Expert Group International Pty Ltd v TransAction Solutions Ltd

[2025] NSWSC 575

Supreme Court

New South Wales

Medium Neutral Citation:

Expert Group International Pty Ltd v TransAction Solutions Ltd [2025] NSWSC 575

Hearing dates:

14-15 April 2025

Date of orders:

24 June 2025

Decision date:

24 June 2025

Jurisdiction:

Equity - Commercial List

Before:

Rees J

Decision:

Declaration that parties bound by expert determination.

Catchwords:

EXPERT DETERMINATION — vendor sells company for $2M plus ‘earn out’ based on EBIT x multiplier — expert determination clause requires chartered accountant of 10 years’ experience — expert determines earn-out payment is $9.7M — whether parties agreed to be bound by expert’s construction of contract — principles at [124]-[129] — purchaser raises proper construction of contract outside timeframe prescribed by expert determination clause — whether expert should have determined that matter at all — expert determination clause varied by letter appointing expert, at [146] — “manifest error” — where suggested error of law — principles at [150]-[153] — Bagata Pty Ltd v Runner Pty Ltd [2024] QCA 17 followed — construction not obviously wrong — no manifest error — parties bound.

RECTIFICATION — principles at [231]-[235] — purchaser’s board had authority to vary contract – board papers and minutes, contemporaneous documents and post-contractual conduct paint compelling picture of common intention – purchaser seeks to avoid bad deal by exploiting imperfect drafting – appropriate case for rectification.

JONES v DUNKEL — issue waiver — written communications with lawyer tendered — whether to draw inference where solicitor not called — whether unnecessary witness — no evidence that lawyer and client had confidential oral communication – inference not drawn, [11].

Cases Cited:

711 Hogben Pty Ltd v Tadros (No 2) [2016] NSWSC 1683

711 Hogben Pty Ltd v Tadros; Tadros v 711 Hogben Pty Ltd [2016] NSWSC 697

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

AGL Victoria Pty Ltd v SPI Networks (Gas) Pty Ltd [2006] VSCA 173

Ampolex v Perpetual Trustee Co (Canberra) Ltd (1995) 37 NSWLR 405

Apand Pty Limited v The Kettle Chip Co (1994) 52 FCR 474

Australian Vintage Ltd v Belvino Investments No 2 Pty Ltd (2015) 90 NSWLR 367; [2015] NSWCA 275

Bagata Pty Ltd v Runner Pty Ltd [2024] QCA 17

Chapmans Ltd v Australian Stock Exchange Ltd (1996) 67 FCR 402; [1996] FCA 474

Commissioner of Taxation v Rio Tinto Limited (2006) 151 FCR 341; [2006] FCAFC 86

Commissioner of Taxation v Rio Tinto Limited (2006) 151 FCR 341; [2006] FCAFC 86

Commissioner of Taxation v Rio Tinto Limited (2006) 151 FCR 341; [2006] FCAFC 86

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

Drane v Aqualyng Holdings [2017] QSC 233

Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd (2017) 261 CLR 544; [2017] HCA 12

Epping Hotels Pty Ltd v Serene Hotels Pty Ltd [2015] VSC 104

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

Flowgroup plc v Co-Operative Energy Ltd [2021] EWHC 344

Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603; [2009] NSWCA 407

Funtastic Ltd v Madman Film and Media Pty Ltd [2016] VSC 708

Galaxy Energy International Ltd v Eurobunker SpA [2001] 2 All ER (Comm) 912

Greencapital Aust Pty Ltd v Pasminco Cockle Creek Smelter Pty Ltd [2019] NSWCA 53

HDI Global Speciality SE v Wonkana No 3 Pty Ltd (2020) 104 NSWLR 634; [2020] NSWCA 296

Heart Research Institute Ltd v Psiron Ltd [2002] NSWSC 646

Holt v Cox (1997) 23 ACSR 590

Homepace v Sita South East [2008] EWCA Civ 1

IIG Capital LLC v Van Der Merwe [2008] 1 All ER (Comm) 435

Invensys Plc v Automotive Sealing Systems Ltd [2002] 1 All ER (Comm) 222

J Family Motel Group Pty Ltd v Baset Super Pty Ltd [2024] NSWSC 1251

James Adam Pty Ltd v Fobeze Pty Ltd (2020) 103 NSWLR 850; [2020] NSWCA 311

Kanivah Holdings Pty Ltd v Holdsworth Properties Pty Ltd [2002] NSWCA 180

King v Wallis (1949) 78 CLR 529

LCA Marrickville Pty Ltd v Swiss Re International SE (2022) 290 FCR 435; [2022] FCAFC 17

Lepcanfin Pty Ltd v Lepfin Pty Ltd (2020) 102 NSWLR 627; [2020] NSWCA 155

Mainteck Services Pty Ltd v Stein Heurtey SA (2014) 89 NSWLR 633; [2014] NSWCA 184

Mayo v W & K Holdings (NSW) Pty Ltd (in liq) (No 2) [2015] NSWCA 119

Natoli v Walker (1994) 217 ALR 201

Orica Investments Pty Ltd v Aurelius Marvel One Limited [2023] VSC 18

Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451; [2004] HCA 35

Port Jackson Stevedoring Pty Ltd v Salmond & Spraggon (Aust) Pty Ltd (1977) 139 CLR 231

Property Investors Alliance Pty Ltd v C88 Project Pty Ltd (in liq) [2023] NSWCA 291

Queenfield Pty Ltd v Gordon Finance Pty Ltd (2019) 60 VR 118; [2019] VSC 857

SA E.Med Pty Ltd v Calvary Health Care Adelaide Ltd (No 2) [2011] FCA 835

Santos Coffee Company Pty Ltd v Direct Freight Express Pty Ltd [2010] NSWCA 14

Sara & Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd [2023] 1 WLR 575; [2023] UKSC 2

Seymour Whyte Constructions Pty Ltd v Ostwald Bros Pty Ltd (In Liq) (2019) 99 NSWLR 317; [2019] NSWCA 11

Simic v New South Wales Land and Housing Corporation (2016) 260 CLR 85; [2016] HCA 47

SSABR Pty Ltd v AMA Group Limited [2024] NSWCA 175

Straits Exploration (Australia) Pty Ltd v Murchison United NL (2005) 31 WAR 187; [2005] WASCA 241

Strategic Publishing Group Pty Ltd v John Fairfax Publications Pty Ltd [2003] NSWSC 1134

Strike Australia Pty Ltd v Data Base Corporate Pty Ltd [2019] NSWCA 205

TX Australia Pty Ltd v Broadcast Australia Pty Ltd [2012] NSWSC 4

Westland Savings v Hancock (1987) 2 NZLR 21

Westport Insurance Corporation v Gordian Runoff Limited [2011] HCA 37; 85 ALJR 1188

Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522; [2005] HCA 17

Yan vYangdo Pty Ltd [2024] NSWSC 1250

Zhong v Guan [2024] NSWCA 300

Texts Cited:

Clive Freedman and James Farrell, Kendall on Expert Determination (5th ed, 2015, Thomson Reuters)

Category:

Principal judgment

Parties:

Expert Group International Pty Ltd (Plaintiff)
Transaction Solutions Ltd (First Defendant)
Frank Mulcahy (Second Defendant)
Mark Snell (Third Defendant)

Representation:

Counsel:
MA Izzo SC / JS Burnett (Plaintiff)
J Giles SC / D Riordan (First Defendant)

Solicitors:
Corrs Chambers Westgarth (Plaintiff)
Mills Oakley Lawyers (First Defendant)
Corrs Chambers Westgarth (Second and Third Defendants – submitting appearance)

File Number(s):

2023/320829

JUDGMENT

1. HER HONOUR: This case concerns whether the parties to a Share Sale Agreement are bound by an expert determination. Under the agreement, the plaintiff, Expert Group International Pty Ltd (the vendor), sold the issued shares in Experteq IT Services Pty Ltd (the Company) to the first defendant, TransAction Solutions Ltd (the purchaser or TAS) for $2 million plus deferred consideration based on the financial performance of the Company in the two years’ post-completion, that is, an ‘earn-out’. The earn-out formula provided for the earn-out payment (Additional Payment) in the second year to be calculated by multiplying the Company’s earnings before interest and tax (EBIT) by higher multiples (being 4x, 4.5x or 5x) depending on whether the Company’s EBIT met various ‘hurdles’.

2. The parties executed a Variation Deed, amending the earn-out formula for the second year. As varied, the formula included the annual profits (Annualised Agreed Profits) for certain contracts with customers (Qualifying Managed Services Agreements). The parties later disputed whether the earn-out formula meant:

1. the Annualised Agreed Profits was added to EBIT for the purpose of clearing a ‘hurdle’ and accessing a higher multiple; or

2. the Annualised Agreed Profits was added to EBIT, and the relevant multiple applied to the sum.

3. The expert, being an experienced chartered accountant, determined that the latter construction was correct. He calculated that the purchaser was obliged to pay $9,663,200 to the vendor. The issues are:

1. whether the parties are bound by the expert’s construction of the earn-out formula;

2. whether the correct application of the earn-out formula was a “Disputed Matter” which fell for determination by the expert at all, given that the issue was raised outside the timeframe prescribed by the expert determination clause;

3. whether the expert determination contains a “manifest error” (the purchaser posited five errors, including the suggested mis-application of the earn-out formula); and

4. in the event that the expert determination is not binding, and the expert’s construction of the earn-out formula was wrong, is the vendor entitled to rectification of the Share Sale Agreement?

4. Much of what follows is concerned with the alternative rectification suit and, to a lesser extent, the commercial context against which the expert determination clause and the earn-out clause may be construed: Lepcanfin Pty Ltd v Lepfin Pty Ltd (2020) 102 NSWLR 627; [2020] NSWCA 155 at [79]-[94] (Bell P, Payne and McCallum JJA agreeing). Consideration of the first issue begins at [114].

Witnesses and inferences

5. The vendor relied on the evidence of its directors, being second defendant Frank Mulcahy and third defendant Mark Snell, together with the evidence of solicitor Felicity Healy. The purchaser relied on the evidence of chairperson Ashley Jennings and chief executive officer (CEO) Shane Baker. All but Ms Healy were cross examined.

6. Mr Mulcahy and Mr Snell were both straight forward and made reasonable concessions. Neither were lawyers or accountants. Neither appear to have understood, or focussed on, the intricacies of the drafting of documents at the time, but went along with the deal as they understood it to be and left the details to their solicitor.

7. The same observations can be made of Mr Baker, who said that he did not pay attention to the detail at the time. Mr Baker left the details to the purchaser’s chief financial officer (CFO), Tony Greene. Mr Baker said that he did not intend that the Additional Payment would be the product of the multiple applied to the sum of the Agreed Annualised Profit and EBIT. He was less than emphatic in maintaining that position and put some distance between himself and the deal. I have deferred to the contemporaneous documents as to how he thought the varied earn-out formula would work, and I suspect that Mr Baker would be content with me doing so.

8. Mr Jennings was not so reticent. He volunteered unkind remarks about the financial performance of the Company. Some of his evidence was unlikely. Mr Jennings said that he was in “complete horror” at Mr Greene’s calculations but did not think to tell the CFO that he had got it wrong. Mr Jennings’ evidence got into difficulty at this point: see [90]-[91]. Mr Jennings’ professed understanding of how the Share Sale Agreement worked was at odds with contemporaneous documents, to which I defer.

