Harrop Engineering Australia Pty Ltd v Beauville Pty Ltd
[2016] VSC 17
•8 MARCH 2016
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
S CI 2014 01036
| ACN 006 577 162 PTY LTD (formerly HARROP ENGINEERING AUSTRALIA PTY LTD) as trustee for the HARROP FAMILY TRUST AND OTHERS | Plaintiffs |
| v | |
| BEAUVILLE PTY LTD (ACN 134 196 080) AND OTHERS | Defendants |
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JUDGE: | ELLIOTT J |
WHERE HELD: | MELBOURNE |
DATES OF HEARING: | 16-19, 25, 26 NOVEMBER, 18 DECEMBER 2015 |
FURTHER WRITTEN SUBMISSIONS: | 21, 23 DECEMBER 2015 |
DATE OF JUDGMENT: | 8 MARCH 2016 |
CASE MAY BE CITED AS: | HARROP ENGINEERING AUSTRALIA PTY LTD v BEAUVILLE PTY LTD |
MEDIUM NEUTRAL CITATION: | [2016] VSC 17 |
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CONTRACT – Sale of businesses – Common mistake – Rectification – Construction of the contract – Alleged breaches not established – Variation – Breach – Loss not established – Whether further adjustments to purchase price required.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr M Clarke | Barry Kenna & Co |
| For the Defendants | Mr P Wallis | Norman Waterhouse |
TABLE OF CONTENTS
A.. Introduction................................................................................................................................... 1
B.. The Sale Agreements................................................................................................................... 2
C.. Background................................................................................................................................. 11
D.. Issues for determination........................................................................................................... 21
E... Rectification................................................................................................................................. 22
E.1... Relevant principles........................................................................................................... 22
E.2... Application of the principles to the facts....................................................................... 24
F... The Fidia Leases......................................................................................................................... 26
G.. Stock related issues.................................................................................................................... 35
G.1... Construction issues........................................................................................................... 35
G.2... The Reason 400 Code........................................................................................................ 37
G.3... Work-in-progress............................................................................................................... 41
G.4... Superchargers returned by Toyota................................................................................. 43
H.. Sick leave..................................................................................................................................... 45
I.... Tax benefits on employee entitlements................................................................................. 46
J.... Interest.......................................................................................................................................... 48
K.. Obsolescence claim.................................................................................................................... 50
L... Conclusion................................................................................................................................... 53
HIS HONOUR:
A. Introduction
This proceeding, not commenced until 2014, concerns the sale of businesses in 2008 in distressed circumstances, where shortcuts were taken and mistakes were made. By reason of the manner in which the deal was done and the transactions completed, a number of issues have arisen between the vendor and purchaser parties. The vendor parties are the 3 plaintiffs to this proceeding. The purchaser parties are the 3 defendants. The defendants are part of a group of companies known as “the Adrad Group”, of which Adrad Pty Ltd (“Adrad”) is the holding company.
On 5 December 2008, 2 agreements were entered into. By the principal agreement (“the Engineering Sale Agreement”), the first plaintiff, Harrop Engineering Australia Pty Ltd (“Harrop Australia”)[1] and the second plaintiff, Harrop Engineering Pty Ltd (“Harrop Engineering”),[2] were the vendors (together, “the Vendors”). The first defendant, Beauville Pty Ltd (“Beauville”)[3] was the purchaser. Beauville was a wholly owned subsidiary of Natra Group Ltd (“Natra”). Natra was also a party to the Engineering Sale Agreement, as was Ronald Harrop (“Harrop Senior”). Harrop Senior (the managing and sole director, and sole secretary, of each of the Vendors) and Natra gave certain guarantees under the Engineering Sale Agreement.
[1]As trustee for the Harrop Family Trust and now known as ACN 006 577 162 Pty Ltd.
[2]Now known as ACN 005 412 215 Pty Ltd.
[3]Now known as Harrop Engineering Australia Pty Ltd.
The second agreement (“the Casting Sale Agreement”) was described as being collateral to the Engineering Sale Agreement.[4] The third plaintiff, Harrop Casting Technologies Pty Ltd (“Harrop Casting”)[5] was the vendor. The third defendant, Beauville (No 2) Pty Ltd (“Beauville (No 2)”)[6] was the purchaser. Again, Harrop Senior and Natra were parties and each gave like guarantees to those under the Engineering Sale Agreement. (The Engineering Sale Agreement and the Casting Sale Agreement will be referred to collectively as “the Sale Agreements”.)
[4]Completion of the Engineering Sale Agreement was subject to simultaneous completion of the Casting Sale Agreement, and vice versa: cl 5.9.1.
[5]Now known as ACN 072 265 457 Pty Ltd.
[6]Now known as Harrop Casting Technologies Pty Ltd.
Under the Sale Agreements, subject to certain conditions, the respective purchasers had the option to offer employment to the existing employees. In addition, certain employees were to be the subject of specific arrangements.[7] One such employee was Harrop Senior’s son, Timothy Harrop (“Harrop Junior”). Harrop Junior was the operations manager of the plaintiffs. On 5 December 2008, he became and remains the operations manager of the defendants. Also, Harrop Senior became managing director of the defendants, and continued until June 2010.
[7]The Sale Agreements, cl 16.1, Schedule 2, Item 5.
Before referring to the specific issues at trial, it is useful to set out the relevant clauses of the Sale Agreements and the factual background leading up to the execution of the Sale Agreements. The terms as defined in the Sale Agreements have been used below.
B. The Sale Agreements
The Engineering Sale Agreement included the following terms:
BACKGROUND[8]
[8]Except for the 2 principal headings, the headings in the Engineering Sale Agreement have not been reproduced as headings are not to be used in construing the Engineering Sale Agreement, unless the context otherwise requires: cl 1.2.1.
A.The Vendors conduct the Businesses in Australia, New Zealand, United States of America and elsewhere and between themselves own all of the Assets.
B. Harrop is the sole director and secretary of each of the Vendors.
C.The Vendors have agreed to sell and the Purchaser [that is, Beauville] has agreed to buy the Assets on the terms in this agreement.
D. The Purchaser is a wholly owned subsidiary of [Natra].
AGREED TERMS
1.1 In this agreement:
…
Assets means:
(a) Goodwill;
(b) Plant and Equipment;
(c) Stock;
(d) each Vendor’s interest in the Transferring Business Contracts;
(e) Intellectual Property;
(f) Statutory Licences;
(g) Records;
(h)all other property, rights and assets of each of the Vendors which are used in the Businesses,
but does not include the Excluded Assets or either Vendor’s interest in the Excluded Assets.
…
Businesses means every business conducted by each Vendor and/or the Vendors jointly and without limitation includes each of the following categories of business conducted under the trade mark “HARROP” namely:
·Industrial Engineering;
·Automotive Engineering including all “Harrop” branded components for performance motorsport;
·Aluminium Casting; and
·Computer Aided Engineering
all as described in the brochures for the Businesses in Annexure A.
Business Contracts means all contracts and arrangements for the supply of goods, services or other benefits to or by either of the Vendors in the ordinary course of each of the Businesses that are not fully performed at Completion, including but not limited to the Equipment Leases, Premises Leases, Sales Contracts, Purchase Contracts, Telecommunications Contracts, and IP Licences.
…
Collateral Contract means the contract for the sale and purchase of business made between [Harrop Casting] as vendor and [Beauville (No 2)] as purchaser made on the same date as this agreement [that is, the Casting Sale Agreement].
Completion means the completion of the sale and purchase of the Assets contemplated in this agreement.
Completion Date means the day on which Completion occurs.[9]
[9]It was agreed at trial this occurred on the Scheduled Completion Date, namely 5 December 2008.
Completion Payment means the total amount set out in Schedule 1.
…
Deposit means $5,000.00.
…
Equipment Leases means the leasing agreements, hire purchase agreements, conditional purchase agreements and sale by instalment agreements for items used in the Businesses including the items listed in Schedule 4.[10]
[10]The document tendered by agreement as the Engineering Sale Agreement included a Schedule 4, which read “Equipment Leases [see following page]”, but there was no following page which listed any Equipment Leases. Nothing really turns on this as the reference to Schedule 4 was inclusive rather than exhaustive. However, for completeness, Schedule 4 to the Casting Sale Agreement did contain a list of leases and hire purchase agreements. No party made reference to this Schedule 4 during the course of the trial. See also fn 19 below.
Excluded Assets means the following assets of either of the Vendors:
(a) cash in hand, on deposit or at bank;
(b) Book Debts;
(c) Records which either Vendor is required by law to retain;
(d)insurance policies owned by either Vendor and the benefit of any claims under those policies.
…
Liabilities means liabilities, losses, damages, actions, causes of action, arbitrations, claims, orders, judgments, outgoings, costs (including legal costs calculated on a solicitor and own client basis) and expenses, whether present or future, actual or contingent.
…
Premises means the premises at each of 96 and 96A Bell Street, Preston Vic 3072.
…
Purchase Price means the amount calculated under clause 3.1.
Records means all current and historical records belonging to or used by either of the Vendors in the conduct of any of the Businesses including:
(a) marketing and customer files, customer lists and selling price lists;
(b)product, promotions, descriptive, sales, trade and application literature and other advertising material and catalogues;
(c) supplier lists, files and records;
(d)stock records and production records, engineering and purchasing data sheets;
(e)wages and other employment benefit and payroll and personnel records of the Transferring Employees and records relating to the use of consultancy services and casual labour;
(f) computer software and computer records;
(g) records of the Transferring Business Contracts;
(h) stationery;
(i)records, invoices, contracts, warranties, bills of lading, delivery dockets and other similar material relating to the acquisition of the Plant and Equipment;
(j)quality assurance manuals and all compliance testing and auditing records relating to quality assurance and accreditation; and
(k)records, service charts, manuals, instruction and operation and repair booklets, spare part lists and similar material relating to maintenance of Plant and Equipment and the assets subject to the Equipment Leases
other than corporate accounting and statutory records and records which either of the Vendors is required by law to retain.
…
Scheduled Completion Date means Friday 5 December 2008.
…
Stock means all raw materials, work-in-progress, finished goods, packaging materials, spare parts, components, consumables, and other stock in trade of any of the Businesses at Completion including goods in transit and stock ordered by and paid for by either of the Vendors before Completion but not received by Completion.
…
Transferring Business Contracts means all of the Business Contracts.
Transferring Employees means Employees who accept the Purchaser’s offer of employment under clause 8.
…
2.Each of the Vendors agrees to sell and the Buyer (sic)[11] agrees to buy the legal and beneficial interest in the Assets, for the Purchase Price, free from Encumbrances, with effect from Completion.
