taken some time to get to the special leave point.

HAYNE J:   Mr Brett is looking to join a third party to that allegation.

MR BRETT:   Tallerman was a case which certainly had some peculiarities about it and the facts were basically quite straightforward, but they are a bit hard to actually work out what happened when you initially read the report.  Essentially what happened was this:  a manufacturer of bullets enters into two contracts to sell a total of 2 million bullets to a purchaser.  That contract was made in Victoria.  There were two contracts for 1 million bullets each; each of those contracts was made in Victoria.

The manufacturer manufactured some bullets, sought to deliver them, the purchaser refused to accept them and what then happened was that there was some correspondence between the parties, which the plaintiff said amounted to a variation of the original contracts so as to extend the time for delivery and payment.

It then sought to sue on the contracts as amended.  What happened was that there was an objection – they sought to sue in the State of New South Wales and I forgot to tell your Honours that some of the correspondence emanated from New South Wales and, in particular, a letter which the plaintiffs had written purporting to accept an offer made by the defendant.  That was posted in New South Wales.

So they sued in New South Wales.  An objection was taken to jurisdiction.  The objection was ultimately withdrawn but only on the basis that the plaintiff accepted that it was limited to relying upon a contract wholly made in New South Wales.  So what it had to establish was that the contract that it was suing was wholly made in New South Wales and there were strong differences between the Justices of this Court as to both the crucial issues in the case.  The Chief Justice and Mr Justice Fullagar held that the alleged variation of the original contract had not actually come to being any sort of agreement at all.  They had never actually agreed to vary the contract at all so that there never was anything other than the original contract made in Victoria.

Mr Justice Williams, who dissented, along with Mr Justice Kitto, although on a different ground, held that there had been an amending contract and that that contract did entirely replace the original contract and it was made in New South Wales.  Therefore the manufacturer of the bullets could sue in New South Wales and was entitled to recover but that, as I say, is the dissenting view.

Now, the principal passage upon which we rely is in the judgment of the Chief Justice and Mr Justice Fullagar at page 112.  Starting about the middle of the page your Honours will see a reference to Anson on Contracts and their Honours had there been discussing the rule about postal acceptance and acceptance being deemed to take place at the place at which the postal acceptance was actually posted rather than the place at which it was received and they then go on to say:

The rule with regard to contracts made by correspondence is indeed only a particular application of a more general rule that a contract is to be regarded as made at the place where that act or thing was done or said which finally created the contractual obligation:  cf. Muller & Co.’s Margarine Ltd. v Commissioners of Inland Revenue.

Just pausing there for a moment, their Honours refer to the contractual obligation and the term that they use is a singular term, “contractual obligation”.  It is apparent, in our submission, from the sentence as a whole that what their Honours are speaking of and describing as the contractual obligation is, in fact, the whole conglomerate of rights and obligations created by the contract in question and that becomes even clearer later on.  They then go on to say:

what is the position where a contract is concluded in one place and subsequently varied by agreement in another place?  There is only one contract, and one would think it clear that that contract must, if it ever becomes material to inquire where it was made –

I interpolate as it was in that case –

be regarded as made at the place where it was originally concluded.  The variation affects the content of the obligation but not the obligation itself.  The place where the parties assumed that obligation, and became bound to one another, is the place where their contract was really made.

In our submission, what their Honours are saying there is, if there has been a contract which has been varied and one has to ask the question, “Where was the contract made?”, one looks at the place where the parties bound themselves to each other and it does not matter that some parts of the content of what their agreement was were varied, it is nevertheless one contract and it was made when it was originally made or where it was originally made.  My slip of the tongue then points up the next point, which is that if that is the right way to approach the question of where a contract was made, it must also be the right way to approach the question of when the contract was made because you cannot have a contract which is made at a particular place unless it was made at the time the parties were at the relevant places.

GAUDRON J:   …..to say, however, ignores that the one document may contain several different contracts and at the end of the day there were, in fact, several different contracts in this case.

MR BRETT:   Well, in our submission, that is ‑ ‑ ‑

GAUDRON J:   That is not necessarily what the section is talking about, but at the end of the day there were several contracts, were there not?

MR BRETT:   In our submission, no, with respect.  There is one contract.  It imposes different obligations on different parties.

GAUDRON J:   With different offers and ‑ ‑ ‑

MR BRETT:   No, in our submission.

GAUDRON J:   ‑ ‑ ‑ different considerations.  I would have thought in ordinary contractual analysis there were several contracts.

MR BRETT:   The Full Court took a similar view and they said at page 885, I think it is, or thereabouts of the appeal book – they referred to there being commercially a number of different agreements.

GLEESON CJ:   But, I mean, the problem with this passage is, is it not – once again, it is just no kind of even faint criticism of the passage – just addressed to a problem that is simpler than the problem with which we are concerned?  The factual complexity of the present situation goes beyond what appears on the face of the language of the relevant section of the legislation and it goes beyond this passage also, but that does not tell you what the result is going to be.  It just means that we have to face up to the complexity.

MR BRETT:   In our submission, it does not go beyond what is being faced at that point in Tallerman, because Tallerman was a case where the Court was being asked to fix a place at which a contract was made. 

GLEESON CJ:   What would they have said if a new party had come into the contract; if one of the variations of the contract had been to introduce a new party?

MR BRETT:   That may well raise a question of whether there has been a rescission and novation of the contract as a whole.  In the view of the Chief Justice and Mr Justice Fullagar in Tallerman, that was not the case in Tallerman’s Case, and it is not the case in the present case that is before your Honours.  We would not contend otherwise than that if the parties had made such fundamental changes to their agreement, that effectively what they had done was to sweep away the whole of the old agreement and replace it with a new one, then ‑ ‑ ‑

GAUDRON J:   But again, that may be over simplifying it.  What if one contract over time evolved into several, which may be a more accurate analysis of what happened here?  I think maybe, at the end of the day, the questions are irrelevant because one is probably looking at the contract under which the obligation to dispose came into existence.  One is not looking as to the question as to under which the contract defines the obligation to dispose to a particular person, in cases of this kind.  That may be one way to it, but ‑ ‑ ‑

GLEESON CJ:   Which is a question of construction of the statutory provision, the resolution of which may not be assisted by the kind of principle referred to in Tallerman.

MR BRETT:   One can look at section 160U(3) and look at the reference in it to disposal under a contract as referring to a disposal under a particular contractual obligation.  That is to say, a particular part of the contract, or a particular contractual obligation rather than the contract as a whole.

GLEESON CJ:   When did the taxpayer first come into any form of contractual relationship with Nicholas Products Pty Ltd?

MR BRETT:   Never.  In our submission, never.

GLEESON CJ:   Did not Nicholas Products Pty Ltd ever become obliged to pay the purchase price?

MR BRETT:   In our submission, no.  There is no contractual document executed by Nicholas Products in favour of any of the vendors, let alone Nicholas Kiwi.  What one has is a sequence of events that goes like this:  there is an agreement between a whole number of sellers and one purchaser, who is Roche.  There is then ‑ ‑ ‑

GAUDRON J:   At that point one may need to identify in what capacity Roche entered into that contract.

MR BRETT:   It just entered into it as Roche.  It was the buyer ‑ ‑ ‑

GAUDRON J:   Well, it ‑ ‑ ‑

HAYNE J:   But with power, with power to ‑ ‑ ‑

MR BRETT:   With power to nominate recipients or assignees.

GAUDRON J:   So it may, for example, have been entering it as trustee of the benefit of the contract for various as then unspecified beneficiaries, or it may have been doing it as agent for as then unspecified principals, or on its own behalf.

MR BRETT:   It could conceivably have been an agent acting on behalf of an undisclosed principal, but there is nothing to suggest that it was ‑ ‑ ‑

GLEESON CJ:   It certainly could not have been an agent acting on behalf of a non-existent undisclosed principal.

MR BRETT:   Of a non-existent undisclosed principal, yes, I take that point.  Nor did it purport to act as trustee for anybody, nor is there any reason for it to suggest that it was doing so, and again, it could not have been acting as a trustee for an as yet non-existent company.  The contract ‑ ‑ ‑

GAUDRON J:   Then you say it entered into it as a person with a right pursuant to the contracts to transfer the benefit of the contract or any particular part thereof to anyone who was prepared to assume the liabilities.

MR BRETT:   Subject to conditions, yes.

GAUDRON J:   Yes.

HAYNE J:   Is that right, or did it simply enter it on its own behalf with power to require performance in a particular way, namely performance by disposition to a person of its nomination or choice.

MR BRETT:   Clause 12.3 talks about or purports to give Roche the right to assign rights, subject to certain conditions, rights under the contract.  It is not merely expressed as a power to direct a transferor as to the identity of a transferee.  It is clause 12.3 which is in volume 2 of the appeal book.  I gave your Honours a reference to it earlier on.

HAYNE J:   It is 284.

