DNFS Pty Ltd & Ors v De Neefe Signs Pty Ltd & Ors
[2008] VSC 424
•16 October 2008
fc
IN THE SUPREME COURT OF VICTORIA
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
COMMERCIAL LIST
F6152
No. 10519 of 2006
| DNFS PTY LTD (ACN 005 587 593) & ORS (according to the schedule attached) | Plaintiffs |
| and | |
| DE NEEFE SIGNS PTY LTD (ACN 115 924 939) & ORS (according to the schedule attached) | Defendants |
---
JUDGE: | PAGONE J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 6 October 2008 | |
DATE OF JUDGMENT: | 16 October 2008 | |
CASE MAY BE CITED AS: | DNFS v De Neefe Signs Pty Ltd | |
MEDIUM NEUTRAL CITATION: | [2008] VSC 424 | |
---
CONTRACT – Construction – Exclusion clause – Whether liability excluded under s 52 Trade Practices Act 1974 – Estoppel.
---
APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr M Dean | Rennick & Gaynor |
| For the Defendants | Mr M Wise | Middletons |
---
HIS HONOUR:
Hargrave J ordered there to be a trial of six preliminary questions arising from a dispute between the vendor and the purchaser of the sale of a business. On 3 October 2005 the plaintiffs, as vendor, and the first defendant, as purchaser, executed a sale of business agreement (“the Agreement”) for the business of designing and manufacturing road traffic and other signs. The Agreement as finally executed provided that, subject to the payment of the purchase price on what was described as the Provisional Completion Date, title to the “Assets (including the Sale Stock)”, but not the Balance Stock, would pass from vendor to the purchaser. It also provided, for the voidance of doubt, that all “Cash on Hand, Accounts Receivable and Prepayments” would become the property of the purchaser on the “Effective Date”. The latter was defined in the Agreement to mean 1 September 2005.
The purchase price had been calculated on the “Net Asset Value” as stated in the “Consolidated Balance Sheet” as at 31 May 2005. Provision had been made for variation of the purchase price in the event that the assets or liabilities of the business were other than as stated in the Consolidated Balance Sheet. Clause 3.2 of the Agreement set out the process for the payment of the purchase price, acknowledging that the amounts payable were to be adjusted in accordance with other clauses in the Agreement. Two of the amounts to be paid as provided by that clause have not been paid. The plaintiffs contend that they are entitled to those payments and commenced these proceedings for their recovery. The defendants contend that the amounts are not payable by reason of the adjustment provisions consequent upon becoming aware that the assets and liabilities were not as stated in the Consolidated Balance Sheet. In part the claims between the parties depend upon the construction of the Agreement, but the defendants also rely upon claims in negligence and under the Trade Practices Act 1974 as well as a claim that the plaintiffs are estopped from relying upon the strict terms of the Agreement. The six questions ordered by Hargrave J for preliminary trial concern the extent to which there has been compliance with the contractual provisions for any adjustment of the purchase price, and the extent to which the defendants may be permitted to rely upon additional causes of action.
Question 1: Has the First Defendant and Plaintiff by counterclaim (“De Neefe”) made a claim for an adjustment to purchase price (“purchase price adjustment claim”) which satisfies the requirements of clauses 4.1, 17.3 and 28 of the Sale of Business Agreement (“Agreement”) referred to in paragraph 6 of the statement of claim?
The purchase price payable by the purchaser is identified in clause 3.1 as $1.955m “to be adjusted in accordance with clauses 4, 17, 18 and 19”. Clause 3.1(b) provides that the purchase price “for the Assets has been calculated on the Net Asset Value stated in the Consolidated Balance Sheet”. That balance sheet is defined in the definition provisions in the Agreement to mean the balance sheet as at 31 May 2005 set out in schedule 1.
Clause 3.2 of the Agreement provides how the purchase price was to be paid. In essence what was provided for was for payment of three amounts and the issue of two traunches of shares. The second and third amounts were not paid and are the subject of the plaintiffs’ proceeding. The payment of those amounts is, however, subject to adjustment in accordance with clauses 4, 17, 18 and 19 of the Agreement. Clause 4 provides for an adjustment of the purchase price if there is either an increase or a decrease in the Net Asset Value following Provisional Completion, or if there is a valid warranty claim by the purchaser under the Agreement. Clause 17 is a general provision for adjustments of which clause 17.3 specifically relates to adjustments to the purchase price. Clause 18 deals with warranties and clause 19 deals with buyer warranty claims.
Clause 4.1 of the Agreement does not, in terms, provide for the making of any claim for an adjustment on the basis of error in the amounts. It provides rather, that there is to be an adjustment to the purchase price if the “Net Asset Value” either increases or decreases following Provisional Completion. Clause 4.1(c) provides that any such adjustments are, in any event, to be made in accordance with clause 17 and, therefore, to the extent that any adjustment may be required under clause 4.1, it must be made in accordance with the provisions of clause 17 to which I will refer below.