[11]“Buyer” was not a defined term. No doubt this is a reference to the Purchaser, Beauville.
3.1 The Purchase Price is:
3.1.1 the amount apportioned as shown in Schedule 1; plus
3.1.2the consideration for the Stock as at the Completion Date determined under clause 6,
subject however to the adjustments required by this agreement.
3.2The Purchaser must pay the Purchase Price as follows:
3.2.1the Deposit on execution of this agreement;
3.2.2the Completion Payment on Completion;
3.2.3the balance of the Purchase Price on finalisation of the value of the Stock pursuant to clause 6.
…
5.1Completion will take place on the Scheduled Completion Date at the Premises, or on any other date and at any other place the parties agree in writing.
5.2 At Completion, the Purchaser must:
5.2.1pay the Completion Payment to and between the creditors of the Vendors in satisfaction or partial satisfaction (as the case may be) of all bank finance and/or trade credit advanced to the Vendors and/or other outstanding Liabilities of the Businesses;
5.2.2accept from the Vendors the assignments or novations of the Transferring Business Contracts, executed by the Vendors and each other party to the document (other than the Purchaser).
5.3 At Completion, the Vendors must deliver to the Purchaser:
5.3.1 exclusive possession of the Premises;
5.3.2assignments or novations of each Transferring Business Contract, in a form previously approved by the Purchaser, executed by the relevant Vendor and each third party in each case;
5.3.3original Transferring Business Contracts (stamped if required by law) and any Assets subject to them;
5.3.4 the Plant and Equipment;
5.3.5 the Stock;
5.3.6 the Records;
…
5.5 Title to the Assets passes to the Purchaser at Completion.
5.6Possession of the Assets and risk related to the Assets pass at Completion.
…
6.1The Vendors must conduct a stocktake of all Stock at the close of business on the Completion Date, at which the Purchaser and its representatives may be present.
6.2The Vendors must prepare stock sheets that list the quantities of each item of Stock.
6.3The Vendors must value the items of Stock at the lower of cost and net realisable value.
6.4At the end of the stocktake, the Vendors must provide to the Purchaser:
6.4.1 the stocklists and written calculation of the value of the Stock;
6.4.2access to all information and assistance to enable the Purchaser to validate the Vendors’ calculation of the value of the Stock.
…
7.1.1Each Vendor must use best efforts to obtain before Completion or if that is impossible then as soon as is practicable after Completion all necessary consents to the assignment of the benefit of the Transferring Business Contracts to the Purchaser at Completion with effect from the Completion Date.
7.1.2Subject to the Vendors obtaining all necessary consents and subject to Completion, each Vendor assigns and the Purchaser accepts an assignment of the benefit, and the Purchaser assumes the burden of the Transferring Business Contracts to which that Vendor is a party, with effect on and from the Completion Date.
7.1.3At the Purchaser’s option, if the other party agrees, the relevant Vendor must join with the Purchaser in a novation of a Transferring Business Contract to which that Vendor is a party at Completion with effect on and from the Completion Date.
7.1.4If a Transferring Business Contract other than those specified in Item 4 of Schedule 2[12] cannot be assigned or novated by Completion:
[12]There were no Transferring Business Contracts specified in Item 4 of Schedule 2.
7.1.4.1Completion must not be delayed;
7.1.4.2the relevant Vendor must hold all its rights and interest under that Transferring Business Contract for the benefit of the Purchaser and the Purchaser must assume responsibility for the performance of that Transferring Business Contract on and from the Completion Date.
7.1.5The Purchaser must perform all obligations of the relevant Vendor under each Transferring Business Contract which are due to be performed on or after the Completion Date.
…
7.2.1Before Completion, the Vendors must discharge all outstanding liabilities under the Transferring Business Contracts in respect of any period up to and including the Completion Date.
7.2.2At payment of the balance of the Purchase Price under clause 3.2.2 (sic)[13] the income and outgoings of the Businesses must be adjusted between the Vendors and the Purchaser as at the Completion Date. In particular … [various items were specified to ensure that the respective owners received the benefit of payments to or by the Businesses made during their respective periods of ownership].
[13]Presumably, this should be a reference to cl 3.2.3.
…
8.4.1 On the Completion Date, each relevant Vendor must:
8.4.1.1 terminate the services of the Transferring Employees;
8.4.1.2pay to each Transferring Employee all amounts to which that Transferring Employee is or may be entitled (by law or under any instrument, award, agreement or arrangement) in connection with wages, salary, commission, bonuses or allowances accruing up to the Completion Date, but excluding all leave entitlements; and
8.4.1.3ensure that all employer superannuation contributions due to be made by the relevant Vendor as employer before the Completion Date in respect of each Transferring Employee have been made.
8.4.2At payment of the balance of the Purchase Price under clause 3.2.2 (sic)[14] the relevant Vendor as employer must deliver to the Purchaser written details of each Transferring Employee’s leave entitlements (by law or under any instrument, award, agreement or arrangement) accruing up to the Completion Date. Long service leave is treated as accrued and is calculated on a pro rata basis if the Transferring Employee’s service with the relevant Vendors or a related entity of the Vendors or a previous proprietor of the Businesses is (for the purpose of the applicable long service leave legislation) at least five years.
[14]Ibid.
8.4.3At payment of the balance of the Purchase Price under clause 3.2.2 (sic)[15] the relevant Vendor as employer must pay or allow to the Purchaser an amount equal to the value of those accrued leave entitlements.
[15]Ibid.
8.4.4Subject to Completion and each relevant Vendor complying with this clause:
8.4.4.1the Purchaser must indemnify the relevant Vendor as employer against all Liabilities which that Vendor may incur in respect of a Transferring Employee’s entitlements; and
8.4.4.2the Purchaser must treat each such entitlement as if accrued by the Transferring Employee while in the employment of the Purchaser.
8.4.5Subject to Completion, each relevant Vendor as employer must indemnify the Purchaser against all Liabilities which the Purchaser may incur involving an Employee, the cause of action for which arose before the Completion Date, and assist the Purchaser in the conduct of any claim for any such Liabilities.
8.4.6Any amount payable by the Purchaser under this clause at payment of the balance of the Purchase Price under clause 3.2.2 (sic)[16] is an adjustment to the Purchase Price.
[16]Ibid.
…
19.1If a party (Debtor) does not pay all or part of the money payable under this agreement on the due date, then the Debtor must pay interest to the other party (Creditor) on the unpaid money (or that part that is outstanding from time to time). Interest is payable at the rate of 3% above the National Australia Bank Overdraft Rate. Interest accrues on a daily basis until and including the date of payment and is payable on demand.
…
21.1In this clause an expression defined in the A New Tax System (Goods and Service (sic) Tax) Act 1999 (Cth) (Act) has the meaning given to it in the Act.
21.2The parties agree that the supply of the Businesses is the supply of a going concern or several going concerns.
…
21.7If:
21.7.1by this agreement, the Purchaser receives rights or benefits under another agreement, or the Purchaser assumes obligations under another agreement (including by assignment or novation); and
21.7.2GST must be paid in connection with a taxable supply by the Purchaser under that other agreement (including that other agreement as assigned or novated),
the Vendors warrant that the Purchaser is entitled to recover from the party required to pay for the taxable supply an amount so that after meeting any liability to pay GST, the Purchaser retains the same amount as if GST were not payable in connection with the taxable supply.
…
22.3[T]he Vendors shall be entitled in all respects to treat the Guarantor[17] as though the Guarantor were jointly and severally liable with the Purchaser to the Vendors instead of being merely surety for the Purchaser.
[17]Although “Guarantor” was capitalised as if it were a defined term, it was not defined in the Sale Agreements, nor was Natra referred to expressly as the Guarantor. However, it was common ground “Guarantor” did in fact refer to Natra.
…
24.1 This agreement may be altered only in writing signed by each party.
…
24.4 This agreement:
24.4.1constitutes the entire agreement between the parties about its subject matter;
24.4.2supersedes any prior understanding, agreement, condition, warranty, indemnity or representation about its subject matter.
24.5 A waiver of a provision of or right under this agreement:
24.5.1 must be in writing signed by the party giving the waiver;
24.5.2 is effective only to the extent set out in the written waiver.
…
24.10Each party must do everything reasonably necessary to give full effect to this agreement.
…
24.12Time is of the essence for the purposes of this agreement.
…
Schedule 1 – Purchase Price and Apportionment
Asset Amount Goodwill $1.00 Plant and Equipment $3,599,407.00 Office Fitout $100,000.00 Vendors’ interests in the Transferring Business Contracts $1.00 Intellectual Property $1.00 Statutory Licences $1.00 Records $1.00 All other property, rights and assets of the Vendors used in the Businesses other than Stock $1.00 Total $3,600,413.00
On its face, Schedule 1 of the Engineering Sale Agreement contained an error. The figures listed did not add up to the total. No-one noticed the error until long after Completion.[18]
[18]See fn 44 below.
The Casting Sale Agreement was in substantially the same terms as the Engineering Sale Agreement. That said, the “Business” was defined differently, namely, as the “the business of aluminium casting conducted under the trademark ‘HARROP’”. In addition, Schedule 1 of the Casting Sale Agreement provided as follows:[19]
[19]The Sale Agreements did contain further differences, which included: for the most part, throughout the Engineering Sale Agreement the plural form of “Vendors” and “Businesses” was used whereas the singular “Vendor” and “Business” was used in the equivalent clauses of the Casting Sale Agreement; clause 5.4.1 of the Casting Sale Agreement read “[t]he Vendor must deliver to the Purchaser the documents requiring the Purchaser’s approval at least 3 days before Completion” while clause 5.4.1 of the Engineering Sale Agreement read “[e]ach Vendor must deliver to the Purchaser the documents requiring the Purchaser’s approval before Completion”; clause 5.10 of the Engineering Sale Agreement concerning Harrop Senior’s obligations at Completion was not replicated in the Casting Sale Agreement; Schedule 2 to the Engineering Sale Agreement listed 6 conditions precedent to that agreement where Schedule 2 to the Casting Sale Agreement listed 2 conditions precedent; and, finally, the copy of the Casting Sale Agreement in the court book included content behind the front pages to Schedules 4 and 5 and the equivalent Schedules to the copy of the Engineering Sale Agreement in the court book included only the front pages and no content.
