El Zain v Vitrafy Life Sciences Ltd

SUPREME COURT OF VICTORIA

COURT OF APPEAL

S EAPCI 2022 0030

EDWARD EL ZAIN	Applicant
v
VITRAFY LIFE SCIENCES LTD (ACN 622 720 254)	Respondent

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JUDGES:	SIFRIS, KENNEDY and OSBORN JJA
WHERE HELD:	Melbourne
DATE OF HEARING:	22 August 2022
DATE OF JUDGMENT:	13 September 2022
MEDIUM NEUTRAL CITATION:	[2022] VSCA 195
JUDGMENT APPEALED FROM:	[2022] VSC 79 (M Osborne J)

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CONTRACT – Construction – Determination of preliminary question – Whether clause allowed for more than one extension of term of contract – Only one extension permitted – Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104.

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Counsel
Applicant:		Mr I D Martindale KC with Mr P G Turner
Respondent:		Mr C M Caleo KC with Mr H C Whitwell
Solicitors
Applicant:	Diakou Faigen
Respondent:	Minter Ellison

SIFRIS JA
KENNEDY JA
OSBORN JA:

Introduction

On 18 December 2018 the respondent, Vitrafy Life Sciences Limited (‘Vitrafy’), entered into a Memorandum of Understanding (‘MOU’) with the applicant, Edward El Zain (‘El Zain’).[1]
[1]Vitrafy executed the MOU under its former name, Cryogenic Holdings Pty Ltd.
The stated purpose of the MOU was to provide a framework for El Zain, or any partner, purchaser or funder, to obtain a licence to exploit and commercialise the ‘Vitrafy Technology’ (as defined).
The MOU was to terminate on 31 December 2019, unless extended by El Zain pursuant to clause 4.7 of the MOU, as set out below. By notice dated 29 December 2019, El Zain extended the operation of the MOU to 31 December 2020. On 29 December 2020, El Zain purported to serve a second notice further extending the operation of the MOU to 31 December 2021.
The issue before the trial judge was whether more than one extension of the MOU was permitted. This issue was dealt with as a preliminary question under rule 47.04 of the Supreme Court (General Civil Procedure) Rules 2015 (the ‘Rules’).
The judge held that, properly construed, clause 4.7 permitted only one extension. El Zain seeks leave to appeal, contending that more than one extension is permitted.
For the reasons that follow, we agree with the judge that, properly construed, clause 4.7 permits only one extension. Accordingly, leave to appeal will be refused.

Relevant background

The MOU concerns intellectual property relating to high-speed ultra-low temperature chilling technology which facilitates a high quality of long life preservation of food and biological materials.