The defendant sought to rely upon clause 4.1 as permitting a variation to the amount of the purchase price by arguing that the “Net Asset Value” of the businesses had decreased since setting the purchase price based on the 31 May 2005 accounts once regard was had to the Consolidated Balance Sheet produced as at 31 August 2005. This argument depended upon the definition of “Net Asset Value” meaning the Net Asset Value stated in the Balance Sheet as at 31 May 2005 and the subsequent Balance Sheet as at 31 August 2005. The definition of “Net Asset Value” means the Net Asset Value stated in the 31 May 2005 Balance Sheet and “where the context requires” any subsequent Balance Sheet of the “De Neefe group”. The question which therefore arises is whether clause 4.1 requires a taking into account of the subsequent Balance Sheet in addition to the Balance Sheet as at 31 May 2005. In my view the context of clause 4.1 does not require taking into account of the Balance Sheet as at 31 October 2005. Clause 4.1 was designed to deal with movements in the value of the Balance Sheet following Provisional Completion. Its terms are not directed to errors, misstatements or mistakes in the Balance Sheet (something clearly dealt with by clause 17.3) but, rather, to accretions or decretions in value over a period of time upon the assumption that the 31 May 2005 Balance Sheet was otherwise accurate. The provisions dealing with the “Provisional Completion” and “Provisional Completion Date” seek to preserve the position of the parties during the anticipated period between the date of contract and the date of satisfaction of any conditions precedent to the completion of the Agreement. Clause 4.1 seeks to accommodate the expected movements in value which may occur during that period to ensure that they be reflected in the purchase price. Clause 4.1, in my view, was not intended, and is not apt, to deal with increases or decreases in figures which are wrong in the balance sheet upon which the purchase price was first determined: those the parties have provided to be dealt with under clause 17. If, however, I am wrong about that conclusion, it is still necessary that any adjustment under clause 4 be made in accordance with clause 17 as expressly required by clause 4.1(c).
Clause 17.3 of the Agreement expressly contemplates that the assets and liabilities of the business might not be as stated in the Consolidated Balance Sheet as at 31 May 2005 and sets out a mechanism for an adjustment to the purchase price. It provides:
17.3 Adjustment to Purchase Price
If at any time in the 12 month period the [sic] following the Provisional Completion Date the assets or Liabilities of the Business are other than as stated in the Consolidated Balance Sheet then the parties will observe the following process:
(a)[T]he party claiming a difference in the value of any Adjustable Asset Item or Liabilities specified in the Consolidated Balance Sheet (the Claimant) shall notify the other parties (the Respondent) within 30 days of becoming aware of the difference in the value of the relevant item and of the fact that the Claimant has a different view on the value of the item(s) and otherwise providing reasonable particulars of what the Claimant asserts to be the true value of the relevant item (Claim).
(b)Within 14 days of receiving written notification of the Claim the Respondent will notify the Claimant whether it accepts or disputes the Claim. In the event that the Respondent accepts the Claim in full or in part then an adjustment to the Purchase Price will be made for the undisputed amount first against the next Balance Stock payment due and second against the next instalment of the Purchase Price which is then due in accordance with clause 3.2(a). In the event that the Respondent does not accept the Claim in full then the Respondent will advise the Claimant in writing that it does not accept the Claim in full.
(c)For 14 days after the Respondent disputes the Claim (Negotiating Period) the parties will meet and negotiate in good faith with a view of resolving and agreeing on the true amount of the Claim. If agreement on the Claim is reached during this period the amount will be adjusted and treated in accordance with the process set out in clause 17.3(b).
(d)If the parties are unable during the Negotiation Period to resolve their dispute (Dispute) the matter will be referred to the Expert in accordance with clause 17.4.
By this clause the parties undoubtedly contemplated adjustments that might flow, not from movements in the value of the business over time, but because the assets and liabilities might be “other than as stated” in the Balance Sheet as at 31 May 2005 which had expressly formed the basis for calculation of the purchase price. The clause sets out a clear process to deal with such claims. The evident purpose of clause 17.3(a) is that the party claiming the difference should notify the other party of a claim in a timely and informative way: that is, that there was to be notification; that the notification was to be given in a timely fashion; and that what was to be notified was to be informative to the recipient. Clause 29.20 adds to these requirements by providing that the times limited in the Agreement “are essential, unless otherwise stated”. I think it reasonable to assume that the time provisions found in clause 17.3 are essential to the Agreement given that they so directly impact upon the purchase price at the specified times. Both vendor and purchaser are likely and entitled to rely upon the dates and amounts for payment stipulated in clause 3.2 and any variation of the quantum payable may be inferred to be of sufficient importance to them that time limits affecting payments are essential.
The plaintiffs maintain that clause 17.3 has not been complied with for a variety of reasons. First, it was said that there was no evidence that following Provisional Completion there was a decrease in the Net Asset Value stated in the Consolidated Balance Sheet to schedule 1 to the Agreement so as to entitle the purchaser to invoke clause 17. I am unable to accept the plaintiffs’ submissions in these terms; that is, I am unable to accept that there was no evidence of a decrease in the Net Asset Value of the business being other than stated in the Consolidated Balance Sheet as at 31 May 2005. The defendants’ claim may ultimately be found not to be correct, but there is ample evidence of a contention (to use a more neutral word than “claims”) that an adjustment to the purchase price was claimed by them on the basis that the assets and liabilities of the business were not as stated in the Consolidated Balance Sheet as at 31 May 2005.