Schedule 1 – Purchase Price and Apportionment
Asset Amount Goodwill $1.00 Plant and Equipment $319,233.00 Vendor’s interests in the Transferring Business Contracts $1.00 Intellectual Property $1.00 Statutory Licences $1.00 Records $1.00 All other property, rights and assets of the Vendor used in the Business other than Stock $1.00 Total $319,239.00
C.Background
In the second half of 2008, the plaintiffs’ businesses were struggling. The economic climate was difficult generally, and Harrop Senior was personally exposed to the plaintiffs’ bankers for their borrowings. Although the extent of the plaintiffs’ plight was not common ground, Harrop Senior acknowledged in his evidence that, as at October 2008, the Harrop businesses were suffering financial difficulties. Harrop Junior was a little more forthright. He accepted there was a real prospect the plaintiffs would be wound up, which could possibly have resulted in disastrous financial consequences for Harrop Senior. As a result of this financial predicament, options were being considered. These included borrowing money from an employee[20] or seeking a moratorium from the bank with respect to debts for plant and equipment.
[20]This option was expressly referred to in an email sent to Harrop Senior on 27 October 2008, which also referred to the fact that the Commonwealth Bank of Australia had refused to provide additional funding of $300,000 for working capital requirements.
For the purpose of considering their options, a valuation of the plaintiffs’ plant and equipment was obtained from Grays Asset Services (Vic) Pty Ltd (“Grays”). This was done with the involvement of the plaintiffs’ primary bank, the Commonwealth Bank of Australia (“the Commonwealth Bank”).[21] On 11 September 2008, a valuation was provided by Grays (“the Original Valuation”). The Original Valuation provided 2 figures: $7,802,890 for market value for existing use; and $3,956,260 as an estimated auction realisation value.[22] The Original Valuation did not include a large array of items in the plaintiffs’ possession.
[21]The valuation was on the instructions of ProMentor, who were engaged by the Commonwealth Bank to organise for Grays to conduct a valuation.
[22]The Original Valuation was headed “Harrop Engineering Australia Pty Ltd”. There was no identification as to which company owned what stock.
In October 2008, the defendants, having learned that the plaintiffs were suffering financial difficulties, considered acquiring the plaintiffs’ businesses. The chief executive officer of Adrad, Donald Cormack (“Cormack”), explored the viability of a purchase.
In late October 2008, Cormack and Gary Washington, an ultimate owner of the Adrad Group (“Washington”), met with Harrop Senior and Ken Nunn, the technical director of the plaintiffs (“Nunn”). At around this time, further financial information about the plaintiffs’ businesses was provided to the Adrad Group.[23] Some of this further information was provided under an email sent on 3 November 2008, which attached various documents, including the Original Valuation and a depreciation register, which had noted a list of financed assets.
[23]Some financial information was provided before the meeting in late October 2008, the detail of which it is unnecessary to record.
Adrad reviewed the financial information and conducted a preliminary analysis. Cormack was assisted in this regard by Greg Martin, the chief financial controller of the Adrad Group (“Martin”).
On 12 November 2008, Adrad sent an offer to acquire “the business operations of the Harrop Group in Australia, the USA and elsewhere including all plant, equipment, stock and intellectual property associated with the business operations of the Harrop Group as at 30 November, 2008”. It was stated that the basis of the offer was as follows:
·Plant and equipment – lower of book written down value or market value as determined on a realization basis as at 30 November, 2008.
·Stock at the lower of cost or market value as at 30 November, 2008.
·Intellectual property including all patents, licences, brands, technical knowledge and know-how – nominal consideration.
·Adrad will take over responsibility for the accrued annual leave and long service leave of the employees. The amount of this provision will be deducted from the amount payable to the Harrop Group entities for plant and equipment.
·Adrad will establish a new entity(s) for the purpose of this transaction and that entity(s) will employ all current employees on the same terms and conditions.
(Emphasis added.)
Although employees were referred to above generally, the senior employees were treated differently. The offer stated that Harrop Senior, Harrop Junior and Nunn would be provided employment contracts “and other key personnel as determined by consultation”.
No fixed purchase price was offered. Rather, a table set out an “indication of the possible cash flows associated with the transaction” and used information that had been provided, including the Original Valuation,[24] to arrive at a possible figure of $631,691 being paid to the plaintiffs after all the obligations of the Harrop Group had been met. Having provided these figures, it was stated that the final position concerning the purchase price would be “based on the results of due diligence and the actual balances as at 30 November, 2008”.
[24]The value for plant and equipment in the offer was only marginally lower than the estimated auction realisation value in the Original Valuation.
The offer included the following:
Our offer above is subject to the completion of a due diligence process to the satisfaction of Adrad and its Bankers[25] and a full stock take being undertaken on Saturday 29 November.
…
Subject to the signing of a Heads of Agreement document,[26] the due diligence process would commence immediately with a view to completion and transfer of funds in full by 15 December, 2008.
…
Ron [Harrop Senior], I am sure that there will be a multitude of other matters to be considered, but we are committed to the transaction, to maintaining the Harrop Group’s status in the marketplace and to the employment security and wellbeing of personnel. We consider that 100% ownership by Adrad is important at this stage to facilitate a quick transaction but are open to the management team having equity in the future.
[25]Adrad had sought and obtained conditional approval from its bank to fund the acquisition.
[26]There was no evidence that a heads of agreement was ever signed.
Although the evidence is not entirely clear, by some means, Harrop Senior indicated a positive response to the offer. This response having been received, Cormack decided it was necessary to obtain an updated valuation to ensure the values in the Original Valuation truly reflected current auction realisation values under forced sale conditions. Ultimately, it was agreed to proceed on this basis. Harrop Senior wanted the updated valuation to be as high as possible. He accepted it was “a very important valuation” and played a significant part in the negotiations of the purchase price.
On 17 November 2008, Grays carried out an inspection for a further valuation. The resulting report was provided on 26 November 2008 (“the Final Valuation”). The Final Valuation was stated to be under instructions from Adrad’s bank. Again, not all items of the plaintiffs’ Plant and Equipment were included. However, that did not mean there was any material omission with respect to the Plant and Equipment at the Premises. This conclusion is borne out by the fact that Harrop Junior reviewed the Final Valuation, and satisfied himself “more or less” that all items of value had been included.[27] Further, Harrop Senior acknowledged that there were assets that had a written down value or a market value of zero.
[27]The items omitted included patterns and coreboxes, which were recorded in the plaintiffs’ records as having a cost price of $211,996 as at 30 June 2008. The plaintiffs made a claim in this amount based on non-payment with respect to these patterns and coreboxes. In fact, these items had a written down value of nil as at 30 June 2008. The claim was abandoned on day 3 of the trial.
The plant and equipment the subject of the Final Valuation was given an estimated auction realisation value of $3,468,960. The Final Valuation was annexed to the Sale Agreements that were ultimately entered into.[28]
[28]Harrop Senior accepted this under cross-examination. The documents tendered as the Sale Agreements did not include the Final Valuation.
Significantly, the assets listed as being the subject of the Final Valuation included encumbered assets. It necessarily follows that the parties contemplated that these assets would need to be unencumbered at the time of completion of any sale so that good title could be given,[29] or, alternatively, some arrangement would need to be made with the financiers to allow a purchaser to continue to use the encumbered assets in the businesses. Naturally, if the latter of these 2 alternatives were adopted there would be no occasion to pay the plaintiffs (or anyone else on the plaintiffs’ behalf) for the value of the encumbered assets, as any purchase would not have been for those assets from or through the plaintiffs.
[29]It was expressly provided that the plaintiffs were required to procure the termination and payout of the Equipment Leases: Schedule 2, Item 2. This Condition Precedent was recorded as a condition to which the plaintiffs were entitled to benefit.
On 26 November 2008, Cormack sent an email enclosing the Final Valuation and a draft sale agreement. Cormack observed that the Final Valuation had come in “a little lower than anticipated”. He stated he would like to discuss that with Harrop Senior.
The draft sale agreement attached to this email was a draft of what became the Engineering Sale Agreement. Significantly, the proposed Schedule 1 did not include any item for office fitout and made no reference to Stock. Further, it contained “[insert agreed value]” for Plant and Equipment. Each other item listed in Schedule 1 had a purchase price of $1.
On 27 November 2008, Martin, on Cormack’s instructions, prepared a preliminary spreadsheet entitled “Harrop Engineering Indicative Cashflows at Settlement”. After it was completed, the spreadsheet was reviewed by Cormack. It sought to provide amounts for the various components of the businesses, for the purpose of ascertaining the Purchase Price. The document contained a nil value for each of Plant and Equipment, office fitout, Stock and a premium. The final line of the spreadsheet suggested a substantial shortfall. It read, “Balance of funds available … - 4,876,096”.
On 29 November 2008, a further draft of the proposed sale and purchase agreement was in circulation. A copy was forwarded by Nunn to Harrop Junior in an email that stated that all of Nunn’s notes and comments had now been explained. Schedule 1 of this draft again contained no item for office fitout. Nunn had made various notes in red on the draft, including “Stock??”. In evidence, Nunn said he was highlighting to himself that no Stock had been listed in Schedule 1. However, this listing was unnecessary, because the mechanism by which Stock was to be accounted for and valued had already been drafted in the proposed clause 6.
On 1 December 2008, Harrop Junior sent an email to the financial controller of Adrad, Chris Newman (“Newman”). The email attached a spreadsheet showing the stock location. Newman was assisting Harrop Junior in preparing for the stocktake by taking the data out of the databases and preparing stock count sheets.
Also around 1 December 2008, an updated indicative cashflow spreadsheet was prepared by Adrad. Unlike the previous draft of this spreadsheet,[30] all components had amounts attributed to them, including the following:
Sale proceeds – plant & equipment $3,468,960
Sale proceeds – office fitout $ 100,000
Sale proceeds – stock $1,000,000
Premium $ 500,000.
The last line of the spreadsheet no longer indicated a shortfall. It read, “Balance of funds available … 192,864”. Both Harrop Senior and Nunn received a copy of this indicative cashflow.
[30]See par 24 above.
Although neither Harrop Senior nor Cormack could be precise as to the timing, in the days before Completion, they had a discussion in which Cormack stated that the parties should, as far as possible, seek to complete the transactions on 5 December 2008. Cormack stated Completion would include, on 5 December 2008, the defendants paying out the plaintiffs’ debts with the Commonwealth Bank, and taking control of the Assets. Cormack said that any outstanding steps would be undertaken as soon as possible after 5 December 2008. Harrop Senior responded by stating that he was happy with this approach. Indeed, Harrop Senior believed it was also in the plaintiffs’ interests to complete the transactions as soon as possible.[31]
[31]On 19 November 2008, Harrop Senior wrote to the Commonwealth Bank and asked it to assist in making the sale “come to fruition as quickly as possible so as to protect the jobs of our employees, enable me to repay my debt to [the Commonwealth Bank], and for the business to be able to move forward in a positive manner as quickly as possible”.
