HWG Holdings Pty Ltd v Fairlie Court Pty Ltd
[2015] VSC 519
•16 October 2015
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS LIST
S ECI 2015 000203
IN THE MATTER OF HWG HOLDINGS PTY LTD (ACN 115 398 322)
BETWEEN
| HWG HOLDINGS PTY LTD (ACN 115 398 322) | First Plaintiff |
| and | |
| FAIRLIE COURT PTY LTD (ACN 142 927 633) | Second Plaintiff |
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JUDGE: | SIFRIS J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 21 September 2015 |
DATE OF JUDGMENT: | 16 October 2015 |
CASE MAY BE CITED AS: | HWG Holdings Pty Ltd v Fairlie Court Pty Ltd |
MEDIUM NEUTRAL CITATION: | [2015] VSC 519 |
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CORPORATIONS – Application for rectification of share register under s 175(1) of Corporations Act 2001 (Cth) – Power to order rectification discretionary – Position as recorded in company’s register does not reflect the intention of the parties – Application granted.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr C Scerri QC with Ms A Folie | Hall & Wilcox |
HIS HONOUR:
Introduction
The First Plaintiff (HWG Holdings) and the Second Plaintiff (Fairlie Court), make application for an order pursuant to section 175(1) of the Corporations Act 2001 (Cth) (the Corporations Act) that the share register of HWG Holdings be rectified to restore the shareholding of Fairlie Court of 404,467 ordinary shares of $1.00 each.
HWG Holdings and Fairlie Court entered into an agreement in June 2010 for HWG Holdings to buy back certain of its shares held by Fairlie Court, pursuant to sections 257A and 257D of the Corporations Act. The buy-back of the shares took place on 28 June 2010, and the shares were cancelled shortly thereafter by operation of s 257H(3) of the Corporations Act.
In mid-2014, the parties discovered that they had entered into the buy-back agreement under a common mistake about an assumption of law upon which the arrangement was based. Since discovering their mistake, the parties have executed a deed acknowledging that they entered into the buy-back agreement under the common mistake, and declaring the buy-back agreement void (Deed of Acknowledgment). The plaintiffs approach the Court for orders to rectify HWG Holdings’ register of members to reflect that the share buy-back agreement was void, by recording that Fairlie Court has held an additional 404,467 shares in HWG Holdings since June 2010 (when those shares were first acquired by Fairlie Court).
Filed in support of the application are the affidavits of Peter Greenham (a director of HWG Holdings, and the sole director and sole shareholder of Fairlie Court) dated 9 July 2015 and 15 September 2015, and the affidavit of Grant Ryan (director of HWG Holdings, and company secretary of Fairlie Court) dated 9 July 2015.
There are no defendants to the application.
Relevant background
HWG Holdings, through its operating subsidiaries, owns and operates abattoirs in Victoria and Tasmania, and its shares are held by a few families.[1] In late 2009 to early 2010, HWG Holdings commenced arrangements to buy back shares held by Peter Greenham, as well as by other shareholders.[2]
[1]Affidavit of Peter Greenham dated 9 July 2015 (Greenham) [7]; ASIC Current & Historical Organisation Extract of HWG Holdings Pty Ltd at exhibit PHG-1 to Greenham.
[2]Greenham [9]; affidavit of Grant Ryan dated 9 July 2015 (Ryan) [6].
The structure for the buy-back of Peter Greenham’s shares involved an intermediate step. A new company, Fairlie Court, was incorporated in April 2010, of which Mr Greenham was the sole director and sole shareholder.[3] On 15 June 2010, Mr Greenham sold all of his 533,467 shares in HWG Holdings to Fairlie Court.[4] Only some of those shares were to be the subject of the selective buy-back.
[3]ASIC Current and Historical Organisation Extract for Fairlie Court, exhibit PHG-2 to Greenham; Ryan [10].
[4]Greenham [10], [11]; Ryan [12]-[15].
HWG Holdings and Fairlie Court subsequently executed a share buy-back agreement on about 28 June 2010, in relation to 404,467 shares in HWG Holdings, signed on behalf of HWG Holdings by Peter Greenham and Grant Ryan, and signed on behalf of Fairlie Court by Peter Greenham.[5]
[5]Exhibit GMR-11 to Ryan. Second Affidavit of Greenham dated 15 September 2015 [3]; Ryan [21].
The consideration for the buy-back was $17.71 per share.[6] The parties structured the buy back so that the price payable was allocated into a capital component of $1.00 per share and a fully franked dividend component of $6,758,643.57. This transaction structure was agreed so Fairlie Court could obtain the benefit of provisions of the Income Tax Assessment Act 1936 (Cth), which permitted shareholders to utilise a franking tax offset for the income tax already paid by the company in respect of a dividend.[7]
[6]Clause 1 of share buy-back agreement, Exhibit GMR-11 to Ryan; Ryan [9], [21].
[7]Greenham [14], [15]; Ryan [25].
The necessary steps were undertaken by HWG Holdings and Fairlie Court to carry out the share buy-back transaction, and the company register of HWG Holdings was updated to reflect the cancellation of shares pursuant to the buy-back agreement.[8] Pursuant to s 257H(3) of the Corporations Act, immediately after the registration of the transfer to the company of the shares to be brought back, the shares were cancelled.
