Distinctive FX2 Pty Ltd v G1 Holdings (Australia) Pty Ltd
[2006] VSC 145
•12 April 2006
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
No. 2092 of 2005
| DISTINCTIVE FX2 PTY LIMITED (ACN 683 278 380) | Plaintiffs |
| and | |
| DISTINCTIVE FX PTY LTD (ACN 075 098 609) | |
| v | |
| G1 HOLDINGS (AUSTRALIA) Pty LIMITED (ACN 111 575 574) | Defendant |
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JUDGE: | DODDS-STREETON J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 28 March 2006 | |
DATE OF JUDGMENT: | 12 April 2006 | |
CASE MAY BE CITED AS: | Distinctive FX2 and Distinctive FX v G1 Holdings | |
MEDIUM NEUTRAL CITATION: | [2006] VSC 145 | |
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CONTRACT – Construction of share purchase agreement – Plaintiffs sell shares in holding company of group operating business - Whether amount paid by seller after completion to settle litigation with third party constituted a Buyer Claim as defined in the agreement, entitling seller to reduction by reference to value of net tangible assets of company on completion – Construction of formula for reduction – Whether all integers of calculation subject to multiplier – Applicable principles of construction. Held - Amount constituted Buyer Claim entitling seller to reduction – In calculation of the reduction, the NTA Excess Amount not subject to the multiplier of 80%.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr N. O’Bryan SC with Mr H. Austin | Deacons |
| For the Defendant | Mr J.E. Middleton QC with Mr F.R. Horgan | Arnold Bloch Leibler |
TABLE OF CONTENTS
INTRODUCTION AND BRIEF OUTLINE OF DISPUTE......................................................... 2
SUMMARY OF FACTS AND RELEVANT TERMS OF THE SHARE PURCHASE AGREEMENT 4
PRINCIPLES OF CONSTRUCTION........................................................................................... 14
The plaintiffs’ main contentions................................................................................................... 17
The defendant’s main contentions............................................................................................... 20
APPLICATION – BUYER CLAIM................................................................................................ 22
THE CALCULATION UNDER CLAUSE 17.3(a)....................................................................... 28
CONCLUSION................................................................................................................................. 30
HER HONOUR:
INTRODUCTION AND BRIEF OUTLINE OF DISPUTE
In this proceeding, the plaintiffs, Distinctive FX2 Pty Limited (“Distinctive”) and Distinctive FX Pty Ltd (“Distinctive FX”), by writ and statement of claim dated 25 August 2005, seek relief in relation to the construction of a share purchase agreement entered into on 5 November 2004 (subsequently amended by a side deed dated 14 December 2004) with the defendant, GI Holdings Australia Pty Ltd (“GI”).
Under the agreement, the plaintiffs, as owners of all issued shares in the holding company of a group which operated a vehicle rental business, sold those shares to GI for a purchase price of $40 million.
The agreement provided that, following its execution, the sellers would continue to operate the business until completion date. The purchase price was to be adjusted by reference to the value of the net tangible assets, calculated as at completion date. The agreement contained warranties, indemnities and representations by the sellers. It also provided for the reduction of buyer claims (as defined) made by GI against the sellers under the agreement by reference to the company’s net tangible assets on completion.
At the date of the agreement, a company in the group was the defendant in litigation brought by a third party (“the National Litigation”). The agreement provided that no provision was to be made for the National Litigation in the Completion Accounts, and hence, in calculating the value of the net tangible assets. The agreement provided that Distinctive would continue to manage the National Litigation and would pay any liability arising in relation to it. Distinctive was required to lodge a bank guarantee of $2 million in relation to the National Litigation and did so on 16 December 2004.
The Completion Accounts were agreed upon in March or April 2005. The value of the net tangible assets calculated on the prescribed basis (and thus excluding provision for the National Litigation) was $5,189,685. The Reference Net Tangible Asset Amount was $3,800,000.
On 14 July 2005, the National Litigation was settled, on terms that the defendant company would pay the sum of $1,700,000 by 21 July 2005 to the plaintiff in the litigation.
On 21 July 2005, the defendant called on the bank guarantee for $1,700,000, which was paid to the plaintiff in the National Litigation in full settlement of its claim.
The plaintiffs contend that the amount paid in settlement of the National Litigation was a “Buyer Claim” and that they are thus entitled to the reduction of that claim by reference to the value of the net tangible assets which, (by application of the plaintiffs’ construction of the formula in clause 17.3(a) of the agreement), would result in Distinctive’s liability to pay only $28,252 in relation to the National Litigation settlement obligation.
The defendant, however, disputes that Distinctive’s obligation to pay the settlement amount for the National Litigation was a “Buyer Claim” entitling Distinctive to a reduction by reference to the value of the net tangible assets of the company calculated in accordance with the prescribed formula in clause 17.3(a).
The principal dispute between the parties is thus whether Distinctive’s obligation to pay the amount of $1,700,000 in settlement of the National Litigation is, on a proper construction, a “Buyer Claim” entitling it to a reduction calculated by reference to the value of net tangible assets in accordance with the formula in clause 17.3(a).
A subsidiary dispute relates to the formula for calculation of the reduction pursuant to clause 17.3(a). The plaintiffs contend that a multiplier of 80% prescribed in the calculation applies only to certain integers and not to an integer known as the NTA Excess Amount (defined to mean $560,000) which the plaintiffs contend is to be added in full. The defendant contends that the 80% multiplier applies to the NTA Excess Amount.
SUMMARY OF FACTS AND RELEVANT TERMS OF THE SHARE PURCHASE AGREEMENT
The plaintiffs, Distinctive and Distinctive FX, were the legal and beneficial owners of all the issued shares in CLA Holdings Limited (“CLA”), the holding company of a substantial private group of companies (“the CLA Group”) which conducted the business of renting and leasing motor vehicles.
By a share purchase agreement dated 5 November 2004 between the plaintiffs, the defendant and Mr Mario Salvo, amended by a side deed dated 14 December 2004 between those parties and CLA Trading Pty Ltd (collectively, the “SPA”), the plaintiffs, as owners, sold all the issued shares in CLA to the defendant, GI.
At that date, CLA Trading Pty Ltd (“CLA Trading”), a company within the CLA Group, was the defendant in a proceeding brought against it by Vanguard Rental (Franchising) Pty Limited (“Vanguard”) as plaintiff.
Clause 1.1 of the SPA set out the following definitions, to apply unless the context otherwise required:
“Auditor” means William Buck;
“Business” means the business as conducted at the date of this Agreement of renting and leasing motor vehicles and franchising and sub-franchising that business using intellectual property either owned or controlled under licence by Group Companies from Europcar International including the Delta and Europcar trademarks.