Relevant terms of the MOU

The recitals to the MOU record that Vitrafy[2] is the owner of the ‘Vitrafy Intellectual Property’ and that El Zain[3] ‘wishes to receive a licence to use the Vitrafy Intellectual Property for specific purposes in accordance with the terms of this Agreement’.
[2]For clarity and consistency, any reference to Cryogenics in the MOU is replaced with Vitrafy in this judgment.
[3]El Zain is referred to in the MOU as ‘Elzain’ as its short name. For clarity and consistency, any reference to Elzain in the MOU is replaced with El Zain in this judgment.
Clause 2.1.1 set out the purposes of the MOU as follows:
The purpose of this MOU is to:
(a)provide the framework for and facilitate the granting of the Licence to El Zain and/or any partner and/or funder and/or purchaser nominated and/or procured by El Zain subject to certain terms and conditions; and
(b)provide for obligations to be fulfilled prior to the execution of the Licence.
Clause 1 provides relevant definitions including:
·‘Licence’ means an exclusive worldwide licence to use the ‘Vitrafy Intellectual Property’ for a period of 20 years (with the option for an extension of a further period of 10 years).
·‘MOU Fee’ is defined as the sum of $100 and the ‘Licence Procurement Fee’ is defined as the sum of $2,500,000.
·‘Vitrafy Intellectual Property’ means all the Intellectual Property relating to the ‘Vitrafy Technology’ which Vitrafy owns and has rights to licence.
·‘Vitrafy Technology’ means the high-speed ultra-low temperature chilling technology which, when used with the Vitrafy Intellectual Property, delivers a high quality, long life preservation process for food and biological materials.
Clause 3 headed ‘Term’ provides that the MOU commences on the date the MOU is executed by both parties and continues ‘until the MOU End Date, unless terminated earlier by the parties in accordance with the terms of this MOU’.
Pursuant to clause 1, ‘MOU End Date’ means the date which is the earlier to occur of the following:
(a) 31 December 2019; and
(b) the date upon which the Licence is executed by both parties; and
(c)if El Zain fails to make either of the payments set out in clauses 5.2.1 or 5.2.2 in accordance with and by the relevant dates set out in clause 5.2.1 and 5.2.2.
Clause 4 is entitled ‘Licence’ and clause 4.1 is headed ‘Timing’, and provides that the parties ‘will use their best endeavours acting reasonably and in good faith to enter into the Licence by 31 December 2019.’
Clause 4.2, headed ‘Proposed terms of Licence’, provides that:
Subject to El Zain making each of the payments of the MOU Fee and the Licence Procurement Fee pursuant to clauses 5.2.1 and 5.2.2 respectively Vitrafy will grant and enter into the Licence with El Zain or any party nominated by El Zain.
Clause 4.3, headed ‘Scope of Work’, specifies that:
Vitrafy shall provide and procure to and for El Zain all reasonable assistance as required by El Zain to support and assist El Zain to procure a partner and/or funder and/or purchaser to enter into a commercial licence for the use of the Vitrafy Technology including any technical or research material and information.
Clause 4.6 is headed ‘Warranties’ and provides, in subparagraph (a), for various warranties by Vitrafy and, in subparagraph (b), for various warranties provided by El Zain. In each case, the warranties are expressed to be given both at the date of execution of the MOU and monthly thereafter. The warranties provided by Vitrafy include the following at clause 4.6(b)(iii):
that El Zain has reasonable grounds for believing that a partner and/or funder is prepared to enter into a sub licence with him to commercialise the Vitrafy Intellectual Property at a meaningful international level;
Clause 5 is headed ‘Licence Procurement Fee’. Clause 5.1 provides that El Zain ‘agrees to pay the MOU Fee and the Licence Procurement Fee to Vitrafy in consideration of Vitrafy entering into this MOU’. Clause 5.2 provides that the MOU Fee is to be paid on the date of execution of the MOU, and the Licence Procurement Fee to be paid on the ‘Payment Date’. ‘Payment Date’ is defined in clause 1 as ‘the earlier of the date that the Licence is executed by both parties and 31 December 2019’.
Clause 5.3 provides that:
Vitrafy shall be absolutely entitled to the MOU Fee and Licence Procurement Fee and no part of it shall be refundable even if the Licence is not executed or is subsequently terminated or the MOU is terminated unless this MOU or the Licence expressly provide otherwise or unless Vitrafy is in material breach of the terms of this MOU or the Licence in which case El Zain will be entitled to a refund of the MOU Fee and the Licence Procurement Fee on demand by El Zain from Vitrafy.
Clause 5.4 provides that:
For the avoidance of any doubt, the parties agree that if this MOU ends on the MOU End Date or is terminated earlier by the parties in accordance with the terms of this MOU, and by that date the Licence has not been executed by both parties, there will not be any obligation on El Zain to pay any of the Licence Procurement Fee which remains unpaid.
Relevantly, it can be seen that the date ‘31 December 2019’ appears in three places in the MOU other than the critical clause 4.7 headed ‘Extension to Date’. First, it appears in the definition of ‘MOU End Date’ in clause 1 which determines the date of termination of the MOU, absent execution of the Licence, and payment of necessary fees. Secondly, it appears in clause 4.1 headed ‘Timing’, which obliges the parties to use their best endeavours to enter into the Licence by 31 December 2019. Finally, it appears in the definition of ‘Payment Date’ in clause 1, which prescribes the relevant date for payment of the Licence Procurement Fee.
The date also appears in the critical clause 4.7 headed 'Extension to Date', which provides as follows:
The parties agree that if El Zain is in discussions with a potential partner and/or funder and/or purchaser to enter into a commercial licence for the use of the Vitrafy Technology, the date of 31 December 2019 wherever it appears in this MOU shall be extended for as much time as nominated by El Zain, acting reasonably and in good faith, to enable those discussions to progress and to be concluded.

