Expert Group International Pty Ltd v TransAction Solutions Limited

[2023] NSWSC 543

Supreme Court

New South Wales

Medium Neutral Citation:

Expert Group International Pty Ltd v TransAction Solutions Limited [2023] NSWSC 543

Hearing dates:

12 May 2023

Decision date:

23 May 2023

Jurisdiction:

Equity - Commercial List

Before:

Ball J

Decision:

(1) Pursuant to s 67 of the Civil Procedure Act 2005 (NSW) this proceeding be permanently stayed;

(2)   The plaintiff to pay the defendant’s costs of the notice of motion filed on 27 April 2022.

Catchwords:

CIVIL PROCEDURE — Stay of proceedings — Dispute concerning line items included in Earn-Out Accounts — Where parties have agreed to refer certain Earn Out disputes for expert determination — Whether the dispute fell within the scope of the experts role — Where matters referable to expert determination included which matters could be relied on in reaching relevant calculation — Whether court proceedings are precluded in the circumstances — Implicit exclusion of jurisdiction

Legislation Cited:

Civil Procedure Act 2005 (NSW)

Cases Cited:

ABB Power Plants Ltd v Electricity Commission of New South Wales t/as Pacific Power (1995) 35 NSWLR 596

Dance withMr D Ltd v Dirty Dancing Investments Pty Ltd [2009] NSWSC 332

Huddart Parker Ltd v The Mill House [1950] HCA 43; (1950) 81 CLR 502

Category:

Procedural rulings

Parties:

Expert Group International Pty Ltd (Plaintiff)
TransAction Solutions Limited (Defendant)

Representation:

Counsel:
M Izzo SC with J Burnett (Plaintiff)
JC Giles SC with N Riordan (Defendant)

Solicitors:
Corrs Chambers Westgarth (Plaintiff)
Donato Legal (Defendant)

File Number(s):

2023/94810

Publication restriction:

None

JUDGMENT

Introduction

1. In this proceeding, the plaintiff, Expert Group International Pty Ltd (Expert Group), seeks declarations concerning the correct construction of certain provisions in a share sale agreement dated 14 August 2020 (the SSA) by which Expert Group sold to the defendant, TransAction Solutions Limited (TSL), all the issued shares in Experteq IT Services Pty Ltd (the Company). The provisions in respect of which the declarations are sought relate to the calculation of deferred consideration payable under the SSA based on the financial performance of the Company post-completion.

2. By a notice of motion filed on 27 April 2023, TSL seeks a stay of the proceeding on the ground that the parties agreed to refer any dispute concerning the amount payable to expert determination.

3. It is common ground between the parties that the Court has power to grant a stay under s 67 of the Civil Procedure Act 2005 (NSW) and that, in the normal course of events, it would do so if, on the correct construction of the SSA, the parties had agreed that the disputes between them would be resolved by expert determination: see Huddart Parker Ltd v The Mill House [1950] HCA 43; (1950) 81 CLR 502 at 508-509 (Dixon J); Dance withMr D Ltd v Dirty Dancing Investments Pty Ltd [2009] NSWSC 332 (Hammerschlag J). The issue between them concerns the question whether, on the correct construction of the SSA, they reached such an agreement.

The SSA

4. Clause 10.1 of the SSA, as amended by deed of variation dated 21 April 2022 (the Amending Deed), provides:

Additional Payments

(a)   Subject to clause 4.4 and this clause 10, the Vendor is entitled to receive Additional Payments from the Purchaser based on the EBIT plus, if specified below, the Annualised Agreed Profit achieved by the Business (whether that business is self-contained in the Company or becomes integrated into the Purchaser and forms a business division of the Purchaser) during each of the Earn Out Periods.

(b)   Each Additional Payment will be determined and paid in accordance with this clause 10 and will be treated as an addition to the Purchase Price.

5. Clause 10.3 of the SSA (again as amended) sets out the amount of additional consideration to be paid depending on the “EBIT plus the Annualised Agreed Profit for the Second Earn Out Period”. If that amount is less than $3,500,000, the amount payable is 4 times EBIT less the amount already paid (which was $2,000,000). If it is between $3,500,000 and $4,000,000 it is 4.5 times EBIT less the purchase price already paid. If is greater than $4,000,000, it is 5 times EBIT less the purchase price already paid.