The plaintiffs also contended that any claim by the purchaser did not comply with the terms of clause 17.3 because no claim was signed by an officer or given under the common seal of the sender and sent to Rennick & Gaynor and, further, that the notices relied upon did not in form constitute notice in writing of: (i) the difference in the value of any adjustable asset item or liability; (ii) the fact that the first defendant had a different view on the value of the item; and (iii) reasonable particulars of what the first defendant asserted to be the true value of the relevant item. The first of these contentions is, I think, beyond doubt. The notifications relied upon by the defendants were plainly not made in compliance with clause 28 of the Agreement requiring, amongst other things, that they be signed by an officer or given under the common seal of the sender and be in writing addressed, relevantly, to Messrs Rennick & Gaynor. This provision, however, was not expressed to be essential to the agreement reached between the parties. It may be true that the notification provisions in clause 28 has not been complied with, but it does not necessarily follow that the pre-condition of notice required by clause 17.3 has not factually been satisfied for the purposes of that clause. The evidence before me makes clear that the plaintiffs had, in fact, received notification and, to that extent, the purchaser, as the party claiming the difference, has in fact notified the plaintiffs of a claim notwithstanding that clause 28 has not been complied with in terms. Non compliance with clause 28 does not necessarily mean that the factual condition to engage clause 17.3 was not created. In circumstances where the evident purpose of clause 17.3 (actual notice) has been satisfied on the evidence, I would be reluctant to construe (and decline to construe) clause 17.3 as being satisfied (or made out) only where clause 28 has also been satisfied. In other words, I do not regard the appropriate conclusion of a non compliance of clause 28 to be that I should act as if clause 17.3 has not independently been satisfied if the facts make that conclusion appropriate.
In this case it is clear not only that the plaintiffs were notified in point of fact, but also that some or all of the notifications received by the plaintiffs were forwarded to Messrs Rennick & Gaynor. On 31 May 2006 an email was sent on behalf of the purchaser to Mark Donegan on behalf of the vendor/plaintiffs. That had been sent to the wrong email address but was resent to Mr Donegan on 6 June 2006. On that same day Mr Donegan forwarded that email to, amongst other people, the plaintiffs’ solicitors at Rennick & Gaynor. The subject matter of the email was described as “Adjustments to Deneefe’s purchase price”. Mr Donegan’s email reveals evident understanding of the email as the notification of a claim for adjustments, and indeed as a claim requiring “an audit review”, adding a suggestion of who should be involved in the audit review. The email sent by Mr Donegan specifically asked that he be called once the recipients (including the plaintiffs’ nominated solicitor by clause 29) had “considered” the listing of adjustments “and the ramifications on the payment due today”.
I am less confident that the other requirements stipulated by clause 17.3 have been satisfied by such notification as the defendants may have made. One of the requirements was that any notification should be within 30 days of “becoming aware” of the difference in the value of the relevant item and of the fact that the defendants had a different view of the value of the item. Mr Harris, an accountant, gave evidence on behalf of the defendants that by May 2006 a number of claims “had been identified” and that he had been directed (presumably at about that time) to advise these to Mr Donegan. On 31 May 2006 a claim was sent to Mr Donegan by the email to which I have already referred (although as previously explained he did not receive it until 6 June 2006) setting out a series of adjustments sought totalling $339,176.71. There is, however, as far as I can see, no other evidence that would enable any conclusion to be reached that any other claim satisfied the condition in clause 17.3 that it be notified “within 30 days of becoming aware” of any difference in value from that shown in the Consolidated Balance Sheet.
The burden of proving the validity of a claim falls upon the party seeking to rely upon it, namely, the defendants. The only evidence concerning compliance with the 30 day from awareness requirement for notification in clause 17.3 is the limited evidence of Mr Harris concerning the first claim and that evidence is ambiguous. On the other hand, I have no reason to assume that the claims which he said “had been identified” by May 2006 had not been brought to the attention of his principals promptly during May 2006. I am also prepared to assume that the direction given to him to advise Mr Donegan of the claim was done promptly after Mr Harris had identified them, and, therefore, that it was done at a point of time near to the time when the claims were identified. Accordingly, I am prepared to assume that the defendants’ awareness of the claims to which Mr Harris referred, and of which notice was given on 6 June 2006, was within the period of time required by clause 17.3.
The other complaint about the notification which I need to consider is whether the details constituted “reasonable particulars” of what the purchaser, as claimant, asserted to be the true value of the relevant item. In all there are eight notifications pleaded by the defendants as notifications of claims for adjustment of the purchase price and warranty claims. It is clear from the terms of clause 17.3 that part of the process of notification was to enable the recipient of the notice to evaluate whether to accept or to reject a claim. It is by that task that one must judge whether the claimant provided “reasonable particulars”. The measure of reasonableness must be judged by reference to whether what was provided enabled a party to undertake the task contemplated by the clause upon receipt of the notice. In this context the plaintiffs complained that they were not given adequate details to evaluate the claims, whilst the defendants complained that the plaintiffs were seeking evidence or supporting documents rather than reasonable particulars to enable the task required by clause 17 to be undertaken by the recipient. I have considered the various items in what the defendants contended to be the relevant notifications and, in fairness to the parties, cannot give a definitive answer as to whether the particulars were reasonable without further evidence. That is to say, some of the items look to me as though they are sufficiently described to enable a recipient, in the plaintiffs’ position, to understand precisely what was meant for the purpose of deciding whether or not to accept or reject the claim. Other items, appear to me to be couched in such terms as would not enable me to conclude that the recipient would necessarily either have known or not have known what was meant without further evidence. In any event, given the views I have formed about compliance with the 30 day time limit for notification upon becoming aware of a difference, the critical notification for me to consider is the spreadsheet dated 31 May 2006, which is the first of the particulars relied upon by the defendants. In relation to that document, the description of the items seem to me to be of a kind which a recipient in the position of the plaintiffs is likely to have understood what was being notified and was sufficient for them to form a view about whether to accept or reject the claim.
Accordingly my answer to the first question is “no” except in relation to the notice given by email dated 31 May 2006 which was resent on 6 June 2006.
Question 2: Has De Neefe made a warranty claim (“warranty claim”) which satisfies the requirements of clauses 4.2, 18 and 28 of the Agreement?