9. The vendor’s solicitor, Glen Sauer, was involved in reviewing the proposed earn-out clause but did not give evidence. The purchaser sought a Jones v Dunkel inference, relying on SSABR Pty Ltd v AMA Group Limited [2024] NSWCA 175 at [183]. The purchaser submitted that, by seeking rectification, the vendor had put its state of mind in issue, giving rise to an implied waiver of privilege: Ampolex v Perpetual Trustee Co (Canberra) Ltd (1995) 37 NSWLR 405 at 411. The vendor submitted that no inference should be drawn where Mr Mulcahy did not recall any conversations with Mr Sauer about the provisions, but communicated with the solicitor by email. The vendor had tendered these emails. Nor did Mr Sauer draft the relevant provisions, unlike the solicitor in SSABR. (I do not think this last submission is a valid point of distinction with SSABR).

10. The vendor did not contest that it had waived privilege but, rather, that Mr Sauer was unlikely to add anything to the factual matrix. I have gone through every email which passed between Mr Mulcahy and Mr Sauer, from when the vendor gave instructions to review the first draft of the Variation Deed until the document was executed. I have also looked at Mr Sauer’s fee notes. Mr Mulcahy sought advice from Mr Sauer on a couple of occasions and invited Mr Sauer to call him: see [57]-[67]. But Mr Sauer appears to have provided all advice by email. The only occasion on which they spoke was in a Microsoft Teams meeting with Mr Greene, to finalise the amendments to the Variation Deed.

11. It remains possible that Mr Sauer spoke to Mr Mulcahy and gave advice orally. But there is just no sign, in the contemporaneous records, that he did. Nor did Mr Mulcahy recall any conversations with Mr Sauer. Mr Mulcahy was a credible witness. It is not necessary for a party to call an unnecessary witness: Apand Pty Limited v The Kettle Chip Co (1994) 52 FCR 474 at 490. I decline the draw the inference as it would result in me making an unwarranted assumption, being that Mr Sauer did give advice beyond that recorded in his emails, and that his evidence as to the content of that advice would not have assisted the vendor.

12. The purchaser’s CFO, Mr Greene, did not give evidence. The vendor sought a Jones v Dunkel inference. The purchaser did not suggest otherwise. I readily infer that Mr Greene’s evidence would not have assisted the purchaser.

13. The purchaser’s solicitor, Norman Donato, did not give evidence. The vendor sought a Jones v Dunkel inference. The purchaser made no submissions in this regard either. An initial question is whether the purchaser has put its state of mind in issue and, thus, waived privilege as well: Commissioner of Taxation v Rio Tinto Limited (2006) 151 FCR 341; [2006] FCAFC 86 at [54]. In its pleading, the purchaser denied that there was a common mistake at the time of entry into the Variation Deed “and further says that the written instrument … conformed to the common intention of the parties as evidenced by the parties’ execution of the agreement.” That is, the purchaser contended that its state of mind (at least) conformed with the contents of the Variation Deed. The purchaser thereby put its state of mind in issue as well.

14. The purchaser does appear to have waived privilege in at least some communications with its lawyer in respect of the Variation Deed. In evidence is an email from Mr Greene to Mr Donato, giving initial instructions, and a letter from Mr Donato to Mr Greene giving advice as to the way forward. But no further emails are in evidence, providing various drafts of the Variation Deed to the purchaser, or any related advice.

15. Given the purchaser’s silence on this subject, and that fact that the purchaser appears to have waived privilege over its communications with Mr Donato, I will proceed on the basis that the purchaser accepts that privilege has been waived. I can thus draw the inference if otherwise available. The Variation Deed was drafted by Mr Donato’s firm. Mr Donato’s evidence would have been relevant. He was in the purchaser’s ‘camp’. No explanation was given for his non-attendance. I infer that Mr Donato’s evidence would not have assisted the purchaser’s case.

The parties

16. Mr Mulcahy and Mr Snell established the Company, which was an IT consulting and professional services firm. The Company was wholly owned by the vendor. Mr Mulcahy was Managing Director of the Company. (It is relevant to note that the Company did not have a CEO or CFO.) The Company provided professional IT services in ‘cloud’ technology. The majority of the Company’s work involved one-off, non-recuring projects, with government customers accounting for 45% of revenue. The Company also had a small managed services offering, which provided annuity income making up 5% of total revenue.

17. The difference between professional / project IT services, on the one hand, and managed services, on the other, is also relevant.

1. Professional / project IT services typically involve the performance of a specific project for a client over short period. As Mr Mulcahy described it, there is generally a short period between initial contact with a client and beginning to undertake a project engagement, with revenue being received from the engagement within one to three months of initial contact.

2. Managed services are ongoing IT services provided to a client for between three and five years. Mr Mulcahy said that managed services contracts take between three and nine months to negotiate and sign.

18. Professional services generally earn less revenue and derive less profit than managed services contracts. Further, managed services contracts become more profitable in the later years of the contract, as the set-up costs are largely incurred in the early years.

19. By contrast to the Company’s business, the purchaser’s core business was the provision of managed services to financial services customers. The purchaser was then facing some major challenges, which were thought likely to result in a substantial decline in revenue and profit if it could not pivot into new capabilities and markets. The purchaser wanted to diversify its revenue base and was particularly interested in developing a ‘cloud’ offering.

20. In order to pursue this strategy, the purchaser had two options: build its own capability in-house or acquire an existing business already operating in that space. Building its own capability from scratch was thought likely to take three years and require an investment of more than $5 million, with no guarantee of success. The purchaser identified the Company as a potential acquisition target, including by reason of its credentials and track record in undertaking significant professional services projects in the ‘cloud’.

Negotiations

21. In 2018, the purchaser’s CEO, Mr Baker, began to discuss the acquisition of the Company with Mr Mulcahy and Mr Snell. Mr Mulcahy and Mr Snell said they wanted $20 million. Mr Baker told them that they were dreaming. Mr Baker said that the industry standard for valuing professional services businesses was four times EBIT. Whilst a higher multiple might be used if the business had a managed services business, the Company only had two such contracts. Mr Mulcahy replied, “Rather than complicate things with Managed Services multipliers at this stage, we can focus on a plan to measure them going forward”. The discussion as to what multiple should be applied for managed services contracts arose quite late in the negotiations: see [38].

22. In July 2019, a term sheet was signed. The purchase price would consist of an initial cash payment of $5 million plus two earn-out payments, subject to a cap of $20 million.

1. The first earn-out payment was at the end of Year 1. A payment would be made based on a four (4) times earnings before interest and tax (EBIT) at the end of the first year, less the initial cash payment ($5 million).

2. A second earn-out payment was at the end of Year 2 and would be calculated using different multipliers depending on the EBIT at the end of that year. The starting point was a multiple of four (4) times EBIT, which ensured a minimum earn-out. If EBIT was greater than $3.5 million, the multiple would increase to 4.5. If the EBIT was greater than $4 million, the multiple was five (5). In each case, the payment would be based on the relevant multiple times EBIT less the initial cash payment and the earn-out payment achieved in Year 1.

23. A period of due diligence followed. By November 2019, Mr Greene had a due diligence report to hand. The consultant considered that the Company’s shares had only nominal value. This led the purchaser’s board to think that they may be paying too much for the Company, when the proposed acquisition was discussed at the board meeting in December 2019. The board still thought that the reason for acquiring the Company was sound. (Presumably, this was because the purchaser was looking at buying the Company for its skills and customer base, rather than its net assets.) However, according to Mr Jennings, several board members emphasised the importance of the sale contract having regard to the Company’s financial performance.

24. Mr Baker went back to the negotiating table. By March 2020, the initial cash payment had been reduced to $2 million plus earn-out payments. The vendor initially rejected this offer, but later accepted it on the basis of an earn-out and confidence “in driving value through the earn-out process”.

23. As part of the negotiations of the Share Sale Agreement, Mr Mulcahy was required to sign an employment contract with the purchaser. In May 2020, Mr Baker enquired, “One question – do you have a view on what’s the best title for you. I was originally thinking CEO Experteq for continuity but it’s causing a little confusion in the various documents as you and I will both [have] the same title. The alternative is a title such as GM Experteq or something similar”. Mr Mulcahy was happy with the title “GM Experteq”. In June 2020, Mr Baker circulated a group organisation chart with the new names and titles. The executive leadership team of the purchaser included Mr Baker as CEO, Mr Greene as CFO and Mr Mulcahy as “General Manager, Experteq”. (This is relevant for the second suggested error, being Disputed Matter No 2).

24. Another issue to be managed when negotiating the Share Sale Agreement was the retention of key staff. Mr Baker proposed a key personnel retention plan based on a 20% annual bonus, which would accrue over three years and be paid out at the end of the term if the staff member was still with the Company. In June 2020, the form of a letter to key employees was agreed, advising them of the transaction and retention bonuses. (This is relevant to the suggested fourth error, being Disputed Matter No 10.)

Share Sale Agreement

27. In July 2020, the Share Sale Agreement was executed. In short, the vendor sold the Company to the purchaser for:

1. a Completion Payment ($2 million), to be paid on Completion, subject to any adjustment under cl 9; and

2. Additional Payments to be paid by the purchaser in accordance with cl 10,

but capped at $20 million: cl 4.

28. Under cl 9, the parties were to prepare Completion Accounts in accordance with Schedule 5, so that any adjustment could be made to the Purchase Price. Relevantly, “Schedule 5 – Completion Accounts” detailed a number of accounting principles and policies which the purchaser was also obliged to have regard when preparing earn-out accounts: cl 10.6(b). Schedule 5 included a expert determination clause in similar terms to that the subject of these proceedings, in the event that the parties could not agree on adjustments to the Purchase Price. An accountant with at least 15 years’ experience, and currently practising at a top-tier accounting firm, was to determine such disputes; the determination was binding absent manifest error: para 2.4(b).

29. Clause 10, entitled “Earn out”, dealt with Additional Payments and largely followed the term sheet, save that the initial cash payment was less. Clause 10 began:

10   Earn Out

10.1    Additional Payments

(a)   Subject to [the $20 million cap] and this clause 10, the Vendor is entitled to receive Additional Payments from the Purchaser based on the EBIT achieved by the Business … 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.

10.2    First Additional Payment

The Additional Payment for the first Earn Out Period will be the amount equal to four (4) times EBIT at the end of the first Earn Out Period less the Purchase Price already paid by the Purchaser to the Vendor.

10.3   Second and final Additional Payment

(a)   lf EBIT for the second Earn Out Period is equal to or less than $3,500,000, then the Additional Payment for the second Earn Out Period will be the amount equal to four (4) times EBIT at the end of the second Earn Out Period less the Purchase Price already paid by the Purchaser to the Vendor including the amount of the Additional Payments pursuant to clauses 10.2.

(b)   lf EBIT for the second Earn Out Period exceeds $3,500,000 but is $4,000,000 or less, then the Additional Payment for the second Earn Out Period will be the amount equal to four and a half (4.5) times EBIT at the end of the second Earn Out Period less the Purchase Price already paid by the Purchaser to the Vendor including the amount of the Additional Payment pursuant to clauses 10.2.

(c)   If EBIT for the second Earn Out Period exceeds $4,000,000, then the Additional Payment for the second Earn Out Period will be the amount equal to five (5) times EBIT at the end of the second Earn Out Period less the Purchase Price already paid by the Purchaser to the Vendor including the amount of the Additional Payments pursuant to clauses 10.2.