On 2 December 2008, the financial controller of Harrop Australia, Gerry Pellissier (“Pellissier”), sent an email to Nunn enclosing the payout figure as at 5 December 2008 for certain equipment leases (referred to by the parties as “the Fidia Leases”). The figure (which bore no resemblance to the then current realisation value of the equipment the subject of the Fidia Leases (“the Fidia Equipment”)[32]) was $498,141.10, including goods and services tax, and was said to be applicable until 16 December 2008. Having received this information, Nunn sent an email to Cormack providing the “payout details”, and noting that information previously supplied appeared to have been included in an analysis of settlement proceeds provided by Adrad.[33]
[32]According to the Final Valuation, the Fidia Equipment had an estimated auction realisation value of $180,000.
[33]The email tendered did not in fact contain the payment details, however there can be no doubt Cormack received the information given his subsequent communication on the issue. Further, the time that appears on this email is earlier than the time of the email sent by Pellissier. However, this is presumably explained by the different time zones for South Australia and Victoria.
In response, Cormack sent an email to Nunn suggesting that Pellissier check the figures, as the payout figure looked to be about $45,000 higher than the book liability.[34] Cormack stated he suspected this was by reason of “break costs” and suggested that it may have been preferable to have the leases “assigned to the new company”, rather than incur any break costs. It is unclear whether this email was sent before or after the discussion referred to in paragraph 28 above. In any event, Cormack gave no further detail at the time as to how or when any payout or, alternatively, any assignment might take place, or the terms of any such transaction.
[34]In fact, the increase of approximately $45,000 was referrable to the amount of $498,141.10 being inclusive of goods and services tax, whereas apparently the earlier figure recorded was exclusive of that tax. There was no suggestion Cormack was aware of this at the time.
On about 3 December 2008, a further indicative cashflow spreadsheet was prepared by Adrad and circulated. The figures for Plant and Equipment and office fitout were identical to the previous spreadsheet.[35] However, Stock had been reduced from $1 million to $900,000 and the premium had been reduced from $500,000 to $460,000. No witness gave any meaningful evidence as to why these reductions occurred. The final line read, “Balance of funds available … - 2,936”.
[35]See par 27 above.
Yet another version of the indicative cashflow spreadsheet was circulated on 4 December 2008. The 4 items referred to in the previous paragraph remained the same, except Stock had been restored to the amount of $1 million. Various other adjustments were made in other items in the spreadsheet so that the final line read, “Balance of funds available … 201,790”.
Late morning on 4 December 2008, Harrop Senior forwarded the most recent indicative cashflow spreadsheet to his accountant, Robert Rigoni, an executive director of Pitcher Partners (“Rigoni”).[36] Pitcher Partners had been Harrop Senior’s long-term accounting advisors, principally through Rigoni. A short time later, Rigoni gave some advice. Harrop Senior gave evidence that he decided to accept the figures for the office fitout and the “Additional amount”.[37]
[36]Rigoni was called on behalf of the plaintiffs to give evidence as an independent expert. I have considered his evidence but have not found it necessary to refer to it directly in determining the issues in dispute between the parties. In these circumstances, I refrain from commenting on the admissibility or probative value of his evidence.
[37]The description “Premium” had been replaced with the description “Additional amount”, but the figure remained $460,000.
Harrop Junior had prepared a plan of the Premises for the purposes of the proposed stocktake, by which he allocated different employees of the plaintiffs to undertake the counting of Stock in different areas. The allocation was done by a table, which identified the relevant storage area (as reflected on the plan) and named the employees responsible for each area. All areas had at least 2 employees allocated. Significantly for an issue in this proceeding, Harrop Junior himself, together with another employee of the plaintiffs, was responsible for counting work-in-progress.
Late on 4 December 2008, Newman sent an email to Harrop Junior, attaching the stock count sheets to assist with the stocktake to be conducted. Newman compiled this from information provided by Harrop Junior and other information provided to him during his visits to the Premises.
Although Harrop Junior could not be precise, in response to a question as to when after 1 December 2008 the stocktake occurred, he gave evidence that it took place “around that date, the days leading up to 4 and 5 December” 2008. Newman suggested it occurred on 5 December 2008, with the stock count data being provided on 8 or 9 December 2008. Presumably, it was based on this evidence that the parties agreed the stocktake occurred on 5 December 2008.[38]
[38]This fact was contained in the document jointly presented as the agreed facts. For completeness, Cormack gave evidence that the stocktake was not conducted until 6 December 2008. Harrop Senior and Nunn asserted that the stocktake was not finished on 5 December 2008. To the extent this evidence might have suggested the counting of Stock was not complete for the purposes of the Sale Agreements on 5 December 2008, I would not have accepted it. Both Harrop Junior and Newman were the persons directly involved in the counting of Stock.
Although Newman was at the Premises when the stocktake was occurring, and he performed a number of random checks, he was not involved in counting the Stock. Harrop Junior was in charge of the stocktake, and the stocktake was carried out by the plaintiffs.
Later, Harrop Junior had a discussion with Newman. Precisely when this occurred was not clear on the evidence. Newman agreed with a suggestion put to him in cross-examination that it was after 12 December 2008. During that discussion, Harrop Junior told Newman that those conducting the stocktake may not have counted every single item. In addition, Harrop Junior stated that there may have been some errors or discrepancies in the count data. He said that when the inventory system was up and going again, the errors would start to show. In response, Newman stated that they would set up an adjustment reason code, and those items could be adjusted, referencing that reason code. This adjustment reason code eventually became generally known as the Reason 400 Code.[39]
[39]Other names were also used in some documents to refer to this code, which code referred to additional Stock by using a computerised accounting system known as “WinMagi”.
Returning to the issue of the Fidia Leases, late in the afternoon of 4 December 2008, Nunn received an email from the lessor’s intermediary concerning the Fidia Leases. The email contained the same payout figure of $498,141.10, but explained that that figure only included 1 month’s penalty rental (which represented approximately $10,000 rather than the $45,000 previously referred to by Cormack).[40] Nunn did not forward these details to Cormack until the morning of 8 December 2008, sending an email which was copied to Pellissier and Harrop Senior. Nunn said there were also discussions around this time regarding the Fidia Leases, but he could not recall the detail.
[40]See par 30 above.
On 5 December 2008, a meeting was held at a Melbourne branch of the Commonwealth Bank. Those in attendance included Harrop Senior, Nunn, Washington and Cormack. At this meeting, the Sale Agreements were duly executed. It was common ground that, upon the execution of the Sale Agreements:
(1)The plaintiffs delivered to Beauville and Beauville (No 2) (together, “the Purchasers”):
(a)the Assets the subject of each of the Sale Agreements, including the Plant and Equipment, the Stock and the Records; and
(b)exclusive possession of the Premises.
(2)The Purchasers took over responsibility for the Transferring Employees in accordance with clause 8 of the Sale Agreements.
(3)The Purchasers paid moneys to the Commonwealth Bank for debts owed by the plaintiffs, including $2,770,974.74 to a related entity.
Pursuant to the Sale Agreements, the following payments have been made to the plaintiffs:
(1) $5,000 on 5 December 2008 by way of Deposit to Harrop Australia.
(2) $5,000 on 5 December 2008 by way of Deposit to Harrop Engineering.[41]
(3) $215,000 on 11 December 2008 to Harrop Australia.
(4) $300,000 on 26 March 2009 to Harrop Australia.
[41]The agreed facts stated the payment was made to Harrop Engineering. Presumably, either this or the payment to Harrop Australia represented the Deposit that was payable under the Casting Sale Agreement to Harrop Casting.
An agreed statement of facts was provided to the court, which included further adjustments that were required to be made to the Purchase Price. It is unnecessary to set out the detail of these adjustments for the purposes of determining the issues in dispute.
D.Issues for determination
At the completion of the evidence at trial, after various concessions and compromises had been made, the following issues remained for determination:[42]
[42]Before the trial commenced, the parties agreed on a list of issues for determination. The 7 issues identified are, in part, a summary of the agreed list of issues to the extent those issues remained in contention. The summary does not replace the list of issues as prepared by the parties, which has been considered as ultimately agreed. See also fn 65 below.
(1)Whether the error in Schedule 1 of the Engineering Sale Agreement was arithmetical, so that the total of the figures listed should be rectified to read $3,699,413 (instead of $3,600,413) or whether the total as recorded in Schedule 1 was correct.
(2)Whether Beauville and Natra breached the terms of the Engineering Sale Agreement, either in the terms as executed or, alternatively, as varied, by reason that the Fidia Leases were not paid out until 19 November 2009; and, if so, the amount of any loss suffered by the Vendors.
(3)Whether an adjustment is required to the Purchase Price for the amount payable for Plant and Equipment, or any other claim may be made, by reason that certain Stock was not included in the stock count sheets as at 5 December 2008, including:
(a)Stock subsequently accounted for in the Reason 400 Code;
(b)work-in-progress;
(c)superchargers returned by Toyota Motor Corporation Australia Ltd or a related company (“Toyota”) in 2009.
(4)Whether further adjustments should be made under each of the Sale Agreements to the respective Purchase Prices with respect to sick leave entitlements; and, if so, to what extent.
(5)Whether the plaintiffs are entitled under the Sale Agreements to any and, if so, what tax benefits on all employee entitlements.
(6)Whether the plaintiffs are entitled to interest in accordance with clause 19.1 of the Sale Agreements for any amounts found to be owing.
(7)Whether an obsolescence claim made with Toyota in the sum of $89,563.66 was accepted by Toyota; and, if so, whether the plaintiffs received a benefit of that or any other amount from Toyota; and, if so, whether the defendants are entitled to an adjustment under the Engineering Sale Agreement of the Purchase Price as a result.
I will deal with each of these issues in turn.
E. Rectification
E.1 Relevant principles
Broadly speaking, absent fraud or misrepresentation, a party is bound by an executed agreement, unless it can establish a defence of non est factum or it is able to have the agreement rectified.[43] By rectification, the presumption that the executed document recorded the true agreement may be displaced in equity if, relevantly for this case,[44] because of common mistake, the written agreement failed to accurately express what had been agreed.[45]
[43]Equuscorp Pty Ltd v HGT Investments Pty Ltd (2005) 218 CLR 471, 483 [33] (Gleeson CJ, McHugh, Kirby, Hayne and Callinan JJ). (A defence of non est factum was not raised in this proceeding.)