MR BRETT:   Yes.  But our submission is that the contract that was entered into on 31 May was one contract, it was a contract in which there were a number of sellers, each of which bound itself to sell everything that it possessed that came within a certain couple of descriptions, assets and intangible rights, and each of which was part of a group entitled to receive a lump sum consideration of $597 million payable entirely by the single buyer, Roche, and that the allocation schedule which was Schedule 2.4(b) and which showed Nicholas Kiwi as being allocated $61 million at that point, was very similar to a provision in a contract between vendor and purchaser of land that might nominate a third party as the transferee of the land.

GLEESON CJ:   One way of looking at the problem might be that the expression “under a contract” invites attention to the source of the obligation to make the disposition.  One way of putting an argument might be – and it does not sound very complicated – that the source of the obligation to make the disposition in the present case was a contractual obligation undertaken by the taxpayer in May 1991.

MR BRETT:   That is our submission.

HAYNE J:   Well then, how does that grapple with this problem?  Under section 160U(3) you are required to, and the section assumes, a singular time.

MR BRETT:   Yes.

HAYNE J:   A “time of making of the contract”.  The contract upon which someone would have sued in this case would have been particularised as a contract, you say, made May, varied August.  How does the Act grapple with the fact that there is an assumed singularity of time, but the contractual obligations originate at different times?

MR BRETT:   The Act does not specifically grapple with that.

HAYNE J:   Then why should we take one in preference to another?

MR BRETT:   Because your Honours apply the general law and ask yourselves:  what does the general law say about what is the time of the making of the contract?

GAUDRON J:   Well, I do not understand why you put that answer to Justice Hayne then, if I may interrupt you, I am sorry.  It talks about “a contract”, which might be a contract pursuant to which the asset was acquired or, as I read it, another contract pursuant to which it was disposed of, and then the making of the contract, it seems to me, must take its meaning from the disjunctive earlier referred to.  It does not seem to me that there is any notion in section 160U(3) where it is “the contract”.  More to the point, one is not looking at something done by contract at all; one is looking at under a contract, so I do not think ‑ ‑ ‑

MR BRETT:   There is a sharp distinction between the language of a change of ownership occurring by a transaction or by the execution of an instrument or whatever, which appears in section 160M, and the phrase, “a disposal or acquisition occurring under a contract”.

HAYNE J:   That the May agreement obliged Nicholas Kiwi to dispose is apparent, but was the disposal that occurred the disposal that occurred under that obligation?

MR BRETT:   Yes it was, in our submission.

HAYNE J:   Why, when you get 62 rather than 61 million for doing it?

MR BRETT:   Because the disposal was simply the disposal.

GLEESON CJ:   It cannot be a disposal under two contracts, can it?  Why not?

MR BRETT:   Disposal under two contracts ‑ ‑ ‑

GAUDRON J:   We are not talking about by; it might just as easily be under ‑ ‑ ‑

MR BRETT:   One can certainly imagine a contract composed of a number of different instruments ‑ ‑ ‑

HAYNE J:   Which this is.

MR BRETT:   Yes.

HAYNE J:   But Justice Gaudron referred to disposal under “a” contract.

MR BRETT:   Yes.

HAYNE J:   The portion of U(3) that troubles me for the moment has been “the” time of the making of “the” contract.

MR BRETT:   Yes.  We submit that there are two possible ways to solve the problem that your Honour has identified.  One is to say, look at the whole agreement that was between all of the parties and, one way or another, fix the time at which that agreement was made, if you can.  Another way of solving that problem, which is presented by these facts in relation to 160U(3) is to read 160U(3) as requiring identification of a contractual obligation to dispose of the asset or, if one is talking about an acquisition, a contractual obligation to acquire an asset.

Our submission is that either way we win.  If one asks what is the time at which the whole agreement between the vendors, including Nicholas Kiwi, and the one and only purchaser who was Roche, what time was that made?  Answer:  it was made in accordance with what the Chief Justice and Justice Fullagar said in Tallerman at the time the original contract was entered into, because what happened later was no more than an alteration of the content of their contractual obligations.  It was not the place or the time at which the parties became bound to each other.  When you talk about the making of a contract, one thinks of when do the parties become bound?  The answer to that question in this case, is “may”.

GLEESON CJ:   A possible way of looking at it would be to say there was an obligation to dispose of this entered into in May.  There was a later variation of the consideration.  That only affects the amount brought to tax, up or down.

MR BRETT:   Yes.

GLEESON CJ:   And there was a later identification of the disponee in a circumstance where it was originally contemplated that that would occur or might occur.

MR BRETT:   Or might occur.

GLEESON CJ:   But the variation of the consideration and the clarification of the identity of the disponee did not affect the constant obligation to dispose of the asset.

MR BRETT:   We submit precisely that and we have put that in our written submissions as an alternative at paragraph 42 and thereabouts of our written submissions.  The obligation to dispose never changed.  There were a number of things amended in the amending agreement.  Some of them, which we would submit, in fact, were not terribly significant, related to the Australian part of the transaction but what never changed was the obligation on Nicholas Kiwi to dispose of everything that it had which either constituted an asset or constituted an intangible right and that obligation came into existence on 31 May and it never ceased to exist and it never got extended or diminished.

If one reads 160U as simply requiring the identification of a time at which a contractual obligation was placed upon the disponor to dispose, then there is only one answer to that question and that is 31 May.  There is no possible alternative.

GLEESON CJ:   Now, how are you going in terms of time, Mr Brett?

MR BRETT:   Not very well, your Honour.

GLEESON CJ:   Well, this is the last day of the sittings, that is why I wanted to raise ‑ ‑ ‑

MR BRETT:   I understand.  I think we have covered a large number of the matters that I wanted to cover in relation to the question of variation.  Could I just run very quickly through the remainder of those and then I want to deal very briefly with what I will call the Elmslie point, which relates to whether the disposition occurred under the contract at all or whether the fact that the deeds of assignment were executed and ‑ ‑ ‑

GLEESON CJ:   Have you made any agreement with Mr Shaw about division of time?

MR BRETT:   No.  I said to Mr Shaw that I thought we would finish within the day and I did not say so but that involves me finishing at about lunchtime which is going to be difficult.

I have read to your Honour the passage that we rely upon from Tallerman but the contrary view, if I could call it that, is that any variation to a contract, no matter how small, constitutes the making of a new principal contract, a whole new principal contract.

I need to just distinguish very briefly here between the principal contract and the contract of amendment.  When there is an agreement to vary a contract, the agreement to vary is itself an agreement and it is a new agreement.  It is one that has not existed before.  We are not concerned with a contract of variation in this case.  We are not relying on the contract of variation in any way.  When the Act asks us to fix the time of the making of a contract, what it is asking us to look at is the time of the making of the principal contract, that is to say the one under which the transfer of assets actually took place.

Now, there is, as I say, a view which is that any variation amounts to the making of a new principal contract, a wholly new principal contract, and our submission is – and this is set out in our written submissions – that that view is inconsistent with a well‑established and well‑accepted line of authority, both in Australia and in England and, we would say, in America, to the effect that it is ultimately a question as to the intention of the parties which is often ascertained by reference to the extent of the changes that are made by a particular variation as to whether the variation amounts to a rescission of the existing contract and the substitution of a new one or, on the other hand, merely a variation of the original contract but leaving the original contract in force.

The leading case in that line of cases is Morris v Baron (1918) AC 1. In view of the time I will not take your Honours to any particular part of it. I simply refer your Honours to the speech of Lord Dunedin at page 25 starting about point 8 or point 9 of the page, about six lines up from the bottom, and going over to the end of the first paragraph on the following page where the view that any variation must necessarily result in the replacement of the old contract by a new one is soundly rejected.

GLEESON CJ:   And two‑thirds the way down page 26 in the sentence commencing “The criterion is”.

MR BRETT:   Yes, your Honour, that is so.  Could I also refer your Honours to Lord Finlay at page 12, Viscount Haldane at page 20, Lord Atkinson at page 31 and Lord Parmoor at page 38.  Very difficult to follow the facts in that case.  The best judgment to read, or best speech to read, is that of Lord Finlay to understand the factual context.

I should say in relation to Morris v Baron that there is a line of cases that follow it, accept it, build upon it, and they are all referred to – or a number of the leading cases are referred to in paragraph 18 of our written submissions, and I will not take your Honours to them.

What our friends say about Morris v Baron is that, in effect, it is an exception to the general rule.  They say the general rule is that every variation results in the replacement of the old contract with a new contract.  They say that Morris v Baron and the cases that follow it are a special case exception which evolved because of problems that arose from applying that general rule in cases involving the statute of frauds.  It often worked to produce unfairness, and they say, as we understand it, that Morris v Baron and that line of authority should be understood as restricted only to cases involving in the Statute of Frauds, which, of course, does not apply in the present case.

