Expectation Pty Ltd v Pinnacle VRB Ltd
[2001] WASC 144 (S)
•11 JUNE 2001
EXPECTATION PTY LTD -v- PINNACLE VRB LTD [2001] WASC 144 (S)
| Link to Appeal : |
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| SUPREME COURT OF WESTERN AUSTRALIA | Citation No: | [2001] WASC 144 (S) | |
| Case No: | CIV:2463/2000 | 15, 16, 19-23 FEBRUARY, 2-4, 7 & 9 MAY 2001, 18 FEBRUARY 2003 | |
| Coram: | MURRAY J | 11/06/01 | |
| 5/09/03 | |||
| 10 | Judgment Part: | 1 of 1 | |
| Result: | Claim dismissed | ||
| B | |||
| PDF Version |
| Parties: | EXPECTATION PTY LTD (ACN 009 030 102) PINNACLE VRB LTD (ACN 060 111 784) |
Catchwords: | Contract Term imposing obligation of good faith Requirements for breach Turns on own facts |
Legislation: | Nil |
Case References: | Central Exchange Ltd v Anaconda Nickel Ltd (2001) 24 WAR 382 Garry Rogers Motors (Aust) Pty Ltd v Subaru (Aust) Pty Ltd [1999] ATPR 41-703 Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41 Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349 Bamco Villa Pty Ltd v Montedeen Pty Ltd [2001] VSC 192 Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd [1991] 24 NSWLR 1 Commercial Union Assurance Company of Australia Ltd v Ferrcom Pty Ltd & Anor (1991) 22 NSWLR 389 Courney & Fairbairn Ltd v Tolaini Brothers (Hotels) Ltd [1975] WLR 297 Far Horizons Pty Ltd v McDonalds Australia Pty Ltd [2000] VSC 310 Hughes Aircraft Systems International v Airservices Australia (1997) 76 FCR 151 Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234 Wenzel v Australian Stock Exchange Limited [2002] FCAFC 400 White Industries (Qld) Pty td v Flower & Hart (1998) 156 ALR 169 |
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
- IN CIVIL
DECISION : 5 SEPTEMBER 2003 FILE NO/S : CIV 2463 of 2000 BETWEEN : EXPECTATION PTY LTD (ACN 009 030 102)
- Plaintiff
AND
PINNACLE VRB LTD (ACN 060 111 784)
Defendant
Catchwords:
Contract - Term imposing obligation of good faith - Requirements for breach - Turns on own facts
Legislation:
Nil
Result:
Claim dismissed
(Page 2)
Category: B
Representation:
Counsel:
Plaintiff : Mr D M Stone
Defendant : Mr H Jolson QC & Mr G S Clarke
Solicitors:
Plaintiff : Williams & Hughes
Defendant : Keogh & Co
Case(s) referred to in judgment(s):
Central Exchange Ltd v Anaconda Nickel Ltd (2001) 24 WAR 382
Garry Rogers Motors (Aust) Pty Ltd v Subaru (Aust) Pty Ltd [1999] ATPR 41-703
Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41
Case(s) also cited:
Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349
Bamco Villa Pty Ltd v Montedeen Pty Ltd [2001] VSC 192
Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd [1991] 24 NSWLR 1
Commercial Union Assurance Company of Australia Ltd v Ferrcom Pty Ltd & Anor (1991) 22 NSWLR 389
Courney & Fairbairn Ltd v Tolaini Brothers (Hotels) Ltd [1975] WLR 297
Far Horizons Pty Ltd v McDonalds Australia Pty Ltd [2000] VSC 310
Hughes Aircraft Systems International v Airservices Australia (1997) 76 FCR 151
Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234
Wenzel v Australian Stock Exchange Limited [2002] FCAFC 400
White Industries (Qld) Pty td v Flower & Hart (1998) 156 ALR 169
(Page 3)
1 MURRAY J: So far as it is relevant to note the nature of the plaintiff's claim, it was for breach of an agreement, called the letter agreement, made between the parties on 29 May 2000. The plaintiff claimed specific performance of the agreement, and damages.
2 The action was tried by me in February and May 2001. I gave judgment on 11 June 2001 for the defendant, with costs.
3 The plaintiff appealed and the appeal was heard on 6 March and 17 April 2002. On 19 June 2002, the appeal succeeded on a limited issue. My judgment was set aside and the action was remitted to me for determination on the existing evidence and in accordance with the reasons of the Full Court. The costs of the trial were reserved to me.