6. “EBIT” is defined to mean “the verified underlying earnings before interest and tax of the Business earned in the ordinary course of business (as calculated pursuant to this clause 10 and Schedule 4)”. However, it appears to be common ground that “EBIT” for the purpose of calculating the multiple in the formulas referred to in the previous paragraph also includes the Annualised Agreed Profit.

7. “Business” is defined to mean “the business of the Company carried on as of the date of this document, as may be varied from time to time by agreement between the Vendor and the Purchaser …”.

8. Schedule 4 sets out a substantial number of line items of a pro forma set of accounts and states in two columns whether amounts falling within each item should be included in the calculation of EBIT and how those amounts should be allocated between TSL’s original business and the business conducted by the Company. To take one example, under the heading “Depreciation” there is a line item “Education and Training”. The first column states (by including a “Y” in the relevant row) that amounts falling within that item are to be included in the calculation of EBIT. The second column states that the whole of that item is to be allocated to “the Business”.

9. “Annualised Agreed Profit” is defined to mean:

… the aggregate annualised profit from Qualifying Managed Services Agreements, such annualised EBIT to be calculated and determined by the Purchaser by reference to the Purchaser’s standard model (refer Approved Worksheets in Annexure A) for assessing the profitability of services provided under a managed services agreement subject to the following costing policy:

…

10. “Qualifying Managed Services Agreements” is defined to include certain specified agreements together with any other agreements for managed services that meet certain specified criteria.

11. “Earn Out Period” is defined to mean:

… each period in respect of which the Vendor may become entitled to an Additional Payment, being each of the following periods:

(a)   in the case of the first Earn Out Period, the period commencing on 14 August 2020 and ending on 14 August 2021;

(b)   in the case of the second and final Earn Out Period, the period commencing on 15 August 2021 and ending on 14 August 2022.

12. Clause 10.4 of the SSA requires TSL to cause the Earn-Out Accounts for the relevant period to be prepared and audited. Clauses 10.6 and 10.7 set out the principles applicable to the preparation of the accounts. Relevantly, cl 10.6 states:

Accounting principles and policies

The Earn Out Accounts for the Business must be prepared in accordance with, in order of precedence:

(a)   the specific principles and policies set out in clause 10.7 and Schedule 4;

(b)   the Accounting Policies; and

(c)   the Accounting Standards in force as at the Post-Completion Accounts Date.

Clause 10.7 sets out a number of specific principles and policies. One is that the accounts must reflect any adjustments highlighted by the auditor. Another is that the accounts must exclude line items specified in Schedule 4 as not to be included (although in an obvious error, cl 10.7 actually says that what must be excluded are the line items in Schedule 4 which are stated to be included).

13. Clause 10.5 of the SSA provides:

Access to Information

The Purchaser must ensure that all information and assistance reasonably requested by the Vendor is given to it to review the relevant Earn-Out Accounts and must permit the Vendor’s representatives to have reasonable access to the Records to review the relevant Earn-Out Accounts.

14. Clause 10.8 states that the Earn-Out Accounts must be prepared so that they follow the format of Schedule 4.

15. Clause 10.9 of the SSA provides:

Vendor to calculate Additional Payment

Within 10 Business Days following the Vendor’s receipt of the materials referred to in clause 10.4 the Vendor must cause the relevant Additional Payment to be calculated in accordance with Error! Reference source not found., clause 10.2 and/or clause 10.3 (as the case may be) and the principles set out in Schedule 4 and give the Purchaser written notice of its calculation (Earn Out Notice)”.

It is apparent that a cross referencing error occurred in the original drafting. In addition, clause 10.2 was deleted by the Amending Deed.

16. Clause 10.10 relevantly provides:

Purchaser to agree or dispute Additional Payment

(a)   Within 10 Business Days following receipt of the Earn Out Notice (the Earn Out Acceptance Period), the Purchaser must notify the Vendor in writing whether it agrees with the Earn Out Notice or any basis on which it disputes the Earn Out Notice which must include (an Earn Out Dispute Notice):

(i)   reasonable details of each matter in dispute (Disputed Matters);

(ii)   in the case of the relevant Earn-Out Accounts, a separate dollar value for each Disputed Matter; and

(iii)   the reasons why each of the Disputed Matters is disputed.

(b)   …

(c)   If the Purchaser gives an Earn Out Dispute Notice to the Vendor within the Earn Out Acceptance Period, the Disputed Matters, if not resolved between the Vendor and the Purchaser within 10 Business Days of delivery of the Earn Out Dispute Notice, be referred for resolution to an independent chartered accountant with over ten years’ experience in the relevant area agreed to by the Vendor and the Purchaser or, failing agreement, nominated at the request of either the Vendor or the Purchaser by Resolution Institute (or a successor body) in accordance with its Expert Determination Rules (the Earn out Expert).