Our answer to that is again found in paragraph 19 of our written submission.  Dan v Barclays Australia Ltd, which is one of the cases that we have put on our list of authorities, is a case having nothing to do with the Statute of Frauds.  We have referred to a very recent decision of her Honour Justice Kenny in the Federal Court – Broken Hill Proprietary Co Ltd v Commissioner of Taxation at paragraph 53.  Again, that had nothing to do with the Statute of Frauds.

We have referred to a case in paragraph 18 called British Broadcasting Corporation v Kelly‑Phillips [1998] 2All ER 845, again, nothing to do with the Statute of Frauds. It was an employment contract and involved the extension of a contract of employment.

Our friends have put as a schedule to their submissions a discussion of some American authorities on this point.  We gave to our learned friends yesterday, and we now seek leave to file – and I understand Mr Shaw will not oppose that application – a response to that.

GLEESON CJ:   That would be very helpful, thank you.

MR BRETT:   We submit that a number of the cases – essentially what we say, your Honours, is the cases that our friends principally rely upon are some cases from the 19th century, in which Justice Clifford, in particular, appears to espouse the view that any variation to a contract necessarily involves the complete replacement of the old contract with a new contract.  We submit that that is certainly not good law in this country or in England any longer and we further submit that it is not good law in the United States either, and we have referred to some authorities which establish that.

I just do not really think I have time to take your Honours to the particular parts of those decisions.  I hope our written submissions will speak for themselves in that regard.

I need to notice very briefly what the Full Court actually said about this question, and what their Honours did is apparent from the passages of their judgment appearing in the fourth volume of the appeal book at page 893.  At the very top of the page, second line, their Honours say:

But neither proposition –

and it does not matter for present purposes what the propositions were:

really answers the question whether the obligation of the Appellant to transfer certain assets for a specified price arose under the May Agreement or under the Amending Agreement made in August which then operated to amend the May Agreement.

It is apparent from that, that the question to which their Honours have directed their attention is the question of, “When did the obligation to transfer certain assets for a specified price arise?”  We submit that their Honours were in error, with respect, in doing so, in two respects.

Firstly, they focused on the question of when a particular obligation arose rather than the question of when a contract was made; and secondly, because even if it is right to have regard to the question of when a particular obligation arose, the only relevant obligation is the obligation to dispose of the asset and they have, we would submit, wrongly linked it to the specification of a price in the contract.

Having done that, their Honours said, “Well, they did not have the specified price until August.  Therefore, you did not have an agreement to dispose for that price until August.  Therefore, the agreement was made in August”.  Now, their Honours do not really give a very clear statement, with respect, as to why they took that approach.  At page 885, under the heading “Was there a disposition made under a contract and, if so, what contract?”, they point to the necessity to identify a consideration in respect of a disposal.  They do not, however, say that that leads to a particular conclusion about what 160U happens to mean.

At page 888 line 10, the paragraph that is around line 10 I mean, they characterise the May agreement as commercially encompassing “two separate kinds of agreements”, namely “one overall agreement” and then a whole lot of little agreements, but it is simply given as a commercial characterisation rather than a legal characterisation and our submission is that whatever may be the commercial thinking behind the agreement that was made, there was only one agreement made on 31 May and it was made between Roche as a buyer and a number of companies as sellers.  In the next paragraph they speak of:

the Amending Agreement changed at least the most fundamental term of the contracts between the Sara Lee subsidiaries and affiliates –

and that is a reference to the amendment of the consideration, although the amendment that they are speaking of there appears to be the $296,000 amendment to the total consideration rather than the $1 million amendment to the allocation of part of it to Nicholas Kiwi, but they do not then go on to say that that is such a fundamental thing that it means that the whole May agreement has disappeared and been replaced, which would be the logical conclusion of making a reference to a change in a fundamental term.  They accept the position that it was only a variation and it was not a rescission and substitution.

So the result is that we find it difficult, with respect, to identify in their Honours’ reasons the basis upon which they did link the consideration with the requirement to identify a time of disposal in 160U(3).  We said that in paragraph 40 of our submissions.

The final thing I want to say about variation, and I notice the time, is that the respondents make an argument that is similar in some respects in the first part of their submissions, paragraphs 1 to 10, where they talk about the scheme of the Act and they submit, as we understand it, that the Act necessarily involves an acquisition and a disposition - a disposal occurring simultaneously.  We simply say that, first of all, that particular proposition was rejected by that Full Court and by the Full Court in the present case at page 885 and we say there is no warrant for it in the Act.  I think that is all I want to say about variation.  I notice the time and I will be very brief on the other two matters after lunch.

GLEESON CJ:   Keep going.

MR BRETT:   If your Honour pleases.  I am happy to do so.  I assumed your Honours might be getting hungry.

HAYNE J:   This Court does not eat or sleep.

MR BRETT:   So the pony express will continue.  If I could turn, and I will try to be as brief as I can, to the question of, did this disposal occur under a contract at all?  And that is a question which is dealt with by the respondents.             That is a question which is dealt with by the respondents.  Their submission is, as I said and I have mentioned briefly a couple of times, that because – it is really in two parts.  It is without a doubt that the actual transfer of ownership occurred, or was effected by, what occurred upon the execution of the deeds of assignment on 30 August.  They say, first of all, that those deeds, properly understand, are indeed themselves contracts and that therefore, if one is looking to identify the contract under which the disposal took place, then those contracts constituted by the deeds are the most immediate contract requiring the disposition, they actually effect it, and therefore that is the contract which one would identify.

Alternatively, they say, that even if those documents are regarded as assignments or conveyances rather than contracts, then their operative effect was such as to break the necessary connection between the transfer of ownership, the disposal, and the contract, which may at some stage, according to the respondent, have required a disposal to take place – I am sort of hesitating because I find it difficult to express their argument properly and I am trying to be as neutral as I can.

The deeds were a kind of novus actus interveniens that broke the link between the contract of May as amended and the transfer of ownership of the asset. 

Our submission essentially is this – and it is set out under the heading “Ground 3” on page 12, paragraphs 51 and following of our written submissions – we simply say that what occurred at closing, including the delivery of the deeds, was no more than was contemplated and provided for by the May agreement, and that the documents that were executed were not new contracts which must be identified as the contracts under which the transfer took place.  We have referred in paragraph 52 to relevant provisions of the May agreement which provided for what was to happen at closing.

Could I refer your Honours to a number of things in support of our submission.  This really goes to the question of whether deeds of assignment can, as it were, break the chain of connection between the contract and the disposal. 

First of all we point to the distinction between the use of the word “under” in section 160U and the use of the word “by” in section 160M.  We say that “under” is a wider word than “by” and it connotes a less direct connection between the contract and the disposal than the word “by”.  An asset can be disposed of under a contract even though it is not disposed of by that contract.  One can think of innumerable examples where that would be the case.

We point out that if 160U, when it uses the word “under” really meant no more than “by”, then there would be no point in having it at all, because the other provisions of section 160U would pick up the slack, as it were. It is actually necessary to go to 160M to begin with.  Section 160M says that there is a disposal of an asset when certain things happen and there is transfer of ownership.  What section 160U(3) is asking the taxpayer to do is to identify a different time from the time at which the actual transfer of ownership took place.  It is a deeming provision.  If the disposition took place by virtue of the contract, there would be no need to have such a deeming provision.

We rely on two cases, one of which is Chan v Cresdon (1989) 168 CLR 242, which is our learned friend’s list of authorities, and that was a case concerning the meaning of the phrase “under a lease”. It is a case in this Court. The phrase in question was “under this lease” and at page 249 at the bottom of the page their Honours the Chief Justice and Justices Brennan, Deane and McHugh say that:

The word “under”, in the context in which it appears, refers to an obligation created by, in accordance with, pursuant to or under the authority of, the lease.

In that particular case what happened did not answer that description but we submit that in the present case what happened does answer that description.  That passage in Chan v Cresdon was picked up in a case decided by Dr Gerber in the ‑ ‑ ‑

GLEESON CJ:   Well, we can probably just rely on the authority of the High Court.

MR BRETT:   Yes, your Honour.  The point about Dr Gerber’s case was it is a tax case directly concerning this provision.  He adopted the same definition as was in Chan v Cresdon. It is AAT Case 9451 and it is (1994) 28 ATR 1108.

Of course, both the judge at first instance and the Full Court accepted that view of the meaning of the word “under” in this particular case.  The

respondents rely on a case called Elmslie v Commissioner of Taxation 46 FCR 576. I will not take your Honours to it. We simply say that case was distinguished by the Full Court, it was distinguished by Mr Justice North, it was distinguished by Dr Gerber in the AAT case 9451 that I have just referred your Honours to and we say it is distinguishable in the present case. Elmslie was a case in which there were some heads of agreement which provided for the execution of a further contract.  That is what happened and that is not what happened in this case.

Finally, your Honours, there is the ratification question.  We have made submissions about that at paragraphs 70 and 71.  We have referred to the relevant cases.  I do not wish to say anything more about that unless your Honours wish me to do so.

GLEESON CJ:   Thank you, Mr Brett.

MR BRETT:   If your Honours please.