[44]The plaintiffs pleaded an alternate case of unilateral mistake, but there was no evidence to support any case that Beauville or Natra, at the time of execution, had any knowledge of any mistake in Schedule 1 of the Engineering Sale Agreement: see Maralinga Pty Ltd v Major Enterprises Pty Ltd (1973) 128 CLR 336, 351.7 (Mason J, with whom Menzies J agreed). It appears from solicitors’ correspondence that the existence of a mistake in Schedule 1 was not discovered until February 2013, the mistake being first noted in correspondence from the defendants’ solicitors dated 5 February 2013.
[45]See, for example, Maralinga Pty Ltd v Major Enterprises Pty Ltd (1973) 128 CLR 336, 350.2 (Mason J, with whom Menzies J agreed).
For rectification, merely showing that the written agreement contains an error is not enough.[46] There must be convincing proof of the mistake.[47] But it is not necessary that a prior agreement be reached for the remedy to be available. It is sufficient if there is a common intention between the parties to the contract as to the relevant matter.[48] The common intention must be known to each other, and be clear so that it may be shown exactly how the written agreement ought to be amended.[49] Further, it must continue until the execution of the agreement, but not be reflected in the written document because of a mistake.[50]
[46]Slee v Warke (1949) 86 CLR 271, 281.5 (Rich, Dixon and Williams JJ).
[47]See, for example, Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603, 712-713 [451]-[458] (Campbell JA, with whom Allsop P and Giles JA relevantly agreed), and the cases there cited.
[48]Slee v Warke (1949) 86 CLR 271, 280.5 and the cases there cited.
[49]Maralinga Pty Ltd v Major Enterprises Pty Ltd (1973) 128 CLR 336, 349.7 (Mason J, with whom Menzies J agreed).
[50]Ryledar Pty Ltd v Euphoric Pty Ltd (2007) 69 NSWLR 603, 660 [281] (Campbell JA, with whom Mason P agreed).
The existence of an entire agreement clause[51] is not a bar to the remedy of rectification.[52] If rectification is sought, evidence of the parties’ actual[53] intention is admissible.[54]
[51]Such a clause existed in both Sale Agreements: see par 6 above, cl 24.4.
[52]MacDonald v Shinko Australia Pty Ltd [1999] 2 Qd R 152, 154.5-156.2 (McPherson JA, with whom Davies JA and Moynihan J agreed), 156.5 (Davies JA).
[53]That is, the subjective intention of the parties at the time the contract was entered into, manifested in a manner to give rise to a common intention that equity will recognise: Ryledar Pty Ltd v Euphoric Pty Ltd (2007) 69 NSWLR 603, 657 [267]-[268] (referring to Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337, 346.4 (Mason J)), 660 [281], 667 [315] (Campbell JA, with whom Mason P agreed); and see 641 [179], 642 [182] (Tobias JA, with whom Mason P also agreed). See also RCR Tomlinson Ltd v Russell [2015] WASCA 154, [53] (Buss and Murphy JJA and Beech J).
[54]Codelfa Constructions Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337, 352.6 (Mason J).
E.2 Application of the principles to the facts
The plaintiffs have established that the Engineering Sale Agreement should be rectified to provide for the total of Schedule 1 to be $3,699,413, on the basis that the Engineering Sale Agreement stipulated the correct office fitout price. The evidence establishes there was a common intention at the time of execution of the Engineering Sale Agreement that the fitout was to be $100,000. The common intention is apparent for a number of reasons.
First, considerable weight must be given to the fact that the Engineering Sale Agreement itself provided for office fitout to be $100,000. Although this fact, on its own, would not establish the plaintiffs’ case, it is not insignificant that the specific amount attributed to the office fitout in the contract is the amount for which the plaintiffs contend.
Secondly, the Engineering Sale Agreement was prepared by the defendants’ solicitors. The plaintiffs did not engage solicitors at the time the Sale Agreements were negotiated and executed. When it became apparent at trial that the solicitor who prepared the contract was not to be called, the defendants’ counsel was told that I would infer that the $100,000 was included in the document based on the defendants’ instructions.[55] It was accepted this inference was properly drawn.
[55]Evidence of the draftsperson’s instructions is admissible in a rectification case: Ryledar Pty Ltd v Euphoric Pty Ltd (2007) 69 NSWLR 603, 657 [270] (Campbell JA, with whom Mason P agreed), citing Mortimer v Shortall (1842) 2 Dr & War 363, 370 (Sir Edward Sugden LC).
Thirdly, the indicative cashflow spreadsheets demonstrate the defendants ultimately intended the amount to be $100,000. As set out above,[56] the first indicative cashflow prepared in late November 2008 had no amount attributed for office fitout. The next 3 iterations of the indicative cashflow, all prepared by the defendants, attributed $100,000 to the office fitout. It was upon the last of these indicative cashflows, that Harrop Senior, and therefore the plaintiffs, told the defendants that they would proceed.[57]
[56]See par 24 above.
[57]See pars 27 and 31-33 above.
Fourthly, Nunn gave direct evidence of 2 conversations with Cormack. The first was person-to-person, in which the figure of $100,000 was discussed. Nunn could recall the location of this discussion, and the substance of what was said. The figure was not agreed to at this point. The second was a telephone conversation where the sum of $100,000 was agreed. Nunn put to Cormack that he had spoken with Harrop Senior and that he felt that $100,000 was the minimum that could be accepted. According to Nunn, Cormack said the figure of $100,000 was acceptable. Although Cormack said he could not recall these conversations, he did not deny them. There can be no doubt the amount of $100,000 for office fitout was discussed. Cormack acknowledged that he had discussions with Martin about the plaintiffs “looking for $100,000 in respect of office fitout” in the negotiations between the parties.
In the context of the contemporaneous documents and the fact that the issue was definitely discussed, I accept Nunn’s evidence on this issue. Nunn was generally a credible witness. The fact that Cormack gave evidence that he was shocked when he learnt the sum of $100,000 had been included for the office fitout is not to the point. This later communication to Cormack could not have occurred until the error was discovered, which was years later,[58] in circumstances where it appears Cormack could not recall his discussion with Nunn. Finally, the bald assertion by Cormack under cross-examination that the amount of $100,000 was never agreed was conclusory and not probative.
[58]See fn 44 above.
Fifthly, in the case as presented, the alternate scenario would mean that office fitout was agreed at $1,000, to arrive at the total of $3,600,413.[59] There was no evidence that any party ever discussed, or recorded in any contemporaneous document, the possibility of the office fitout being fixed at $1,000.[60]
[59]There was no suggestion there was any error in the figure provided for Plant and Equipment or that any of the other items were to be acquired for anything other than nominal consideration.
[60]This includes a settlement statement prepared on 12 December 2008. The defendants relied on this document as evidence that the office fitout was not agreed as $100,000 because there is no reference to office fitout. But the absence of office fitout altogether does not assist in determining what value should have been attributed to it.
Sixthly, no witness gave any evidence of any discussion by which the total price of $3,600,413 was agreed.
Seventhly, when the defendants’ solicitors discovered the error in February 2013,[61] and referred to it in correspondence to the plaintiffs’ solicitors, they sought to explain the amount of $100,000 attributed to the office fitout as being likely to have arisen in relation to an apportionment of an uplift of $449,680 with respect to the amount allowed for Plant and Equipment. At trial, no witness on behalf of the defendants gave any substantive evidence consistent with this explanation.[62]
[61]See fn 44 above.
[62]During his evidence, Cormack appeared to allude to this explanation by referring to the $100,000 being part of a premium. But it was no more than a bare assertion.
The conclusion reached is based on the principles as set out above;[63] that is, the presumption that the amount recorded as the total in Schedule 1 was agreed cannot stand, and the Engineering Sale Agreement must be rectified because of convincing proof of a common mistake. However, for completeness, it must be noted that usually, when rectification is sought (whether it be founded on common or unilateral mistake), the opposing party contends that the contract as executed reflects the agreement. In contrast, in this case both parties accepted that Schedule 1 contained an error. In other words, both parties accepted that the written agreement did not accurately record, in all respects, what had been agreed. Thus, logically, if the plaintiffs had been unable to overcome the usual presumption, on the facts of this case the presumption as to the written terms of the contract recording the true agreement could not operate in the usual way.[64]
[63]See pars 44-46 above.
[64]Evidence Act 2008 (Vic), s 140(2)(a) and (b).
F. The Fidia Leases
The position the parties created by their negotiations with respect to the Fidia Leases was most unsatisfactory. The parties came to a general, somewhat vague and undocumented agreement, chose not to alter the written contracts to reflect that agreement, and then allowed the non-resolution to continue for an inordinate period of time. It is in this context that the court is asked to resolve the dispute.
The plaintiffs referred to clauses 5.3.2 and 7.1 of the Sale Agreements in pleading that “despite” those clauses, “the defendants proceeded to pay out the [E]quipment [L]eases referred to in the schedules as follows”. Reference was then made to the paying out of Equipment Leases with “CBFC” (presumably a reference to an associate of the Commonwealth Bank), which occurred on 5 December 2008 at Completion, and the payout of the Fidia Leases in November 2009. The statement of claim further alleged that the defendants failed to pay out the Fidia Leases on 5 December 2008. Precisely why the non-payment of the Fidia Leases on the Completion Date was alleged to be a failure by the defendants was not entirely clear.
Ultimately, in closing submissions, the plaintiffs’ primary case was that the defendants failed on the Completion Date to pay the balance of the Purchase Price so the plaintiffs could pay out the Fidia Leases. Further, an alternate case was put, relying, principally, on a discussion shortly before the Sale Agreements were entered into.[65] Based on that discussion between Harrop Senior and Cormack,[66] and the emails between, and the conduct of, the parties leading up to 5 December 2008, the plaintiffs alleged that the Sale Agreements[67] were varied “such that the defendants agreed to either promptly pay out the Fidia Leases and to deduct the payout from the Purchase Price payable to the plaintiffs, or to assign the Fidia Leases in accordance with [clauses] 5.3.2 and 7.1 of the [Sale Agreements]”. The plaintiffs also sought to rely on email communications after 5 December 2008 as evidence of the agreement said to be in place as at 5 December 2008.
[65]See par 28 above. That this was an alternate case was far from clear on the pleadings. The statement of claim simply alleged a failure of the defendants to pay the plaintiffs on 5 December 2008 the balance of the Purchase Price to enable the plaintiffs to pay out the Fidia Leases, and then pleaded an alleged variation of the Sale Agreements without pleading the variation as an alternative. Further, the agreed list of issues, which identified the questions for determination by the court, raised no question for determination that did not involve an alleged variation of the Sale Agreements.