“Buyer Claim” means any claim made by the Buyer against the Seller under the Agreement or any document executed pursuant to this Agreement, including without limitation, any claim for breach of the warranties or under the indemnities contained in clause 66 and clause 19, but excluding any claim made by the Buyer against the Seller under clauses 6.12 and 19(1);
“Claims” means any claims, demands, actions, proceedings, judgments, damages, losses, costs, expenses or liabilities whatsoever;
“Company” means CLA Holdings Limited (ABN 60 084 548 283);
“Completion” means completion of the sale and purchase of the shares as contemplated by this Agreement;
“Completion Accounts” means the consolidated financial position of the Group as at Completion Date (including the date of completion) prepared in the manner specified in clause 4 and certified by the Auditor;
“Completion Date” means the date on which completion occurs being the later of:
(a)30 November 2004;
(b)the date that is the tenth (10th) Business day following satisfaction or waiver of the last of the conditions set out in clause 2.1; and
(c)any Deferred Completion Date (if applicable) pursuant to clause 8.6(c).
“Deposit” means the sum of $4,000,000 to be held by the Escrow Agent in accordance with the Escrow Agreement;
“Liability” includes a present, prospective or contingent liability;
“National Litigation” means Supreme Court of Victoria proceeding number 4970 of 2003 between Vanguard Rental (Franchising) Pty Ltd (formerly ACN Rental (Franchising) Pty Ltd) (Plaintiff) and CLA Trading Pty Ltd (Defendant);
“Net Tangible Assets” means the net tangible assets of the Group as calculated in accordance with clause 4.2;
“NTA Deficit” has the meaning given to it in clause 6.5;
“NTA Retention Amount” means $2,500,000;
“Outstanding Debts” means all amounts owing by each Group company but only to the extent that they remain owing at the time of Completion;
“Purchase Price” means $40,000,000 less any amount by which the Seller Debts exceed $4,469,334 and adjusted accordingly for any NTA Deficit under clause 6.5;
“Reference Net Tangible Asset Amount” means $3,800,000;
“Seller” means Distinctive and Distinctive FX;
“Seller Debts” means all amounts owing by a seller and/or Associates of a seller (other than a group company) to a group company as set out in Schedule 4;
“Warranties” means the sellers’ warranties and representations as set out in Schedule 6 and clause 17;”
Clause 1.1 was amended by the side deed dated 14 December 2004 to include a definition of the term “NTA Excess Amount” as follows: “NTA Excess Amount means $560,000”.
Pursuant to clause 1.2 of the SPA:
“(a)headings and underlinings are for convenience only and do not affect the interpretation of that Agreement
(b)words importing the singular include the plural and vice versa
(c)a reference to anything includes part of that thing
(d)the words including or such as, when introducing an example, do not limit the meaning of the words to which the example relates to that example or examples of a similar kind.”
Clause 3 of the SPA provided for the sale of the shares in CLA to the Buyer with effect as and from Completion Date for the Purchase Price, on and subject to the terms and conditions of the Agreement. Clause 3(a) states: “The Seller agrees to sell and transfer, and the Buyer agrees to purchase from the Seller the shares with effect as and from the Completion Date and free from any Encumbrances and together with all rights … attached to or accruing to the shares for the Purchase Price and upon and subject to the terms of this Agreement.”
Clause 2.1 of the SPA provided that the obligations of the Seller and the Buyer under clause 3 were conditional upon the satisfaction and fulfilment of a number of specified conditions precedent, on or before the Completion Date.
Those conditions included circumstances such as notice by the Treasurer of the Commonwealth of Australia that there was no objection to the sale, the non‑destruction of the vehicle fleet, the CLA Group’s ownership of the material intellectual property and the Buyer’s due diligence investigations not revealing various specified adverse matters in respect of the business. In particular, clause 2.1(h) provided:
“none of the following events or circumstances is found by the Buyer (or its advisers) as part of the Buyer’s Due Diligence Investigations in respect of the Business;
…
(ii)except for the National Litigation, there is no actual or pending material litigation (or a threat of litigation against any Group company excluding any actual or pending litigation).
… “
Clause 2.6 of the SPA stated that the conditions in clause 2.1 were for the benefit of the Buyer and must be fulfilled to the reasonable satisfaction of the Buyer or waived in writing by the Buyer.
Clause 4.1 of the SPA provided that the Buyer was to cause the Company to prepare a consolidated statement of financial position for the CLA Group as at Completion Date (“Completion Accounts”), to be certified by the Auditor as having been prepared in accordance with the provisions of clause 4.3, and otherwise in accordance with Australian Accounting Standards.
Clause 4.3 provided that the Completion Accounts (and specifically the value of the Net Tangible Assets to be determined from the Completion Accounts) would be prepared on the basis of a number of specified principles, including:
“(h) on the basis that Accounts Payable, other creditors and liabilities and any litigation matters or matters otherwise in dispute must be fully recognised and calculated in accordance with the accounting policies used to prepare the Accounts applied consistently”
but provided, pursuant to clause 4.5(m)(iv) that:
“no provision will be made for the National Litigation.”
Clause 4.2 provided:
“The value of the Net Tangible Assets will be calculated from the Completion Accounts as the sum of the assets less liabilities of the Group Companies calculated on the bases set out in clause 4.3 and otherwise in accordance with Australian Accounting Standards.”
Between the date of the execution of the SPA and Completion, the Seller was required to continue to conduct the Business. Clause 7.1 relevantly provided:
“From the date of this Agreement until Completion, the Seller must ensure that, except with the prior written consent of the Buyer, such consent not to be unreasonably withheld or delayed:
(i)the Business is conducted in the ordinary and usual course,
… “
Given the Seller’s continuing control of the business between execution and completion and the possibility of changes in the Company’s circumstances during that period, the SPA provided for adjustments to both the purchase price and the Seller’s lability for “Buyer Claims”.
Clause 17.1(a) provided that Distinctive and Mr Salvo represented, warranted and covenanted to and with the Buyer that the statements in Schedule 6 were true, accurate and not misleading at the date of the agreement and would be true, accurate and not misleading on Completion Date.
Clause 17.1(b) provided that Distinctive FX represented, warranted and covenanted to and with the Buyer that the statements contained in paragraphs 1 to 8 of Schedule 6 were true, accurate and not misleading at the date of the Agreement and would be true, accurate and not misleading on the Completion Date.
Clause 17.3 (headed “Other Limits on Claims”) provided that the liability of Distinctive in respect of any claim for breach of any warranty would be reduced or extinguished (as the case may be) to the extent that a number of specified factors were established, including, for example, the disclosure of, or provision for, the subject matter of the claim in the Completion Accounts.