GLEESON CJ:   Mr Shaw, how long do you expect to require for your submissions?

MR SHAW:   Your Honour, I am not sure, but somewhere between an hour and an hour and a half, I should think.

GLEESON CJ:   I should think that your opponent will need at least 20 minutes for a reply, so we will adjourn until 2 pm.

MR SHAW:   If your Honour pleases.

AT 1.01 PM LUNCHEON ADJOURNMENT

UPON RESUMING AT 2.02 PM:

GLEESON CJ:   Yes, Mr Shaw.

MR SHAW:   If the Court please, may I commence with some preliminary submissions which have some very significant ramifications for the substantive submissions when I come to them.  The first series of these submissions relates to the facts and to the nature of the contract or contracts which were entered into.  My learned friend opened by describing the sale and purchase agreement as an agreement for the sale of the OTC business, and that is true.

Much of what subsequently occurred in his submissions and in the discussion which ensued proceeded on a basis which ignored the fact that the sale of the business involved more than the sale of assets.  It involved taking over the business and that meant taking over the assets and the contracts and agreeing to fulfil the liabilities which the business had, and the deal was a whole one, if I might call it that.  The taking over the liabilities was not something separate and different and independent from taking over the assets, it was all part of the one deal, and it is submitted that it would be very surprising to find that any part of the transactions involved in the whole deal took place, for example, under a different contract from any other part or that one part was not under a contract and another part was.  You have to look at the contract as a whole and the whole of what it involved.

If I might just add to my learned friend’s references.  In volume 1 at page 343, there are definitions of the “assigned contracts” and “assumed liabilities”.  In clause 2 there is ‑ ‑ ‑

HAYNE J:   Sorry, what page are you, Mr Shaw?

MR SHAW:   The first page was 234.

GLEESON CJ:   That must be volume 2.

MR SHAW:   No, it is volume 1, right at the end of volume 1.

GLEESON CJ:   Right.

MR SHAW:   I am told I said the wrong page.  I should have said 234.  In clause 2 which commences at page 236, there is not only the provisions of clauses 2.2 and 2.3 at page 237, but also the provisions of clause 2.8 at page 241 relating to the assignment of assigned contracts.

I desire to draw attention also to something in clause 12.3, which is in volume 2 at page 284.  That provided for a right to assign subject to the fulfilment of the provisos, but one of the provisos involves:

the assignee shall agree to be bound by the terms and conditions of this Agreement ‑ ‑ ‑

HAYNE J:   Agree with whom?

MR SHAW:   Well, we would submit, agree with us, but at any rate, whatever that means, it is clear, it is submitted, that if there was to be an assignment there would be a further contract with the assignee of some kind and when one bears in mind that the contract involved not only the sale of assets but the assumption of liabilities, it is submitted that, assuming that those things occurred, and we submit they did and my learned friends submit they did, by the final deeds, it cannot be true that there was never a contractual relationship between Nicholas Products and Kiwi Brands because the only way contractual liabilities could be assumed is by contract.  When I come to look at the terms of the deed of assumption of liabilities, it is clear, it is submitted, that it sounds in contract and so, it is submitted, does the deed of assignment on its term and one cannot ignore some of the terms simply because they produce what might be regarded for my learned friend’s purposes as an inconvenient result.

The second series of preliminary submissions that we would make relate to the construction of sections 160M and 160U.  Some discussion took place this morning about the significance of section 160U and our learned friends said that that is really only a timing provision and that what amounts to a disposal or acquisition is to be found in section 160M.

We would agree with that and we would submit that the kind of disposal which occurred here is the kind of disposal which is dealt with in section 160M(1).  Now that is of some significance in relation to the construction of section 160U because what it says is:

where a change has occurred in the ownership of an asset, the change shall be deemed…..to have effected a disposal of the asset by the person who owned it immediately before the change and an acquisition of the asset by the person who owned it immediately after the change.

So, if one has, as it were, a…..change of ownership and the section goes on to expand the meaning of “change of ownership” in various ways, one has a change from ownership by one person to ownership by another person immediately and what one is concerned with is not disposal in abstract but an actual disposal by one person to another which immediately effects a change in ownership.

One should, when considering section 160U, bear in mind that, for present purposes at any rate, what one is talking about is a disposal which has been brought about by a change in ownership from one person to another.  The problems or absurdities which might arise by treating disposition to have taken place at a time different from the acquisition may be illustrated by this case, and your Honour the Chief Justice approached the illustration this morning.  The consideration here was a consideration which for present purposes was not in money, it was in US dollars, and if the disposal took place earlier than the acquisition, then the rates of exchange used to calculate what the disposal consideration was and what the acquisition consideration was will depend on the rates of exchange on the days on which these disparate events occurred.  Here it will be perhaps 31 May and 30 August and the rates of exchange may be very different, and you will get, first of all, periods in respect of which there is no indexation available and you will get differences in the amounts which are to be taken into account in calculating capital gains because dispositions will be taking place for different considerations in Australian dollars from considerations at which the acquisition from that very person took place.  It is submitted that that really is a very curious and surprising outcome, if that be the outcome.

HAYNE J:   Could I take you back to the premise from which this limb of the argument proceeds.  As I understood the premise you stated, it was that section 160M(1) identified that the relevant change in ownership was from one to another immediately; do I accurately state your premise?

MR SHAW:   I think so, your Honour; I thought I was repeating the words of the section.

HAYNE J:   Well, are you not taking the deemed consequence of change and identifying what the statute deems to be the consequence as being the content of that which precedes it, namely change, and is that a legitimate means of arguing from a deemed consequence?

MR SHAW:   Well, your Honour, what it is doing is not, it is submitted, accurately called a deemed consequence, in the sense that it is more the case of that subsection providing a definition, as it were. To take the heading, “What Constitutes a Disposal or Acquisition”, that might not be a proper assistance but, at any rate, what it is telling you is for the purposes of the part what a disposal and what an acquisition is, subject to the other parts of the section and the other part too, of course, but what it is telling you is, when we talk about a disposal, when we talk about an acquisition, this is one of the things we are talking about and, in our submission, it is perfectly legitimate, be it a matter of definition or a matter of deeming, to say that when one is looking at what section 160U might sensibly be construed to mean, to say you have got to bear in mind what section 160M(1) says, and that certainly does not contemplate a situation in which you have this difference in timing between a disposal and an acquisition.

GAUDRON J:   No, because what it is talking about is a change in ownership.

MR SHAW:   Yes, it is.

GAUDRON J:   And disposal is an artificial construct, in a sense in this legislation, imposed on things we well understand, but once you construct disposal as an artificial construct, why should it matter whether for the purposes of 160U(3) there is any contemporaneity in it?

MR SHAW:   Well, what I was really saying is that whether you might or might not construe section 160U(3) as possibly involving an incontemporaneity, section 160M(1) suggests you should not, that is all, and cannot.  The other thing we would say - and really this was not something which had occurred to us before but has occurred as a result of something that your Honour the Chief Justice said and something that Justice Hayne said this morning.  It related to trying to impose a simple statutory provision on a complex factual situation and say, “What is the answer?”, when the simple statutory provision does not seem really directed to anything quite as complex as one is faced with.

The answer might be that section 160U(3) is in the singular, under a contract, so that if you have a situation in which you cannot say it is under a contract – and one cannot read that in the plural because of the obvious difficulty that would lead to in the result - if you cannot say it is under a contract, but you have to say there is more than one contract that is relevant to this, then that provision does not apply.

GAUDRON J:   But that must involve reading 160U(3) as in the conjunctive, not the disjunctive.

MR SHAW:   No, it is merely saying when it says “a contract” it means “a contract”.  That is all.

GAUDRON J:   I am afraid I do not follow how, then, you read it.  You are saying in this case if you cannot say it was acquired under one contract ‑ ‑ ‑

MR SHAW:   No, no. What I meant was if it be true, for example, that there were a number of contracts involved ‑ ‑ ‑

GAUDRON J:   Yes, then you might go to 160U(4).

MR SHAW:   Yes.

GAUDRON J:   But if you can say there were a number of contracts involved and it was acquired under one and disposed of under another, would not 160U(3) still apply?

MR SHAW:   It conceivably might but, for present purposes, you would still have to say it was under a contract, even if you could separate them out and we would point out that here, on any view, there is a contract made on 31 May and its terms were altered in important ways in August so, on one view of things, there was more than one contract.

GLEESON CJ:   But another way of looking at it is to say that if the contractual situation that resulted in the disposition is more complicated than that to which subsection (3) is directed, you apply subsection (4).

MR SHAW:   Yes, and my learned friend - and I perhaps might go to Tallerman 98 CLR now - my learned friend read a passage from the judgment of Chief Justice Dixon and Justice Fullagar at page 112, but he did not read on and had he read on he – the intervening paragraph is relevant but I shall not read it out since it is quite long, but going to the middle of the next page, their Honours say:

If that is the test to be applied here –

it just referred to the difference between variations which affect the rescission of an earlier contract and variations which do not and saying it is not terribly satisfactory because it is just a matter of degree, their Honours go on:

the plaintiff must, as the Full Court held, fail.  On the conventional basis on which the action was tried, it could not succeed unless it established a new and independent contract made in 1952.  It proved, at most, a contract made as to some of its terms in 1951 and as to some of its terms in 1952.