[66]It must be noted that this discussion is a different discussion to that referred to in the particulars to the relevant allegation in the statement of claim. Paragraph 28A contained the allegation concerning a variation of the Sale Agreements and only referred, in the particulars to the allegation, to a conversation between Cormack and Nunn in early December 2008, together with a series of emails from 2 December 2008 (see pars 29, 30 and 39 above) to 2 June 2009. Nothing turns on this, as it was common ground between the parties that the relevant discussion took place between Harrop Senior and Cormack and that the substance of that conversation was as set out in par 28 above.
[67]In fact, the statement of claim simply referred to “the agreement”, which I have read to be a reference to the Sale Agreements.
Notwithstanding the existence of clauses 24.1 (alterations may only be in writing) and 24.4 (entire agreement clause) of the Sale Agreements,[68] and the absence of any written agreement altering or varying the Sale Agreements, it was clear on the evidence the parties agreed to a separate arrangement in relation to the Fidia Leases. In contrast to any discussions about Stock,[69] the principal negotiators, with full authority, agreed to an arrangement different to what had otherwise been agreed with respect to the plaintiffs’ existing financial obligations concerning the Plant and Equipment the subject of the sale.
[68]See par 6 above. Generally speaking, such clauses do not preclude a court finding, as a matter of fact, that the parties made an oral agreement which was collateral to and varied the principal agreement: cf, for example, Yarrabee Chicken Company Pty Ltd v Steggles Ltd [2010] FCA 394, [90] (Jagot J); GEC Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd (2003) 128 FCR 1, 61 [217] (Finn J); Commonwealth of Australia v Crothall Hospital Services (Aust) Ltd (1981) 36 ALR 567, 576.9 (Ellicott J), quoted with approval in GT Corporation Pty Ltd v Amare Safety Pty Ltd [2008] VSC 143, [303] (Robson J).
[69]See pars 38 above, and 91-92 and 94-97 below.
Accordingly, there is no occasion to decide the issues based on the written contracts alone. That said, the language used to give rise to the variation was, of itself, quite vague. To properly understand what was intended by Harrop Senior and Cormack in their discussion shortly before 5 December 2008, the relevant context must be considered, which included the express terms of the Sale Agreements they were about to enter into.[70] Once this exercise is carried out, the objective intention of the parties is apparent. In short, the parties agreed to defer both the settlement with respect to the Fidia Leases and also the means by which the settlement would occur, but to act as soon as possible to implement 1 of the contemplated means of settlement.
[70]The relevant clauses in the drafts provided before 5 December 2008, and in existence at the time of the relevant discussion, were in substantially the same terms as the Sale Agreements as executed.
As may be seen from what is set out above,[71] in the time leading up to the Sale Agreements being entered into, the parties were expressly contemplating 2 possible scenarios that were still open and may have applied to the Fidia Equipment. Either the Fidia Leases were to be paid out, thereby enabling the plaintiffs to give clear title to the Purchasers; alternatively, an assignment or novation might have been entered into, whereby the Purchasers would take the benefits of the Fidia Leases, and assume, either indirectly or directly, the obligations under the Fidia Leases.
[71]See pars 21 and 28-30 above.
It follows that, on the first of those scenarios, the Purchasers’ obligation to pay the balance of the Purchase Price would remain, which price would have included payment for the Fidia Equipment (albeit part of the Purchase Price would have needed to be directed to paying out the Fidia Leases). Alternatively, if an assignment or a novation were to be entered into, then there would have been no occasion for the Purchasers to pay for the Fidia Equipment, but then necessarily the Fidia Leases would have come within the description of Transferring Business Contracts,[72] thereby attracting the operation of provisions governing Transferring Business Contracts. In particular:
(1)Subject to certain formal conditions, the Purchasers would have been required to take an assignment of the benefit, and assume the burden of the Fidia Leases: clause 7.1.2.[73]
(2)If the Fidia Leases could not be assigned or novated, the relevant Vendor was required to hold its rights and interests under the Fidia Leases for the benefit of the Purchasers, who were required to assume responsibility for the performance of the Fidia Leases: clause 7.1.4.2.[74]
[72]See par 6 above, cl 1.1.
[73]See also cl 5.2.2.
[74]The references in cl 7.1.4.2 to 5 December 2008 have been removed above, as the obligation would have been to take such steps as soon as possible after 5 December 2008, had this alternative been chosen.
It is unnecessary to consider further the possibility of the Fidia Leases being treated as Transferring Business Contracts as the parties opted for the first of the 2 possible scenarios.[75] That said, by reason of the variation it was incumbent upon the parties to act “as soon as possible after 5 December 2008” so that, 1 way or the other, the plaintiffs were to either be paid for all of the Plant and Equipment transferred as at 5 December 2008 or alternatively relieved of their obligations with respect to that Plant and Equipment.[76]
[75]Consequently, it is also unnecessary to consider ancillary issues relating to conditions precedent or waiver: cll 5.8, 16.1-16.4 and Schedule 2, Item 2. Further, this observation does not ignore the fact that, from August 2009, the defendants paid instalments under the Fidia Leases: see par 72 below. It was not suggested this course of conduct was a definite election on the part of the defendants to assume ongoing responsibility for the monthly liabilities.
[76]Subsequent correspondence indicated that, as late as 20 May 2009, the Purchasers had not made it clear whether they wanted to take an assignment of the Fidia Leases or to pay for the Fidia Equipment under the Sale Agreements, thereby allowing the plaintiffs to pay out the Fidia Leases.
In closing submissions, the defendants contended that the conversation between Harrop Senior and Cormack[77] “was sufficient to relieve the defendants of the obligation to pay any more than the [Commonwealth Bank] payments on 5 December” 2008. It was then submitted that that conversation did not actually place positive obligations on the defendants to undertake specific steps by specific points in time with respect to the Fidia Leases. It was further submitted that the agreement to do everything “as soon as possible” after 5 December 2008 did not impose any obligations on the defendants with sufficient certainty to effect a contractual variation.
[77]See par 28 above.
The agreement to defer non-Commonwealth Bank obligations must be viewed in light of other communications directly concerned with the Fidia Leases. To reiterate,[78] as a result of the suggestion made by Cormack on 2 December 2008 to leave the alternative options open, Nunn made further inquiries. At 5.29 pm on 4 December 2008, Nunn received an email advising that the payout figure of $498,141.10, including goods and services tax, included only 1 month’s penalty rental. This information was provided directly to Cormack by email on 8 December 2008. The penalty of 1 month’s rental was approximately $10,000 and not the $45,000 previously the subject of comment by Cormack.
[78]See pars 30 and 39 above.
It follows that, by 8 December 2008, the Purchasers had all the relevant information to determine whether or not to:
(1)Seek to have the benefit of the Fidia Leases assigned or novated to the Purchasers, or either of them, and assume responsibility for the Vendors’ obligations under the Fidia Leases; or
(2)Purchase the Fidia Equipment unencumbered, which would have required payment of the balance of the Purchase Price (so far as it was ascertainable at that point in time, which would have included payment for all the Plant and Equipment) on the basis that the plaintiffs would immediately pay out the Fidia Leases.
Under cross-examination, Cormack conceded he had the information the subject of the email by 8 December 2008, though he said he could not recall whether he knew all the relevant information at the time. On the evidence, it is highly likely Cormack knew all the relevant details. Even accepting he did not know the monthly instalment was approximately $10,000, if he had considered it necessary he could easily have made, and it was incumbent on him to make,[79] the relevant enquiries to ascertain that figure.
[79]See the Sale Agreements, cl 24.10: par 6 above. See also Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596, 607.4 (Mason J) and the cases there cited.
However, despite having all the relevant information available, the Purchasers took no decisive steps to finalise the position in relation to the Fidia Leases. This inactivity resulted in an email being sent by Nunn to Cormack on 24 December 2008, in which Nunn inquired as to whether the Fidia Leases had been paid out. Of course, by this time, Nunn, as well as Harrop Senior and Junior, were employees of the defendants rather than simply arm’s length parties to the transactions.
Cormack responded promptly. On the same morning, he stated to Nunn that “[w]e are aware of this and will attend to the item’s transfer early in the new year”. However, the Purchasers did no such thing. Such inactivity was not only a breach of the agreement to act as soon as possible, but, initially at least, it also caused loss to the plaintiffs.[80]
[80]The position of the plaintiffs was dealt with collectively by the parties. In other words, there was no point taken as to which plaintiff or plaintiffs actually bore the loss. If necessary, this matter may be addressed before final orders are made.
Notwithstanding the Purchasers took possession of the Fidia Equipment on 5 December 2008 and then used it to earn revenue, the plaintiffs remained liable to the lessor to meet the monthly instalments under the Fidia Leases. The first of those was due later in December 2008. It was not paid at that time.
No doubt to avoid ongoing exposure for breaching the Fidia Leases, the following payments (inclusive of goods and services tax) were made by the plaintiffs:[81]
[81]Cormack acknowledged he was aware these payments were being made by the plaintiffs from 23 February 2009.
Date Lease Payment 6 January 2009 $10,656.69 27 January 2009 $10,656.69 23 February 2009 $10,656.69 20 March 2009 $10,656.69 24 April 2009 $10,656.69 23 June 2009 $21,412.48 Total $74,695.93
In August 2009, the defendants paid the sum of $21,392.30 with respect to the Fidia Leases. Further, in October 2009 a further $10,710.30 was paid. Finally, on 19 November 2009, the defendants paid out the Fidia Leases by paying the sum of $404,691.05. Each of these amounts was inclusive of goods and services tax.
As a result of the matters set out above, the remaining issues are:
(1)At what point in time the defendants breached the agreement made with respect to the Fidia Leases.
(2)The amount of any loss suffered by the plaintiffs as a result of that ongoing breach.
Whilst denying any breach, the defendants submitted that if the court were to find a breach by the defendants with respect to the Fidia Leases, then the earliest it could be found to have occurred was 8 April 2009. As set out in paragraph 95(2) and (3) below, it was not until this point in time that there was any agreement with respect to the valuation of the Stock (not including items of Stock disputed in this proceeding). However, the issues with respect to the Fidia Leases were not dependent upon the process required under clause 6 of the Sale Agreements with respect to Stock.
The plaintiffs contended that the breach had occurred by 24 December 2008, being the date on which Cormack promised to attend to the Fidia Leases early in 2009. It was submitted that by that point in time, any outstanding steps with respect to the Fidia Leases, particularly which option to adopt, could have been undertaken by the defendants so that the time contemplated by the phrase “as soon as possible after 5 December 2008” had lapsed.