The issues relevant to the second question are, broadly speaking, the same as those arising for question 1. The vendors gave a series of contractual warranties under the Agreement and by clauses 4.2, 18, 19 and 28 of the Agreement provided a mechanism for warranty claims to be made. The vendor expressly represented and warranted by clause 18.1 that the “Warranties” (as defined in the Agreement) were “true and accurate and not misleading”.
Clause 4.2 provided that the amount of a warranty claim (or to the extent that it exceeded the value of a cash component payable) could be retained by the purchaser from one of the payments due under clauses 3.2(a)(ii), 3.2(a)(iii) and 3.2(a)(iv) [sic] until the warranty claim was resolved between the parties. Clause 18.5 imposed an obligation on the purchaser to give notice in writing of any warranty claim “promptly after becoming aware of the matter providing reasonable detail of the nature of the claim and the damages sought such that the amount of damages can reasonably be determined”. Clause 18.3 provides that the right of the purchaser to make a claim for damages for a breach of any of the warranties expired and would be extinguished 12 months after the Provisional Completion Date except in respect of a claim of which notice had been given prior to that date in accordance with clause 18.5. Clause 28 of the Agreement, as I have previously indicated, deals with the giving of notices and requires, amongst other things, that they be in writing, addressed to the respective solicitor of the recipient and were to be either signed by an officer or under the common seal of the sender.
The contention for the defendants was that the “warranty claims relied upon by the defendants [were] coextensive with the purchase price adjustment claims”. The notices relied upon in the particulars in paragraph 3 of the amended reply for the defendants are described as “adjustment of purchase price and warranty claims” without differentiating notices of price adjustment claims from notices of warranty claims. The defendants contended that the notices could objectively be regarded as conveying to the reader that a claim was being made under either clause 4.1 (adjustment for net asset value increase or decrease) or clause 4.2 (adjustment for warranty claims). I am unable to accept this submission. I have already expressed the view that I do not read clause 4.1 as the basis of an entitlement to an adjustment for amounts which are payable under clause 17. It is clause 17.3(b) which effects an obligation to make an adjustment to the purchase price where the recipient of the notice accepts the claim. The relevant sentence in that sub-clause provides:
In the event that the Respondent accepts the Claim in full or in part then an adjustment to the Purchase Price will be made for the undisputed amount first against the next Balance Stock payment due and second against the next instalment of the Purchase Price which is then due in accordance with clause 3.2(a). (emphasis added)
Those claims where there was disagreement were first to be negotiated (clauses 17.3(c), (d)), and if still unresolved, were to be referred to determination by a third party (clause 17.4). The Agreement then provided for an adjustment to the purchase price of the amount determined by the third party under clause 17.4 to be adjusted “in accordance with the process set out in clause 17.3(c)”. In other words, the Agreement made specific and clear provisions for the adjustment to the purchase price where there were claims made under clause 17. Even if, which I do not accept, clause 4.1 could be an independent source of claims properly referrable under clause 17, any adjustments were still to be made in accordance with that clause as expressly provided for by clause 4.1(c).
The position in respect to warranty claims is quite different from claims for variation of purchase price. The Agreement contemplated that warranty claims would not bring about a variation to the purchase price. That is not surprising because the purchase price was, in effect, the economic value of the business determined by reference to its assets and liabilities as disclosed in the accounts assuming them to be accurate. Conceptually, therefore, there would be no reason to diminish the purchase price if a claim could not be brought under clause 17 but depended, rather, upon a breach of a warranty. Conceptually, a reduction in the purchase price for a breach of warranty could produce an unjust gain to the purchaser who might have the economic value of the business at the price paid for (assuming that an adjustment purchase price was not available) but reduced by the quantum of the damages for a breach of a warranty. What the Agreement contemplates, rather, is that any breach of warranty would, if anything, sound only in damages. Clause 4.2 does not in terms provide for an adjustment of purchase price but, rather, (and significantly) only the retention of the disputed amount “until such time as the Warranty claim is resolved” between the parties.
A consequence of what I consider to be the fundamentally different way in which the Agreement deals with adjustments to purchase price through clause 17 (whether with or without clause 4.1) and warranty claims (however they may become payable, whether with or without the assistance of clause 4.2) is that the nature of any claim must be capable of being identified. This is supported by the difference in the notice provisions applicable to each claim. Thus, for example, clause 17.3 requires the claiming party to provide “reasonable particulars of what the Claimant asserts to be the true value of the relevant item” (clause 17.3(a)), whilst the notice required from the purchaser of a warranty claim is to provide “reasonable detail of the nature of the claim and the damages sought such that the amount of damages can reasonably be determined”. The vendor who might be in receipt of a claim should be under no doubt about whether the claim is made for an adjustment to purchase price having the effect of a diminution in a payment by direct operation of the Agreement, or a warranty claim sounding in damages with a contractual right of retention and, presumably, some form of set‑off if the claim be upheld. The notices relied upon by the defendants, to the extent that they are undifferentiated as between price adjustment claims and warranty claims, cannot in my view be relied upon as warranty claims unless it is clear from the notice given that the claim is a warranty claim.
The contention for the defendants is that its claims for an adjustment to purchase price under clause 17.3 are also simultaneously capable of being warranty claims. The warranties given by the vendors as true, accurate and not misleading under clause 18.1 are those defined in clause 1 as the representations and warranties set out in schedule 3. Amongst the warranties in schedule 3, and in particular those relied upon by the defendants, are those headed “Accuracy of information”. The warranties under that heading are:
(a)The information set out in this Agreement including the Recitals and the Schedules are true, complete and accurate in all respects.