17. Clause 10.11 of the SSA relevantly provides:

Instructions to Earn Out Expert

(a)   Once the Earn Out Expert has been selected, the Vendor and Purchaser must act in good faith and do all things within their power to agree the scope of the Earn Out Expert’s appointment and to effect the appointment (including signing the Earn Out Expert’s engagement letter and agreeing to pay the fees and expenses of the Earn Out Expert in accordance with clause 10.11(e).

(b)   The Earn Out Expert will be instructed to:

(i)   decide the Disputed Matters within the shortest practicable time and in any event within 15 Business Days of the referral;

(ii)   apply any principles set out in clause 10.6 and Schedule 4 (and no other principles);

(iii)   determine the amount of the relevant Additional Payment; and

(iv)   determine whether the Purchaser had a reasonable basis for disputing the Earn Out Notice with respect to the Disputed Matters.

(c)   …

(d)   The Earn Out Expert will act as an independent expert and not an arbitrator and the Earn Out Expert’s decision on the amount of the relevant Additional Payment will (in the absence of manifest error) be final and binding on the Vendor and the Purchaser.

(e)   …

18. Clause 22 of the SSA contains a general dispute resolution regime. It states that if a dispute “arises in connection with this document” the parties must use their reasonable endeavours to resolve the dispute in accordance with the procedures set out in the clause. A party claiming that there is a dispute must serve a Dispute Notice identifying precisely the dispute and giving full particulars of it. The other party has five business days to respond. If the dispute is not resolved within 15 business days of issuing the notice, the parties must refer the dispute to mediation. Clause 22.1(b) provides that “neither party may commence court proceedings in relation to a Dispute without first complying with this clause”.

19. Clause 22.2 of the SSA provides:

Exceptions

This clause 22 does not:

(a)   apply to proceedings for urgent interlocutory or declaratory relief (or other interim or conservatory measures, including measures required to prevent expiry of a relevant limitation period);

(b)   apply to Disputes in relation to clause 8.6, clause 9, clause 17 or clause 18 of this document; or

(c)   limit any right of the Purchaser to terminate this document.

Factual background

20. On 27 October 2022, TSL provided Expert Group’s solicitors with a copy of the audited Earn-Out Accounts. At the end of those accounts were a number of additional line items not included in Schedule 4 which showed TSL’s calculation of EBIT, the calculation of Annualised Agreed Profit and the calculation of the additional amount payable, which was said to be $1,694,910.

21. On 9 November 2022, the solicitors for Expert Group wrote to TSL seeking “evidence (including BDO’s [the auditor’s] detailed working papers)” for certain line items in the Earn-Out Accounts.

22. On 21 December 2022, Expert Group provided TSL with a letter which relevantly said:

3   This document constitutes an Earn Out Notice in accordance with clause 10.9 of the SSA. We set out our calculations in respect of the Additional Payment in Annexure A to this Notice. We record the following:

(a)   EBIT is calculated as being $2,858,535.68 for the Earn out Period;

(b)   the multiplier stated to apply in clause 10 of the SSA is “4 times EBIT”;

(c)   the aggregate amount payable under clause 10 is $11,434,143 (rounded to the nearest dollar); and

(d)   the Additional Payment for the purpose of clause 10 of the SSA is $9,434,143 (rounded to the nearest dollar)

4   For the avoidance of any doubt, we wish to record that we do not agree with the Preliminary Accounts as prepared by [TSL] for the Earn Out Period. To date, we have raised a number of valid concerns with respect to the calculations including the inclusion of erroneous items which were not the subject of agreement and the exclusion of certain agreements which are Qualifying Managed Services Agreements. We have also repeatedly requested information under clause 10.5 of SSA but in a number of instances the information provided does not adequately support the position adopted by [TSL] or alternatively, no supporting evidence has been provided at all.