30. As the Additional Payment at the end of each Earn Out Period was to be reduced by the amount of the Purchase Price already paid, being $2 million, the Company needed to achieve an EBIT of $500,000 before the vendor would receive anything ($500,000 x 4 = $2,000,000 - $2,000,000 = nil). The parties referred to $500,000 as the “trigger” or “hurdle” to receive an Additional Payment. I will return to further portions of cl 10 in due course, specifically, the expert determination process prescribed in the event that the parties could not agree on Additional Payments. A third expert determination clause was to be found in cl 17, concerning the tax consequences of the transaction. Such disputes were to be determined by an expert with over ten years’ experience in tax; the expert’s decision was binding absent manifest error: cl 17.3(c); 17.4(c).

31. A dispute resolution procedure was also to be found in cl 22, requiring mediation. In earlier proceedings, Ball J concluded that, although the Share Sale Agreement did not expressly say so, it was implicit that any matter falling within the scope of what was to be determined by the expert was to be determined exclusively by the expert, and not by the Court following an unsuccessful mediation under cl 22: Expert Group International Pty Ltd v TransAction Solutions Ltd [2023] NSWSC 543 at [25]. Finally, cl 31.12 of the Share Sale Agreement provided that each party submitted to the jurisdiction of the courts in New South Wales in connection with matters concerning the Share Sale Agreement.

32. The Share Sale Agreement was completed on 14 August 2020. One of the transaction documents, and a condition precedent to completion, was a New Service Agreement between the purchaser and Mr Mulcahy: cl 1.1; 2.1(a). On 14 August 2020, Mr Mulcahy signed a contract of employment with the purchaser as General Manager, Experteq. Mr Mulcahy’s salary continued to be paid by the Company. Mr Mulcahy’s role remained largely the same, with a handful of additional duties for the purchaser.

33. After completion, a letter was sent to key employees including Andrew Smith, David Bourke and Dave Colvin, setting out the terms of the key employee retention bonus now offered. The key employee was eligible to receive a retention bonus in addition to their usual salary and bonus package. During the first, second and third years after completion, the retention bonus would be between 10% and 30% of their salary, depending on whether the Company achieved EBIT of (variously) less than $1 million or more than $2.5 million.

34. The first Earn Out Period began.

Re-negotiation

35. In April 2021, Mr Mulcahy sought to renegotiate the earn-out provisions in respect of managed services contracts. He approached Mr Baker and complained that the Company’s resources were being diverted to secure a number of managed services agreements, which stood to benefit the purchaser in the years to come. The cost of securing these deals would be part of the EBIT calculation for the Earn Out Periods, but the revenue and profit would be achieved after the end of the Earn Out Periods. As such, there was no incentive for the Company’s sales team to secure these engagements, rather than project IT services.

36. Mr Baker acknowledged Mr Mulcahy’s concerns and said he would take the matter up with the board. Mr Mulcahy asked that the profit from the full term of any managed services agreement be included in the Earn Out Period. Mr Baker thought he could probably ‘sell’ recognition of the first year of profit from such deals. Mr Mulcahy was agreeable to this course.

37. Mr Baker and Mr Greene began work on a proposal to incentivise the Company to win more managed services deals. As Mr Greene later reported to the purchaser’s board, the intent of the variation to the earn-out provisions was to encourage focus on managed services contracts, which were more valuable to the purchaser than professional services income. Mr Jennings acknowledged that the purchaser wanted the Company to ‘chase’ managed services deals, as they delivered long-term revenue to the purchaser; the problem was that the profits derived from such agreements went beyond the Earn Out Periods and would not be included in the calculation of Additional Payments.

First board meeting

38. By June 2021, Mr Greene and Mr Baker had finalised a proposal for the board, being a board paper with an accompanying extract of the existing earn-out clause. Mr Baker noted in his paper that, towards the end of final negotiations with the Company on the Share Sale Agreement, in particular, in respect of the multiple (4 times), the vendor raised whether the purchaser would or could treat managed services deals differently, “as they’re more valuable.” Given that this was raised so late in the negotiations, Mr Baker had advised that it would be difficult to change the arrangements, but agreed to consider the matter when the Company secured a managed services sale. The Company now looked to achieve three such sales, being to NSW Transport, Maddocks and NSW Crime Commission. This was considered to be “remarkably good news! … managed services deals … are highly valuable to TAS as they take TAS into new clients/new markets and deliver long-term annuity revenue.”

39. Mr Baker reported that Mr Mulcahy had now requested that the earn-out arrangements for managed services contracts be reviewed, “The Experteq GM raised that he’s encouraging the team to seek out and secure managed services opportunities, but recognizes that the effort involved in securing this business is far greater than securing professional services contracts and often delivers less value in the short-term (given the time it takes to implement these deals and that the profit is spread over a much longer period – multiyear).” Mr Baker put forward two options to the board, being:

•   Retain the standard 4 times multiple for managed services deals but recognise a full year of annualised revenue against the second year of the earnout, or

•   Increase the 4 times multiple to 6 times multiple for managed services deals but recognise a full year of annualised revenue against the second year of the earnout

40. In order to qualify for this arrangement, the managed services contract would need to meet three conditions: the contract must be executed within the two year earn-out period, “must be for a minimum of 2 years (ideally 3 years)”, and must have no exit option without payout of the contract.

41. Mr Baker noted that, typically, the industry paid “far more” for a managed services business than for a professional services business, “The 4 times multiple we’ve agreed to is in the range of what is paid for a professional services business, common for the former but anywhere from 6 to 10 times is not unusual for managed services business.” Further:

[the purchaser] wants to reward [Mr Mulcahy] to drive the culture and behaviour of seeking out and securing managed services opportunities. Given this is far more time consuming and less profitable (within the earnout period) than securing professional services opportunities, it is recommended to provide the right incentive to encourage this behaviour.

42. Mr Baker noted that the 6 times multiple “would still be on the lower end of what the industry pays for this type of business” but would drive the type of business which was most valuable to the purchaser. Mr Baker recommended offering a 4 times multiple for two-year managed services contracts and a 6 times multiple for three year contracts and, in each case, recognising a full year of annualised revenue at the second Earn Out Period.

43. As to how this proposal would work in practice, Mr Baker used the potential three-year managed services contract with Maddocks as an example:

Financial Implications

Using the Maddocks deal for modelling purposes and assuming an annual profit for this deal of $88k the calculation would resemble the following – noting the clause extract below from the Share Sale Agreement in relation to Earn Out:

6 x $88,000 = $528,000 (or $176k [sic] if the 4 times multiple is achieved)

Payable at the conclusion of the second earn out period only after applying the EBIT requirements in respect to the 4 times multiple (refer clause 1[0].3 below which is the scenario we expect to play out) which also accounts for the purchase price.

The TAS business unit costs applicable to Experteq managed services business will be transferred (using inter-company accounting) to the Experteq P&L in the manner prescribed including formal agreement to the fee structure.

44. As I read the board paper, Mr Baker then considered that the financial performance of the Company was tracking to achieve an EBIT multiple of 4 times in the second Earn Out Period: cl 10.3(a), Share Sale Agreement. (Mr Jennings said that no one then expected that the Company’s financial performance would qualify for the higher multiples in cl 10.3(b) or (c).) If the Company secured a managed services deal with Maddocks for three years, then, if Mr Baker’s recommended multiple of 6 times was used, the Company could expect to receive an additional $528,000 for the second Earn Out Period. If the Maddocks deal proved to be only a two-year contract, then a 4 times multiple would apply and result in a smaller payment.

45. Whatever the multiple, the product of the annual profit for the managed services contract and the multiple was an amount “Payable at the conclusion of the second earn out period”. This was in addition to what the vendor was presently entitled to receive under the earn-out clause. Any payment remained subject to deducting the Purchase Price already paid ($2 million) and the amount of any Additional Payment at the end of the first Earn Out Period (then expected to be nil).

46. The purchaser’s board considered the matter at their meeting on 22 June 2021. Mr Jennings said there was extensive debate at the board meeting in respect of the proposal. Several board members did not want to amend the Share Sale Agreement, as the vendor had agreed to its terms following protracted negotiations. The majority of the board, however, considered that the amendment would align the Company’s interests with those of the purchaser, and had the potential to increase the purchaser’s profits overall. The majority of the board preferred Mr Baker’s suggested multiple of 4 times rather than 6 times. The board minutes record:

The board asked a range of questions for more clarity on the proposed payment of 6x for any managed services business written by the Experteq team. It was explained the 6x was only available under this proposal for long term agreements of >2 years and only in the event the earnout hurdles were achieved under the Share Sale Agreement noting this clause was included in the board papers.

The board were not comfortable with the 6x proposal and determined that the earn out terms and formula as set out the Share Sale Agreement at 4x EBIT would apply but in the case of managed services business won by Experteq the full years profit of such new business would be applied to the EBIT result not from the first invoice date. This decision was subject to first understanding the financial implications in respect to this payment formula which Greene was mandated to identify and report back to the board under separate cover as the payment may impact the FY22 budget in the event it was classified as an operating and not capital expense.

47. I take the reference to “earnout hurdles” to be to the minimum EBIT which the Company had to achieve before the vendor could expect to receive anything, being at least $500,000 or, if an Additional Payment was made at the end of the Earn Out Period, even more. The minutes record that the board apprehended that the annual profit for a managed services contract would be added to the EBIT for the Earn Out Period and the multiple of 4 times applied to the sum, resulting in a “payment”. However, the board’s decision was subject to understanding the financial implications of the formula, which required Mr Greene to provide further material to the board, including as to whether any additional payment would be considered to be an operating or capital expense. A Work in Progress Schedule completed after the board meeting noted that the purchaser’s auditors were to provide a report in relation to any additional earn-out payment under the Share Sale Agreement and the classification of any such payment as a capital (acquisition) expense.

48. Mr Baker and Mr Greene continued to work on the proposal. No Additional Payment was payable by the purchaser at the end of the first Earn Out Period. The second Earn Out Period began.

49. On 13 September 2021, the Company entered into a managed services agreement with Maddocks. On 14 September 2021, the Company was also “short listed” in a tender for a managed services contract with the Health Care Quality Safety Commission. Mr Mulcahy thought this was a good time to press Mr Greene to recognise managed services deals in the Additional Payment for the second Earn Out Period, and did so.

50. On 29 September 2021, Mr Greene asked the purchaser’s solicitor, Mr Donato, how to progress the matter. Mr Greene provided the solicitor with an extract from the board papers and minutes of 22 June 2021. Mr Donato advised that a deed of variation would be needed, and offered to prepare one for review.

51. Mr Mulcahy also met with Mr Greene and others to discuss the allocation of costs, margins and resources between the Company and the purchaser in respect of the managed services deals. As Mr Jennings recalled it, initially the parties sought to agree on the percentages to be applied to each managed services agreement to work out an annualised agreed profit. This was later abandoned in favour of working out actual EBIT results for each managed services deal, as there were difficulties agreeing on the percentages.

Second board meeting

52. By October 2021, Mr Greene had received advice from the purchaser’s accountants on the treatment of any additional earn-out payment “including any annualised [managed services] profit addition”. The accountants considered that any additional Earn Out would be capitalised as part of the purchase price. The accountants also noted that, given the financial results for the Company for the two months ended 31 August 2021, there was no evidence to suggest that a material earn-out would be due for the second Earn Out Period.