(b)All information which has been given by or on behalf of the De Neefe Group to the Purchaser (or to any director, agent or advisor of the Purchaser) with respect to the Business and Assets is true, complete and accurate in all respects.
(c)All information which is known to the De Neefe Group relating to the Business or the Assets or otherwise the subject matter of this agreement which is material to be known by a Purchaser of the Business has been disclosed in writing to the Purchaser.
These warranties, in these terms, are capable of extending to the accuracy of the value of any adjustable asset item or of any liability in the Consolidated Balance Sheet being, as it was, in the first of the schedules to the Agreement. It is therefore possible, if perhaps inadvisable, for the Agreement to have created a distinct overlap between an adjustment to purchase price under clause 17.3 and a simultaneous claim for damages for the same item as a warranty claim.
Whether a claim, however, may simultaneously be made under clause 17.3 (as an adjustment to purchase price) and under clauses 18 and 19 (as a warranty claim) the notice requirements for each is separately provided for and in material respects is different. Adjustment to purchase price must be made within 30 days of becoming aware of the difference in the value of an item, whilst the right of the purchaser to make a claim for damages for breach of any warranty must be made “promptly after becoming aware of the matter”. The notice of a claim for adjustment to purchase price must provide reasonable particulars of what the claim asserts to be the true value of the relevant item, whilst the details of a warranty claim must be of the nature of the claim and damages sought such that the amount of damages can reasonably be determined. Both claims would seem to require being made in the 12 month period following the Provisional Completion Date, but an adjustment to purchase price does not arise unless made within 30 days of becoming aware of the difference in the value of the relevant item, whilst the entitlement of a warranty claim expires and is extinguished 12 months after the Provisional Completion Date; that is, one set of provisions creates an entitlement which only arises if conditions are satisfied whilst the other assumes an existing entitlement which is terminated at the expiration of a period. These are additional matters which lead me to conclude that any notice must make it clear that it is seeking to invoke one of the provisions. I do not exclude the possibility that a notice might expressly seek to enliven simultaneously both sets of provisions but I do not consider that any of these notices do that. On the contrary, it seems to me that the notices were all directed to claims for adjustment to purchase price rather than warranty claims.
The first communication relied upon by the defendants was the email initially sought to be sent on 31 May 2006 that was ultimately sent on 6 June 2006. There is nothing in the email or the attached spreadsheet which suggests that any item in that claim was made as a warranty claim except, possibly, for three items dated 28 February 2006 where the word “warranty” appears in the description of the item. However, it seems clear to me that the word “warranty” is really a description of an item otherwise referrable to the Balance Sheet of the business and not a claim for a specific breach of warranty. The second communication relied upon by the defendants was an email dated 10 July 2006. Nothing in that email or the attachment indicates to me that the claim was made as a warranty claim. On the contrary, the covering email speaks in terms of the amounts being included in the adjustments to the purchase price. The third communication relied upon by the defendants is another email, this one dated 11 July 2006. It does little more than attach an updated schedule of adjustments to increase the claims previously made and, therefore, does not raise any separate claim or any separate indication of a different claim under the warranty provisions rather than an adjustment to purchase price. The fourth correspondence relied upon by the defendants is a letter from the defendants’ solicitors to the plaintiffs’ solicitors dated 8 August 2006. This letter does refer generically to clauses “4, 17, 18 and 19 of the Agreement”. It does so however, as a mere recitation that the obligation to make payments was subject to those clauses. The letter went on to convey the writer’s instructions to make “deductions” to the purchase price “as adjustments under clauses 4 and 17 of the Agreement” without any reference or suggested reliance on the warranty provisions. The fifth communication relied upon is an email dated 10 August 2006 from the defendants’ solicitors attaching schedules relating to the liability of the Public Transport Board. This appears to be a reference to the third item in the previous correspondence of 8 August 2006 in which deductions were claimed, amongst other items, in relation to liability to the Public Transport Board. To that extent the subsequent email of 10 August provides no foundation for a warranty claim. The sixth item relied upon by the defendants are documents sent by Mr Scrinis to Mr Donegan on 8 September 2006. Those documents are exhibited to witness statements tendered in evidence by each of them. There appears to be some differences between the two sets of documents tendered but neither purports to be a warranty claim. The seventh communication relied upon by the defendants is an email from Mr Scrinis to Mr Donegan dated 12 September 2006 described simply as a break down of the top debtors which had not paid. There is, again, nothing in that to indicate a warranty claim. The last communication referred to in the defendants’ particulars as warranty claims was conceded, in my view correctly, to be outside of the period within which warranty claims could be made under clause 18.3 and, therefore, was not pressed as a separate warranty claim.
The plaintiffs also rely upon the requirement in clause 28 to which I have referred in dealing with the issues under the first question. For the same reasons I do not accept those contentions.
Accordingly, my answer to question 2 is “no”.
Question 3: If the answer to questions 1 and 2 is “No”, does the Agreement, upon its proper construction, preclude De Neefe from making a purchase price adjustment claim or a warranty claim in accordance with the Agreement?
The Agreement precludes the purchaser from making a purchase price adjustment claim or a warranty claim in accordance with the Agreement to the extent that I have answered questions 1 and 2 in the negative. The entitlement to make a purchase adjustment claim under clause 17 arises where the facts identified in clause 17.3 exist. To the extent that a claim has not been made in conformity with the clause there is, in my view, no entitlement to do so. A warranty claim if not made within the 12 months following the Provisional Completion Date (as defined) is expressly terminated by clause 18.3. Either way the Agreement provides a mechanism bringing an end to entitlements to claim.
Accordingly, my answer to question 3 is “yes” to the extent that a claim has not already been brought.