4 These reasons are therefore supplementary to those I originally published on 11 June 2001: Expectation Pty Ltd v Pinnacle VRB Ltd [2001] WASC 144, and to the reasons of the Full Court: Expectation Pty Ltd v Pinnacle VRB Ltd [2002] WASCA 160. These reasons should be read with the reasons already delivered.
5 The letter agreement was directed towards achieving the making of other agreements between the parties, licence agreements, funding agreements and a collaborative venture. The subject matter of those other agreements is immaterial for present purposes. The particular clause with which these proceedings are concerned was clause 6 which was in the following terms:
"The parties agree that they will negotiate in good faith to close the transactions contemplated in this letter agreement in an expeditious manner and as soon as practicable."
6 I held that clause 6 imposed an obligation on both parties to use their best endeavours to ensure the making of the agreements contemplated by the letter agreement within the time framework provided so as to ensure that each party had the benefit of the agreement. I considered therefore that there was no need to imply a term to that effect. It should be noted that the licence agreements and the collaborative venture agreement contemplated by the letter agreement were to be entered into no later than 30 June 2000 or such later date as was agreed. I found that an extension of time to 31 July 2000 was agreed, but no further extension was negotiated. The only one of the transactions contemplated by the letter agreement which had by then been entered into was a licence agreement and, in particular, the contemplated collaborative venture agreement was never made.
(Page 4)
7 One can focus attention, for present purposes, upon the requirement in clause 1(a) of the letter agreement to make the collaborative venture agreement by 31 July 2000. The Full Court held that the non-fulfilment of that condition precedent to the performance of the letter agreement did not automatically terminate the letter agreement. It remained, but it was voidable. Either party could terminate it, provided that it was not a party in default, in the sense that it caused or contributed to the non-compliance with the requirement to make the collaborative venture agreement by 31 July 2000.
8 In the view of the majority of the Full Court, Hasluck J dissenting on this point, the defendant could therefore terminate the agreement, as it purported to do on 27 October 2000, unless it caused or contributed to the failure to make the collaborative venture agreement by the stipulated time, by reason of its breach before that time of clause 6 of the letter agreement by its failure to negotiate in good faith as required by that clause. At [94] of his reasons, Steytler J, with whom Miller J agreed, said:
"If no further extension of time was agreed upon (as is common cause) and if there was no waiver (and none was contended for, otherwise than by way of the alleged variation agreement, or found), then either party could, at any time after 31 July 2000, avoid the contract for failure of the condition if that party had not, prior to 31 July 2000, repudiated the contract or breached it in such a way as to cause or contribute to the failure of the condition. Equally, of course, the parties could, if they chose, keep the contract on foot and agree upon a further extension of time or, perhaps, waive the condition. However, in circumstances in which no further extension of time had been agreed upon and in which there was no waiver of the condition, neither party could thereafter breach an obligation to negotiate in good faith to close the transaction in question expeditiously and as soon as practicable, when the time for doing so had already expired."
9 I am to give final judgment on the case on the basis of the existing evidence and in accordance with the reasons of the Full Court. As I understand the position, it amounts to this. The defendant purported to terminate the letter agreement on 27 October 2000. If it did so effectively then it is clear that the plaintiff is not entitled to the declaration it seeks, that either the licence agreement made or the letter agreement is a binding and subsisting agreement. The defendant will not be entitled to take the course it has if it is proper to find that it has, before 31 July 2000,
(Page 5)
- breached the letter agreement by its failure to comply with clause 6. If that is the case then, as I understand the nature of the plaintiff's claim, it will have a remedy to elect to have the contract remain on foot and sue for specific performance or alternatively damages, or it may simply pursue a remedy in damages for the breach of contract. I discussed the matters which seemed to me to affect the possible outcome at [155] – [163]. I referred again to the inappropriateness of specific performance of the letter agreement at [169] – [170]. I would see no reason to depart from those views.
10 Without referring to all the evidence which I reviewed in my judgment in relation to activities on behalf of both parties during the relevant period, I think I made it clear that in my view there was intense activity during the latter part of June 2000, particularly in respect of the proposed collaborative venture. That period concluded with the agreement to extend the time for performance of the letter agreement from 30 June to 31 July 2000. That was achieved on 30 June. At [94] of my judgment I observed that, although nothing was achieved in respect of the collaborative venture agreement after 30 June 2000, during July the defendant's solicitors were instructed and worked on the preparation of a prospectus with respect to a share placement agreement and underwriting agreement and a substantial "due diligence" manual was prepared for use by the defendant in that regard.