53. The proposal to vary the earn-out provisions came before the purchaser’s board for further consideration on 5 October 2021. The accountants attended and advised that “any earn-out payment in Year 2 (including the adjusted EBIT for annualised managed services profit under the agreed conditions) would be considered a deferred consideration and capital in nature”. The accountants then left the meeting.

54. The minutes record that Mr Baker then “added clarity to the earn out matter by talking to the agreed conditions and the new business that would generate the profit to be accounted”. The board resolved that the revised earn out EBIT calculation conditions be endorsed and a deed of variation be completed. That is, the board accepted the proposal presented at the previous board meeting in June 2021, now that the additional information sought had been provided.

Variation Deed

55. Attention turned to drafting the variation to the earn-out provisions. On 8 November 2021, Mr Greene circulated a first draft of the variation deed, including “the addition of the Annualised profits from (managed services) deals.” Clauses 10.1 and 10.3 of the Share Sale Agreement would be amended as marked:

10   Earn Out

10.1    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 … 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.

…

10.3   Second and final Additional Payment

(a)   lf EBIT plus the Annualised Agreed Profit for the second Earn Out Period is equal to or less than $3,500,000, then the Additional Payment for the second Earn Out Period will be the amount equal to four (4) times EBIT at the end of the second Earn Out Period less the Purchase Price already paid by the Purchaser to the Vendor including the amount of the Additional Payments pursuant to clauses 10.1 - 10.3.

(b)   lf EBIT plus the Annualised Agreed Profit for the second Earn Out Period exceeds $3,500,000 but is $4,000,000 or less, then the Additional Payment for the second Earn Out Period will be the amount equal to four and a half (4.5) times EBIT at the end of the second Earn Out Period less the Purchase Price already paid by the Purchaser to the Vendor including the amount of the Additional Payment pursuant to clauses 10.1 - 10.3.

(c)   If EBIT plus the Annualised Agreed Profit for the second Earn Out Period exceeds $4,000,000, then the Additional Payment for the second Earn Out Period will be the amount equal to five (5) times EBIT at the end of the second Earn Out Period less the Purchase Price already paid by the Purchaser to the Vendor including the amount of the Additional Payments pursuant to clauses 10.1 - 10.3.

(d)    For the purposes of this clause 10, Annualised Agreed Profit means the annualised net profit derived from new managed services business signed by the Purchaser under a formal contract, being the annualised net profit determined by the Purchaser in line with the Purchaser’s standard pricing model or as agreed between the parties (Purchaser and Frank Mulcahy) within 60 days of the date of the relevant contract, from sources secured by Experteq and/or Experteq clients which contracts satisfy the following conditions:

(i)   they were signed within the 2 year earnout period;

(ii)   the minimum term of the secured contract is 2 years; and

(iii)   the secured contract must have no right to be terminated early without an early termination payment being payable to the Vendor.

56. As will be seen, negotiations then focussed on further amendments to cl 10.3(d). The only changes made to cl 10.3(a) to (c) was to correct (most) cross-references.

57. Mr Mulcahy forwarded the draft to Mr Snell and to the vendor’s lawyer, Mr Sauer, initially asking Mr Sauer to review the variation deed “and let me know what you think of it[s] structure and wording. Happy to jump on a call to discuss.” On 9 November 2021, Mr Mulcahy forwarded the material to Mr Sauer at his new firm, “Pls call me with any questions”.

58. This was the first that Mr Snell had heard of the proposed variation. Mr Snell was “a little bit surprised by … the offer at the time.” He reviewed the initial draft and sent through a series of questions on 9 November 2021. Mr Snell also spoke to Mr Mulcahy about the rationale for the proposed variation, and “what’s the benefit to TAS, because that wasn’t really understood by me at the time of reading the contract.” Mr Mulcahy explained that the amendment was to encourage Mr Mulcahy and his team to focus on managed services without being detrimental to their earn-out potential. Mr Snell left it to Mr Mulcahy to negotiate the balance of the document.

59. On 16 November 2021, Mr Sauer provided initial comments. The drafting of proposed cl 10.3(d) was said to be unclear. Mr Sauer proposed alternative drafting. Mr Sauer also queried whether profit from contracts which were less than two years would still be captured in EBIT. Mr Mulcahy answered some of Mr Sauer’s queries and enquired “Is there any risk here to us that contracts on TAS paper will not qualify because of the wording” of Mr Sauer’s alternate drafting. Mr Sauer answered Mr Mulcahy’s query by a further email. (Mr Sauer later rendered an invoice to the vendor, which records that all work was done on this date; the narration does not refer to any meeting or telephone call with Mr Mulcahy.)

60. Mr Mulcahy forwarded Mr Sauer’s comments to Mr Greene and Mr Baker. On 25 November 2021, Mr Greene replied, “All profits make up Experteq EBIT – which includes those contracts that don’t meet the annualised net profit criteria outlined above – as for those that do meet the criteria we apply the annualised formula.” The question posed by Mr Sauer had highlighted the need to ensure that the profits from any given managed services contract were put in the correct category of either EBIT or Annualised Agreed Profit, and neither missed nor double counted.

61. On 18 January 2022, Mr Greene provided Mr Jennings with a further draft of the Variation Deed “following our call”. (The amendments concerned cl 10.3(d) and are not presently relevant.) As to the way forward, Mr Greene noted that it was intended to arrive at an agreed annualised profit for each managed services deal, and to agree these percentages by a side letter. Once this was done, Mr Greene would complete a forecast of the EBIT result for the Year 2 Earn Out period “so we have visibility on what the Extra Payment to the Vendor may look like under the Sale Agreement earn out terms.”

62. Mr Jennings raised the same query as Mr Sauer. On 19 January 2022, Mr Jennings emailed Mr Greene, “Just doing a final review and I’m trying to get my head around if any portion of annualised agreed profit on managed services secured … Expertech … may get included in Expertech’s EBIT in the second term.” Further:

“Why I ask, the Deed of Variation states:

-   ‘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 …’

-   ‘if EBIT plus the annualised agreed profit for the second earn out period exceeds …’

In the event any or all the Expertech managed service arrangements commence prior to 14 Aug 22, and any portion of the annualised agreed profit (AAP) is booked to Expertech’s EBIT has TAS unintentionally doubled up on that portion of the AAP.”

63. Mr Greene replied on 20 January 2022 that there were “2 protections” from “potentially double counting the additional payment due”. The first protection was the definition of EBIT and associated provisions in Schedule 4 of the Share Sale Agreement. The second “and stronger mitigation” was their plan to isolate the revenue from managed services deals so that they were accounted for in the purchaser’s books of account, negating any risk that the Company’s EBIT included the revenue/profit from qualifying managed services deals. Mr Jennings replied that he just wanted to make sure that the variation deed “didn’t catch us out”. Mr Greene agreed, noting that they needed to be “absolutely sure in protecting our business given this variation was the result of a TAS initiative in being fair to the Vendor.” Mr Jennings replied that it was okay to release the draft deed to the vendor for their lawyer’s review.

64. On 21 January 2022, Mr Greene circulated the draft which had been approved by Mr Jennings. On 28 January 2022, Mr Greene sent an email to the Company’s finance manager, copied to Mr Mulcahy, advising that the three managed services deals had to be accounted for in the purchaser’s financials “as a separate arrangement has been agreed with [Mr Mulcahy] on the profit recognition towards Year 2 – earn-out. This will avoid double counting these profits – and keep the [Company] accounts in a normalised EBIT position.” To achieve this, invoices which had been rendered by the Company the previous month would need to be transferred to the purchaser. The Company’s finance manager obliged. After this, the parties generally referred to the Company’s EBIT, adjusted to remove the Annualised Agreed Profit of managed services contracts, as “normalised EBIT”.

65. On 29 January 2022, Mr Sauer followed up Mr Mulcahy, “how did you end up going with this?” Mr Mulcahy provided the current draft of the Variation Deed, “Pls let me know what you think and we can put this to bed hopefully.” On 3 February 2022, Mr Sauer advised Mr Mulcahy that the amendments he had earlier proposed to the variation deed had not been incorporated. Mr Sauer marked-up the deed with the missing amendments. (These proposed amendments are not presently relevant but were mainly directed to identifying the Company’s managed services clients, contracts and pricing models with precision.) Mr Mulcahy provided this document to Mr Greene. On 4 February 2022, Mr Greene replied “your lawyer has missed the brief on this matter.” What had been agreed was an additional payment that was negotiated on a case by case basis, with an agreed profit percentage to be applied to each managed services deal. Mr Mulcahy provided Mr Sauer with Mr Greene’s response, “Pls let me know if you’d like me to set up a quick call with him to discuss.”

66. Later that day, Mr Greene provided the proposed percentage profits for the Maddocks deal and the NSW Crime Commission deal. Further emails ensued, agreeing on the margins for third-party revenue which formed part of these managed services contracts. On 6 February 2022, Mr Green advised Mr Mulcahy that he proposed to use these figures “for the purposes of forecasting the additional payment and potential Earn-Out” at 14 August 2022, once the half-year accounts were available.

67. Mr Mulcahy arranged a Microsoft Teams meeting with Mr Greene and Mr Sauer on 7 February 2022 “for a quick chat to finalise the wording in the Deed.” On 9 February 2022, Mr Mulcahy provided Mr Sauer with an updated version of the deed, “Pls let me know what you think.” On 14 February 2022, Mr Sauer advised Mr Mulcahy that it looked like the purchaser had accepted most of his draft “which is good”. As to further amendments suggested by Mr Sauer, Mr Mulcahy replied, “Given that this is outside of the original sale agreement and is a benefit to us, I am reluctant to push it with them too much as they are being very understanding and cooperative.” This appears to have been Mr Sauer’s last involvement before the Variation Deed was executed. (Mr Sauer later rendered a fee note for his services. The narration did not refer to any meetings or telephone calls with Mr Mulcahy, other than participation in the Teams meeting on 7 February 2022, together with Mr Greene.)

68. Mr Mulcahy arranged a further meeting on 15 February 2022 “to work through the 3 pricing worksheets and the framework used to derive the %’s to be applied to generate a TAS/EXP revenues.” In advance of the meeting, Mr Greene provided the proposed percentage profits and Agreed Annualised Profits for each of the managed services contracts, being Maddocks, NSW Crime Commission and an E-Health contract, making a “total value of $482,020 to add to the normalised EBIT in the Experteq P&L …”.

Third board meeting

69. On 22 February 2022, a draft Variation Deed was included in the board papers. The management report noted:

The terms have been agreed between the parties and the negotiations are continuing on the respective %’s to be applied to the three (3) qualifying deals which will be set out in related ‘side letters’ and executed by the parties. The application of the standard TAS pricing framework is being overlayed to the pricing schedules in each of the 3 new contracts with this approach delivering the % to be annualised and to form the additional payment at the conclusion of the second earn out year i.e. 14 August 2022.

70. One of the matters in the Work in Progress Schedule, on which the board was updated, was the Variation Deed. The minutes record that Mr Baker spoke to “the additional earn out matter” and referred to the Variation Deed included in the board pack. He repeated the history, being that the Share Sale Agreement did not include earnings from managed services deals, of which the Company had won several since Completion, “As a result of the board decision to allow … these deals to form part of the earn out we have been negotiating with the vendors … on the appropriate formula”. Mr Baker advised that the original proposal was that there would be an agreed percentage applied to each qualifying deal, but the parties could not agree on a percentage. He recommended that actual EBIT results from each deal be used instead, using separate ledgers. The draft Variation Deed was being revised to reflect this alternative, “and our lawyer has been mandated to complete this task.”.