Notices to extend

By a written notice dated 29 December 2019 (the ‘first notice’), El Zain nominated 31 December 2020 as the time by which the date of ‘31 December 2019’, wherever it appeared in the MOU, would be extended to enable him to progress and conclude the discussions he was in with a potential partner and/or funder and/or purchaser.
Vitrafy accepted that the first notice was effective such that the references to 31 December 2019 in the definitions of ‘MOU End Date’, ‘Payment Date’, and in clause 4.1 headed ‘Timing’ should instead read ‘31 December 2020’. It accepted therefore that the first notice extended the term of the MOU to 31 December 2020. It did not accept that the first notice changed the reference in clause 4.7 headed ‘Extension to Date’ from ‘31 December 2019’ to ‘31 December 2020’.
By a written notice dated 29 December 2020 (the ‘second notice’), El Zain then purported to extend the MOU by a further 12 months to 31 December 2021.
By letter dated 22 January 2021, Vitrafy informed El Zain that it considered the second notice to be ineffective, such that the MOU came to an end when the extension effected by the first notice expired, namely on 31 December 2020.

Proceeding below

On 4 October 2021, El Zain commenced proceedings against Vitrafy in the Trial Division of the Supreme Court. The principal relief claimed was a declaration that the second notice was valid, and specific performance of clause 4.2 of the MOU for the grant of the Licence by Vitrafy to El Zain.
At a directions hearing held on 5 November 2021, Vitrafy, with El Zain’s consent, sought orders that a separate question be heard and determined pursuant to rule 47.04 of the Rules. On that date, the judge ordered by consent that the following question be tried as a separate question in the proceeding:
On its proper construction, does clause 4.7 of the memorandum of understanding dated 18 December 2018 (‘MOU’) allow for more than one extension of the MOU?
It was common ground in the proceeding below that the first notice validly extended the MOU to 31 December 2020. The only issue for determination was the separate question.
The judge held that the answer to the preliminary question is no; on its proper construction, clause 4.7 of the MOU does not allow for more than one extension of the term of the MOU.