Clause 17.3 (as amended by the side deed) further states:
“If the Buyer notifies the Seller of a Buyer Claim and if the value of the Net Tangible Assets in the Final Completion Accounts is greater than the Reference Net Tangible Asset Amount then the liability of Distinctive in respect of the Buyer Claim shall be reduced:
(a)by an amount equivalent to 80% of the amount by which the value of the Net Tangible Assets exceeds the Reference Net Tangible Asset Amount plus the NTA Excess Amount (the Agreed Reduction); and
(b)the Seller will be liable for any liability whatsoever in excess of the Agreed Reduction as a result of a Buyer Claim; and
(c)once the Agreed Reduction has been fully set off against any Buyer Claim no further set off will be made under this clause including in respect of any current or future Buyer Claims, and
for the avoidance of doubt the limitations set out above will not apply to any Claim made by the Buyer against the Seller under the indemnities contained in clauses 6.12 and 19(l).”
Clause 17.7 provides:
“Threshold
(a)Neither Distinctive, Distinctive FX nor Salvo shall have any liability in respect of a Claim for a breach under the Warranties:
(i)if the liability incurred or sustained by the Buyer in respect of the Claim is less than $50,000; and
(ii)unless the amount of the claim when aggregated with the amount of any other Claims made against Distinctive under this Agreement, exceeds the sum of $500,000.
(b)Once the total of all liabilities incurred or sustained by the Buyer in respect of Claims for a breach or breaches of the Warranties (where each such breach results in liabilities of $50,000 or more) exceeds $500,000 Distinctive must pay the all such liabilities, and not just the excess over the $500,000.
(c)For the purpose of this clause 17.7, a claim shall exclude any Claim by the Buyer in respect of the National Litigation or the NTA Deficit.
Clause 6.12 provided for an indemnity by Distinctive of the Buyer (for itself and as trustee for the CLA Group Companies) against all Claims brought in connection with certain specified company liquidations. Clause 19(l) provided for an indemnity by Distinctive of the Buyer for all Claims which may be made, brought against or suffered by the Buyer or any Group Company arising in connection with “the Tax Assessment Claim”.
Clause 6 is headed “Payment”. It includes a number of sub-headings as follows:
6.1Payment by the Buyer on Signing
6.2Release of the Deposit
6.3Payment by Buyer at Completion
6.4Payments by Buyer after Completion
6.5Completion Accounts off set after Completion
6.6National Litigation
6.7Litigation provision payment after Completion
6.8Conduct of the National Litigation
6.9Directions to Pay
6.10Seller Debts
6.11Buyer Option to Prepay
6.12Distinctive Indemnity
Clause 6.6 provides:
“National Litigation
Distinctive indemnifies the Buyer (for itself and as trustee for the Group companies) against all Claims which may be made brought against, suffered or incurred by the Buyer or any of the Group Companies, which arise directly or indirectly out of or in connection with the National Litigation and which were not otherwise paid by Distinctive.”
Clause 6.7 provides:
“Litigation Provision payment after Completion
(a)Within 10 Business Days of the Final determination, settlement or discontinuance of the National Litigation (the Finalised Matter), Distinctive must provide reasonable evidence to the Buyer that there has been a final determination settlement or discontinuance of the National Litigation and that no further Claim can be made against the Group Companies pursuant to the National Litigation.
(b)Distinctive must pay to the Company the final aggregate liability of the Group Companies pursuant to the National Litigation (including all legal costs and ancillary costs incurred in respect of the Finalised Matter (Finalised Amount) when the amounts comprising the Finalised Amount are due).”
Clause 6.8 provides:
“6.8 Conduct of the National Litigation
(a)The Buyer acknowledges that Distinctive will have conduct of the National Litigation and may take such actions as Distinctive may decide about it, including the right to negotiate, defend and/or settle the National Litigation and to recover costs incurred as a consequence of the National Litigation from any person subject to the remaining provisions of this clause.
(b)Following Completion, the Buyer must not, and must use its best endeavours to ensure that any Group Company does not, make any admission of liability, or any agreement or compromise without first consulting with, and obtaining the consent of, Distinctive.
(c)Following Completion, the Buyer must give and must cause the Group Companies to give, to Distinctive all assistance reasonably requested by Distinctive in connection with the National Litigation, including:
(i)the supply by the Group Companies and their directors of relevant information, books and records of the Group Companies promptly upon request except for any information, books and records that are the subject of legal professional privilege or confidentiality undertakings entered into by any Group Company; and
(ii)giving Distinctive and Distinctive’s professional advisers reasonable access to the personnel and premises of the Group Companies and the relevant assets, accounts, books and records within the possession or control of the Group Companies for the sole purpose of conducting the National Litigation.
(d)Distinctive must:
(i)pay all of the costs and expenses associated with the National Litigation net of any input tax credits that a Group Company, or the representative members of the GST group of which the Group Company is a member, is entitled to;
(ii)act reasonably and properly consider the continuing business and reputation of the Buyer and the Group Companies;
(iii)at reasonable intervals or upon request of the Buyer provide the Buyer with written reports concerning the conduct, negotiation, control, defence and/or settlement of the National Litigation;
(iv)notify the Buyer of any offer of settlement and the terms of any offer of settlement in relation to the National Litigation; and
(v)not settle or offer to settle the National Litigation without the prior written consent of the Buyer (which may not be unreasonably withheld).
(e)Subject to the Company receiving the Finalised Amount from Distinctive under clause 6.7(b), the Buyer must procure that the Company pays when due the amounts comprising the Finalised Amount to the relevant parties in the proportions to which those parties are entitled, and otherwise complies with the terms of any determination, settlement or discontinuance of the National Litigation and any costs agreement with the Company’s solicitors and other representatives in the National Litigation.
(f)On the same day as the delivery by the Buyer of the Replacement Guarantee and to secure the obligations of Distinctive under clauses 6.6 and 6.7, Distinctive must provide to the Buyer an unconditional and irrevocable bank guarantee (Distinctive Bank Guarantee) in favour of the Buyer and on the terms acceptable to the Buyer issued by an Australian bank as defined by the Banking Act 1959 or a financial organisation approved by the Buyer for an amount of $2 million.
(g)The Buyer undertakes with Distinctive not to call or make demand under the Distinctive Bank Guarantee unless Distinctive fails to meet its obligations under clause 6.6 and 6.7(b) and only for the amounts then owing under clause 6.6 or clause 6.7(b) by the Seller to the Buyer.
(h)Distinctive must:
(i)ensure that the Distinctive Bank Guarantee is kept current and enforceable and that it does not expire until after the receipt by the Buyer of notice of the Finalised Matter in accordance with clause 6.7(a) and only provided that the Seller has paid all monies comprising the Finalised Amount to the Company pursuant to clause 6.7(b);
(ii)if the Buyer makes a demand on the Distinctive Bank Guarantees for an amount less than $2 million provide a replacement bank guarantee for an amount equal to $2 million less the demand made, when requested by the Buyer; and
(iii)pay all expenses associated with the provision and maintenance of the Distinctive Bank Guarantee.