What their Honours seem to be saying is (a) not surprising, it just happens to accord with the fact, and (b), obviously sensible.  If you have a contract which you make at one point and then you alter it at another, then when you finally come to fulfil the terms of the contract as altered, the contract has not assumed that form until the later time, it is true that, depending on what has happened, the entering into of the variation agreement may not have rescinded the former agreement.  That might still continue in some respects.  Here, there is not any doubt because there is an actual provision about it.

But assuming that that actual provision was not there, then one might say did it or did it not?  But for our purposes, all we need say is: look, the contract, pursuant to which the ultimate change in ownership occurred, did not take the form pursuant to which the ultimate disposal occurred until the date when the amendments were made.  Now it might be said in answer to that, that can surely not be so.  You might have altered some inconsequential term about somebody in Greece or something that has absolutely nothing to do with Australia;  and yet you are saying that the contract did not take its final form until the later time when the amendment was made.  Strictly speaking that might be true, but then one might say: let us look at what the amendment did.

Now, if I contracted to sell you the library which I have in chambers and then we decided that instead of you having all the books I have in chambers, we would substitute a set of Commonwealth Law Reports I have at home instead of the set of Commonwealth Law Reports I have in chambers, or some different set of law reports for the Commonwealth Law Reports I have in chambers, it might be that, looking at the contract overall, the change which has been made in relation to that new set of reports that has just been introduced, might not be very significant.  But if you are asking a question about the capital gain made in respect of those reports ‑ ‑ ‑

HAYNE J:   But there you have changed the subject matter and change of subject matter, I can well understand, may well introduce quite ‑ ‑ ‑

GAUDRON J:   And you may have two contracts.

HAYNE J:   Yes.

MR SHAW:   Your Honour, you may.  But what I am doing is meeting the proposition that, even if you regard the old contract as continuing to exist for various purposes, that does not mean that in respect of every variation you will regard the old contract as determining matters which relate to, or are affected by, the amendment.

HAYNE J:   Well it seems to me, if I may say so, Mr Shaw, either you have to take a stand at the point of “any variation is significant” or you have to take a stand which isolates subject matter and obligation to dispose, and you, at the moment, seem to be staking out ground that lies somewhere between those extremes, and I just wonder whether that is possible.

MR SHAW:   Well, your Honour, I suppose there is an ambiguity in the phrase “obligation to dispose”.  We would say that that was affected here and it was affected here because you cannot look at disposal in the abstract.  Section 160M(1) speaks of a change of ownership from one person to another being a disposal by the person who owned it before and an acquisition of the person who owned it after, in each case immediately.  Here the obligation changed from an obligation to transfer to Roche to an obligation to transfer to Nicholas Products, and it is submitted ‑ ‑ ‑

GAUDRON J:   Well, was it?  I mean, that is one way of looking at it.  One might need to look at this contract a little more carefully.  If it was an obligation to transfer to Roche or its nominee and it subsequently transferred to its nominee, it is the same thing, is it not?  One may need to look very carefully at that assignment clause.

MR SHAW:   Your Honour, in our submission, it is impossible to regard the assignment clause as a nomination clause.  The reason it is impossible is because the contract involves not only the disposal of assets but the assumption of liabilities, and it could not be in contemplation, it is submitted, that Roche could say to Sara Lee or any of the Sara Lee subsidiaries, “Well, your liabilities are going to be assumed by some man of straw”. 

HAYNE J:   Why not, when the clause permits assignment to one or more of its subsidiaries or affiliates without prior written consent?

GLEESON CJ:   And makes Roche continue itself to carry the liability.

MR SHAW:   So it does, it does.

GLEESON CJ:   That is their protection against that, is it not?

MR SHAW:   Yes, it is, but you also have to have under clause 12.3 an assumption of the liabilities under the contract by the assignee. 

HAYNE J:   Yes.

MR SHAW:   So, it is not a matter of simply saying, “Here you are, transfer the assets to whoever you like, Nicholas Products or anybody”.  It is a matter of saying, “Well, we’re assigning to a wholly owned subsidiary, we are remaining liable and the person we’ve nominated is going to assume the liabilities and going to take the assets”.  Your Honour will recall that the letter of notice of assignment said that the subsidiaries did agree to be bound by all the terms and conditions, and your Honour will recall that the deed of assignment and the deed of assumption of liabilities say, in the one case, that Nicholas Products paid the 62 million, not Roche.  In the case of the deed of assumption of liabilities, that as part consideration for the sale of the business, Nicholas Products assumed the liabilities under the assigned contracts and what are called the assumed liabilities.

If I might go to those deeds; they are in volume 3.  At page 555 is the deed of assignment.  The operative part is on 556:

in consideration of the sum of U.S. $62,461,000 paid by the Buyer –

The buyer is Nicholas Products -

to the Seller ‑ ‑ ‑

GAUDRON J:   Yes:

pursuant to the terms of the Agreement –

which is defined.

MR SHAW:   Which is defined, yes.

GAUDRON J:   It could as easily have read “under the agreement as defined”.

MR SHAW:   The agreement is the agreement as amended.

GAUDRON J:   Yes.

MR SHAW:   Not the agreement as unamended.  The money is paid by Nicholas Products and the consequence of the payment is:

the Seller does hereby sell, convey, assign, transfer and deliver to the Buyer…..all of the Seller’s right, title and interest in and to the Assets, the Intangible Rights…..and the Assigned Contracts –

In our submission, there is no warrant for ignoring the word “sell” there.  It is true the other words are there too and they must be given effect, but “sell” is there and the Full Court said about that, “Well, poof”.  In our submission, you cannot say “poof”, it is there.  Then, when we come to the deed of assumption of liabilities, which is at page 559, again the buyer is Nicholas Products.  At page 560:

in partial consideration of the sale, pursuant to the Agreement, by the Seller to the Buyer of the Seller’s right, title and interest in and to the Assets and the Intangible Rights…..the Buyer hereby assumes, undertakes and agrees to pay, perform and discharge, in accordance with their terms, all of the Assumed Liabilities of the Seller.

Then there is the same terms used in relation to the assigned contracts in the next paragraph.  In our submission, it is impossible to do anything but give those words a contractual effect.  The alternatives seem to be contractual effect or none.

HAYNE J:   The words take their origin, do they, from clauses 2.1, 2.2 which we find at pages 236 and 237:

at the Closing, Sellers shall sell to Buyer, and Buyer shall purchase –

MR SHAW:   Your Honour, the clauses are 2.2, 2.3 and 2.8.

HAYNE J:   Being cast in terms of futurity that, at closing, this shall happen.

MR SHAW:   The buyer there is Roche, not Nicholas Products.

HAYNE J:   Yes.

MR SHAW:   Those were the clauses which provided for, as it were, the sale of this business and ‑ ‑ ‑

HAYNE J:   But in light of that contractual wording, what do we make of the fact that the instruments provided at closing spoke in terms of sale?

MR SHAW:   Well, your Honour, the question is, do the deeds of 30 August have any contractual effect?  What we submit is, they should be looked at together and, indeed, one has to bear in mind that the amending agreement, the notice of assignment and these various closing instruments, if I can call them that, and the payment of the money, all occurred at the same time and as part of the same interchange of documents.  So that they all need to be looked at together and what our submission is, is that if you look at the deed of assumption of liabilities, and that has a contractual effect, there is no reason for thinking that the deed of assignment might not also have contractual effect.

It is not conclusive, but you do have some transactions taking place at this point which do involve contractual relations between Nicholas Products and Kiwi Brands, and if a true assignment – and by that I mean an assignment pursuant to clause 12.3 ‑ had taken place, then it seems to have been contemplated that there would be contractual relations between the assignee and the relevant Sara Lee subsidiary, and if there is not a true assignment under clause 12.3, but this is something different, then one might say, well, either this is occurring pursuant to the substitution of Schedule 2.4(b) by the amending agreement or it is simply being done, as it were, by way of bringing to an end the contractual obligations, but not in precisely the way contemplated by the contracts that had been entered into, so that one should regard those instruments as not being executed under a contract at all.

But the fact of the matter remains that Nicholas Products was simply not referred to in the contract, except perhaps by way of possibility as an assignee, unnamed, in the 31 May contract.  It was referred to once the amendment was made.  It was referred to as a purchaser of the assets of Kiwi Brands for $62‑odd million, which was a different figure from the figure which Roche was going to purchase them for, and, in our submission, that being so and the documents relating both to the amendment and to closing in the sense of the deeds of assumption of liabilities and the deed of assignment all having been executed on 30 August and when one bears in mind that Nicholas Products itself was not in existence on 31 May, it seems a very strange consequence to say that the disposal which took place on 30 August, the disposal which resulted from the change in ownership from us to Nicholas Products, was something which should receive a date earlier than that.