The judge’s reasons

After setting out the principles of construction and the competing submissions of the parties, the judge rejected El Zain’s main contention to the effect that the date of the extension includes a reference to the date in clause 4.7 itself, thereby permitting the clause to, in effect, enjoy an ongoing operation.
The judge commenced by rejecting a submission made by Vitrafy that the language is incapable of supporting a construction that allowed for more than one extension. He then moved on to deal with its second submission (which was premised on an alternative position that it was ‘possible’ for the language to accommodate El Zain’s construction). The judge said (at paragraph 54):
I find Vitrafy’s second argument far more persuasive; whilst a literal reading of the phrase ‘wherever it appears in this MOU’ could include reference to clause 4.7 itself, such an interpretation sits at odds with considerations of objective context, purpose and commercial rationality.[4]
[4]El Zain v Vitrafy [2022] VSC 79, [54] (‘Reasons’).
As will be seen below, El Zain places much emphasis on this paragraph.
The judge proceeded to consider the text of clause 4.7 and said:
Taking the text of clause 4.7 on its own, El Zain’s submissions pay insufficient regard to the introductory words of clause 4.7 viz ‘… if El Zain is in discussions with a potential funder and/or funder and/or purchaser to enter into a commercial licence for the use of the Vitrafy Technology … the date of 31 December 2019 wherever it appears in this MOU shall be extended for as much time as nominated by El Zain … [to] enable those discussions to progress and to be concluded …’ (underline added).
Thus, the fact of discussions being on foot as at the date of the giving of the extension notice is not simply a matter which conditions El Zain’s entitlement to give the notice, but serves to illustrate the purpose for which the ability to give an extension notice exists. The purpose of an extension notice is to facilitate the conclusion of those discussions which were on foot as at the date of the extension notice.[5]
[5]Ibid [55]–[56] (emphasis added).
The judge identified that El Zain had accepted that, on his construction, there could be multiple extensions provided discussions were on foot with another potential counter party, and said:[6]
In that event, on El Zain’s preferred construction, a second extension notice could be given for the purposes of facilitating the conclusion not of the discussions which precede the first extension notice but different discussions which precede the second notice and so on. In that respect, such a construction alters the purpose for which the clause 4.7 extension facility exists. Rather than facilitating the extension of the MOU to enable only the pre-31 December 2019 discussions to be concluded, El Zain’s construction includes facilitating the extension of the MOU to enable the completion of whatever discussions are in place during the extended term of the MOU. In such circumstances, Vitrafy would have no certainty as to the point at which it, as the owner of the Intellectual Property, would start to derive a commercial benefit from its exploitation, whether as a result of the entering into of the Licence contemplated by the MOU or otherwise.
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To interpret the clause in a way so as to permit multiple extensions with the attendant rolling uncertainty as to the point at which the MOU would end or the Licence would be executed, is at odds with the expectation of reasonable business people and would work commercial inconvenience, if not give rise to a commercial nonsense.[7]
[6]Ibid [59], [61].
[7]Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104, 117 [52].
The judge considered that his conclusion was reinforced by three further matters drawn from the text of the MOU. First, that El Zain has provided consideration of a mere $100 for the rights obtained by him under the MOU, which on his construction permits the giving of multiple extension notices whilst he engages in and aspires to conclude discussions with potential partners or funders. Secondly, that Vitrafy is locked out from any other means of commercially exploiting the technology in the meantime. Thirdly, that at the time the parties entered into the MOU, El Zain warranted that he had ‘reasonable grounds to believe that a partner and/or funder [was] prepared to enter into a sub licence with him to commercialise the Vitrafy Intellectual Property’ at a meaningful international level.[8]
[8]Reasons, [62].
The judge accepted Vitrafy’s submission that clause 4.7 is a mechanical provision designed to extend the time referred to in three operative provisions. The judge said:
Having regard to the above, I accept the submission that clause 4.7 is a mechanical provision which operates to extend the time referred to in the three operative parts of the MOU; the MOU End Date, the Request Date[9], and the timing subclause 4.1. Extensions of the date appearing in those parts of the MOU were necessary so as to extend the term of the MOU so as to enable the facilitation and completion of the discussions which were on foot at 31 December 2019.[10]
[9]This was clearly a misstatement intended to be the Payment Date.
[10]Reasons, [67].
Given that he considered that there was a ‘constructional choice’ the judge had regard to certain extrinsic evidence, but found it to be of no assistance.[11] He ultimately concluded:
Rather, the text of the MOU, and considerations of objective context, purpose and commercial rationality, all militate against the construction urged by El Zain, and in favour of that contended for by Vitrafy.[12]
[11]Ibid [68]–[82].
[12]Ibid [83].

The proposed ground of appeal

The sole proposed ground of appeal is as follows:
The judge erred in law in departing from the ordinary and natural meaning of clause 4.7 of the Memorandum of Understanding.

El Zain’s submissions

The gravamen of El Zain’s submissions is that, on the ‘ordinary natural meaning’ of clause 4.7, he was entitled to extend the term of the MOU more than once. In particular, he submitted that paragraph 54 of the reasons demonstrated that the judge had found that the words ‘wherever it appears in this MOU’ had an ordinary meaning which included reference to clause 4.7 itself. However, the judge had then erred in law in ‘departing’ from that ordinary and natural meaning.
El Zain also submitted that the judge’s conclusion was based on three ‘principal findings’.
The first principal finding was alleged to be constituted by the judge’s statement that ‘the purpose of an extension notice is to facilitate the conclusion of those discussions which were on foot at the date of the extension notice’ as cited above.[13]
[13]See above at [33].
The second principal finding was the judge’s alleged findings about the parties’ ‘expectations’ by reason of the following statements:
On execution of the MOU, the parties expected that by the End Date (31 December 2019), either the MOU would end, in which case Vitrafy could seek an alternative counter party, or means of exploiting the Intellectual Property, or that the Licence would be executed with El Zain (or his nominee), and that the Licence Procurement Fee ($2.5 million) would be paid. That expectation was qualified by the fact that El Zain could extend the MOU term for such period as he may reasonably and in good faith nominate, for the purpose of concluding the discussions then on foot. Following the receipt of that extension notice, Vitrafy would then have the certainty of an end date, either for the termination by effluxion of time of the MOU or the execution of the Licence by a new end date.[14]
[14]Reasons, [60].
The final finding was allegedly made about the parties’ ‘belief’ by reason of the following statements made by the judge:
Thus, the parties stipulated the date of 31 December 2019, whilst providing for its extension in the circumstances contemplated by clause 4.7 in the belief that on the date of entering into the MOU, El Zain believed on reasonable grounds that a partner or funder, was on that date, prepared to enter into a sub-licence enabling commercialisation of the technology at a meaningful international level. It can hardly be supposed that in those circumstances the parties contemplated that clause 4.7 could be permitted to operate on some sort of rolling and continued basis.[15]
[15]Ibid [63].
El Zain submitted that there was no evidentiary basis for each of these alleged ‘findings’. Rather, the judge had assumed facts as to what business common sense required.
Accordingly, it was submitted that the second notice was valid and effective.