(i)Immediately after delivery to the Buyer of notice of the Finalised Matter in accordance with clause 6.7(a) and provided that the Seller has paid all monies comprising the Finalised Amount to the Company pursuant to clause 6.7(b):
(i)the Buyer must return the Distinctive Bank Guarantee to the Seller; and
(ii)the Buyer forever releases and discharges the issuer from any obligations to pay the Buyer under the Distinctive Bank Guarantee and undertakes not to make any claims under the Distinctive Bank Guarantee.”
On 16 December 2004, Distinctive caused the National Australia Bank to issue a bank guarantee (that is, “the Distinctive Bank Guarantee”) in the sum of $2 million, pursuant to clause 6.8(f) of the SPA.
On 15 March 2004, GI provided the Completion Accounts to Distinctive and Distinctive FX. The Completion Accounts, in accordance with clause 4.3(m)(iv) of the SPA, made no provision for the National Litigation. The parties agreed on the Completion Accounts in March or April 2005.
It was not disputed that the value of the Net Tangible Assets as defined in clause 1.1 of the SPA was $5,189,685 and that the Reference Net Tangible Asset Amount, as defined in clause 1.1 of the SPA, was $3,800,000.
On 14 July 2004, CLA Trading and Vanguard executed terms of settlement pursuant to which the National Litigation was settled on the basis that, inter alia, CLA Trading agreed to pay Vanguard $1.7 million inclusive of interest and costs, in full and final settlement of the claim and counterclaim, by bank cheque or electronic transfer by 4.00pm on 21 July 2005, in return for a full release of CLA Trading and all its related bodies corporate.
It is not disputed that the settlement of the National Litigation was a Finalised Matter within the meaning of clause 6.7(a) of the SPA and that the settlement sum of $1.7 million was the Finalised Amount within the meaning of clause 6.7(b).
By a letter to Distinctive dated 14 July 2005, CLA forwarded the terms of settlement. The letter relevantly stated:
“In accordance with clause 6.7(b) and 6.8(e) of the SPA:
(a)Distinctive is required to pay CLA Holdings the final aggregate liability of the Group Companies, including CLA Trading, pursuant to the National Litigation (the Finalised Amount). The Finalised Amount in this case is the settlement amount of $1,700,000; and
(b)once Distinctive has paid the Finalised Amount to CLA Holdings, CLA Holdings is required to procure the payment of the Finalised Amount to Vanguard Rental.
The Terms of Settlement require that the settlement amount is to be paid (by way of bank cheque made payable to Vanguard Rental (Franchising) Pty Ltd or by electronic transfer) by 4.00pm on 21 July 2005 and therefore CLA Trading must have cleared funds in order to do [so].
The SPA envisages not only that Distinctive will pay to CLA Holdings the Finalised Amount but that it will do so in sufficient time to enable CLA Holdings to procure the necessary payment to Vanguard Rentals in accordance with the Terms of Settlement to which Distinctive has consented.
Please confirm by no later than close of business on 19 July 2005 whether Distinctive proposes to honour its contractual obligations to pay the Finalised Amount in sufficient time to enable CLA Trading to comply with its obligations under the Terms of Settlement. In our view cleared funds would need to be paid to CLA Trading’s account … or a bank cheque payable to Vanguard Rental (Franchising) Pty Ltd received by CLA Trading, by no later than 10am on 21 July 2005.
If you do not confirm by close of business on 19 July 2005 that Distinctive proposes to meet its contractual obligations to CLA Holdings to pay the Finalised Amount, then we will assume, consistent with the stance taken in your previous correspondence, that Distinctive does not propose to honour that obligation and we will act accordingly.
… “
The letter of Deacons, solicitors for Distinctive, to CLA Holdings dated 15 July 2005, asserted that any amount that Distinctive was required to pay to GI in respect of a “Buyer Claim” was to be reduced by $1,671,748. The letter conveyed Distinctive’s offer to deliver to GI a bank cheque for $28,252 in full and final satisfaction of its indemnity under clause 6.6 of the SPA. The letter further stated:
“We deny that our client has any contractual obligations to CLA Holdings – CLA Holdings is not a party to the SPA. Our client only has contractual obligations to GI … “
GI rejected the plaintiff’s assertion that the obligation to pay the amount pursuant to clause 6.7(b) in settlement of the National Litigation was a “Buyer Claim” entitling Distinctive to a reduction under clause 17.3(a).
PRINCIPLES OF CONSTRUCTION
There was no dispute on the principles applicable to the construction of commercial contracts, a summary of which is set out in Unique Lifestyle Investments Pty Ltd v Robertson[1] as follows:
“Relevant authority establishes that the modern approach to the construction of commercial agreements of business people is, generally, to endeavour to uphold the bargain by eschewing a narrow or pedantic approach in favour of a commercially sensible construction, unless irremediable obscurity or a like fundamental flaw indicates that there is, in fact, no agreement. … it is permissible to have regard to extrinsic evidence of the “factual matrix”[2] or surrounding circumstances in determining the meaning of contractual terms.”
“In Hillas & Co Ltd v Arcos Ltd,[3] Lord Wright stated:
“Businessmen often record the most important agreements in crude and summary fashion. Modes of expression sufficient and clear to them in the course of their business may appear to those unfamiliar with the business far from complete or precise. It is, accordingly, the duty of the court to construe such documents fairly and broadly, without being too astute or subtle in finding defects.”[4]
[1][2005] VSC 347.
[2]Reardon Smith Line Ltd v Ynngar Hansen-Tangen [1976] 1 WLR 989 at 997; Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337.
[3][1932] All ER 494.
[4]At 503-504.
In Biotechnology Australia Ltd v Pace,[5] Kirby J, in acknowledging the difficulty of reconciling the competing principles, stated as a general observation that:
[5][1988] 15 NSWLR 130.
“The determination of every case depends upon its own facts. The meaning of the agreement between the parties must be discovered objectively. Where there is suggested ambiguity or vagueness or where it is urged that a term is illusory, it may sometimes be both necessary and appropriate to have regard to extrinsic evidence in order to give meaning to that to which the parties have agreed; see, eg Kell v Harris (1915) 15 SR (NSW) 473 at 479; 32 WN (NSW) 133 at 136 and Raffles v Wichelhaus (1864) 2 H&C 906; 159 ER 375.
The court will endeavour to uphold the validity of the agreement between the parties: see Hillas & Co Ltd v Access Ltd. The court will attempt to avoid frustrating the wishes of the contracting parties so far as those wishes may be ascertained from the agreement between them: see Meehan (at 589); see also Barwick CJ in Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429 at 437 where his Honour said that: ‘ … In the search for that intention no narrow or pedantic approach is warranted, particularly in the case of commercial arrangements.’