I should perhaps add this.  Questions were asked this morning about the possibility that you might have a disposal simply by entering into a contract, say a specifically enforceable contract for the sale of land, on the basis that the entry into the contract resulted in a change of ownership.

GLEESON CJ:   I thought the current theory was that full beneficial ownership does not go to the purchaser until the purchase price is paid.

MR SHAW:   Yes, and, your Honour, I am merely saying it does not really matter here because we say and my learned friend says this change in ownership was effected by the deeds on 30 August, but not only is that the current theory about what happens when you enter into a contract for the sale of land, but the received way, if I could call it that, of looking at the way in which the capital gains tax provisions used to operate in relation to disposals was that you had to wait and see, if you got a contract for the sale of land, if it was actually completed.  If it was actually completed, then you backdated it, assuming it was under the contract, and if you do not adopt some approach like that, you get yourself into terrible problems because what happens when the contract is rescinded, for example, or it is terminated for breach or whatever.

GLEESON CJ:   The problem with variations of contracts - and circumstances such as the non‑existence of the disponee in the present case sound accidental - the problem with the variation of contracts is that they may be major or they may be inconsequential.

MR SHAW:   Yes.

GLEESON CJ:   They may affect fundamental provisions of the agreement or they may not.  On the other hand, you cannot, as it were, adopt a construction of the Act which produces the result that the judge decides it case by case according to whether it feels right to treat it as being under the contract before variation or in some other way, so you have to have a principle.

MR SHAW:   Yes, you do.  What we would say, your Honour, is what you do is – this might be a principle which might not solve every case but it would solve this case - what you do is you say it has to have been a change of ownership and, I mean, there might be other questions too under the other provisions of section 160M.  The answer here is yes, there has.  On 30 August there was a change of ownership from us to Nicholas Products and then you say that means there has been a disposal by us and an acquisition by Nicholas Products.

Then you say that disposal, that change of ownership – where is that?  Is that provided for under a contract?  Here you say it is true that there was an assignment clause in the original contract of 31 May but that contemplated, if there was an assignment, a further contract with the assignee and us and if one leaves out assignment, the first time you find any reference to Nicholas Products and the first time there came to be an obligation on us to dispose of the assets to Nicholas Products was once the amending contract was made.

GLEESON CJ:   That really is the crux of it, is it not, as I think Mr Brett pointed out to us this morning.  If you look at the reasoning in the Full Court, it was because they tied in the amount of the consideration and the identity of the disponee with the obligation to dispose, that they decided the case as they did.

MR SHAW:   Yes.  That is so, but we would, of course, accept that but what we have been saying is that there other ways of looking at it which lead to the same conclusion, ways they did not accept because they were saying you could have this difference in time between disposition and acquisition without dealing, in this respect, with section 160M(1) and they also said that the deeds of 30 August did not have contractual effect.

But, your Honour, maybe one can usefully ask a different question.  What is the answer to the question, “Was the deed of assumption of liabilities made under a contract, and if so, which contract?”?  Your Honours will recall that is a deed entered into by Nicholas Products and acknowledged by us, by which the assumed liabilities and the assigned contracts were covenanted to be fulfilled and performed by Nicholas Products.  Now, assume for a moment that Nicholas Products had no contractual liability to enter into that but nevertheless did because it was asked to by Roche.  We would submit that in those circumstances one would not say the deed of assumption of liability was entered into under a contract.

If that be so, then it seems very strange to say it was not but the deed of assignment was.  That is why we have been submitting that it is important to look at what the whole agreement does and look at everything which occurred on 30 August because, although of course, in order to answer the question which arises in this case, one has to answer a question about the disposal of the assets because that is a disposal in respect of which the capital gain was assessed, one cannot, it is submitted, really come to the right conclusion about that without taking into account the context in which it occurred and the fact that it was, as we submit, only one part of a whole set of interconnected transactions and arrangements, all of which ought to be looked at together.  One should regard what happened on 30 August as part of one whole transaction.  I mean, it is true you can look at it as separate transactions, but it is nevertheless part of one overall transaction provided for if it had been Roche and if the price had remained the same in the earlier contract, but that just is not so.

May I say something briefly about the ratification point.  I accept that the submission which we have put on this has everywhere so far been greeted with stony stares of disbelief.  Nevertheless ‑ ‑ ‑

GLEESON CJ:   I spent years earning my living that way, Mr Shaw.

MR SHAW:   Nevertheless, it is submitted it really has some sense to it.  The fact of the matter was, as my learned friend briefly outlined, when the contract of 31 May was signed on behalf of our client in Europe, the man who signed it had no authority to do so, and it was only later – I think about 20 August – that the ratification of the contract was given ‑ ‑ ‑

GLEESON CJ:   Where is that instrument?  We were shown it, I think, by Mr Brett this morning.

MR SHAW:   Page 635 in volume 3 that would be.

GLEESON CJ:   Yes.

MR SHAW:   In fact, that one is Golden Heath, but if one turns over to – no, 635.  Yes, that is right, that is Nicholas Kiwi.

GAUDRON J:   But the company was not executed relevantly by anyone other than Roche at that stage, was it?

MR SHAW:   Yes.  At that stage – by that stage I mean on 31 May, it was executed by Roche and by Sara Lee and by numbers of the Sara Lee subsidiaries who were stated to be parties.  About those other subsidiaries there is no evidence but about Nicholas Kiwi there is evidence, and there is undisputed evidence that Mr Patten who signed the page, which is at 291, had no authority to do so when he did.

GAUDRON J:   Had no authority to - I do not follow this.  Had no authority to do so from whom?

MR SHAW:   From Nicholas Kiwi.

HAYNE J:   So no authority to execute?  We are speaking of authority to execute?

MR SHAW:    To enter into the contract.

GAUDRON J:   Where does Nicholas Kiwi – yes ‑ ‑ ‑

MR SHAW:   That is us.

GAUDRON J:   Yes.

MR SHAW:   Although our name seems to change with remarkable ‑ ‑ ‑

GLEESON CJ:   This is Kiwi Aus?

MR SHAW:   Yes.

GLEESON CJ:   But what page do we see somebody purporting to execute it on behalf of Kiwi?

MR SHAW:   Page 291.

GLEESON CJ:   Was it because of a lack of authority or deficiency because they did not comply with the Articles of Association, or what was the problem?

MR SHAW:   The passages are at page 630 in the affidavit of Mr Glanville in paragraph 6 and it is at line 16 down to the end of paragraph 6 and at page 655 in Mr Patten’s affidavit.

GLEESON CJ:   Now ratification makes effective that which he purported to do without authority.

MR SHAW:   Yes.

GLEESON CJ:   So it makes effective what he did on 31 May.

MR SHAW:   Yes, quite so.  The question is really this: if your Honour looks, for example, at what is said in the Full Court judgment at page 894 from line 1 down to line 12.

So what the authorities show is that, as between the parties, once you have ratification you throw back the execution to the date on which it occurred, although, in fact, it was unauthorised, and that is a wholesome and convenient fiction as Lord Macnaghten said and it was accepted by Justice Isaacs.  So one has this fictional treatment of the date of the making of the contract as when the contract was, in fact, signed, although it was unauthorised.

GAUDRON J:   But I do not want you to be diverted too much – I am sorry, I do not want to divert you too much - but it is signed by a director.  It has not got the company’s seal though, has it?

MR SHAW:   No.

GAUDRON J:   No, I suppose that is the thing.  There is no doubt it was signed by a director.

MR SHAW:   Yes.

GAUDRON J:   As between the parties one assumes they might well have been bound by that by reason of an estoppel or ostensible authority or something.  What I am saying is it may be that as between the parties the ratification was superfluous.

MR SHAW:   Well, the only evidence that there is is that he was without authority and that there was the ratification and Mr Patten is not a – and it is perfectly clear that the ratification did not occur until into the new financial year.

GLEESON CJ:   But the proposition on page 895 line 12 is the answer that the Full Court gave.  Now, why is that incorrect?

MR SHAW:   No, it does not mean that it is to be ignored necessarily, your Honour, but when the question is:  for the purposes of income tax law on what date was the contract actually made, the answer is it was made when it was ratified.  It is true that as between the parties it will be backdated, but that does not make any difference to the fact that it was not made until the ratification and the fact that that is so is demonstrated, it is submitted, by the fact that if third party rights intervene the backdating does not occur.

GAUDRON J:   Well, it talks about the exact minute.  It talks about the execution of the company of the contract.

MR SHAW:   Yes.

GAUDRON J:   I do not read that minute of ratification as providing any secure foundation for the proposition that the contract only came into existence when ratified.  It may simply have been there for more abundant precaution.

HAYNE J:   This way there seems to have been an awful lot done in apparent reliance and giving effect to the agreement in the intervening period, Mr Shaw.