71. Mr Greene then outlined the accounting practices that would be employed to deliver the EBIT results for each of the three current qualifying deals “that would be annualised in the normal fashion before being applied to the normalised EBIT that derived from the standard operations of Experteq.” A question was raised about dispute resolution, and Mr Greene confirmed that the Variation Deed would not be executed until both parties were in full agreement. Beyond this, the board made no further resolutions in respect of the matter.

72. On 3 March 2022, Mr Greene and Mr Mulcahy met to discuss final numbers. There followed a large number of emails, copied to Mr Baker, attaching various iterations of the worksheets for each managed services agreement, which were to be attached to the Variation Deed.

73. On 14 March 2022, Mr Greene provided the final version of the Variation Deed to Mr Jennings, together with a comparison copy showing the changes to the document since it was included in the board papers in February 2022. Mr Greene explained, “The revisions account for the shift from a fixed % of recurring gross revenues to actual EBIT … . Worksheets will be attached to the deeds to support the agreed cost allocations.” Mr Greene continued to send various iterations of the worksheets to Mr Mulcahy.

74. On 29 March 2022, Mr Greene sent the final worksheets for the three qualifying managed services deals to Mr Jennings. The worksheets set out the fees, costs and projected profit for each qualifying managed services contract. On 1 April 2022, Mr Jennings executed the Variation Deed. Mr Greene then forwarded the deed and the attached worksheets to Mr Mulcahy for execution.

75. In its final form, cl 10.1 of the Share Sale Agreement, as varied, was as first circulated on 8 November 2021: see [55]. Clause 10.2 was unchanged (and now redundant). Clause 10.3 now provided: (with changes from those first circulated on 8 November 2021 underlined)

10.3   Second and final Additional Payment

(a)   If EBIT plus the Annualised Agreed Profit for the second Earn Out Period is equal to or less than $3,500,000, then the Additional Payment for the second Earn Out Period will be the amount equal to four (4) times EBIT at the end of the second Earn Out Period less the Purchase Price already paid by the Purchaser to the Vendor including the amount of the Additional Payments pursuant to clauses 10.1 and 10.2.

(b)   If EBIT plus the Annualised Agreed Profit for the second Earn Out Period exceeds $3,500,000 but is $4,000,000 or less, then the Additional Payment for the second Earn Out Period will be the amount equal to four and a half (4.5) times EBIT at the end of the second Earn Out Period less the Purchase Price already paid by the Purchaser to the Vendor including the amount of the Additional Payments pursuant to clauses 10.1 and 10.2.

(c)   If EBIT plus the Annualised Agreed Profit for the second Earn Out Period exceeds $4,000,000, then the Additional Payment for the second Earn Out Period will be the amount equal to five (5) times EBIT at the end of the second Earn Out Period less the Purchase Price already paid by the Purchaser to the Vendor including the amount of the Additional Payments pursuant to clauses 10.1 - 10.3.

(d)   For the purposes of this clause 10:

(i)   Annualised Agreed Profit means 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:

(A)   each individual component and deliverable (under recurring costs) included in the approved worksheets (Approved Worksheets) (set out in Annexure A) completed for each of the Qualifying Managed Services Agreements will have 5% (ex GST) added to the cost values in the same worksheets to recognise the infrastructure support overheads applicable to the businesses of the Purchaser and Vendor; and

(B)   the cost values plus the infrastructure support overheads will form the expense base to offset against the recurring revenues of each Qualifying Managed Services Agreements to deliver an EBlT value which will be annualised using the standard calculation of actual EBIT/number of days of recurring revenue*365; and

(C)   in the event an out-of-scope deliverable considered to be extraordinary in nature, as agreed by the Vendor and Purchaser, acting reasonably, that is not included in the Approved Worksheets (meaning an under-scoped and under-priced deliverable or service) arises during the term of a Qualifying Managed Services Agreement and the Purchaser and Vendor are held responsible for delivery of such services, the costs plus the infrastructure support overheads rate of 5% will be expensed and accounted to the ledger of the respective deal.

(ii)   Experteq Client means any client that has been introduced to the Purchaser Entity by the Company, Frank Mulcahy or any other employee or contractor of the Business.

(iii)   Purchaser Entity means the Purchaser or any of the Purchaser's subsidiaries (including the Company); and

(iv)   Qualifying Managed Services Agreements means:

(A)   the Master Services Agreement executed between    TAS and Maloch Pty Ltd … dated 6 September 2021;

(B)   the Customer Agreement executed between Vendor and New South Wales Crime Commission … dated 17 December 2021;

(C)   the Customer Agreement executed between Vendor and Health Administration Corporation, as represented by eHealth NSW … dated 1 December 2021; and

(D)   any other agreement for managed services (New Agreement) executed during the Earn Out Period … and which satisfies the following conditions:

(i)   the minimum term of the New Agreement is 2 years; and

(ii)   the New Agreement cannot be terminated before the agreed term of the New Agreement; or

(iii)   if the New Agreement is terminated prior to the expiry of the agreed term of the New Agreement, it must contain an early termination payment or stranded costs provision acceptable to the Purchaser.

76. The earn-out clause was now more complex than when the Share Sale Agreement was first executed in July 2020. The parties did not, however, re-visit the expert determination clause. Clause 8 of the Variation Deed provided that each party submitted to the jurisdiction of the courts in New South Wales in connection with matters concerning the deed.

Forecast for the board

77. Having finalised the terms of the Variation Deed and the accompanying worksheets, Mr Greene turned his attention to modelling what the Additional Payment for the second Earn Out Period might be. It will be recalled that, under cl 10.3 of the Share Sale Agreement, the Purchase Price already paid had to be deducted from the product of EBIT and the applicable multiple before any Additional Payment could be calculated. Mr Green prepared a spreadsheet, entitled “Earn Out Additional Payment”, which took this into account. This spreadsheet becomes important, as Mr Greene later presented it to the board.

78. On 11 April 2022, Mr Greene and Mr Baker spoke, apparently about the modelling of the Additional Payment in the spreadsheet. On 12 April 2022, Mr Greene emailed Mr Baker, “Following on from our conversation yesterday – I tested [Mr Mulcahy’s] response to Model 1 attached – which deducts the $2m from each transaction – the original and the revised plan. He accepted this”. I take it from this email that Mr Greene showed the spreadsheet to Mr Mulcahy. Mr Greene also emailed the spreadsheet to Mr Baker, explaining:

“Using this model, if Experteq hit $1m EBIT in their normalised accounts AND only the 3 current qualifying deals are accounted – the payout = $4.599m

If we were to exclude the $2m from the revised earn out terms you can add $2m to this number above – which is conservative given we expect more qualifying deals to be won.”

79. In the attached spreadsheet, Mr Greene calculated how much the vendor would receive under the Share Sale Agreement, before and after the variation. As to the forecast Additional Payment before the variation, Mr Greene used the Company’s projected EBIT, based on financial results to the end of February 2022 ($214,879) and including the revenue expected to be received under the three managed services contracts to the end of the second Earn Out Period. Forecast EBIT was $568,036. This was multiplied by 4 ($2,272,144). He then deducted $2 million. The Additional Payment was $272,144. Mr Greene then modelled what the Additional Payment would be using higher projected EBITs of $750,000 and $1 million. If the Company’s EBIT was $1 million, then the vendor would receive obtain an Additional Payment of $2 million.

80. As to the forecast Additional Payment after the variation, Mr Greene took the total annualised EBIT for the three managed services contracts ($1,149,910). He added the projected EBIT for the Company without the revenue earned on the three managed services contracts, which I understand to be what Mr Greene and Mr Mulcahy referred to as “normalised EBIT”. (According to Mr Greene’s later explanation to the board, this included the transitional or non-recurring fees from the managed services contracts: see [87].) Mr Greene added these two figures together and multiplied the total by 4 before deducting the $2 million already paid. This resulted in an Additional Payment of $2,599,640. (The formula at Cell L18 may have an error: the reference to L17 is presumably intended to refer to B19.) Importantly, Mr Greene applied the multiplier to the Annualised EBIT for the managed services contracts.

81. The forecast indicated that, after the variation, the Company would receive an Additional Payment of some $2.6 million based on its presently forecast EBIT and its existing three managed services contracts. That is, it was no longer necessary for the Company to basically double its forecast EBIT before it could expect an Additional Payment of $2 million.

82. On 15 April 2022, Mr Greene sent a more elaborate version of this spreadsheet to Mr Jennings, copied to Mr Baker. Mr Greene explained that he had only included the three qualifying managed services deals “noting that there are another three (3) new clients that are likely to execute qualifying agreements this month.” The calculation was now done slightly differently. Mr Greene looked at various projected forecasts of normalised EBIT, that is, without the recurring revenue from managed services contracts. He multiplied the projected EBIT by 4 and then deducted the Purchase Price of $2 million. He separately took the total Annualised EBIT for the three managed services contracts and multiplied this by 4. He added both figures together. That is, Mr Greene separately applied the multiple of 4 to normalised EBIT and Annualised EBIT for the managed services contracts, rather than adding the normalised EBIT and Annualised EBIT together before applying the multiple to the sum.

83. Mr Greene again looked at how the Additional Payment would increase if normalised EBIT was $750,000 or $1 million. Mr Greene also looked at how the Additional Payment would increase if Annualised EBIT for the managed services contracts increased to $1.5 million, against each of the forecast normalised EBITs. According to this spreadsheet, the total Earn Out Payment was forecast to be as much as $8 million.

Fourth board meeting

84. The vendor executed the Variation Deed on 21 April 2022. Mr Greene prepared to report to the board, including to provide a forecast of the Additional Payment which may be payable at the end of the second Earn Out Period. On 25 April 2022, Mr Greene sent to Mr Jennings and Mr Baker a revised spreadsheet and some commentary for inclusion in the management report for an upcoming board meeting. Like the previous spreadsheet, Mr Greene separately applied the multiple of 4 to normalised EBIT and the Annualised EBIT for managed services contracts, before adding these figures together to arrive at a total Additional Payment. Depending on the projected normalised EBIT, the total Additional Payment was up to $8 million.

85. On 29 April 2022, Mr Greene sent instructions to the Company’s finance manager, copied to Mr Mulcahy, to begin issuing invoices in accordance with the Variation Deed. Mr Greene advised that the revenue and expense on managed services contracts would be recorded separately in the purchaser’s accounts “so the margin available to [the Company] is clearly visible and will be added – as agreed – to the EBIT number.”

86. The May 2022 board papers included a management report on the Variation Deed. On 3 May 2022, the purchaser’s board considered the management report, which was supported by two worksheets:

1. Annexure A summarised the details of the five managed services agreements that were expected to qualify under the Variation Deed for inclusion in the calculation of the earn-out, together with the value of those contracts. In addition, details were provided for a further five managed services agreements which were then ‘in the pipeline’.

2. Annexure B was another iteration of the Earn-Out Additional Payment worksheet already described.

87. In the management report, the board was informed that the Variation Deed had been executed. The forecast in Annexure B had been completed “based on the original and additional earn out conditions”. Where there were a number of deals in the pipeline, the forecast “includes a ‘what if’ total should the EBIT value reach $1.5m in qualified deals which is looking likely”. Mr Greene explained in some detail how he had prepared the forecast:

For comparative purposes the Sale Agreement Terms in Annexure B worksheet provides the application of the original Sale Agreement obligations whereby the actual EBIT position at 14 August 2022 is the only value that forms the basis for the 4x multiple.