Question 4: If the answer to question 3 is “Yes”, does an estoppel arise against the Plaintiffs as pleaded in paragraphs 2 to 10 of De Neefe’s amended reply to defence to amended counterclaim filed 12 February 2008?
The parties accept that the relevant principles to establish an equitable estoppel are those found in the judgment of Brennan J in Waltons Stores (Interstate) Ltd v Maher,[1] where his Honour said:
In my opinion, to establish an equitable estoppel, it is necessary for a plaintiff to prove that (1) the plaintiff assumed that a particular legal relationship then existed between the plaintiff and the defendant or expected that a particular legal relationship would exist between them and, in the latter case, that the defendant would not be free to withdraw from the expected legal relationship; (2) the defendant has induced the plaintiff to adopt that assumption or expectation; (3) the plaintiff acts or abstains from acting in reliance on the assumption or expectation; (4) the defendant knew or intended him to do so; (5) the plaintiff's action or inaction will occasion detriment if the assumption or expectation is not fulfilled; and (6) the defendant has failed to act to avoid that detriment whether by fulfilling the assumption or expectation or otherwise. For the purposes of the second element, a defendant who has not actively induced the plaintiff to adopt an assumption or expectation will nevertheless be held to have done so if the assumption or expectation can be fulfilled only by a transfer of the defendant's property, a diminution of his rights or an increase in his obligations and he, knowing that the plaintiff's reliance on the assumption or expectation may cause detriment to the plaintiff if it is not fulfilled, fails to deny to the plaintiff the correctness of the assumption or expectation on which the plaintiff is conducting his affairs.
The estoppel pleaded by the defendants rely upon the assertion that at no point during the course of the conduct of the parties in relation to the claims did the plaintiffs say to the defendants that the form in which they had made the claims was defective. It was not until the commencement of this proceeding that the plaintiffs expressly took the point that there had been non-compliance with the contractual requirements for the making of claims. Indeed, the defendants maintain that the plaintiffs had engaged in, and with, the process of adjustment to purchase price by asking for details of the claims, by asking for meetings to resolve differences and by rejecting the claims in substance. It is thus said that the defendants were led to assume that the claims were accepted as claims and further, that the defendants could have taken steps to remedy any defect had the plaintiffs indicated that they were taking the position which they now take.
[1](1988) 164 CLR 387 at 428-9.
The evidence before me establishes that the conduct of the plaintiffs unquestionably created an expectation on the part of the defendants that strict compliance with clause 17 was not required. There can be no doubt that from at least 6 June 2006, the plaintiffs knew that the defendants were making claims for an adjustment to the purchase price in reliance upon clause 17 of the Agreement. It may be that there was no obligation on the part of the plaintiffs positively to assert that they would insist upon compliance with clause 17 of the contract, but the plaintiffs in this case positively engaged in a process which on any view indicated the commencement of a process to determine whether there was to be an adjustment to the purchase price pursuant to clause 17. On 6 June 2006 Mr Donegan received the list of adjustments sought by the defendants. His email to, amongst others, the plaintiffs’ solicitors requested consideration of the listing of adjustments and of the ramifications to the payment which was due that day. Rather than to require compliance with the terms of the Agreement, the plaintiffs engaged in the process for adjustment which had been agreed to. On 22 June 2006 Mr Donegan wrote to Mr Harris on behalf of the defendants on the subject matter of “Adjustments to Deneefe purchase price”. That correspondence, by email, expressly stated that there had been an initial review of what was referred to as a “claim for adjustments to the purchase price” and that the plaintiffs were unable to accept any of the adjustments. The email went on to refer to their agreement, asking that Mr Harris arrange a suitable time within the next 14 days to meet and review the source documentation and any other relevant materials “that form the basis for [the] claims”. There would plainly have been no point in saying this if the plaintiffs were intending to rely upon a failure of strict compliance with clause 17.3(a) of the Agreement. That email, in my view, is further clear conduct on the part of the plaintiffs which induced the defendants to adopt an assumption or expectation that compliance with at least some part of clause 17.3 would not be required.
The more difficult question on the material available to me is the extent of non‑compliance which the plaintiffs represented that they would not enforce. What is clear is that at all times the plaintiffs have maintained an entitlement, whether rightly or wrongly, to more information about the nature of the claims being sought. I cannot therefore conclude that the plaintiffs were prepared to accept that the defendants had complied with all of the conditions in clause 17.3 for a valid claim to be accepted. Plainly the plaintiffs did not accept the claims and, moreover, did not accept that reasonable particulars had been provided. It follows from that, I think, that they cannot have induced the defendants to rely upon a view that the plaintiffs would not insist upon the requirement in clause 17.3 that the notification had to be within 30 days of becoming aware of the difference in the value of the relevant item. In other words, any estoppel against the plaintiffs is limited to non‑compliance with, in effect, the requirement that notices comply with clause 28.
The estoppel pleaded against the plaintiffs in paragraphs 2-10 of the amended reply to the defence to the amended counterclaim filed 12 February 2008 goes beyond that established against the plaintiffs on the material before me. The evidence does not establish an inducement that the plaintiffs would treat the notices given “as if they had complied with the Sale of Business Agreement in all respects”. The assumption induced by the conduct of the defendants was, rather, more limited, namely that the notice provision required by clause 28 would not be relied upon. The evidence does not establish any inducement to forego the requirement in clause 17.3 that any notification had to be within 30 days of the claimant becoming aware of the difference in the value of the relevant item. Indeed, nothing was said in the evidence to suggest any inducement on the part of the plaintiffs that could have been relied upon by the defendants in that respect.