But the court will not do so, where, in effect, it is asked to spell out, to an unacceptable extent, that to which the parties have themselves failed to agree. Nor will the court clarify that which is irremediably obscure … ”. [6]
“Consistently with the above principles, in MLW Technology Pty Ltd v May,[7] Gillard AJA, (with whom Winneke P and Buchanan JA agreed), stated:
“The court, in construing contracts between businessmen and also their actions, should proceed in a common sense, non-technical way. How would the businessmen construe the agreement in the light of the commercial purpose of the setting … “[8]
“His Honour referred[9] to Lord Wright’s observations in Hillas, supra, and to Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd[10] in which Lord Steyn, noting that the law had moved on from a strict technical approach, stated:
“Since then there has been a shift from strict construction of commercial instruments to what is sometimes called purposive construction of such documents … It is better to speak of a shift towards commercial interpretation. About the change in approach to construction there is no doubt. … In determining the meaning of the language of commercial contract, and unilateral contractual notices, the law therefore generally favours a commercially sensible construction. The reason for this approach is that a commercial contract is more likely to give effect to the intention of the parties. Words are therefore interpreted in the way in which a reasonable commercial person would construe them. And the standard of the reasonable commercial person is generally hostile to technical interpretations and undue emphasis on niceties of language.”[11]
[6]At 136.
[7][2005] VSCA 29.
[8]At [76].
[9]At [77] – [81].
[10][1997] AC 749.
[11]At 770-771.
The defendant, however, emphasised that caution should be exercised in the application of the maximum “expressio unius est exclusio alterius”, for the reasons stated by the High Court in Houssein v Under Secretary Department of Industrial Relations and Technology and Industrial Commission of NSW (“Houssein”).[12] The High Court there construed certain provisions of the Industrial Arbitration Act 1940‑1981 (NSW). It rejected the contention, based on the maxim “expressio unius”, that one statutory provision (which expressly excluded writs of prohibition or certiorari in respect of decisions of the Industrial Commission of New South Wales (“the Commission”) relating to industrial matters), evinced “a legislative intention to deal explicitly and exhaustively with the writs of prohibition and certiorari and to limit the ouster of those remedies to decisions relating to industrial matters”.[13] As such, it was submitted that another provision of the relevant legislation did not oust the court’s jurisdiction in relation to decisions on non-industrial matters.
[12](1982) ALR 577.
[13]At 581.
The High Court considered that the latter provision was well‑established to exclude the writs of prohibition and certiorari and its operation was not confined to decisions on industrial matters. The two statutory provisions did not contradict each other and did not depend on each other. In such circumstances, the High Court stated[14] that there was “no room for the application of the maxim ‘expressio unius’. The maxim must always be applied with care, for it is not of universal application and applies only when the intention it expresses is discoverable upon the face of the instrument: Saunders v Evans (1801) 8 HL Cas 721 at 729.”
[14]At 581.
The plaintiffs’ main contentions
Mr O’Bryan, senior counsel for the plaintiffs, submitted that, on the more reasonable construction, which better conformed to the SPA as a whole, the National Litigation obligation constituted a “Buyer Claim” and the plaintiffs were thus entitled to a reduction according to the formula set out in clause 17.3(a).
He contended that the definition of “Buyer Claim” in clause 1.1 conclusively supported the plaintiffs’ construction. The term “Claim” (a component of the definition of “Buyer Claim”) was extensively defined in clause 1.1 and included “Liabilities” which term was also broadly defined in clause 1.1.
Mr O’Bryan emphasised that the broad definition of “Claim” included many examples of both “active voice” claims (which could be appropriately described as “made by the Buyer against the Seller”) and “passive” processes, which did not admit of, or require, any articulation of a claim.
As such, he argued that it was not a necessary hallmark of a “Buyer Claim” that it be articulated. In relation to the “passive voice” category of claims, including “judgments”, “damages”, “losses”, “costs”, “expenses” or “liabilities”, it was necessary only that they exist.
Further, the definition “Buyer Claim” did not impose any temporal requirement. Rather, it captured everything, whether in the past, present or future. It was clear, for example, that “Liabilities” (which included “present, prospective and contingent liabilities”) were “Claims”, and extended to both existing and future claims.
Mr O’Bryan submitted that although the parties had agreed that the National Litigation would not be provided for in the Completion Accounts, the potential liability was clearly identified, a settlement was anticipated in the near future and $2 million was agreed to be an approximate figure to cover it. Nevertheless, when compared with other matters of risk dealt with under the SPA, the National Litigation obligation was not a peculiarly certain future claim, which was carved out for entirely separate treatment under the SPA.
He also argued that, given that any increase in net tangible asset value on Completion was a windfall to the Buyer, it was fair that the net tangible asset value at Completion should apply to reduce any amount which the Seller was required to pay for the National Litigation.
Although disputing that the definition of a “Buyer Claim” required articulation or notification, Mr O’Bryan argued that any such requirement was, in the present case, satisfied by CLA’s letter to Distinctive dated 14 July 2005, which notified Distinctive of the terms of settlement of the National Litigation and required it to pay CLA the Finalised Amount (stated to be $1.7 million) by 19 July 2005.
Mr O’Bryan contended that it would be extraordinary if the Seller’s entitlement to a reduction under clause 17.3(a) could be defeated by the mere “device” of calling on the Distinctive Bank Guarantee without any associated correspondence or other notification.
He contended that clause 6.6 and 6.7 of the SPA were closely related. It was a standard drafting practice, he contended, to treat an indemnity and an associated obligation to pay in separate provisions. That treatment did not establish that clauses 6.6 and 6.7 were entirely separate and created unrelated species of legal obligation.
The plaintiffs submitted that, although the indemnity in clause 6.6 was in respect of claims which “arise directly or indirectly out of or in connection with the National Litigation”, clause 6.7 contemplated that the Group’s liability under the indemnity would shortly crystallise into a sum certain, which Distinctive was obliged to pay.
Further, the plaintiffs argued that “the request or direction of GI under clause 6.8 that Distinctive pay the Finalised Amount to [CLA]was also a claim, cost, expense or liability which was made (or sought to be enforced) by GI against Distinctive under the SPA, or any document executed pursuant to the SPA and thus also a “Buyer Claim”.”
They submitted that although the Finalised Amount was not payable to GI, it was clear that only GI could enforce the liability to pay it and therefore had a real interest in Distinctive’s performance of the obligation. The plaintiffs also submitted that the reference in clause 6.8(g) to “amounts owing under clause 6.6 or clause 6.7(b) by the Seller to [GI]” recognised that, although technically no amount could be owing to GI under clause 6.7(b), Distinctive’s obligation to GI was an obligation akin to debt.
The plaintiffs contended that Distinctive’s obligation to pay the Finalised Amount was not independent of GI, because the liability arose out of Distinctive’s obligations to GI under the SPA and was enforceable only by GI. Upon the payment of the Finalised Amount, GI was obliged to procure the payment by CLA to the recipient. Further, Distinctive was obliged to provide GI with a bank guarantee in favour of GI to secure its obligations under both clauses 6.6 and 6.7.