23. On 6 January 2023, TSL served an Earn Out Dispute Notice which identified each of the matters it disputed. According to Expert Group, the disputes can be grouped into the following categories:

1. Whether particular contracts are “Qualified Managed Service Agreements” to be counted as part of Annualised Agreed Profit;

2. Whether particular expenses are to be included in arriving at the Annualised Agreed Profit;

3. Whether particular expenses are to be included in arriving at EBIT because they were not incurred or were “Once-off Expenses” within the meaning of cl 10.14 of the SSA;

4. Whether the CFO/CEO line item is to be included in the EBIT in circumstances where those expenses were not in fact incurred by the Company;

5. Whether the Leave Provision Shortfall is to be excluded because of an agreement to that effect.

Consideration

24. The dispute between the parties essentially raises two issues. The first is the scope of the expert’s role. The second is whether Expert Group is precluded from commencing court proceedings that fall within the role of the expert. It is common ground that Expert Group has satisfied the requirements set out in cl 22 of the SSA in relation to the matters in dispute.

25. In my opinion, the answer to the second question is clear. The parties have set out in the SSA how the amount of the relevant Additional Payment is to be determined and have agreed that any dispute concerning that amount “will (in the absence of manifest error) be final and binding on the Vendor and the Purchaser”. Although the SSA may not have used words which expressly state that any matter falling within the scope of what is to be determined by the expert are to be determined exclusively by the expert, such an agreement is implicit in the dispute resolution mechanism chosen by the parties. As Handley JA explained in ABB Power Plants Ltd v Electricity Commission of New South Wales t/as Pacific Power (1995) 35 NSWLR 596 at 599:

It has long been established that contractual or statutory provisions prescribing in positive terms a procedure to be followed necessarily imply that the same matter will not be dealt with under a different procedure. In King v Wallis (1949) 78 CLR 529 at 550, Dixon J said:

“This accords with the general principles of interpretation embodied in the maxim expressum facit cessare tacitum and in the proposition that an enactment in affirmative words appointing a course to be followed usually may be understood as importing a negative, namely, that the same matter is not to be done according to some other course.”

Here the parties have chosen to have certain matters determined by an expert. They could not have intended that those same matters would be determined by the Court following an unsuccessful mediation in accordance with cl 22.

26. As to the first question, there appear to be two main possibilities. One is that the expert is to determine all matters in issue between the parties which are relevant to the determination of the amount of the Additional Payment. The other is that the expert is to determine whether the calculation of the Additional Payment is correct. The first means that included in the matters that may be referred to the expert are questions about whether the (audited) accounts on which the calculation of the Additional Payment is based satisfy the requirements of the SSA (to the extent that that is in dispute between the parties). The second would require the expert to accept that the accounts are correct and simply check the calculation of the Additional Payment.

27. It might be thought that the structure of clause 10 favours the second interpretation. Clause 10.9 requires Expert Group to cause the Additional Payment to be calculated “following receipt of the materials referred to in clause 10.4”. That material consists of the Earn-Out Accounts and the auditor’s report. It does not include the material to which Expert Group is entitled under cl 10.5. That suggests that Expert Group is to calculate the Additional Payment on the face of the accounts that are provided (taking into account which items are to be included and which are to be excluded in accordance with Schedule 4). Clause 10.10 permits TSL to dispute that calculation and requires it to give reasons for doing so. If the disputes identified by TSL cannot be resolved, those disputes are referred to the expert. The Earn Out Notice to be prepared by Expert Group is required to contain a calculation and it appears that that is what TSL is entitled to dispute under cl 10.10 is that calculation. On this approach, there is nothing to prevent either party from submitting that the accounts were not prepared in accordance with the SSA. But that is a dispute governed by cl 22 and one that would ultimately be resolved by the Court.

28. In my opinion, that interpretation must be rejected, for a number of reasons.

29. First, there is nothing in cl 10 which rules out the alternative interpretation. In particular, there is nothing in clause 10.9 which specifically states that Expert Group must accept the accuracy of the Earn-Out Accounts for the purposes of undertaking the calculation.

30. Second, cl 10 appears to contemplate that Expert Group will be entitled to raise issues in relation to the Earn-Out Accounts. Otherwise, cl 10.5 would serve no purpose.

31. Third, the Court should not readily conclude that the parties intended disputes about the Earn-Out Accounts and disputes about the calculation of the Additional Payment should be resolved separately and by different mechanisms. The purpose of the preparation of the Earn-Out Accounts is to permit the calculation of the Additional Payment. The structure of clause 10 and the time limits imposed on the parties suggest that the parties intended that the amount of the Additional Payment would be determined promptly. That object would be defeated if disputes about the Earn-Out Accounts were to be determined in accordance with cl 22. Moreover, if disputes about the Earn-Out Accounts were resolved in accordance with cl 22 then it would not be possible for the parties to comply with the time limits imposed by cl 10.