Vitrafy’s submissions

Vitrafy’s submissions have been largely reflected in our analysis below, such that it is unnecessary to describe them at length.
In brief, Vitrafy submitted that the trial judge was correct and that the text of the MOU, and considerations of objective context, purpose and commercial rationality, all militate in favour of the construction that clause 4.7 does not allow for more than one extension of the term of the MOU.

Analysis

The relevant principles are not in dispute. As identified by the judge, they were relevantly summarised by French CJ, Nettle and Gordon JJ in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd as follows:[16]
The rights and liabilities of parties under a provision of a contract are determined objectively, by reference to its text, context (the entire text of the contract as well as any contract document or statutory provision referred to in the text of the contract) and purpose.
In determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable businessperson would have understood those terms to mean. That enquiry will require consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract.
Ordinarily, this process of construction is possible by reference to the contract alone. Indeed, if an expression in a contract is unambiguous or susceptible of only one meaning, evidence of surrounding circumstances (events, circumstances and things external to the contract) cannot be adduced to contradict its plain meaning.
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Other principles are relevant in the construction of commercial contracts. Unless a contrary intention is indicated in the contract, a court is entitled to approach the task of giving a commercial contract an interpretation on the assumption ‘that the parties ... intended to produce a commercial result’. Put another way, a commercial contract should be construed so as to avoid it ‘making commercial nonsense or working commercial inconvenience’.[17]
[16]Ibid [42].
[17](2015) 256 CLR 104, 116–117 [46]–[52] (footnotes omitted). The quoted paragraphs were cited with approval by five members of the High Court (French CJ, Kiefel, Bell, Keane and Gordon JJ) in State of Victoria v Tatts Group Ltd (2016) 328 ALR 564.
A number of El Zain’s submissions may be rejected at the outset.
First, we consider that the premise of much of El Zain’s case is misconceived. Thus, the judge did not identify the so-called ‘ordinary natural meaning’ — and depart from it — in paragraph 54, or otherwise. The judge merely identified that a literal meaning of the phrase ‘wherever it appears in this MOU’ could include reference to clause 4.7 itself. Whether it did or not could only be determined by consideration of the text, context and purpose according to the principles already identified (and which the judge proceeded to apply).
Next, the suggestion that the judge made factual ‘findings’ contrary to evidence is also without merit.
The first so-called evidentiary ‘finding’ was that the purpose of an extension notice was to facilitate the conclusion of discussions which were then on foot. However, this is merely an observation about what the words of the MOU themselves disclose. As we explain below, the text of clause 4.7 expressly provides that if El Zain ‘is in discussions’ with a particular entity, the date shall be extended so as ‘to enable those discussions’ to progress and conclude.
The second alleged finding was also not concerned with any actual subjective ‘expectation’ dependent on evidence. The statement that the parties ‘expected’ that by 31 December 2019 the MOU would either end or that the Licence would be executed, is apparent from the text of the MOU. It reflects the parties’ intentions as objectively ascertained.
Finally, there was the complaint about the judge’s reference to the parties’ ‘belief’ that El Zain believed on reasonable grounds that a partner or funder was prepared to enter into a sub-licence. Such a ‘belief’ can also be objectively gleaned from the terms of the express warranty given in clause 4.6(b)(iii), cited above. There is no need for other ‘evidence’.
We therefore reject the suggestion that the judge made findings contrary to evidence. We also do not accept that he somehow fixed on an ‘ordinary and natural meaning,’ and then departed from it. Rather, the critical issue, to which we will now turn, is whether the judge’s construction was correct.
The judge’s reasons are careful and considered, and, for the reasons which follow, are, in our opinion, correct. This follows from a plain reading of the language used by the parties, as well as the context and purpose.