Mr O’Bryan also pointed out that in clause 17.3, the indemnities under clauses 6.12 and 19(l) were expressly excluded from entitlement to the reduction, just as they were expressly excluded from the definition of “Buyer Claim” in clause 1.1. In contrast, any claims in relation to National Litigation were expressly excluded from the benefit of limitation of liability under clause 17.7, thus indicating that the drafter specifically “turned its mind” to such claims and expressly provided for their exclusion when that was intended.
The plaintiffs submitted that the clear intention of the parties was to apply the clause 17.3(a) Agreed Reduction to all liabilities under the SPA, save those which were expressly excluded.
In summary, the plaintiffs argued that:
(h)“the liability of Distinctive to pay the Finalised Amount was:
(i)a claim, demand, cost, expense, or Liability;
(ii)which [was] made, brought against, suffered or incurred by [one] of the Group Companies, namely CLA Trading Pty Ltd and;
(iii)[arose] directly or indirectly out of or in connection with the National Litigation and which was not otherwise paid by Distinctive; and thus fell within the terms of the Distinctive indemnity contained in clause 6.6.”
The defendant’s main contentions
The defendant contends that Distinctive’s National Litigation obligation under clause 6.7 was not a “Buyer Claim” and thus was not subject to the Agreed Reduction under clause 17.3(a).
In support of that construction, the defendant’s written submissions state:
(a)Clauses 6.6 to 6.8 inclusive constitute a separate and independent code for matters dealing with the National Litigation, whereby the vendors retain the Conduct of and liability for the National Litigation. The parties’ intention was that the transfer would occur while the vendors retained control of, and liability for the National Litigation. When considered in its proper commercial context, the National Litigation was intended to be treated separately. Provision for it was not to be included in the Completion Accounts – it was not to be treated as an asset or liability of the company. Further, it was to be separately secured by the bank guarantee.
Mr Middleton, senior counsel for the defendant, did not dispute the plaintiffs’ characterisation of the commercial background to the SPA. He stressed that the SPA was entered into before a due diligence was done, and as many matters were, at that stage, unresolved and uncertain, there were risks which required evaluation before there was a finalised account.
He submitted that in that context, the National Litigation was identified as “something certain”, in stark contrast to other unknown and speculative risks, such as those indemnified under clauses 6.12 and 19(l) of the SPA. The unique certainty of the National Litigation justified and explained its separate treatment in a “quasi‑code” under the SPA. The modern purposive approach to the construction of commercial agreements therefore supported the defendant.
While conceding that the definition of “Buyer Claim” in clause 1.1 was wide, Mr Middleton argued that the reference in the definition to “Claims made by the Buyer against the Seller” qualified and limited the balance of the definition. No phrase or example which followed that initial reference could expand the term “Buyer Claim” inconsistently with the restrictive requirement that it be “made by the Buyer against the Seller”.
Mr Middleton pointed out that the indemnity under clause 6.6 was very broad and covered matters which had nothing to do with the final determination, settlement or discontinuance of the National Litigation, which were covered by clause 6.7.
He argued that, in contrast to clause 6.6, clause 6.7 dealt with “Payment after Completion”. The whole mechanism of clause 6.7 was self-executory. It obliged Distinctive to pay the Company, not the Buyer, whereas the Buyer was the party indemnified under clause 6.6. In effect, Mr Middleton argued that, unlike a claim which must be “made”, as envisaged in clause 6.6, clause 6.7 dealt with a subsisting obligation, which could only give rise to a claim if it were breached. Breach was unlikely, given the Distinctive Bank Guarantee. The whole purpose of clause 6.7 was to avoid the necessity to make a claim.
In relation to the express exclusions of clause 6.12 and 19(l) in the definition of “Buyer Claims” and from the limitation in clause 17.3, and the express exclusion of the National Litigation in clause 17.7, Mr Middleton argued that the exclusions were not exhaustive. Further, the maxim expressio unius should be carefully applied.
He contended that the letter of CLA requiring payment of the National Litigation obligation did not satisfy the requirement that the Buyer make a claim against the Seller, as the letter required, in terms, that Distinctive pay CLA Holdings.
Mr Middleton further submitted that, although a different set of circumstances could have given rise to a “Buyer Claim”, the specific transaction which occurred in the present case did not do so.
APPLICATION – BUYER CLAIM
The defendant argued that the requirement that the Claim be made by the Buyer against the Seller governed all the following content of the definition of “Buyer Claim” in clause 1.1, necessarily excluding any examples where literal satisfaction of that requirement was not possible. In my opinion, the defendant’s interpretation is unduly restrictive, and necessarily inconsistent with other significant elements of the definition, which it would render ineffectual.
The definition of “Buyer Claim” should be read as a whole. Pre‑eminence should not be attributed selectively to any particular constituent phrase. The definition includes the term “Claim” which clause 1.1 defines to include, inter alia, “Liabilities”. “Liability” is in turn defined, and, by clause 1.2(b), “words importing the singular include the plural and vice versa”.
If read with the definitions of “Claim” and “Liability” incorporated into it, the definition of “Buyer Claim” would read “Buyer Claim” means “any claims, demands, actions, proceedings, judgments, damages, losses, costs, expenses, or present, prospective or contingent liabilities whatsoever made by the Buyer against the Seller”.
According to the ordinary use of language, a number of elements of the definition, such as judgments, losses and liabilities, cannot be “made by the Buyer against the Seller”, although they could give rise to claims which could be made. It was not suggested, however, that the terms “Claim” and “Liabilities” should not bear their defined meanings in the context of the definition of “Buyer Claim”.
On the defendant’s interpretation, it would be necessary to disregard those elements of the definitions of “Claims” and “Liabilities” which are inconsistent with the literal application of a requirement that they be “made by the Buyer against the Seller.”
Further, the defendant’s construction does not accord sufficient weight to the fact that the word “Claim”, (which must be understood to incorporate its extensive sub‑definitions), precedes the phrase “made against the Seller”. In my view, the following phrase “made by the Buyer against the Seller” should not operate to negate particular species of obligation introduced by the initial, broad definition of “Claim”, as expanded by the definition of “Liability”.
While the definition is, on any view, imperfectly drafted, strict insistence upon a requirement that a Claim be “made by the Buyer against the Seller” would ascribe a prescriptive operation to that phrase and would deny effect to many of the classes of obligation encompassed by the primary definition of “Claim”. Although liabilities or losses cannot be “made against the Buyer by the Seller”, but rather, give rise to claims which may be made by the Buyer against the Seller, such species or sources of obligation are expressly included as elements of the definition of “Buyer Claim”.