On the basis that the first lease payment was not made by the plaintiffs until 6 January 2009, it is unnecessary to determine precisely when the agreement with respect to the Fidia Leases was breached. It is sufficient to find, as I do, that by failing to take any necessary steps to implement either of the options available to them as soon as possible, the defendants breached the agreement, which breach occurred before 6 January 2009 and continued until the defendants paid out the Fidia Leases.[82] It follows that, if the defendants had performed the agreement by either option available then the plaintiffs would not have been required to make any further lease payments under the Fidia Leases.[83]
[82]Upon paying out the Fidia Leases, the parties contended for different amounts to be accounted for by way of adjustment to the Purchase Price.
[83]There was no probative evidence that, after 8 December 2008, the plaintiffs prevented the defendants performing the agreement with respect to the Fidia Leases or that they were anything other than ready, willing and able to take any necessary steps once the defendants informed the plaintiffs which option they intended to take: see, for example, Foran v Wight (1989) 168 CLR 385, 422.5-430.1 (Brennan J).
As to the correct approach to the quantum of loss, Cormack accepted under cross-examination that whoever paid out the Fidia Leases should receive a credit for goods and services tax. Self-evidently, any reduction of the Purchase Price by reason of the defendants paying out the Fidia Leases should be net of that tax in circumstances where a tax credit would be available.[84]
[84]If necessary, the parties can consider this issue, and whether or not, in fact, a credit was available in finalising the “balance of the Purchase Price”: see par 82 below.
As to the specific amount of the plaintiffs’ loss, the plaintiffs contended that they should receive an award for the full amount of all payments made from January 2009 to June 2009 (excluding goods and services tax), on the basis that none of those payments would have been required to have been made by the plaintiffs if the defendants had not breached the agreement. I do not accept this submission.
As submitted by the defendants, the capital component of the lease payments made by the plaintiffs did not give rise to the plaintiffs suffering any loss. The capital component of the lease payments reduced the capital amount owing under the Fidia Leases, which in turn ultimately meant that the reduction in the Purchase Price (by reason of the defendants paying out the Fidia Leases) was less by an amount equating to these capital amounts. In other words, the amount of the Purchase Price that the plaintiffs had to forego in order that the Fidia Leases were paid out was commensurately reduced by the capital amounts paid by the plaintiffs under the Fidia Leases between January 2009 and June 2009.
Accordingly, no loss was caused by the capital components of the lease payments.[85]
[85]For completeness, the plaintiffs did not make a claim for loss of use of moneys by reference to the capital payments made.
It follows that the only loss arising out of the ongoing breach as found was the interest component of each of the lease payments, which were in the order of $3,000 per month, or approximately $18,000 in total. However, the amount of such loss must be adjusted to take into account the payments that were made by the defendants from August to November 2009. The plaintiffs have received a benefit with respect to the capital components of these payments.
In summary, for each of the reasons set out above, the claim for work-in-progress based on either common or unilateral mistake must fail.
G.4 Superchargers returned by Toyota
Before 5 December 2008, Harrop Australia supplied superchargers[106] to Toyota. The superchargers were to be used by Toyota as part of its racing developing activities. However, at some stage, again before 5 December 2008, Toyota decided it no longer wished to engage in such activities. As a result, in around August or September 2008, Nunn had a discussion with a representative from Toyota in which Nunn was told superchargers already supplied were not going to be used by Toyota. Nunn was asked whether Harrop Australia would like them back. Nunn indicated that it would. It was agreed the superchargers would be returned without any requirement for payment.
[106]“A supercharger is a mechanism attached to an internal-combustion engine to deliver to the cylinders a volume of air greater than that from the suction of the pistons alone, used to increase power; booster”: Macquarie dictionary (5th ed), 1651.1 (col 3).
There was an issue about the timing of this conversation. Another former employee of Harrop Australia, the erstwhile business development manager, Peter Eustace (“Eustace”), said that he did not become aware of the position of Toyota in this regard until 19 December 2008.
Although these 2 pieces of evidence are not inconsistent, the issue arose because Nunn said he kept Eustace generally informed concerning Toyota, Eustace having previously worked for Toyota. The evidence of Nunn was clear and he had specific reasons as to why he could recall the timing. Although ultimately nothing really turns on the timing of the notification by Toyota of Harrop Australia,[107] to the extent it might matter, I have accepted Nunn’s evidence as to the timing of the relevant discussion.
[107]See par 114 below.
The superchargers were not included in the stocktake conducted for the purpose of the Sale Agreements. Further, they were not returned by Toyota until around March 2009. Upon their return, they remained at the Premises for a number of months. Then, at the direction of Harrop Senior, they were moved to an adjoining factory. The reason Harrop Senior gave for doing this was because, according to him, the superchargers “belonged to the old Harrop”.
Subsequently, the Purchasers had a use for the superchargers. This gave rise to a discussion in or about September 2009 between Harrop Senior and Moore. Moore said his title at that time was either finance and analysis manager or commercial manager. During that discussion, Harrop Senior told Moore that he would bring back the superchargers as long as the superchargers went on the Reason 400 Code. Moore agreed with this.
The superchargers were then returned to the Premises, some of which were sold and the remainder are in the possession of the Purchasers.
Based on the above, the plaintiffs plead a separate agreement, referred to in the statement of claim as “the Supercharger Agreement”. It was contended that the Supercharger Agreement was partly oral and partly to be implied. Insofar as it was oral, it was alleged that Moore was advised by Harrop Senior that the superchargers would be returned “provided that the plaintiffs were paid for the superchargers by the defendants”. The evidence simply does not bear out this allegation.
As may be seen from the brief summary of facts set out in paragraph 110 above, Harrop Senior said no more than that the superchargers were to be included on the Reason 400 Code. It was not put to Moore during his cross-examination that this meant, or that he understood it to mean, that there was a requirement for the defendants to pay for the superchargers. Further, Moore was not involved in the negotiations concerning the Sale Agreements.[108] There is no basis for suggesting at the time the relevant discussion took place he had any understanding of the terms of the Sale Agreements, or that he had any authority to vary those terms or to bind the defendants.
[108]Moore was not employed by Beauville until February 2009.
Furthermore, and in any event, at the time the Sale Agreements were executed, the superchargers belonged to Harrop Australia by reason of the agreement that Toyota would return them.[109] Harrop Australia, as 1 of the Vendors, sold all its Stock to the Purchasers. From that moment on, regardless of whether Toyota had offered to return the superchargers before or after 5 December 2008, if Harrop Australia had any interest in the superchargers then they belonged to the Purchasers. Accordingly, any discussion between Harrop Senior and Moore in 2009 was of no legal consequence. (The plaintiffs did not put an alternate case that, if the agreement to return the superchargers was struck after 5 December 2008, the plaintiffs had any claim to the ownership of the superchargers. No doubt, this position was adopted because any communications between Toyota and Nunn or Eustace after 5 December 2008 could only have occurred at a time when each of them was employed by the defendants.)
[109]See par 106 above.
In summary, at all times on and from 5 December 2008, the superchargers were the property of the Purchasers. The plaintiffs have no entitlement to be paid with respect to any of them.
H. Sick leave
After the Completion Date, the parties negotiated the amount of sick leave to be paid or allowed for the purposes of clause 8.4.3 of the Sale Agreements.[110] Ultimately, they agreed that the sum of $144,938.60 should be allowed in favour of the Purchasers, subject to 2 further matters in dispute.
[110]See par 6 above.
As to the first matter, the plaintiffs referred to 6 employees whose employment had been terminated after 5 December 2008 whilst in the employment of 1 of the Purchasers. The first such termination occurred in May 2009 and the last was in December 2013. Each of these employees allegedly failed to “cash out” accrued sick leave as they were apparently entitled to under the relevant industrial agreement (“the Award Agreement”).[111] The total amount of accrued sick leave in question was $28,255.74. During closing submissions, when the plaintiffs’ counsel was asked where specifically in the Sale Agreements the obligation arose for the Purchasers to account for this situation, the court was informed that the argument was no longer pressed.
[111]The Award Agreement, known as the Harrop Engineering Australia Pty Ltd Certified Agreement 2005, provided sick leave could be “cashed out” at a rate of 7.6 ordinary hours per sick leave day owed provided that the employee was left with no less than 10 sick leave days and remained in the employ of Harrop Australia for the following 12 months: cl 19.d. For completeness, I note the Award Agreement provided it was to operate from 1 May 2005 to 1 May 2008, but it was common ground it was still the relevant agreement at all material times.
The second matter related to the terms of the Award Agreement. The plaintiffs submitted that because an employee was not entitled to cash out all of her or his accrued sick leave, but was required to leave no less than 10 days sick leave accrued, then the amount to be allowed for the defendants should represent no more than the actual amount the employees could have cashed out on the Completion Date.
There is simply nothing in the language of clause 8.4.2 of the Sale Agreements which would alter the ordinary and natural meaning of “accruing” in that clause.[112] If an employee had accrued less than 10 days sick leave as at the Completion Date, such leave did not cease to be a “leave entitlement … accruing up to the Completion Date”. That is, with less than 10 days sick leave accrued, an employee could utilise that sick leave, while still employed, if she or he became ill. The words “those accrued leave entitlements” in clause 8.4.3 is plainly a reference to the leave entitlements referred to in clause 8.4.2, and must have a corresponding meaning. Accordingly, the plaintiffs’ contention finds no support in the language used.
[112]Macquarie dictionary (5th ed), 11.4 (col 2) defines “accrue” to mean “(accrued, accruing) 1. to accumulate in the course of time. 2. (of a right or demand) to become legally enforceable”.
Tax benefits on employee entitlements
The plaintiffs contended that any allowance in favour of the Purchasers under the Sale Agreements for leave entitlements ought not be the total amount of such entitlements, but rather a lesser amount, representing the total amount less the future tax benefit to the Purchasers. The plaintiffs submitted the correct construction of clause 8.4.3 required such an outcome because of the use of the word “value” rather than the word “amount” in that clause. In other words, it was submitted that the requirement to allow the Purchasers “the value of [the] accrued leave entitlements” meant something different to the full amount of those leave entitlements.
In support of this submission, reference was made to the use of the word “amounts” in clause 8.4.1.2. It was submitted that if it was intended that the plaintiffs were required to pay or allow the full amount of the accrued leave entitlements, the word “amount” would have been used in the final phrase of clause 8.4.3 without reference to “value”.
In response, the defendants submitted that “value”, in the context of clause 8.4.3, was a reference to the dollar amount of the leave entitlements, calculated by reference to the number of days of the entitlements that were accruing multiplied by a dollar value for each day.