11 Earlier, in June as I found, there were negotiations and discussions between Mr Smith for the plaintiff and Dr Jacques for the defendant. At [96] and [97] I said:
"In my opinion Jacques' view of what was required to be agreed and incorporated into the collaborative venture agreement was much closer to the mark in respect of what was required to fulfil the letter agreement than the approach that Smith was taking on behalf of Expectation. The impression I have is that Expectation were concerned not so much with the technical aspects but to have the agreements made and executed and to have Pinnacle locked in. In any event it is clear that Jacques regarded the responses from Expectation, particularly by Smith, as being entirely unsatisfactory by the end of June - he described the discussions as "one sided" and it is clear that he regarded the response to his approaches as so inadequate as to preclude progress. Nothing further was achieved by Pinnacle to progress the collaborative venture after that time and nor it appears were
(Page 6)
- there any further significant developments from Expectation's side.
So far as the collaborative venture is concerned, it appears that both parties simply allowed the matter to drift on once the extension of time was granted, despite the obligation imposed jointly on the parties by cl 6 of the letter agreement to negotiate in good faith to close the transactions contemplated by the agreement "in an expeditious manner and as soon as practicable".
12 At [164] and [165] I said:
"The parties seem to me in this case to be either equally at fault, or it may be that neither is at fault, for the following reasons. It has been seen that following the making of the letter agreement there was a flurry of activity on both sides. The parties achieved the licence agreement by 15 June 2000. They initialled the basic terms sheet which might provide the foundation for the collaborative venture agreement. But it is clear that on Pinnacle's side in particular, for what appear to me to be obviously good reasons, the collaborative venture agreement produced in draft by Expectation was regarded as entirely unsatisfactory. I accept that Jacques made strenuous efforts thereafter to get a sensible contribution from Expectation, and in particular from Mr Smith on its behalf. He did that even while overseas in America and Japan.
An extension of time to 31 July was negotiated, but little effective work appears to have been done after that occurred. I think Jacques really gave up on Smith and I think that at that point the ball was in Expectation's court, but the work to progress the collaborative venture did not occur. As July progressed, of course, those in charge of Pinnacle's affairs became increasingly distracted by the efforts to preserve their own position on the board of the company and as its management and those acting for Expectation were enlisted to assist in resolving their difficulties. The failure to progress either the collaborative venture agreement or the funding agreements in the form of the share placement and underwriting agreements cannot I think, in the circumstances that occurred, be reasonably laid entirely at the door of one party or the other."
(Page 7)
13 I accept, of course, the decision of the Full Court that it was not open on the pleadings to have regard to and make a finding about the plaintiff's performance of clause 6. Nor did I make it abundantly clear, having regard to the way I approached the matter, whether my conclusion about this issue was a finding that the defendant was in breach of this clause before or after 31 July 2000. For me, having regard to the way I approached the matter, it was unnecessary to make precise findings because I took the view that both parties were responsible, in fact, for the failure to achieve the making of the agreements contemplated by the letter agreement, with the exception of the one licence agreement which was executed. If the proper view was that neither was at fault in that regard, the plaintiff failed. If, on the other hand, both were at fault, on the view I took the plaintiff was disentitled to relief for the breach by the defendant.
14 However that may be, I turn to the question now requiring decision. Taking the view of clause 6 of the letter agreement which I set out in item (8) of [36] of my judgment, a view which I repeated at [162], my view of the clause is that the obligation of good faith provided for is a mutual obligation upon both parties to negotiate in good faith, to do what was reasonably required in the circumstances affecting the parties to enable the contingent elements of the contract comprised in the letter agreement to be satisfied within the time framework provided, including any extension agreed upon.
15 In my opinion, that view of the clause is consistent with the observations of Dawson J in Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41, at 144, and of Finkelstein J in Garry Rogers Motors (Aust) Pty Ltd v Subaru (Aust) Pty Ltd [1999] ATPR 41-703 at 43-014 [37], where his Honour said:
"In my view, a term of a contract that requires a party to act in good faith and fairly, imposes an obligation upon that party not to act capriciously. It would not operate so as to restrict actions designed to promote the legitimate interests of that party. That is to say, provided the party exercising the power acts reasonably in all the circumstances, the duty to act fairly and in good faith will ordinarily be satisfied."
16 Those observations were quoted with approval by Parker J in Central Exchange Ltd v Anaconda Nickel Ltd (2001) 24 WAR 382, and at 394 [24] and [25] his Honour accepted the submission that the obligation of good faith involved at least three related notions:
·
(Page 8)
· "An obligation on the parties to cooperate in achieving the contractual objects (loyalty to the promise itself),
· compliance with honest standards of conduct, and
· compliance with standards of conduct which are reasonable, having regard to the interests of the parties."