Accordingly, my answer to question 4 is “no” but the plaintiffs are estopped from their reliance upon the notification requirements in clause 28 to the extent that they may be required to be complied with for the purposes of any claim.
Question 5: Does the Agreement, upon its proper construction, preclude De Neefe from making the claims pleaded in paragraphs 42 to 52 of its further amended defence and counterclaim filed 21 December 2007?
Paragraphs 42 to 47 of the defendants’ further amended defence and counterclaim plead a case against the plaintiffs of misleading and deceptive conduct contrary to the Trade Practices Act 1974 (“the Trade Practices Act claims”). Paragraphs 48 to 52 plead a case of negligent misstatement against the plaintiffs at common law (“the negligent misstatement claim”). The plaintiffs contend that neither claims may be brought because the Agreement, upon its proper constructions excludes all claims other than those contemplated by the Agreement itself.
The application of exclusion clauses at common law depends upon the intention of the parties and is a question of construction.[2] Whether an exclusion clause in a contract protects a party from liability in negligence is also a question of construction whether or not the exclusion clause expressly uses the word “negligence”.[3] In BHP Petroleum Ltd v British Steel PLC[4] the Court of Appeal held that, as a matter of construction, the words “all liability” in the clause of a contract were capable of embracing negligence.[5]
[2]JW Carter, Elisabeth Peden and GJ Tolhurst, Contract Law in Australia (5th edition, 2007) 274; Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500.
[3]Carter, Peden and Tolhurst, above n 2, 283-4.
[4][2000] 2 Lloyd’s Rep 277.
[5][2000] 2 Lloyd’s Rep 277, 285 (Evans LJ, Lord Lloyd agreeing), 289 (Lord May LJ, Lord Lloyd agreeing).
In this case the parties intended to exclude all liability other than that expressly provided for in the Agreement. The Agreement provided extensive, and perhaps generous, entitlements to the purchaser in respect of misstatements, whether negligent or innocent. The entitlement under clause 17.3 to obtain an adjustment to the purchase price arose, in effect, whenever there was a misstatement in the value of an adjustable asset item or the value of the liabilities as specified in the balance sheet providing the foundation upon which the purchase price was determined. The purchasers’ entitlement to recover any amount of misstated value was expressly provided for in the Agreement but was made conditional upon the existence of the pre-conditions and the giving of notice in accordance with clause 17.3. There were likewise provisions for the making of warranty claims which, as set out above, extended to the accuracy of information. Warranty claims were to be made, not as an adjustment to the purchase price but were contemplated in the Agreement to be made by way of claims for damages for breach. Such claims are expressly provided to expire and extinguish 12 months after the Provisional Completion Date except in respect of a claim of which notice had been given in accordance with clause 18.5 of the Agreement. In my opinion it is clear that these parties to this Agreement intended to exclude all other claims being made under the Agreement. It follows that the Agreement precludes the defendants making the negligent statement claims.
The Trade Practices Act claims requires different considerations. Section 68 of the Trade Practices Act 1974 renders void any term of a contract that purports “to exclude, restrict or modify or has the effect of excluding, restricting or modifying the application of some of the provisions in that Act”. Here the defendants seek to rely upon s 52 of the Trade Practices Act 1974 which is not protected from exclusion, restriction or modification by s 68. However, the authorities on s 52 are predominantly against giving effect to a contractual provision to exclude or limit the liability created by the section.[6] There are many sound reasons against giving effect to exclusions which seek to limit the operation of s 52,[7] although there is much force in concluding that the operation of s 52 in this case could produce an unjust outcome as against the vendor who has contractually agreed to an adjustment to the purchase price if the values represented were wrong. Parties to contracts such as the Agreement are entitled to rely upon the certainty of their bargain upon their terms and the operation of s 52, in this case, could have the effect of undoing the commercial bargain between the parties rather than protecting the person claiming to have been misled or deceived.
[6]Petera Pty Ltd v EAJ Pty Ltd (1985) 7 FCR 375, 378 (Wilcox J); Byers v Dorotea Pty Ltd (1986) 69 ALR 715; Clark Equipment Australia v Covcat Pty Ltd (1987) 71 ALR 367; Bateman v Slatyer (1987) 71 ALR 553; Collins Marrickville Pty Ltd v Henjo Investments Pty Ltd & Ors (1987) 72 ALR 601; PJ Berry Estates Pty Ltd v Mangalore Homestead Pty Ltd (1984) ATPR ¶40-489; Dibble v Aidan Nominees Pty Ltd (1986) ATPR ¶40-693; see also Law Book Company, Heydon, Trade Practices Law, vol 2 (at 102) [11.720] 11-10551.
[7]See, for instance, Petera Pty Ltd v EAJ Pty Ltd & Ors (1985) 7 FCR 375; see also Heydon, above n 6, [11.720].