In arriving at these forecast options, we have used the Experteq EBIT result at 31 March 2022, added the transition or non-recurring fees from the four (4) deals (which are not part of the Variation terms) and the actual earnings from the qualifying deals from go-live billing dates (across January 2022 to April 2022) through to 14 August 2022.

In respect of our available capital in meeting the earn out obligations, we hold liquidity over $14m.

88. Mr Greene concluded his paper by noting, “As shown by sales achieved in the earn-out period, this acquisition has delivered significant value”. Whilst the Company had been acquired to develop a cloud capability and to leverage the Company’s consulting/professional services capabilities “as a beachhead to open new opportunities and hopefully secure new major managed services opportunities” this had been achieved more quickly and in greater volume than anticipated and “provides a very solid platform for [the purchaser’s] future relevance and growth.” Mr Green concluded:

Note: It is important to recognise that all managed services deals (except Maddocks) sold and delivered in the earnout period (revenue and profit) are recognised in Experteq’s P&L and the earn-out factors apply according to the sale agreement. The Deed recognises the managed services deals which meet the criteria set out in the Deed and apply an annualised contribution for the qualifying deals. Therefore, the difference between the two (sale agreement and Deed) is the difference between the actual period of new contract billing in the earnout period versus a full year (annualised) contribution.

89. The minutes of the board meeting record that Mr Greene presented the worksheets modelling the additional earn-out calculations under the Variation Deed. It would appear from the minutes that he did so in some detail. Subject to various assumptions, the additional earn-out payments were between $5.4 million and $8.4 million, which included the current four qualifying clients and four prospective new clients. Mr Greene noted that there were at least two other clients in the pipeline that would qualify under the deed, if they became managed services clients. The minutes record that the directors asked a number of questions in respect of the models and the implications for the purchaser, which were clarified by Mr Greene and Mr Baker. The minutes record that a post earn-out period review would be undertaken “with the lessons from this transaction”.

90. Mr Jennings initially said he could not recall whether he looked at the worksheets provided by Mr Greene, and was unsure whether he reviewed the modelling. Mr Jennings agreed that the use of the multiplier in these worksheets did not accord with his suggested understanding: that the variation was limited to changing the hurdles in order for a particular multiplier to be applied. But Mr Jennings said he did not tell Mr Greene that he had got it wrong. Mr Jennings then said he had reviewed the spreadsheet and, further:

A.   When I received the - the spreadsheet, my initial reaction, I recall, was surprise at … the, I suppose, EBIT annualised projections, and I felt that if it was correct, that it was a lot more than what I would’ve assumed due to the performance of the organisation.

Q.    You looked at these spreadsheets, Mr Jennings?

A.    I did.

Q.   You were concerned about the numbers Mr Greene was coming up with?

A.   I was concerned - concerned with the - the spreadsheet and the figures that were projected.

…

Q.   It’s perfectly …obvious that Mr Greene is applying the four times multiple to the annualised agreed profit, isn’t it?

A.   Well, I can only go by my recollection of when I - my - my reaction when I received the - the spreadsheet, and my reaction was complete horror that that figure was to be paid on those scenarios.

91. But Mr Jennings did not recall challenging Mr Greene on his calculations, “I can’t recall whether I did or not, sir.” Nor could he recall whether anyone at the board meeting expressed the view that the multiple of 4 should not be applied to the Annualised Agreed Profit. Mr Jennings became a little evasive and guarded at this point. I think it unlikely that Mr Jenning would not have raised such a matter, which had significant financial ramifications for his company, if he had actually thought that the methodology was wrong.

Earn Out Period accounts

92. As the second Earn Out Period drew to a close, Mr Mulcahy was interested to know whether various managed services deals would be included in the earn-out calculation. On 10 August 2022, Mr Mulcahy met with Mr Greene and asked whether he had a view on the likely amount of the Additional Payment for the second Earn Out Period. Mr Greene showed Mr Mulcahy a spreadsheet on his laptop that included his calculation of the Additional Payment. The payment was forecasted to be more than $2 million and was calculated by adding the Annualised Agreed Profit to EBIT and then applying the multiplier. Mr Greene said that the amount still needed to be audited. Mr Mulcahy did not agree with the forecast figure but did agree with the methodology used. He asked Mr Greene to send him a copy of the spreadsheet, but it was not forthcoming.

93. On 14 August 2022, the second Earn Out Period concluded. On 15 August 2022, Mr Mulcahy resigned as General Manager of Experteq, giving three months’ notice. As to the next step, cl 10.4 of the Share Sale Agreement provided:

10.4   Preparation of Earn Out Period accounts

Within 60 days of the end of each Earn Out Period, the Purchaser must:

(a)   cause the accounts for the Business for the relevant Earn Out Period to be prepared and audited (Earn-Out Accounts); and

(b)    release a copy of the Earn-Out Accounts for the relevant Earn Out Period to the Vendor together with a copy of the auditor's report.

94. Clause 10.6 obliged the purchaser to prepare the Earn Out Accounts in accordance with the principles and policies prescribed in clause 10.7 and Schedule 4, the accounting policies used for the preparation of the Completion Accounts set out in Schedule 5 and Accounting Standards. Relevantly, EBIT was to be adjusted to include a full year’s remuneration of the Chief Executive Officer and the Chief Financial Officer. As mentioned at the outset, the Company did not have a CEO or CFO. The purchaser had both, being Mr Baker and Mr Greene.

95. On 22 August 2022, Mr Greene tasked the purchaser’s accountants with the audit process for the Earn Out Period. On 5 September 2022, Mr Greene provided Mr Mulcahy with the accountant’s audit plan, which noted that an area of focus would be on cl 10.1(a) and cl 10.3(a), (b) and (c) of the Share Sale Agreement and Variation Deed. The auditor proposed:

“We will:

-   Obtain management’s Earn Out calculation and challenge judgements and assumptions used;

-   Ensure the Earn Out calculation is in line with the terms of the Agreement and the Variation Deed;

-   Ensure the inputs used in management’s calculation are appropriate and in line with the Approved Worksheets;”

96. On 10 October 2022, the purchaser provided an audit report for the Earn Out Accounts for the second Earn Out Period. The auditor confirmed that the Company’s financial information for the year ended 14 August 2022 fairly presented the financial position. Mr Greene calculated that the Additional Payment was $1,935,244.25, as follows:

1. The Company’s EBIT for the year ended 14 August 2022, with balance day adjustments, was $1,086,948.61.

2. Four managed services deals qualified for consideration in the earn-out calculation, being NSW Crime Commission, Maddocks, NSW Health and Link Wentworth Housing. The annualised EBIT for these four contracts was added to the Company’s EBIT, giving a total of $1,787,017.77.

3. From this, the annual costs of the CEO/CFO ($803,206.71) were deducted, leaving $983,811.06. This figure was multiplied by 4, from which $2 million was deducted, leaving $1,935,244.25.

97. Mr Greene calculated the Additional Payment using the same method as demonstrated in his worksheets presented to the board.

Dispute

98. As to the next step, cl 10.5 of the Share Sale Agreement imposed an obligation on the purchaser to ensure that the vendor was given all information and assistance it reasonably requested to review the Earn Out Accounts and business records. Clause 10.9 of the Share Sale Agreement then provided:

10.9   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 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).

99. On 18 October 2022, the vendor requested a copy of the Earn Out Accounts for the second Earn Out Period in a form consistent with the terms of the Share Sale Agreement. (Clause 10.8 imposed formatting requirements for the Earn Out Accounts.) In respect of the CEO and CFO costs, evidence of such costs was sought “as our Client is not aware of any CEO or CFO being appointed with respect to the Business.”

100. On 27 October 2022, the purchaser provided the vendor with the Earn Out Accounts for the second Earn Out Period in the prescribed format under the Share Sale Agreement. The CEO and CFO costs were identified as those of Mr Baker and Mr Greene. The earn-out amount had reduced to $1,694,910 as a result of further costs being identified in the audit. Beyond this, the purchaser continued to use the formula as illustrated by Mr Greene’s worksheets, applying the multiple to the sum of the Agreed Annualised Profit and EBIT.

101. On 9 November 2022, Mr Sauer raised a number of queries with the purchaser’s calculations and suggested a meeting. On 15 November 2022, Mr Mulcahy finished work and left Experteq. On 16 November 2022, Mr Greene responded to the vendor’s requests but advised that a meeting was not thought to serve any purpose. On 23 November 2022, Mr Greene provided the vendor’s lawyer with further material, including the auditor’s files. On 1 December 2022, the vendor sought further clarification, which was provided.

102. On 22 November 2022, the purchaser’s board reviewed the acquisition of the Company. The acquisition was considered to have had significant value and to have been a turning point for the business. The total acquisition had cost $3.7 million compared to the projected $8 million. Importantly, there is no suggestion in the board paper that Mr Greene’s calculation of the earn out, either in the forecasts earlier presented to the board or since, was wrong.

103. On 21 December 2022, the vendor issued an Earn Out Notice, putting the Additional Amount payable at $9,434,142.73. Where the Earn Out Accounts and auditor’s report had been provided on 10 October 2022, the notice was issued more than 10 Business Days later, contrary to cl 10.9. In any event, the vendor advised that it did not accept the audited accounts and considered that the Company’s EBIT was $1,385,585.52. The Company considered that there were five qualifying managed services contracts, with an annualised profit totalling $1,472,950.16. This made a total EBIT of $2,858,535.68. This figure was multiplied by 4 ($11,434,143), from which the purchase price of $2 million was deducted, leaving an Additional Amount Payable of $9,434,142.73.

104. That is, the method used by the vendor was the same as the purchaser; the inputs were different. The purchaser points to a small portion of the Earn Out Notice, which can fairly be described as a ‘snippet’, as indicating that the vendor then understood that the Additional Payment was “4 times EBIT”. When the letter is read as a whole, together with its attached spreadsheet, it is apparent that the vendor and purchaser were then applying the earn-out formula in the same way.

105. As to the next step, cl 10.10 of the Share Sale Agreement provided:

10.10   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)   If, within the Earn Out Acceptance Period, the Purchaser confirms its acceptance of the Earn Out Notice or fails to give an Earn Out Dispute Notice before the expiry of the Earn Out Acceptance Period, the Vendor and the Purchaser will be deemed, on the date of that confirmation or the expiry of the Earn Out Acceptance Period (where applicable), to have agreed the amount of the relevant Additional Payment for the purposes of this document and the Additional Payment shown in the Earn Out Notice will be final and binding on the Vendor and the Purchaser.

(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).

217. In its submission to the expert, the vendor disputed any agreement to bear a portion of Mr Neller’s commission. The purchaser was said to have provided no evidence that the commission had, in fact, been paid. According to the template provided by the purchaser, Mr Neller was not entitled to be paid the commission. Nor was it clear why the purchaser had pre-paid the commission, where the managed services agreement had five years to run and Mr Neller may not be entitled to all of the commission. The purchaser had provided no evidence that the commission was paid under a commission structure previously used by the vendor. Reliance was placed on para 4.11 of Schedule 5. The vendor submitted that the commission should be excluded as a Once-off Expense, where the purchaser had accepted that the commission payment was non-recurring.