The language of clause 8.4.3 could have been clearer. The use of the word “value” does give rise to some uncertainty.
In my view, considering the contract as a whole, and also the subject matter of clauses 8.4.2. and 8.4.3, the better construction is that contended for by the defendants. This conclusion is reached not only because the word “value” permits such an interpretation, which interpretation is clear in its meaning and operation, but also because there are numerous difficulties with the alternate construction contended for by the plaintiffs. Those difficulties are:
(1)The plaintiffs submit that the amount of the “value” automatically should be the total amount less 30 percent, representing the likely tax deduction for a company. However, there was no certainty that either of the Purchasers would be making any profits in the future (so as to be actually able to benefit from any such tax deductions). Given the businesses were sold in such distressed circumstances, any future profitability was entirely speculative. In any event, even if profits were made in the future, there could be no certainty that the Purchasers would be paying tax at a rate of 30 percent.
(2)The plaintiffs’ construction also assumes that employee entitlements would have been taken up in the foreseeable future and, as a result, a deductible expense would be incurred. There was no proper basis to make such an assumption for all employee entitlements. For example, sick leave might have been taken up in the future by a person being absent from work because of illness (thereby giving rise to no additional deductible expense), rather than “cashing out” the entitlement (which may have given rise to a deductible expense).
(3)Elsewhere in the agreement, express provision was made in relation to the need or otherwise for tax to be paid.[113] Presumably, if tax adjustments were also contemplated under clause 8.4.3, then, similarly, express provisions would have been made.
[113]Clause 21.7 of the Sale Agreements made express allowances for goods and services tax in the event that it had to be paid in connection with a taxable supply by the Purchasers: see par 6 above.
In conclusion, the construction contended for by the plaintiffs gives rise to uncertainty, potentially for an indefinite period of time. It cannot be presumed that commercial parties acting reasonably would have intended such a construction.[114]
[114]See par 85 above.
J. Interest
For reasons explained below,[115] it is not strictly necessary to consider this issue. However, in case the matter goes on appeal and amounts are found to be owing which would attract interest, I will briefly deal with it.
[115]See pars 129-131 below.
The parties contend for different constructions of clause 19.1 of the Sale Agreements, arising out of the absence of a definition of the “due date”; that is, when moneys were payable under the Sale Agreements. Primarily, the plaintiffs submitted that “due date” was the date upon which the total Purchase Price ought to have been paid, which they contended was the Completion Date (namely, 5 December 2008). In contrast, the defendants submitted that different debts arising under the Sale Agreements had different due dates. Further, the defendants submitted that only the Deposit and the Completion Payment were due on 5 December 2008, with the “balance of the Purchase Price [due] on finalisation of the value of the Stock pursuant to clause 6” (as per clause 3.2.3) and the finalisation of any adjustments (under clause 3.1).[116] In closing submissions, the plaintiffs also put an alternate date with respect to Stock, namely a due date of 8 or 9 April 2009.
[116]See also cl 8.4.6.
Regrettably, the Sale Agreements did not provide a timeframe within which the valuation process under clause 6 was to be completed. However, to the extent that the plaintiffs’ primary submission implicitly suggests that it ought to have been done by the Completion Date, that submission must be rejected. Clause 6.1 required the plaintiffs to complete the stocktake at the close of business on the Completion Date. In those circumstances, there was no time available for the Purchasers to validate the plaintiffs’ assessment of the value of the Stock. Given the large number of items of Stock, objectively the parties must have intended the validation of the plaintiffs’ calculation of the value of the Stock by the Purchasers to have been completed after the Completion Date. Absent any specified time, it must be implied that the Purchasers had a reasonable period of time in which to conduct this process.[117]
[117]Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd (1989) 166 CLR 623, 641.9 (Brennan J), 661.8 (Gaudron J), both citing Reid v Moreland Timber Co Pty Ltd (1946) 73 CLR 1, 13.4 (Dixon J). No reliance was placed on cl 22.1 of the Sale Agreements, by which Natra guaranteed the “the due and punctual performance and observance by [the Purchasers] of all the covenants, stipulations and conditions on [the Purchasers’] part …”.
By reason that each of the plaintiffs’ claims in relation to Stock has failed, it is strictly unnecessary to determine what the due date was with respect to Stock. Suffice to say, leaving aside the Stock the subject of the Reason 400 Code, the valuation process was completed by April 2009.[118] That was done principally by Newman, with input from Harrop Junior. On the evidence, I accept that this process was conducted within a reasonable time.[119] Accordingly, the part of the Purchase Price attributable to the Stock became payable on 8 April 2009, upon all parties agreeing to the value of the Stock.
[118]See pars 95(2) and (3) above.
[119]I note, to the extent that the plaintiffs chose to have some input into the conclusions of the Purchasers’ validation of the calculation of the value that would necessarily need to be taken into account in determining whether the Purchasers had performed their obligations within a reasonable time. In any event, in 2009, there was no suggestion by the plaintiffs that there was any undue delay in the valuation process.
Based on the findings made concerning the Fidia Leases,[120] although the plaintiffs were successful in establishing a breach of contract, it appears there was ultimately no loss and, therefore, no occasion to consider the question of interest.
[120]See pars 57-84 above.
The plaintiffs did not submit any interest was payable pursuant to clause 19.1 with respect to the office fitout in the event that the Engineering Sale Agreement were rectified.
Finally, in light of these findings with respect to interest, it is unnecessary to consider what effect, if any, the agreement about only paying out certain debts on the Completion Date[121] may have had with respect to the operation of clause 19.
[121]See par 28 above.
K. Obsolescence claim
The defendants contended that the plaintiffs had received a benefit of $54,796 from Toyota, as a result of which the defendants are entitled to an adjustment of the Purchase Price of that sum in their favour.
This claim by the defendants, made by way of set-off, arose from Toyota’s decision to cease the program known as “Toyota Racing Development Sports Conversion” business. Nunn was first informed of Toyota’s intention in or about August or September 2008.[122] Formal notice of the decision was given in a letter sent by Toyota on 19 December 2008. That letter was addressed to Eustace as business development manager of Harrop Australia. Naturally, by this time Eustace did not hold that position. He had become the business development manager for Beauville.[123]
[122]See par 106 above.
[123]It was not clear on the evidence when Beauville changed its name to Harrop Engineering Australia Pty Ltd.
Toyota stated that it wanted parts supplied up to 31 March 2009, but after that time there would be no requirement for such supply. The letter also invited discussion with Toyota in the event that there were “any commercial issues that you foresee with respect to the cessation”. That said, there was no representation by Toyota in the letter that any compensation would be provided for any loss suffered by its suppliers. Further, there was no suggestion of any contractual arrangement between Toyota and Harrop Australia by which Toyota was contractually bound to purchase any products.
On Friday 20 February 2009, Toyota sent an email to Eustace stating it had not received any obsolescence claims “from Harrop”. The email stated that the cut-off date for such a claim was the following Monday. Eustace promptly forwarded this email to each of Harrop Senior, Harrop Junior and Nunn. No claim was made by any of the plaintiffs or the defendants by the following Monday.
It was not until 13 March 2009 that Eustace made an obsolescence claim on behalf of “Harrop”. The covering email apologised for the delay. The total claim for obsolescence made was $89,563.66. However, this amount was reduced by $54,796, that amount being recorded as “Outstanding to Toyota”. This left a balance of $34,767.66 which was noted as “Total variation owing to Harrop”.
It is unnecessary to go into the detail of the evidence concerning the amount of $54,796 said to be owing to Toyota. Suffice to say, moneys had been paid by Toyota to Harrop Australia previously, which had been the subject of a set-off arrangement by which Toyota purchased goods from Harrop Australia and set-off the purchase price against moneys previously paid by Toyota rather than paying further moneys for those goods. As at 13 March 2009, Toyota still had the benefit of $54,796 under this arrangement.
The defendants contended that the Purchasers failed to obtain the full benefit of the obsolescence claim because it was reduced by the amount of $54,796 as set out above. As part of their defence, the defendants pleaded that the obsolescence claim was accepted by Toyota “but the amount of the claim was wrongly received and retained by the plaintiffs for their own use and benefit”. There was simply no evidence to support the allegation that the plaintiffs received and retained any part of the obsolescence claim.
In their submissions, rather than claiming the full amount of $89,563.66, only $54,796 was claimed on the basis that the plaintiffs had received a benefit of that amount. The fundamental difficulty with this contention is that there was no evidence that Toyota ever honoured any part of the obsolescence claim. As may be seen from the correspondence referred to above,[124] the claim made was out of time. In these circumstances, there was no proper basis for inferring that Toyota did or would have accepted it, or any claim made out of time. In making this finding, I note an email in the evidence which might suggest that Toyota had extended the cut-off date to 13 March 2009. The court was not taken to this email at trial, it simply formed part of an email chain, other parts of which were referred to in evidence. For completeness, if the cut-off date had been extended to 13 March 2009, that would not alter the conclusion that the defendants have failed to prove the plaintiffs received or retained the alleged benefit or that Toyota honoured any part of the claim. It follows that there is also no basis for concluding that the defendants would have received $89,563.66 or any lesser sum pursuant to the obsolescence claim.
[124]See pars 136-137 above.
Further, if the amount of $54,796 outstanding under the arrangement with Toyota had been a debt actually due and payable by Harrop Australia, presumably Harrop Australia would have sought to have had it paid as part of the settlement process under clause 7.2.1 of the Sale Agreements. In any event, whether that is correct or not, it is unnecessary for the court to determine the nature of any obligation to Toyota. For the purpose of assessing the defendants’ claim, whatever the obligation may have been, no benefit was derived by any of the plaintiffs, by reason of the obsolescence claim and the earlier set-off arrangement, in circumstances where there is no evidence that the claim was ever acceded to by Toyota or that Toyota ever intended to enforce the debt outside the set-off arrangement.
L. Conclusion
For the reasons set out above, the plaintiffs have been successful in their claim for rectification of the Engineering Sale Agreement. Otherwise, the plaintiffs have been unsuccessful in obtaining the relief sought. Save for relief relating to rectification, and any consequential orders that may be sought as a result of issues concerning the Fidia Leases, the plaintiffs’ claims will be dismissed.
On the facts as presented to the court, the last payment towards the Purchase Price was made on 26 March 2009.[125] However, the finalisation of the value of Stock did not occur until 8 April 2009. The parties should now promptly proceed to prepare a final settlement statement, consistent with these reasons, so that the final balance of the Purchase Price may be ascertained, and the corresponding payment or allowance may be made.
[125]See par 41(4) above.
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