El Zain v Vitrafy Life Sciences Ltd - [2022] VSCA 195

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…

Grounds of appeal

[14] The appellant contends that the primary judge erred in finding that the respondent had discharged the onus of establishing the matters required under the relevant provision.

[15] It was submitted that his Honour failed to give adequate weight to the evidence of the second witness, and that the findings of fact were not reasonably open on the material before the Court.

[16] The respondent, for its part, submits that no error is disclosed, and that the conclusions reached were well within the range of outcomes available to the primary judge.

Consideration

[17] It is convenient to deal first with the question of construction, as the resolution of that issue informs the remaining grounds advanced by the appellant.

[18] For the reasons that follow, we are of the view that the appeal should be allowed in part and the matter remitted for further determination.

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Details

Case: [2022] VSCA 195
Decision Date: 13 September 2022

CaseChat Overview and Summary

In El Zain v Vitrafy Life Sciences Ltd, the court considered the dispute between the parties regarding the interpretation of a clause within a memorandum of understanding (MOU) that allowed for extensions to the term of the agreement. The primary issue was whether the clause permitted multiple extensions of the MOU term. The case was heard in the Federal Court of Australia, with the Honourable Justice Edelman presiding. The legal question before the court was the proper construction of clause 4.7 of the MOU, which outlined the conditions under which the term of the MOU could be extended.

Justice Edelman analysed the text of clause 4.7 and concluded that the clause was intended to facilitate the conclusion of specific discussions that were ongoing as of the date the extension notice was given. The judge found that the clause did not permit multiple extensions, as this would result in uncertainty and potential commercial inconvenience for Vitrafy, the owner of the intellectual property. The judge considered that permitting multiple extensions would alter the purpose of the clause and would not align with the expectations of reasonable business people. Additionally, the judge noted that El Zain had provided minimal consideration for the rights obtained under the MOU, which would permit multiple extensions while he engaged in discussions with potential partners or funders.

The court's reasoning was influenced by the principle that the interpretation of a contract should give effect to the commercial purpose of the contract. Justice Edelman determined that the clause was not intended to allow for multiple extensions, and that such an interpretation would be unreasonable and contrary to the commercial purpose of the MOU. The court's decision reinforced the importance of considering the commercial context and purpose of contractual provisions when interpreting their meaning. The final orders of the court were in favour of Vitrafy Life Sciences Ltd, finding that clause 4.7 did not permit multiple extensions of the MOU term.

Orders

Orders of the court

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Background

Background to the litigation

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Evidence

Evidence Before The Court

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Decision

Reasons for decision

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.…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].

Ratio Decidendi

Legal Principle Established

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