The starting point is the language used in the text of clause 4.7 itself. In this respect, we agree with the judge that, although the phrase ‘wherever it appears in this MOU’ could include reference to clause 4.7 itself, other parts of clause 4.7 very much weigh against such a construction.
First, as identified already, the use of the phrase ‘is in discussions with a potential partner and/or funder and/or purchaser’ is clearly intended to have reference to specific discussions. The purpose of the notice is then to enable ‘those’ discussions to conclude by either the entry into a commercial licence, or the conclusion of such discussions without result. There is no reference to multiple discussions. Rather, the clause is directed to enabling the conclusion of particular discussions with a particular party at a particular (present) time.
Secondly, there is the use of the word ‘nominated’. That is, the extension is for the time ‘as nominated by El Zain’. The ordinary meaning of the word ‘nominate’ is to ‘appoint’ or to ‘propose’.[18] Such language is not apt to embrace a series of rolling acts with indefinite effect. This is highlighted by the absence of words such as ‘from time to time’. Rather, the word ‘nominated’ suggests that El Zain was to be given a single opportunity to take a particular action (or not). That action was constituted by the specification of a discrete, certain period of time.
[18]The Macquarie Dictionary defines ‘nominate’ as including ‘1. to propose as a proper person for appointment or election to an office’, and ‘2. to appoint for a duty or office’; Macquarie Dictionary (online at 6 September 2022) ‘nominate’.
The words we have identified therefore suggest that an extension was intended to serve the purpose of providing a ‘once-off’ opportunity to finalise discussions which were already on foot. The words ‘wherever it appears’ must also be read within the context of the entire MOU, to which we now turn.
As identified earlier, the date of 31 December 2019 appears in three other places in the MOU: the definition of ‘MOU End Date’ in clause 1; the ‘Timing’ clause 4.1; and the definition of ‘Payment Date’ in clause 1. The extensions of the date specified in each of these clauses thereby has some substantive effect, ie it will affect whether an obligation arises to enter into the Licence and pay the Licence Procurement Fee, or whether the MOU was to come to an end. Clause 4.7, by way of contrast, contains no deadline before which something of substance is to happen or not happen, and does not readily attract the concept of an ‘extension’ at all. We therefore agree with the judge that clause 4.7 is clearly intended to be a mechanical provision which operates to extend the time specified in the three operative provisions. It thereby operates to extend the date ‘wherever it appears’ in the provisions of the MOU which have some substantive effect.
It is also tolerably clear from a review of the MOU that certainty was a critical issue and the legitimate and proper expectation of the parties. This is apparent from reading the MOU as a whole, though a number of matters are particularly significant. First, the parties identified the crucial date of 31 December 2019 on the basis that (only subject to clause 4.7) either the MOU would come to an end, or a licence would be executed by that date. Secondly, the importance of a certain end date is highlighted by El Zain’s warranty that it had reasonable grounds to believe that a partner and/or funder was already in existence who was or were prepared to enter into a sub-licence. The existence of such a warranty reinforces the notion that clause 4.7 was intended to only permit the conclusion of existing discussions with a specified entity already in contemplation. Thirdly, the MOU makes provision for El Zain to obtain rights by the mere payment of $100. It can hardly be supposed that the parties intended Vitrafy to be locked out from other means of exploiting its technology for some indefinite, extended time period in return for such a small amount of consideration.
Overall, then, having regard to the text, context, and purpose, we consider that a reasonable business person would understand that clause 4.7 does not permit the extension of the MOU on some sort of rolling, indefinite basis with no certain end date. Rather, we agree with the judge that, on its proper construction, clause 4.7 does not permit more than one extension of the term of the MOU.
Leave to appeal will be refused.
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[2022] VSCA 195

13 September 2022