Relevant authority emphasises the importance of a commercially sensible approach which avoids “technical interpretations and undue emphasis on niceties of language”.[15]
[15]Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749 at 770-771.
When read as a whole, the definition evinces an intention that “Buyer Claim” bear a broad, ambulatory meaning, which should not be defeated by the incongruity of a constituent phrase.
I consider that reasonable business people would understand the definition of “Buyer Claim” in clause 1.1 to include all the species of obligation imported by the sub‑definitions, despite the inability of some of them literally to conform to a requirement that they be “made by the Buyer against the Seller”.
In my view, the SPA as a whole supports the conclusion that “Buyer Claim” incorporates all the enumerated classes and sources of obligation owed by the Seller, including the obligation under clause 6.7.
Clause 1.1 provides that a “Buyer Claim” includes “without limitation any claim for breach of the warranties or under the indemnities contained in clause 6.6 and clause 19”, but expressly excludes any “claim made by the Buyer against the Seller under clauses 6.12 and 19(l)”. There is no reference to clause 6.7. In the absence of some material, substantive difference in kind between Distinctive’s liabilities under clause 6.6 and clause 6.7, the express exclusion of clauses 6.12 and 19(l) from the definition of “Buyer Claim” suggests that liability under clause 6.7 is also comprehended by the definition of “Buyer Claim”.
The defendant argued that the clause 6.7 obligation was entirely distinct from the clause 6.6 indemnity. Initially, the defendant appeared to contend that clause 6.8(g) treated the indemnity for claims against the Buyer under clause 6.6 and the obligation under clause 6.7(b) to pay the Finalised Amount as discrete alternatives. At trial, Mr Middleton did not press that contention.
Clause 6.8(f) of the SPA states that Distinctive must provide GI with the Distinctive Bank Guarantee in its favour “to secure the obligations of Distinctive under clauses 6.6 and 6.7.” Thus, the obligations of Distinctive to, on the one hand, indemnify GI (for itself and as trustee for the Group companies) for claims made against GI and the Group, and, on the other hand, the obligation of Distinctive to pay CLA the Finalised Amount (which is a contractual obligation owed to the Buyer), are both owed to GI and are to be secured to GI by the Distinctive Bank Guarantee. The obligations under each clause are not treated as materially different or mutually exclusive, but rather, are secured by the identical security in the same amount.
Clause 6.8(g) provides that no call is to be made under the Distinctive Bank Guarantee unless Distinctive fails to meet its obligations under clauses 6.6 and 6.7(b). (Emphasis added.) Again, no distinction is made between the obligations, which are both owed to GI, which is empowered to take action for default in relation to either or both by calling on the Distinctive Bank Guarantee which secures them. While the reference to “the amounts then owing under clause 6.6 or clause 6.7(b)” indicates alternatives, when taken in context, it cannot negate the unambiguous acknowledgment that the obligations under both clauses are equally to be secured by the Distinctive Bank Guarantee. Although the reference appears literally to contemplate that there will be an amount owing under only one of the two clauses, in the light of the preceding words of clause 6.8(h) and the terms of clause 6.8(f), it is clear that GI could make a call under either or both clauses.
Further, the reference in clause 6.8(h) to “the amounts then owing under clause 6.6 or clause 6.7(b) by the Seller to the Buyer” recognises that clause 6.7(b) creates an obligation owed, and effectively capable of resulting in indebtedness to, GI. Although clause 6.7(b) requires, in terms, “payment of the Finalised Amount to [CLA]”, rather than to GI, GI holds the indemnity under clause 6.6 for itself and as a trustee for the Group companies.
The defendant argued that clause 6.7 covered only post‑Completion payments and, by establishing a bank guarantee, obviated the need to make a claim. The possibility, however, that the bank guarantee would not be in place, or would not suffice to cover the Finalised Amount, necessarily qualifies that assertion. It also underlines the considerable functional inter‑dependence and substantive overlap between clauses 6.6 and 6.7.
Although headed “Litigation provision payment after completion” sub‑clauses 6.7(a) and (b) do not, on analysis, specify that either “the determination, settlement or discontinuance of the National Litigation”, or the payment by Distinctive to CLA of the Finalised Amount, must necessarily occur after Completion. Clause 1.2(a) provides that, “unless the context otherwise requires, headings and underlinings are for convenience only, and do not affect the interpretation of this Agreement”. Obligations under clause 6.7 are, therefore, not limited to those arising post Completion.
The SPA provides that Distinctive has the conduct of the National Litigation after the control of CLA and the Group has passed to GI and that it must provide the Distinctive Bank Guarantee to secure its obligations under clauses 6.6 and 6.7 in the sum of $2 million on the same day as the delivery by GI of the Replacement Guarantee. By clause 6.4(c)(ii), that is 21 Business Days after the Completion Date.
If the National Litigation were settled (or otherwise resulted in a liability to pay CLA Trading) before the Distinctive Bank Guarantee were put in place, or if, after that date, the Finalised Amount exceeded the $2 million, any amount not recovered under the Distinctive Bank Guarantee, would, in substance, if not in form, be a debt owed to GI, as clause 6.8(h) expressly recognises. As such, it would, in my opinion, fall within the definition of the “Claims” indemnified under clause 6.6, which are expressly stated in the clause 1.1 definition to be within the ambit of a “Buyer Claim”.
The fact that the same security applies to the obligations under both clauses 6.6 and 6.7 underlines their substantially similar nature, potential overlap and interdependence. As such, there is no rational basis to exclude obligations under clause 6.7 from the definition of “Buyer Claim” when claims under clause 6.6 are expressly included.
The defendant’s contention that the National Litigation was uniquely certain, thereby justifying entirely separate treatment under the SPA, was not, in my opinion, established. Although the National Litigation was identified and the bank guarantee put in place, the SPA identified other “risks” such as the tax assessment under clause 19(l) with greater precision. Item 65 of the Specific Disclosures merely stated that “the contingency for the National Litigation as noted in the 2003 Audited Accounts continues to exist”. In contrast, Item 65,116 of the Specific Disclosures set out the income tax assessment (dealt with in clause 19(l) of the SPA) with considerable detail and precision. Items 39 and 51 of the Specific Disclosures contain specific details of the liquidation of CLA Operations Pty Ltd (in liq) and other companies in liquidation referred to in clause 6.12.
A rigid policy of separate treatment of the National Litigation under the SPA is also inconsistent with the express inclusion as a “Buyer Claim” of claims under the indemnity in respect of the National Litigation under clause 6.6. In contrast to Houssein,[16] in the present case, there is no separate, independent provision of the SPA which contraindicates the significance of the express exclusions of claims in respect of the National Litigation from the benefit of clause 17.7, when clause 6.7 is not expressly excluded from the definition of “Buyer Claim”, although other specified obligations are. The combined effect of the relevant express exclusions indicates that, in the absence of its express exclusion from the definition of “Buyer Claim”, the obligation under clause 6.7 is included. Further, the claims by the Buyer referred to in clause 17.7 must logically constitute “Buyer Claims”, which are additional to the “Buyer Claims” in respect of the National Litigation under the indemnity in clause 6.6.