MR SHAW:   Well, your Honour, I am not really sure that is true; the amending agreement was entered into by Sara Lee as agent for the subsidiaries amongst others, as well as for itself, and all the various things your Honours referred to in fact occurred on 30 August.  Your Honour, I am not suggesting that, as a matter of, if you like, commercial reality, it was not perfectly plain the thing was going to go, but of course it was.  I mean ‑ ‑ ‑

HAYNE J:   And that Sara Lee would deliver its wholly owned subsidiary, was it wholly owned?

MR SHAW:   Yes.

HAYNE J:   And that this man had signed these documents in blank because the parent company had suggested that this might be a good idea in furtherance of the parent company’s commercial aims.

MR SHAW:   Well, your Honour, that may be so, but in fact the company was being run from Australia, as the evidence shows, and one can perfectly well understand what Mr Patten did, but it is submitted that the evidence showed that in fact the contract was not made until ratified.  Now that has been accepted below; what has not been accepted is that the backdating does not occur and the only reasons I can offer for that are the ones which I have offered and it is submitted that of all those reasons, the best one is the simplest one, namely that it is true.  If the Court pleases, in our submission, this appeal should be dismissed.

GLEESON CJ:   Thank you, Mr Shaw.  Yes, Mr Brett.

MR BRETT:    Could I deal with the last point first very briefly, the ratification point.  Our submission is that there is nothing in it.  When the board ratified the act of Mr Patten, they ratified an act which had taken place, they retrospectively clothed it with authority and the question in the present case is, when was the contract made?  The answer is, he did the relevant act on 31 May and that act is now known to have been done with authority.

The only other thing I would like to say about ratification is just to take up something that your Honour Justice Hayne said about what happened in the intervening time and a lot of work and things having been done in the intervening time on the assumption that the agreement was binding.  If I could refer your Honours to pages 655 and 656 of the appeal book, which is in volume 3.  This is part of an affidavit of Mr Patten.  First of all, at page 653 paragraph 8 he records that he:

was appointed as a director.....on 3 May 1991.

which I think answers the question that Justice Gaudron raised – yes, he was a director.  Then, on page 655, particularly paragraph 18, he describes his role, from early June of 1991:

until the sale was finally effected on 30 August 1991.  I had certain dealings with Roche in Australia.....a comprehensive due diligence –

conducted.  At paragraph 19 he begins by saying his:

role from early June to the closing of the deal was generally to discuss operational issues with Roche in Australia.

It occurred to me when I read that, that it is a pity we did not run an argument of implied ratification during June and not simply rely upon the formal ratification which occurred in August.

GAUDRON J:   It was only a ratification of the execution.

MR BRETT:   Yes.  It cannot be sensibly contended that the board of directors did not know very shortly after 31 May that Mr Patten had signed this contract on their behalf and was spending most of his time working to implement it, and that he was doing so without their authority.

CALLINAN J:   An $US800 million contract - - -

MR BRETT:   An $US800 million contract involving the sale of the entire business of Nicholas Kiwi.  In relation to ratification, we rely on what Justice North held and his reasons, and we would rely on what the Full Court held and their reasons, and I do not wish to reply any further to that. 

Could I deal with the submissions our learned friend made at the outset.  One point that was made was in relation to clause 12.3, which is the assignment clause found in appeal book volume 2 at page 284.  The particular matter to which our friend pointed was the second proviso requires the assignee to:

agree to be bound by the terms and conditions of this Agreement -

although that is not to relieve the assignor from any of its obligations.  The submission, as we understood it, was what the clause therefore envisaged was a further separate contractual agreement.

The first thing to be said about that is that although the word “agree” is used, in our submission, it does not necessarily import a contractual agreement, and what would have been perfectly effective would be an assumption of liabilities made by deed – not a contract at all, but a deed.  So there is nothing in the clause itself, in our submission, that necessarily means that where the transfer of the relevant assets ultimately takes place to a third party such as Nicholas Products, Nicholas Products must necessarily become a party to a contract with Nicholas Kiwi, the vendor – or the relevant one of the vendors.

In furtherance of that argument, our friend referred to the deed of assumption of liabilities and contracts which is in volume 3 at page 559.  I am not going to pretend to your Honours that there are not things in these deeds that our learned friends can point to as lending some support to their argument, but I do submit that when this deed and the deed of assignment are read as a whole it is clear that what they are actually doing is merely operating as transfers or as deeds properly so called rather than as contracts.

Our friend made the submission that this deed - “sounds in contract” was the phrase that he used.  He did not explain precisely why that was so or what was meant by that and we would certainly accept that Nicholas Kiwi could sue on that deed.

GLEESON CJ:   How could Nicholas Products have assumed the liabilities it assumed otherwise than by contract?

MR BRETT:   By executing a deed.  Your Honour, it is necessary, probably, to distinguish between different ‑ ‑ ‑

GLEESON CJ:   You mean that a deed is not a contract for the purpose of these provisions?

MR BRETT:   Yes, in our submission.  This is a deed and it is a deed whereby by formal act of the company, Nicholas Products, certain liabilities are assumed.  Could I make this point as well.  Clause 12.3 refers to liabilities and obligations.  It is necessary to bear in mind that there are lots of liabilities and obligations that are referred to in the principal contract.  There are the liabilities of Roche as buyer to the sellers as vendors, and the principal one of those liabilities of course is to pay the purchase price, but then there are also references to liabilities which the vendor companies have to third parties under other contracts, contracts which have been entered into in the course of business of those other vendors.

This deed of assumption of liabilities and contracts is an assumption by Nicholas Products of the liabilities of Nicholas Kiwi to third parties.  Now, on no view are the third parties party to that deed.  What does not appear anywhere to have happened is for Nicholas Products to have actually assumed a liability to pay the purchase price or any part of it.

It is recited in the deed of assignment on page 556 that in fact Nicholas Products did pay $62.461 million but there is no point at which Nicholas Kiwi could have sued for the purchase price because Nicholas Products only actually ever entered into the transaction at the time these deeds of assignments were actually executed.

GLEESON CJ:   What do you say to Mr Shaw’s submission, taking up the language of Tallerman on page 113 of 98 CLR, that these assets were disposed of under a contract that was made as to some of its terms in May 1991 and to some of its terms on 30 August 1991?

MR BRETT:   We accept that, but ‑ ‑ ‑

GLEESON CJ:   That does not sound like a proposition that anyone would want to quarrel with, unless there were tax consequences riding on it.

MR BRETT:   No.  I was going to say something about that because, in our submission, it supports us.  It was led into by our friend referring to section 160U(3) and submitting that one possible solution to the problem that arises in a situation where you do have a contract and a subsequent variation was that you had several contracts and 160U(3) only applies where you only have one contract.

GLEESON CJ:   Or you had one contract made – to use the language of this judgment – made as to some of its terms in one year and as to some of its terms in another year.

MR BRETT:   Yes.  Well, the point is, your Honour, the Chief Justice and Mr Justice Fullagar are saying that there was a contract made as to some of its terms at one point and some of its terms as to another point.  They have answered the question of where that contract was made on the previous page, at 112, they said that contract was made at the place where the original one was made.  They must answer the question when it was made the same way.

GAUDRON J:   I do not really think that is right, if I may say so.  When you have an agreement to vary an agreement, you have, in fact, got two agreements.

MR BRETT:   Yes.

GAUDRON J:   And that you have to relate to 160U(3).  That is what you had here.  You had two agreements.

MR BRETT:   We had two agreements.  I would submit this.  The amending agreement did not affect any disposal of assets or did not affect or provide for any disposal of assets by Nicholas Kiwi or, indeed – no, it did not.

GLEESON CJ:   The argument against you is that it provided for the only disposal that ever occurred, that is a disposal to Nicholas Products.

MR BRETT:   No, it did not do that either.  Well, yes, it did.  Yes, it indicated that that would be the recipient of the asset, but it did not require – I mean, this is an argument which rears its head in a number of places throughout this case – it did not require any different disposal.  The obligation to dispose was not any different before that amended ‑ ‑ ‑

GLEESON CJ:   There was undoubtedly a new agreement came on the scene on 30 August.

MR BRETT:   Yes.

GLEESON CJ:   That is how the purchase price came to be $1 million more.

MR BRETT:   Well, that is how the allocation of part of the purchase price to Nicholas Kiwi came to be increased.

GLEESON CJ:   Relevant to this disposal, to this ‑ ‑ ‑

MR BRETT:   Yes.

GLEESON CJ:   And that is how Nicholas Products came to assume liabilities and that is how it came about that there were 14 employees instead of 54 employees.

MR BRETT:   With respect, if I could stop there for a moment.  The amending agreement did not put any liabilities onto Nicholas Products.  Nicholas Products did not assume any liabilities under that – it was not a party to it.

GLEESON CJ:   There is no doubt that there was an agreement entered into on 30 August.

MR BRETT:   On 30 August, yes.