17 In my opinion, it is important for present purposes to focus upon the requirement imposed by the clause on the defendant to negotiate towards an acceptable collaborative venture agreement in the context of the capacity to make the other agreements contemplated by the letter agreement and in the context of the circumstances particularly affecting the defendant during the relevant period ending on 31 July 2000. The defendant would breach this term, not by what may be described as mere inactivity, but by the abandonment of the process of negotiation, a failure to do what was reasonably required if the defendant was to remain loyal to the promise it had made. The defendant was to do what was reasonably required in all the circumstances applicable to it, but it must not be overlooked that the obligation was imposed upon both parties and the process of negotiation is a two-way street.
18 It must be remembered, in my opinion, that in the latter half of June 2000, leading up to the final date of 30 June contained in clause 1(a) of the letter agreement, there was intense activity towards the formation, in terms acceptable to both parties, of the collaborative venture agreement, particularly between Mr Smith for the plaintiff and Dr Jacques for the defendant. I have described the detail of that in my original judgment and I need only repeat here the conclusions to which I then came.
19 I noted that all that was achieved was an extension of time to 31 July. I said that the evidence showed that the parties had different views as to the content of the collaborative venture agreement which they were unable to reconcile. The terms sheet initialled by the parties was, I considered, merely to be a general framework for a properly framed collaborative venture. I accepted that Dr Jacques' view that, despite his best efforts, he was unable to get a sensible contribution to the formation of the collaborative venture agreement from the plaintiff, was justified by the events which had occurred. It was not possible on the evidence to make any specific finding against the defendant in relation to Dr Jacques' visit to Perth early in July.
(Page 9)
20 I accepted that Jacques was not reasonably required during the relevant period, the weeks of July 2000, to keep returning to Smith, who was apparently conducting the negotiations for the plaintiff, with propositions for the content of the agreement to which the plaintiff was not responding productively. He committed himself to that process without getting an effective response. In my opinion, at that point he was reasonably entitled to conclude, as it appeared he did, that negotiations could not be progressed without an effective contribution from the plaintiff. That never happened.
21 As July progressed it was, in my opinion, relevant to note that the board of the defendant was, as I had put it and as the board itself clearly thought, effectively under siege by disaffected shareholders who sought to have their own nominees elected to the board. That process of reconstitution of the board, if I may describe it generally in that way, was effectively completely by the middle of August 2000. Thereafter it is clear the board of the defendant was not interested in pursuing to completion the terms of the letter agreement and the making of the various agreements, including particularly the collaborative venture agreement, by which the letter agreement was to be implemented.
22 I think that generally during July 2000 both the incumbent board of the defendant and those conducting negotiations for and involved in directing the plaintiff understood that if the letter agreement was to be fully performed it had to be by the board of the defendant which was then in office. That led to the involvement of Messrs Smith and Rainford in what I described as an endeavour to bring their influence to bear in an effort to shore up the position of the board. In my view, this activity forms part of the surrounding circumstances, with the final outcome of the activity in the last part of June, in the context of which the judgment must be made whether the defendant breached its obligation to negotiation in good faith by 31 July 2000, given also that there is no evidence to suggest that the defendant was not prepared during that period to enter into a properly framed collaborative venture agreement or that it was intent upon resisting or frustrating the plaintiff's legitimate contractual expectations in that regard.
23 While I think that certainly after the middle of August 2000, when the defendant's administration settled down, the position might have been different. I would not, in all the circumstances of the case, be prepared to find that before 31 July 2000 the defendant had breached the obligation of good faith by failing to take reasonable action to negotiate the collaborative venture agreement generally described in clause 3 of the
(Page 10)
- letter agreement and the terms sheet, even having regard to the obligation that the negotiations should proceed expeditiously to make the relevant agreement as soon as practicable. In my judgment at [167] I thought that the proper conclusion was that both parties are in breach of clause 6 of the letter agreement. I intended that to be a conclusion following my effort to summarise my views about what occurred after 2 August 2000 in [166]. I understand what the Full Court said about that and that, so far as the defendant is concerned, the conclusion expressed generally in that way, without precision as to time, is unhelpful.
24 The conclusion to which I have come, that I am not satisfied that the defendant breached its obligation of good faith in July 2000, is dependent upon the state of the negotiations at that time and the circumstances generally affecting the defendant and its board, in which persons acting for the plaintiff were involved, in a mutual effort to create circumstances in which the collaborative venture agreement could not only be made, but would be performed. In my view, that is the issue requiring decision which is raised squarely by the pleadings. The defendant has not committed the relevant breach of contract and the plaintiff's claim should be dismissed.
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