[16](1982) ALR 577.
Clause 17.7 states that “claims by the Buyer in respect of the National Litigation” are excluded from certain claims (for breaches of warranties) in respect of which the Seller’s and Mr Salvo’s liability is excluded. It is recognised that liability of the Sellers and Mr Salvo for breach of warranties in respect of the National Litigation constitutes “claims by the Buyer”.
The apparent acknowledgment of the possibility of “Buyer Claims” in relation to the National Litigation, other than under the clause 6.6 indemnity, is, again, inconsistent with separate treatment of the National Litigation in the SPA. In my opinion, a commercial purpose of its separate treatment in a “quasi-code” was not established.
The defendant also argued that clause 17.3 of the SPA requires the Buyer to notify the Seller of a “Buyer Claim”, but notice was neither required by clause 6.7(b) nor, in the present case, given under it. Recourse could be had to the bank guarantee without notice and the mechanism under clause 6.7 was inconsistent with the making of a claim.
As discussed above, in my view, the definition of “Buyer Claim” does not require that it literally be “made by the Buyer against the Seller” and an unduly technical approach to the giving of notice should also be eschewed. The written requirement of CLA that Distinctive pay the Finalised Amount, in my opinion, constituted a sufficient notification of the “Buyer Claim” founded on Distinctive’s obligation under clause 6.7(b).
The defendant also argued that sub‑clauses 6.8(h) and (i) provide that the Seller must pay all the monies comprising the Finalised Amount to the Company and do not contemplate a set‑off by the Agreed Reduction, as required by clause 17.3.
Clause 17.3 deals, in terms, with “reduction” of the liability of Distinctive. It also refers to “limitations”. The reference to set‑off is but one of several characterisations of the effect of the clause, which could equally operate as a reduction or a limitation.
In my opinion, the terms of the definition of “Buyer Claim” (including the sub‑definitions of “Claim” and “Liability” in clause 1.1) the substantial overlap between clauses 6.6 and 6.7 and the failure to differentiate between them elsewhere in the SPA; the lack of clear, consistently separate treatment of the National Litigation, and the express exclusions in the definition of “Buyer Claim”, clause 17.3 and clause 17.7, indicate that, on a fair reading of the relevant clauses in the context of the SPA as a whole, a reasonable business person would conclude that the obligation under clause 6.7(b) constitutes a “Buyer Claim” entitling Distinctive to a reduction pursuant to clause 17.3.
THE CALCULATION UNDER CLAUSE 17.3(a)
The side deed dated 14 December 2004 was executed by Distinctive, Distinctive FX, Salvo, GI and CLA Trading.
By clause 5(a), it amended clause 1.1 of the principal deed by inserting the following defined terms:
(a)NTA Excess Amount means $560,000.
(b)Clause 17.3(a) is amended such that the words “plus the NTA Excess Amount” are included after the words “Reference Net Tangible Assets Amount” but before the words “The Agreed Reduction”.
(c)Clause 17.3(b) is amended such that the words the “Buyer” are deleted and replaced with the word “Seller”.
Clause 2(1) of the Side Deed provides that, “Any monetary adjustments under clause 2 of this Deed or any limits that otherwise relate to the Tax Assessment Claim under the SPA shall be calculated without reference to the NTA Excess Amount (as defined in clause 5 of this Deed).”
Following the amendments prescribed by clause 5 of the side deed, clause 17.3 of the SPA states:
“If the Buyer notifies the Seller of a Buyer Claim and if the value of the Net Tangible Assets in the final Completion Accounts is greater than the Reference Net Tangible Asset Amount then the liability of Distinctive in respect of the Buyer Claim shall be reduced:
(a)by an amount equivalent to 80 per cent of the amount by which the value of the Net Tangible Asset Amount exceeds the reference Net Tangible Asset Amount plus the NTA Excess Amount (‘the Agreed Reduction’)”.
Clause 17.3(b) states:
“The Seller will be liable for any liability whatsoever in excess of the Agreed Reduction as a result of the Buyer Claim”.
The plaintiffs contend that, on a proper construction, the Agreed Reduction is calculated by subtracting the Reference Net Tangible Asset Amount from the Net Tangible Assets Value – calculating 80% of the resultant figure, and only then adding the $560,000 – to produce a reduction of $1,671,748.
The defendant, in contrast, contends that, on a proper construction, the calculation of any Agreed Reduction requires the addition of the Reference Net Tangible Amount to the NTA Excess Amount of $560,000, the subtraction of that total from the Net Tangible Assets Value and then the multiplication of the result by 80%. In the present case, that would produce a reduced reduction of $1,559,748.
If the $560,000 is not properly subject to the multiplier of 80%, the plaintiffs would receive the benefit of the entire $560,000 in calculating the amount of any available reduction, rather than merely 80% of the $560,000.
The plaintiffs point out that the NTA Excess Amount was not originally an integer of the clause 17.3(a) calculation in the principal deed, but was included by an amendment made by the later side deed. They contend that it was natural that the NTA Excess Amount would be included as a fixed sum of $560,000 in the clause 17.3(a) reduction calculation, as if the parties had intended the NTA Excess Amount to be a figure of only 80% of $560,000, they would have defined it accordingly.
The defendant contends that clause 17.3(a) (as amended by the side deed) clearly indicates that the 80% multiplier must operate against an asset amount, rather than against only some of the integers in the varied asset calculation.
Although the language of clause 17.3(a) as amended by the side deed may appear to support the defendant’s construction, if the prescribed integers are written as a mathematical formula, the brackets enclosing the integers subject to the multiplier of 80% would more naturally be placed to exclude the phrase “plus the NTA Excess Amount”. The calculation in clause 17.3(a) is ambiguously expressed. The NTA Excess Amount, however, is referred to only in clause 17.3(a) and in clause 2(1) of the side deed. The reference to the NTA Excess Amount in clause 2(1) of the side deed is only to exclude its application. The sole substantive function of the NTA Excess Amount is therefore in the context of the calculation in clause 17.3(a). That circumstance indicates that the ambiguity should be resolved by holding the NTA Excess Amount to be applied in the calculation as a fixed sum of $560,000, as defined, because there is no other apparent purpose for the definition.
CONCLUSION
In my opinion, the plaintiffs have established their claim. Distinctive’s obligation under clause 6.7(b) to pay the sum of $1,700,000 in settlement of the National Litigation constituted a “Buyer Claim”, as defined in clause 1.1 of the SPA, entitling the first plaintiff to a reduction under clause 17.3(a) of the SPA. In calculating the reduction, the NTA Excess Amount is not subject to the multiplier of 80%.
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