26. Fourth, the expert is required to have qualifications and experience which seem more appropriate if the parties expected that it may be necessary for the expert to resolve disputes concerning the accounts, rather than simply resolve disputes about the calculation of the Additional Payment. The qualification and experience required of the expert are particularly appropriate to deal with disputes concerning the recognition and treatment of various amounts in accounts that must, among other things, be prepared in accordance with the Accounting Standards.

27. Expert Group points out that, as a result of the amendments to cl 10 of the SSA, the amount of the Additional Payment depends on “EBIT plus the Annualised Agreed Profit” whereas the Earn-Out Accounts are prepared in accordance with Schedule 4, which is concerned with the calculation of EBIT. Similarly, cl 10.11(b)(ii) states that the parties are to instruct the Earn Out Expert to “apply any principles set out in clause 10.6 and Schedule 4 (and no other principles)”. Expert Group submits that, as a consequence, there is doubt about whether the expert can determine any issues relating to the Annualised Agreed Profit, with the result that those matters must be determined by the Court.

28. I do not accept that submission. No doubt there are some infelicities in the drafting of cl 10 resulting from the fact that under the original SSA the amount of the Additional Payment depended solely on EBIT whereas, as a consequence of the Amending Deed, it now depends on Annualised Agreed Profit as well. However, cl 10.9 requires Expert Group to cause the amount of the Additional Payment to be calculated, which requires Expert Group to consider the Annualised Agreed Profit as well as EBIT. Clause 10.10(a) requires TSL to notify Expert Group of “any basis on which it disputes the Earn Out Notice”, which would include any dispute in relation to the Annualised Agreed Profit. It is those disputes that are referred to the expert and which the expert is required to decide in determining the amount of the Additional Payment. To the extent that those disputes concern the Annualised Agreed Profit, Schedule 4 is not relevant. However, the other matters referred to in cl 10.6, such as the Accounting Standards, are. They are the matters to which the expert must have regard in resolving any issues concerning the Annualised Agreed Profit.

29. Expert Group also submits that one issue raised by the proceeding is whether the parties reached agreement that any back-dated salary reviews would be excluded from the calculation of EBIT for the purpose of determining the Additional Payment. That agreement is said to be recorded in an email chain ending with an email sent on 28 June 2022 from Mr Shane Baker to Mr Frank Mulcahy. The agreement is admitted by TSL in its list response.

30. I accept that the expert cannot resolve disputes concerning the question whether the SSA has been varied. However, it is not specifically pleaded that as a result of the exchange of emails between Mr Baker and Mr Mulcahy the SSA was varied. Such a claim would be difficult to maintain in the light of cl 31.11 of the SSA which provides that “[t]his document can only be amended, supplemented or replaced by another document signed by the parties”. Rather, what is pleaded in para 100 of the List Statement is that:

In the premises, on the proper construction of the Share Sale Agreement (as varied), and/or pursuant to the agreement referred to in paragraph 99 above, the Leave Provision Shortfall is not to be taken into account in calculating EBIT for the purpose of determining the Additional Payment for the second Earn Out Period.

That allegation is denied in the list response.

37. In my opinion, the dispute concerning the consequences of an admitted agreement between Mr Baker and Mr Mulcahy is not sufficient to justify the refusal of a stay. That dispute appears to be incidental to the main issues between the parties concerning the calculation of the Additional Payment, all of which the parties have agreed should be resolved by the expert. It is not clear how the resolution of that dispute could affect the calculation of the amount of the Additional Payment under the SSA when it is not alleged that the agreement varied the SSA or prevented one party or the other from relying on its rights under the SSA. Expert Group should not be permitted to avoid the agreement it reached about how any dispute concerning the amount of the Additional Payment should be resolved by raising a matter that at best appears to be incidental and at worst appears to be extraneous to the real issues between the parties in relation to the calculation of that amount.

Orders

38. It follows that the proceeding should be permanently stayed. There is no reason why TSL should not have its costs of the notice of motion filed on 27 April 2023.

39. Accordingly, the orders of the Court are:

1. Pursuant to s 67 of the Civil Procedure Act 2005 (NSW) this proceeding be permanently stayed;

2. The plaintiff to pay the defendant’s costs of the notice of motion filed on 27 April 2022.

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Decision last updated: 23 May 2023