218. Whether the commission was a Once-off Expense involves an accounting concept which the expert was well qualified to consider. Whether he was right or wrong is not the issue, but whether he was obviously wrong. I agree with the purchaser that the expert’s conclusion appears odd. Perhaps it was because the commission had been paid up-front rather than over the course of the five-year managed services contract to which it related. But it probably would have been easier for the expert to decide the matter if he had been provided with a copy of the relevant document. It is harder to criticise the conclusion reached where the expert was largely reliant on the parties’ assertions and a ‘template’.

219. Nor does it matter, where the expert continued to hold the view that the accounting principle in para 4.11 of Schedule 5 applied. There is no doubt that the incentive scheme was introduced by the Company after the Completion Date. The expert’s view that that principle applied in this situation is not obviously wrong, for reasons earlier stated.

220. Nor was the expert satisfied that the purchaser had accounted for the commission appropriately, given the absence of relevant documents. Overall, the expert’s rejection of this expense item was not a manifest error.

221. In the result, the expert determination stands.

Rectification

224. In the alternative, the vendor sought rectification on the basis that the common intention of the parties was that, pursuant to cl 10.1(a) and cl 10.3(a), the Second Additional Payment was to be calculated by applying the relevant multiple to the sum of EBIT and Annualised Agreed Profit at the end of the Second Earn Out Period. The vendor sought rectification of cl 10.3(a), by adding the following words: (inserted words underlined)

10.3   Second and Final Additional Payment

(a)   If EBIT plus the Annualised Agreed Profit for the second Earn Out Period is equal to or less than $3,500,000, then the Additional Payment for the second Earn Out Period will be the amount equal to four (4) times EBIT plus the Annualised Agreed Profit at the end of the second Earn Out Period less the Purchase Price already paid by the Purchaser to the Vendor including the amount of the Additional Payments pursuant to clauses 10.1 and 10.2.

225. At the time of entry into the Variation Deed, the parties were said to be under a common mistake that the written instrument conformed with their common intention. The purchaser denied this.

226. As the vendor has already succeeded on its primary contention, it is only necessary to deal with this claim briefly in the event that I am wrong about whether the parties were bound by the expert’s construction of the earn-out formula and / or whether the expert’s construction was a manifest error.

Submissions

227. The vendor submitted that this was a compelling case for rectification, given the purchaser’s contemporaneous calculation of the forecast second Additional Payment was consistent with the clause as rectified. While there can sometimes be an issue as to whose state of mind should be attributed to a corporate party, when determining common intention (SSABR Pty Ltd v AMA Group Limited [2024] NSWCA 175 at [149]-[156]), this was said to present no difficulties here. The relevant decision-maker was the board of directors. The chairperson, CEO and CFO all shared the common intention, as reflected in materials provided to the board, both before and after execution of the Variation Deed. Whilst members of the board other than Mr Jennings did not give evidence, the Court does know what the board was told, including models graphically demonstrating how the varied clause would work. The standard of “clear and convincing proof’ of a common intention was said to be comfortably satisfied: Property Investors Alliance Pty Ltd v C88 Project Pty Ltd (in liq) [2023] NSWCA 291 at [130] (Kirk JA); SSABR Pty Ltd v AMA Group Limited [2024] NSWCA 175 at [139]-[140].

228. The vendor submitted that the fact that the Variation Deed was drafted by lawyers was of little significance and no more than reasons for caution, given even experienced solicitors can misrecord their clients intention: Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603; [2009] NSWCA 407 at [461] (Campbell JA). The drafting did not materially change from the first draft prepared by Mr Donato. That draft was prepared in answer to Mr Greene’s instruction that the intention of the amendment was to have an amount “payable” at the end of the second Earn Out Period calculated by reference to annual profit from managed services agreements. The words adopted in the original draft – which it may be inferred were intended to give effect to that instruction – were not the subject of any subsequent negotiation. The limited work undertaken by Mr Sauer and his team in respect of the draft Variation Deed – less than 4 hours between November 2021 and February 2022 – undermined any submission that the words in the draft Variation Deed were the subject of extensive negotiation between lawyers such that it could be inferred that it is unlikely that the language used in the clause contained any errors.

229. The purchaser submitted that the vendor had not discharged its “heavy onus” given suggested frailties in the evidence of Mr Mulcahy and Mr Snell and the absence of evidence from Mr Sauer. The omission of evidence from Mr Sauer left a gap in the evidence bearing upon the vendor’s state of mind at the time of entering into the Variation Deed: SSABR at [187(3)]. (For reasons earlier stated, I decline to draw this inference). There was said to be no contemporaneous documents indicating that the vendor held a mistaken belief. The Earn Out Notice was said to point in the opposite direction. (For reasons earlier stated, I do not agree with this either). Nor were there any contemporaneous communications indicating that the purchaser was aware that the vendor was labouring under a mistaken belief when the parties entered into the Variation Deed: Mayo v W & K Holdings (NSW) Pty Ltd (in liq) (No 2) [2015] NSWCA 119 at [59]. There is no evidence which might support a finding of unconscientious departure from the common intention of the parties, which was the rationale informing the remedy.

230. The purchaser submitted that decision-making authority regarding entry into the Variation Deed was vested in the board. That decision was made on 22 February 2022. The board had before it the Variation Deed, which contained clauses 10.3(a)-(c) in the form in which those clauses were expressed at the time of execution. It had not been involved in the negotiations, with the exception of limited involvement by Mr Jennings. There was no proper evidentiary basis to conclude that the board intended the Variation Deed to mean other than what the draft deed it considered and approved objectively conveyed.

Principles

231. The circumstances in which equity may rectify a written contract were described by Campbell JA in Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603; [2009] NSWCA 407 at [444]:

… equity focuses on what it is unconscientious for a party to assert about the contract. The rationale is that it is unconscientious for a party to a contract to seek to apply the contract inconsistently with what he or she knows to be the common intention of the parties at the time that the written contract was entered. In other words, when a plaintiff succeeds in a claim for rectification, the plaintiff is found to have been justified in in effect saying to the defendant “you and I both knew, when we entered this contract, what our intention was concerning it, and you cannot in conscience now try to enforce the contract in accordance with its terms in a way that is inconsistent with our common intention.

232. Rectification is granted only upon clear and convincing proof, being not only that the written document does not correctly record the common intention of the parties, but what the common intention of the parties actually was: Franklins v Metcash at [451]. As such, rectification in equity is a departure – albeit it one which is circumscribed by the insistence on cogent proof – from the objective theory of contract: Seymour Whyte Constructions Pty Ltd v Ostwald Bros Pty Ltd (In Liq) (2019) 99 NSWLR 317; [2019] NSWCA 11 at [15].

233. In establishing what the actual intentions of the parties were, there is no requirement for communication of that common intention by express statement, but it must at least be the parties’ actual intentions, viewed objectively from their words or actions, and must be correspondingly held by each party: Simic v New South Wales Land and Housing Corporation (2016) 260 CLR 85; [2016] HCA 47 at [104] (per Gageler, Nettle and Gordon JJ). As Kiefel J observed in Simic at [42]-[43]:

… A court, in determining whether the burden of proof is discharged, may be said to view the evidence of intention objectively, in the sense that it does not merely accept what a party says was in his or her mind, but instead considers and weighs admissible evidence probative of intention. ….

It is not to be expected that parties to contractual negotiations will express themselves in terms of their intentions. It is therefore to be expected that proof to the necessary standard will usually require some manifestation of the intention of each party by their words or conduct and that the requisite common intention will be a matter of inference for the court from that evidence. …

234. As Tipping J also observed in Westland Savings v Hancock (1987) 2 NZLR 21, “the fact that a party has acted as if the document stood in the form into which it is sought to be rectified is strong evidence of the existence of an intention of the part of that party to contract in those terms”: at 32. This was followed in Ryledar Pty Ltd v Euphoric Pty Ltd (2007) 69 NSWLR 603; [2007] NSWCA 65, where Tobias JA (with whom Mason P and Campbell JA agreed) added, “Such conduct is obviously of significance but, depending on other evidence, if any, it is not necessarily conclusive although in the absence of any such evidence it may be”: at [184].

235. Where an agreement has been reduced to writing through a process of negotiation between solicitors over a period of months and is clearly a matter of great commercial significance to the parties, that situation is itself a factor that tends to make it less likely that the parties have recorded their common intention incorrectly: Franklin v Metcash at [460]. However, Campbell JA noted “we know that sometimes even experienced solicitors take or are given inadequate instructions, or misunderstand their instructions, and in consequence misrecord their client’s intention, so these matters are no more than reasons for caution in making the factual findings upon which a rectification order is based”: at [461]. Likewise, in Queenfield Pty Ltd v Gordon Finance Pty Ltd (2019) 60 VR 118; [2019] VSC 857, a case involving a drafting error by a solicitor, Riordan J observed, “It is the common mistake which enlivens the doctrine of rectification and to deprive the party of the remedy on the basis that it was party to the mistake, would be to substantially deny the remedy of utility”: at [85].

Consideration

236. If the only evidence before the Court was the oral evidence of Mr Mulcahy, Mr Snell, Mr Baker and Mr Jennings, then I would not be satisfied to the requisite standard that an order for rectification ought be made. Their recollections were, no doubt unwittingly, affected by hindsight and self-interest to varying degrees. However, to their evidence may be added a significant body of contemporaneous documents. The imprecise language used in individual records, whether the board papers, board minutes or emails, means that I would not be satisfied that rectification should be ordered having regard to any individual document. But the cumulative effect of these contemporaneous documents is clear. To this may also be added the parties’ strongly consistent post-contractual conduct. The result is compelling.

237. The purchaser’s board had authority to enter into the Variation Deed. The board resolved to adopt Mr Baker’s proposal to vary the earn-out arrangements on 22 June 2021, subject to various questions being satisfactorily answered. As earlier detailed, Mr Baker’s proposal envisaged a payment being made to the vendor based on the multiple being applied to what became known as Annualised Agreed Profit: see [43]-[45]. The board, according to the minutes, understood this proposal and agreed ‘in principle’: see [46]-[47].

238. In September 2021, Mr Greene instructed the purchaser’s solicitor, Mr Donato, to prepare the Variation Deed. Mr Greene’s instructions were, effectively, to prepare a document to give effect to the board’s resolution on 22 June 2021 to adopt Mr Baker’s proposal. I infer that Mr Donato read Mr Baker’s board paper and the minutes. I infer that Mr Donato endeavoured to give effect to the board’s decision in the draft Variation Deed.

239. In October 2021, while Mr Donato was in the process of drafting the Variation Deed, the board formally approved Mr Baker’s proposal, where the board’s accounting query had been answered in the meantime: see [53]. Nowhere in the board papers or minutes from June or October 2021 is there any suggestion that Annualised Agreed Profit would be added to EBIT for the purpose of identifying whether the Company had passed a ‘hurdle’ to qualify for a higher multiple. The board paper and minutes are premised on the multiple being applied to the annualised profits of managed services contracts, with a view to making a payment to the vendor of the resulting sum.

240. Throughout this period, Mr Mulcahy was regularly meeting with Mr Baker and Mr Greene to progress the variation and the accompanying worksheets. It is highly likely that they discussed how the varied earn-out formula was going to work, as it was a matter of keen interest and the reason why they were meeting.