GLEESON CJ:   So relevant to the disposition, there were two agreements.  It does not solve the problem raised by section 160U(3) but it is a fact not to be ignored.

MR BRETT:   And we are not ignoring it.  That is what we are here for.

GLEESON CJ:   Then as a matter of construction of 160U(3), how does it deal with the case, either where an asset was disposed of under two contracts, or an asset was disposed of under a contract that was made as to some of its terms in one year and as to some of its terms in another year.

MR BRETT:   Well, as to the latter, where it is made as to some of its terms in one year and as to some of its terms in the latter year, provided we are still talking about the same contract - and that is what Chief Justice Dixon and Mr Justice Fullagar described on page 112 of Tallerman as the one contract, the one principal contract - that that was made at the place the original one was made and it was made at the time the original contract was made.  We are speaking here of the principal contract as amended.

The Chief Justice’s view was that, provided all that happened by virtue of the amendment that was agreed upon later, which everybody accepts is a separate contract and it is a new contract, but it is a contract which merely provides for a variation of the earlier contract, the principal contract which came into existence on 31 May in the present case remains the source of the obligations to dispose.  It also remains the source of the obligations to provide consideration and that is described by their Honours as a single contract made as to some of its terms at one time, and as to some of its terms at another time.  But if you are assigning a place to the making of that contract, it is where it was originally made, and we would say if you are assigning a time to the making of that contract, it is the time it was originally made.

GAUDRON J:   Why do you not, as Mr Shaw said, say, “Well, there are really two contracts so it does not fall within 160U(3), it comes within 160U(4)”?

MR BRETT:    That was something which Mr Shaw put forward as having occurred to him during the course of the morning.  It is, I suppose, a possible solution.  But if one looks, for example, at 160U(4), that says:

Where the asset was acquired or disposed of otherwise than under a contract, the time of acquisition or disposal shall be taken to have been the time when the change in the ownership occurred.

We would submit that it is just totally unreal to describe a situation in which a disposal has taken place, certainly under one contract and perhaps under more than one contract, as a disposal which took place otherwise than under a contract.  It is a very peculiar way to read.

HAYNE J:   But unreality, if there be unreality in that, and I am by no means certain that there is, stems from an assumption that the source of the obligation to dispose can be sheeted home to one time and one contract.

MR BRETT:   Yes.

HAYNE J:   Now, if that is not so, why is it unreal to say U(3) does not apply, therefore tip over into U(4)?

MR BRETT:   It is hard to envisage a situation where two separate contracts as distinguished – and I use that term in distinction to the situation where you have a number of instruments which together constitute a single contract – both continuing to be operative, it is difficult to think of a situation where they could both provide for the same thing, that is to say, the disposal of the same asset to the same person at the same price.  The point of saying that is that it is difficult to see how that problem could actually arise.

We would submit that the evident purpose of 160U(3) is to fix the time of disposals which take place pursuant to contracts.  If there is more than one contract which somehow or other provides for the same disposal, then one would have to identify that with which the disposal has the most immediate connection, in our submission.  That would be the only way that one could go.

GLEESON CJ:   Leaving aside the circumstances of the present case entirely, it is not difficult to imagine, is it, cases in which there will be more than one contract relevant to a disposal, and those different contracts might be made at different times?

MR BRETT:   They might, but it is difficult to imagine the situation in which they could all provide for the disposal, require the disposal to be made.  If one provides for disposal to be made at a particular time and another one provides for the same disposal to be made at a different time, which one does the ‑ ‑ ‑

HAYNE J:   Well, “I agree to sell you my business on terms that you provide me with a restraint of trade covenant.”

MR BRETT:    Yes.

HAYNE J:   Agreement for sale made 29 June, restraint of trade covenant produced 3 July; when is the relevant contract for disposition made?

MR BRETT:   I think the way in which the Act deals with that is to deem the contract for the restrictive covenant to be a contract for the disposal of the covenant as opposed to ‑ ‑ ‑

HAYNE J:   When is the disposal of the business?  I agree 29 June to sell you my business if you give me the covenant.

MR BRETT:   Sorry, we agree 29 June to dispose of the business ‑ ‑ ‑

HAYNE J:   If you give me the covenant and the covenant is not produced until 3 July.

MR BRETT:   If that is a contract to which the giving of the covenant is a true condition precedent, then the answer to that would be on 3 July when that condition precedent is performed and, for the first time, binding contractual arrangements come into existence.  Until that time, all one has is an offer ‑ ‑ ‑

HAYNE J:   That is to focus attention on when there is a binding contractual stipulation for disposition.

MR BRETT:   Yes.

HAYNE J:   If that is firstly a necessary inquiry, as it seems to be, the next question is, is it a sufficient inquiry?

MR BRETT:   Well, in our submission, yes.  Once one has a binding contractual obligation to dispose of the asset, one has a contract under which an asset must be disposed of and ultimately will be disposed of, perhaps subject to the performance of conditions, perhaps subject to various contingencies, but, nevertheless, with all those “subject to”s, a binding contract for the disposal of the asset under which the asset ultimately is disposed of.

Could I go very briefly to the submissions that our learned friends made about the deed of assignment and the effect of what occurred at settlement and whether what happened at settlement was something that occurred under the principal contract or was it something that was in itself either not under the contract at all or else involved the creation of a new set of contracts.

Our friends pointed to the use of the word “sell” in the deed of assignment in volume 3.  At page 555 the deed of assignment is.  Yes, it certainly does say that the seller does hereby sell along with conveying, assigning, transferring, delivering and so on.  That is one thing that, perhaps, points to the creation at that time of a new contract for sale and that seems to be about the only thing that our learned friends rely on in this document as doing that.

We point out that while it states that the seller sells, it does not state that the buyer buys.  We point out that this document is expressed to be made pursuant to section 12.3.  We point out that it expresses itself to be:

delivered pursuant to the Agreement and it shall not alter, supersede, augment, abridge or affect any provision of the Agreement.

We have actually set out in our written submissions at paragraph 66, I think, eight indications in the deed of assignment which we rely upon as indicating that what that document was was the carrying into effect of what was provided for by the May agreement, particularly in Clause 3.2 of the May agreement which describes what is to happen at closing.

That clause requires there to be delivered documents in recordable form which will effect the transfer of the assets from the seller to the recipient.  That is what the parties thought they were doing, that is what they said they were doing.  They said they were doing it pursuant to the agreement and the fact that they happened to use the word “sell” as one of the litany of verbs which describe the passing of the assets from A to B does not convert it from what is essentially a transfer into a contractual sale.

Our friends referred to the fact that Nicholas Products did not exist at the time at which the disposal is, on our submission, deemed to have occurred.  I think our friends said there was something odd about Nicholas Products being deemed to have acquired something before it existed.  We would make two answers to that.  The first is that this is a deeming provision.  The effect of deeming Nicholas Products to have acquired assets at a particular date, being a date prior to its incorporation, will be of no consequence whatsoever unless and until there is a disposal of those assets by Nicholas Products because the only purpose of fixing a time of acquisition is so that you can fix a cost base from which to calculate a capital gain if and when there is a disposal.

We certainly accept that there is no way that Nicholas Products can dispose of any of those assets before it exists and so the oddity that our friends point to really comes down to the idea that there is something odd about saying that when Nicholas Products ultimately does dispose of all or some of these assets you calculate the cost base by reference to something that happened at a time before it was incorporated.  Now, in our submission, that is not so odd as to mean that it could not have been contemplated by the Act.

The second thing we would say is this, that we are not quite sure what follows as a consequence of that submission.  Our friends say there is something odd about it.  That would seem to lead to the conclusion that one, therefore, has to read some sort of qualification into section 160U along the lines that a company which acquires an asset under the contract is deemed to have acquired it at the time the contract was entered into except where that time happens to be prior to the incorporation of the company of the acquirer.  Well, that is not what the Act says.

There is an assumption in addition that is made in the submission that our friends have made.  They have assumed that if an asset is disposed of under a contract it must also be acquired under a contract.  Now, that is, in our submission, not necessarily the case.  We certainly have cases where an asset can be disposed of under a contract and nobody acquires it because what happens to the asset is it is destroyed or just by effluxion of time it ceases to exist, and I am thinking of perhaps a covenant not to compete for a certain period of time might come within that class.

In any event, where, as in the present case, Nicholas Products has acquired this asset without ever becoming a party to the principal sale and purchase agreement, it is quite possible that the answer to the oddity that our friends see is that Nicholas Products did not acquire the asset under that contract.

We say it does not follow from the fact that Nicholas Kiwi disposed under a contract; that Nicholas Products necessarily acquired under a contract.  That is not a question which has to be resolved in the present proceedings.  It is a question which may come up in some other case in the future, but for the moment we simply make it as a possible answer to the oddity that our friends identify.  Unless there is anything further, your Honours, that is what I wanted to say by way of reply.

GLEESON CJ:   Thank you, Mr Brett.  We will reserve our decision in this matter.

AT 3.40 PM THE MATTER WAS ADJOURNED