In this case the defendants’ pleading is that the profit and loss accounts and the balance sheets disclosed by the plaintiffs represented “the true profit/loss position and the assets and liabilities” of the plaintiffs “both individually and collectively as at the date they were created.” It is these representations which the defendants contend were not only misleading and deceptive within the meaning of s 52 of the Trade Practices Act 1974 but which also induced them to enter into the Agreement and which caused them damage. It is unlikely that the parties intended to exclude (as a matter of construction of the Agreement) such liability as s 52 may have cast upon the plaintiffs in view of the state of the authorities and in the absence of an express attempt to address the liability which s 52 created. In saying that, however, I should not be understood as expressing any view about the defendants’ prospects of success on that pleading or upon its sufficiency. Question 5 in this trial of preliminary questions is posed as one of construction of the Agreement and, accordingly, it may be inappropriate to go much beyond what is needed to answer that question. In particular I reach no conclusion about whether the defendants can make out the necessary nexus between the representations and their execution of the contract. In that regard I note (as one of the facts relevant to any inducement) that the Agreement provided a clear mechanism to protect the defendants from any misstatement as to the financial details of the business. At this state of the proceeding it might be thought that the inducement for the defendants was the contractual protection offered by clauses like 4, 17 and 18, rather than the accuracy of the financial details in the balance sheet and profit and loss accounts. Indeed, it may be that the proper inference to be drawn from the terms of such clauses, when considered in light of the evidence at trial, is that any representations were to the effect that the accounts needed correction (or at least a representation that they might). The terms of the Agreement may, therefore, be found on any further evidence at trial to deprive “conduct of [its misleading and deceptive] quality or [break] the causal connection between conduct and loss”.[8] On the evidence available to me, I would conclude that any loss to the defendants was occasioned by their failure to comply with clause 17 rather than any inducement which was misleading or deceptive. Similarly, on the evidence before me, I would conclude that the presence of provisions for adjustment to the purchase price would relevantly deprive the plaintiffs conduct as misleading or deceptive, or sufficiently connected to the defendants’ loss. In other words, on the evidence on the trial of preliminary questions, I would conclude that the defendants had failed on their Trade Practices Act claims.
[8]See Kewside Pty Ltd v Warman International Ltd (1990) ATPR (Digest) ¶46-059, 53,221 (headnotes); C Lockhart, The Law of Misleading or Deceptive Conduct (2nd ed, 2003) 305.
Accordingly, my answer to question 5 is “yes” as to the claims pleaded in paragraphs 48 to 52 and “yes” as to the claims pleaded in paragraphs 42 to 47 on the evidence at the trial of the preliminary point.
Question 6: Should clauses 6.2 and 7.2 of the Agreement be rectified so as to read respectively:
6.2Immediately prior to the Effective Date, the purchaser and the De Neefe Group will cause its representatives to conduct a stock take …
7.2… At the Effective Date the De Neefe group will physically identify each item of Balance Stock.
It is common ground between the parties that question 6 should be answered “yes”. The evidence led by the parties on this point makes clear that position to be correct.
Accordingly, my answer to question 6 is “yes”.
I will order that:
1. The preliminary questions should be answered as follows:
(1) Q. Has the First Defendant and Plaintiff by counterclaim (“De Neefe”) made a claim for an adjustment to purchase price (“purchase price adjustment claim”) which satisfies the requirements of clauses 4.1, 17.3 and 28 of the Sale of Business Agreement (“Agreement”) referred to in paragraph 6 of the statement of claim?
A. No, except in relation to the notice given by email dated 31 May 2006 which was resent on 6 June 2006.
(2) Q. Has De Neefe made a warranty claim (“warranty claim”) which satisfies the requirements of clauses 4.2, 18 and 28 of the Agreement?
A. No.
(3) Q. If the answer to questions 1 and 2 is “No”, does the Agreement, upon its proper construction, preclude De Neefe from making a purchase price adjustment claim or a warranty claim in accordance with the Agreement?
A. Yes, to the extent that a claim has not already been brought.
(4) Q. If the answer to question 3 is “Yes”, does an estoppel arise against the Plaintiffs as pleaded in paragraphs 2 to 10 of De Neefe’s amended reply to defence to amended counterclaim filed 12 February 2008?
A. No, but the plaintiffs are estopped from their reliance upon the notification requirements in clause 28 to the extent that they may be required to be complied with for the purposes of any claim.
(5) Q. Does the Agreement, upon its proper construction, preclude De Neefe from making the claims pleaded in paragraphs 42 to 52 of its further amended defence and counterclaim filed 21 December 2007?
A. Yes, as to the claims pleaded in paragraphs 48 to 52, and yes, as to the claims pleaded in paragraphs 42 to 47 on the evidence at the trial of the preliminary point
(6) Q. Should clauses 6.2 and 7.2 of the Agreement be rectified so as to read respectively:
6.2 Immediately prior to the Effective Date, the purchaser and the De Neefe Group will cause its representatives to conduct a stock take …
7.2 … At the Effective Date the De Neefe group will physically identify each item of Balance Stock.
A. Yes.
2. The proceeding is adjourned to 17 October 2008 for directions and for any submissions about costs.
---
SCHEDULE OF PARTIES
| F6152 No. 10519 of 2006 | |
| BETWEEN: | |
| DNFS PTY LTD (ACN 005 587 593) | Firstnamed Plaintiff |
| HIGH SD PTY LTD (ACN 006 230 253) | Secondnamed Plaintiff |
| NNTSIGN PTY LTD (ACN 008 663 330) | Thirdnamed Plaintiff |
| - and - | |
| DE NEEFE SIGNS PTY LTD (ACN 115 924 939) | Firstnamed Defendant |
| TRAFFIC TECHNOLOGIES LIMITED (ACN 080 415 407) | Secondnamed Defendant |
| CONSTANTINE ANDREW SCRINIS | Thirdnamed Defendant |
| AND BETWEEN: | |
| DE NEEFE SIGNS PTY LTD (ACN 115 924 939) | Plaintiff by Counterclaim |
| - and - | |
| DNFS PTY LTD (ACN 005 587 593) | Firstnamed Defendant by Counterclaim |
| HIGH SD PTY LTD (ACN 006 230 253) | Secondnamed Defendant by Counterclaim |
| NNTSIGN PTY LTD (ACN 008 663 330) | Thirdnamed Defendant by Counterclaim |
8
0