241. When the draft Variation Deed was first circulated in November 2021, Mr Snell asked Mr Mulcahy what the variation was about. From what he was told by Mr Mulcahy, and from Mr Snell’s review of the draft Variation Deed, he understood that there was to be a change to the payout calculation, “I had taken it that Annualised Agreed Profit was being added to EBIT, and referred to henceforth as EBIT.” The sum would be multiplied by the multiplier. On reviewing the document again on 21 April 2022, Mr Snell said that he understood that the Annualised Agreed Profit was being added to the EBIT to accumulate, “the impression I had after reading the whole document was that they were being added together.”

242. Mr Mulcahy’s evidence as to his understanding took some twists and turns. It was not clear whether Mr Mulcahy got confused (for which he could be forgiven) or whether his answers reflected what he thought at the time, what he understood the Variation Deed to, in fact, provide, or what he had come to think. In any event, Mr Mulcahy initially said that he understood that EBIT and Annualised Agreed Profit were the same, “my view was that EBIT contained Annualised Agreed Profit.” Mr Mulcahy conceded that the words in the proposed Variation Deed did not say that, but “what I was thinking at the time was Annualised Agreed Profit and … EBIT were one and the same”. Mr Mulcahy said he did not have accounting or financial training and thought “At least they’d be used for calculating the same thing.” Mr Mulcahy later conceded that EBIT did not include Annualised Agreed Profit, “That wasn’t my view at the time, but I accept that that’s what the words say. But that’s not what I thought.” He then agreed that he knew at the time that EBIT and Annualised Agreed Profit were distinct (which may be explicable given how he and Mr Greene separated the two by ‘normalised EBIT’ to prevent double-counting). Whilst he recognised that EBIT and Annualised Agreed Profit were two different things, his view was that “towards the calculation at the end, they would be the same thing.”

243. As noted at the outset, neither Mr Mulcahy or Mr Snell were lawyers or accountants; their skills lay in IT. They appeared to me not to have grappled with the intricacies of the drafting at the time, but went along with the deal as they understood it to be and left the detailed document review to Mr Sauer. That does not mean that these gentlemen were not bound by their execution of the Variation Deed. But it does mean that, to the extent that their misunderstanding as to how the Variation Deed would operate was shared by the purchaser, then equity may rectify the document to accord with that common intention.

244. In fact, Mr Sauer did not suggest any substantive amendments to cl 10.3(a) to (c). Nor does Mr Mulcahy appear to have given Mr Sauer any detailed instructions, beyond asking him to review the document “and let me know what you think of it[s] structure and wording.” There is no evidence that Mr Mulcahy gave more expansive instructions in conference as to how he understood the varied earn-out formula should work. For reasons earlier given, I do not infer that evidence given by Mr Sauer would not have assisted the vendor.

245. Turning to Mr Baker, he was not a member of the board. His understanding is tangentially relevant, as he put forward the proposal to vary the earn-out provisions to the board and answered the board’s questions. Mr Baker said that he did not intend that the Additional Payment would be the product of the multiple applied to the sum of the Agreed Annualised Profit and EBIT. As earlier mentioned, Mr Baker was less than emphatic in maintaining this position and put some distance between himself and the deal.

246. Mr Baker also said that, as the profit derived from managed services contracts was already included in EBIT, he considered that profit would be double counted if the Additional Payment was calculated as the product of the multiple against the sum of EBIT and annualised profit. He did accept, however, Mr Greene’s explanation on 20 January 2022 that there would be no double counting, although said he was “not on the detail of that” as all accounting was done by the CFO. He also appeared to accept that the same problem of double counting would occur elsewhere in cl 10.3.

247. Mr Baker did not recall looking at the spreadsheet prepared by Mr Greene as to how much the earn-out was likely to be. Nor did Mr Baker review the Earn Out Accounts, or Mr Greene’s calculation of the Additional Payment, as the amount calculated was not outside his expectation. As Mr Baker was not surprised by the amount of the Additional Payment, he said he did not notice an error in the calculation of the Earn Out Amount.

248. Overall, Mr Baker’s evidence as to his understanding at the time does not align particularly well with his report to the board on this subject, or his participation in subsequent board meetings without demur. I defer to Mr Baker’s understanding as evidenced in these documents. If Mr Baker’s concern was ‘double counting’, that was addressed by Mr Greene before the Variation Deed was executed, by implementing a change to accounting procedures to ensure that the accounts for qualifying managed services contracts were maintained by the purchaser. Beyond this, Mr Baker appears to have left the details to Mr Greene and did not check the worksheets as they were circulated, either before or after the Earn Out Amount was calculated.

236. Turning to Mr Greene, he was the architect of the varied earn-out provisions. He was not a member of the purchaser’s board, but a source of information as to how the varied arrangements would work. I infer that the evidence of Mr Greene would not have assisted the purchaser.

237. Turning the all-important board, the board agreed to Mr Baker’s proposal to vary the earn-out arrangements ‘in principle’ in June 2021 and then formally resolved to adopt the proposal in October 2021. The matter became before the board again on 22 February 2022, when the board papers included a draft Variation Deed. According to the minutes, Mr Baker informed the board that the deed would be amended to change the annualised profits for managed services contracts from agreed percentages to actual EBIT results. The board was told that Mr Donato was in the process of amending the document. Mr Greene also informed the board of the change in accounting practices to avoid double counting.

238. At odds with Mr Jenning’s recollection, the minutes do not record Mr Baker giving the board a detailed explanation of the varied earn-out formula, including that the effect of the formula was to enable the vendor to access a higher multiple, rather than the multiple being applied to the sum of EBIT and the annualised profit of qualifying managed services contracts. Having regard to the minutes, it is more likely that this did not happen, where the deed was then being amended by Mr Donato. It is less likely in these circumstances that board members read the draft Variation Deed closely, where they had been told that it was not in final form. This may explain why no-one picked up any drafting error at the time.

239. The Variation Deed did not then come back before the board until after it had been executed by both parties. The Variation Deed was executed by Mr Jennings. It is not suggested that he did not have authority to do so. That authority was conferred by the board’s resolutions in June and October 2021. After Mr Jennings executed the Variation Deed but before it was executed by the vendor, Mr Jennings had the opportunity to review Mr Greene’s worksheet, which set out clearly how the varied earn-out formula was expected to work. What is plain from that worksheet is that the Annualised Agreed Profit from the Qualifying Managed Services Agreements was multiplied by 4.

240. Whilst Mr Jennings variously said that he did or did not look at the worksheet, I note that Mr Greene asked, in his cover email, to confirm Mr Jennings’ availability to participate in a meeting in the coming days “for us to talk through this subject”. As the chairperson of the board, and the board member with whom Mr Greene and Mr Baker were dealing on this matter, it is more likely than not that Mr Jennings would have reviewed the worksheet in respect of an issue which had financial implications for the purchaser, and in preparation for a meeting with the CFO, and I so find. Mr Jennings did not ‘raise the alarm’ that the forecast Additional Payment of some $4.6 million was not what he had in mind.

241. Before the vendor executed the Variation Deed Mr Greene also showed Mr Mulcahy the worksheet modelling the forecast earn-out payment and Mr Mulcahy “accepted this”: see [77].

242. The board’s understanding as to how the Variation Deed worked may be inferred from the fourth board meeting, after the deed had been executed. The management report explained how the varied earn-out formula would work. Mr Greene demonstrated it further during the board meeting using the worksheet as a visual aid. The board members asked questions about it. The board did not voice any disagreement with the workings of the arrangements under the Variation Deed, as explained by Mr Greene and clarified in subsequent questions and answers.

243. Mr Jennings said that if he had understood that there had been a prospect that the Additional Payment would be approximately $7 million higher than that estimated when entering into the Share Sale Agreement, he would not have agreed to the Variation Deed and believed that his fellow board members would have shared his views. However, Mr Greene did forecast that the Additional Payment could be up to $8 million on current projections. Mr Greene’s management report noted “In respect of our available capital in meeting the earn out obligations we hold liquidity over $14m.” The minutes of the board meeting record an expectation that the Additional Payment may be $5.4 million to $8.4 million. That is, the board appreciated how much the Additional Payment might be and was advised by the CFO that the purchaser had sufficient liquidity to cover that obligation. I did not accept Mr Jenning’s evidence on this subject: see [90]-[91].

244. The purchaser then conducted itself as if the Variation Deed was in the form that the vendor now seeks. Mr Greene showed the worksheet to Mr Mulcahy again at the end of the second Earn Out Period: see [92]. The purchaser calculated the Earn Out Amount using the method in Mr Greene’s worksheet. When the board reviewed the acquisition of the Company in November 2022, there was no suggestion in the board paper that Mr Greene’s calculation of the earn-out, either in the forecast earlier presented to the board or as since calculated by the purchaser, was wrong. The vendor calculated the Earn-Out Amount in the same way.

245. The purchaser did not depart from this approach in its Earn Out Dispute Notice: see [107]. When Ball J gave judgment in May 2023, his Honour noted that it was “common ground that ‘EBIT’ for the purpose of calculating the multiple in the formulas referred to in [cl 10.3] also includes the Annualised Agreed Profit”: see [113]. It was not until Mr Croft had been appointed that the purchaser first put forward an alternative construction of the earn-out formula, in August 2023. That does not mean that that construction was not correct, but it does strongly suggest that the purchaser had not thought of it until then. This is consistent with the purchaser sharing a common intention with the vendor, when the Variation Deed was executed more than two years earlier.

246. When the vendor provided the expert with Mr Mulcahy’s statutory declaration, setting out his negotiations with Mr Baker and Mr Greene in respect of the Variation Deed, and his understanding as to how it was to operate, the purchaser did not cavil with Mr Mulcahy’s description but simply invited the expert to treat it as irrelevant. This suggests that the purchaser did not disagree with Mr Mulcahy’s description at the time.

247. I conclude that the purchaser held a common intention with the vendor that the earn-out formula, as varied, would operate by applying the multiple to the sum of EBIT and Annualised Agreed Profit, before deducting the purchase price already paid. That was what the Variation Deed was intended to effect. Clause 10.3, as varied, was lengthy and complex. Whilst Mr Donato likely intended to produce that result by his drafting, his failure to do so was not picked up by Mr Sauer, who does not appear to have been given comprehensive instructions.

248. The businesspeople involved focussed on their negotiations of the deal but did not delve into the interstices of the drafting. That the clause as drafted produced a different result does not appear to have been discovered until much later, when the purchaser’s legal representatives prepared submissions to the expert. (I infer that the evidence of Mr Donato would not have assisted the purchaser.) The purchaser thereafter sought to extract itself from what it regarded as a bad deal by exploiting imperfect drafting. Equity would not permit that result, as it would be unconscientious for the purchaser to thereby extract itself from what was, in fact, agreed. For these reasons, I would have ordered rectification of cl 10.3 in the manner proposed by the vendor.

Orders

262. For these reasons, I make the following orders:

1. Declare that the plaintiff and first defendant are bound by the expert determination of Paul Croft dated 22 September 2023.

2. Order the first defendant to pay $9,663,200 to the plaintiff, together with interest accruing at the current Reserve Bank of Australia cash rate target plus 3% per annum.

3. Direct the parties to provide a calculation of the interest, preferably agreed, within 7 days, so that judgment can be entered accordingly.

4. First defendant to pay the plaintiff’s costs of the proceedings, including the cross-claim.

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Decision last updated: 24 June 2025