[8]See Ryan [17] to [24] for the steps undertaken to effect the buy-back transaction.
In May 2011, Fairlie Court lodged a tax return for the financial year 2009/2010, claiming a franking credit of $2,896,561 in relation to the dividends in HWG Holdings.[9]
[9]Greenham [16].
In July 2014 the Deputy Commissioner of Taxation wrote to Fairlie Court, following a risk review of the company’s affairs, and identified as a risk the eligibility of Fairlie Court to use ‘franking credits’ in respect of the shares the subject of the buy back.[10] As a consequence of Fairlie Court not holding HWG Holdings’ shares for at least 45 days before they were bought back as required by s 160APHO(2) of the now repealed Part IIIA of the Income Tax Assessment Act 1936 (Cth), Fairlie Court was not entitled to claim a franking tax offset. The result was that the dividend Fairlie Court received from HWG Holdings was fully taxable in the year of receipt as part of its income without the benefit of the franking tax offset. Upon receipt of the July 2014 letter, Fairlie Court first became aware that it was not entitled to the franking credit.[11]
[10]Greenham [17], [18], Letter from Deputy Commissioner of Taxation to Fairlie Court dated 9 July 2014, exhibit PHG-3 to Greenham.
[11]Greenham [19].
The parties took steps to reverse the buy-back agreement.[12] On 19 May 2015, HWG Holdings and Fairlie Court executed the Deed of Acknowledgement. It is signed on behalf of HWG Holdings by Peter Greenham and Grant Ryan, and signed on behalf of Fairlie Court by Peter Greenham. Under the Deed of Acknowledgment, the parties acknowledged that each of them entered into the buy-back agreement under a common mistake, and declared the agreement to be void ab initio.[13]
[12]Greenham [20]; Ryan [27].
[13]Deed of Acknowledgment dated 19 May 2015, exhibit GMR-15 to Ryan; Ryan [28].
Nature of the application
Commonly applications to the Court to rectify a company’s register are contested, or orders are sought as part of a contested proceeding. However, there is authority for the Court to make orders pursuant to section 175(1) upon an uncontested application supported by all relevant parties. In Re Mogul Studs Pty Ltd,[14] an application made with the support of all relevant parties, Black J was satisfied on the evidence that the register did not reflect the parties' positions and his Honour made an order for rectification.
[14](2012) NSWSC 1639.
The absence of a proper contradictor to the present application should not it was submitted preclude the parties from obtaining the relief they seek. In this application, the parties are not seeking declarations,[15] but rather apply to the Court for it to exercise powers conferred under the Corporations Act and at general law. In Re Mogul Studs, the Court did not consider whether the absence of a contradictor would preclude the Court from rectifying the register pursuant to s 175 of the Corporations Act.
[15]Cf Forster v Jododex Australia Pty Ltd (1972) 127 CLR 421 at 437-8 per Gibbs J.
While the relief sought in this application, if granted, may have income tax consequences, this case is not, it was submitted, in the category of cases in which parties seek to usurp the proper statutory tax assessment process.[16]
[16]By way of example, Annacott Pty Ltd v Konnan Pty Ltd [2012] VSC 389, Summit Grain Investment Australia Pty Ltd v Attorney-General for the State of Victoria [2013] VSC 383.
In the present case the Australian Taxation Office has not issued a notice of assessment in which the dividends on the shares the subject of the buy-back have been assessed as not eligible for franking credits.[17] Further, and importantly, Fairlie Court has provided to the Australian Taxation Office notice of this application together with a draft of the originating application and a copy of the Deed of Acknowledgement.[18] The ATO has advised in writing that the Commissioner of Taxation would not seek to be made a party to, nor otherwise participate in the proposed proceeding.[19] The taxation implications of the present application are no bar to the relief the parties are seeking.
[17]Greenham [16], [22].
[18]Greenham [23], letter from Hall and Wilcox to John Evans of the ATO dated 20 May 2015, exhibit PHG-4 to Greenham.
[19]Greenham [24], letter from John Evans of the ATO to Anthony Bradica of Hall and Wilcox dated 28 May 2015, exhibit PHG-5 to Greenham.
Section 175(1) of the Corporations Act provides:
(1)A company or registered scheme or a person aggrieved may apply to the Court to have a register kept by the company or scheme under this Part corrected.
This section does not confer jurisdiction on the Court to rectify the register. Rather, the section assumes the Court has jurisdiction as part of the general power of courts of equity.[20]
[20]Peninsula Gold Pty Ltd v Sunbeam Victa Holdings Ltd (1996) 20 ACSR 553 at 558.
In Grant v John Grant & Sons Pty Ltd, Fullagar J held:
The power to order rectification of the register must clearly, I think, be in all cases discretionary. The person claiming rectification must show that he has some equity which the court will protect. If he is a shareholder, then prima facie he shows such an equity if he establishes that a name is wrongly included or omitted from the register of his company. Some definite reason must be shown, I would think, for refusing rectification before rectification will be refused. But there may be circumstances which justify, or even compel, refusal…[T]he power of a court of equity to order rectification is no more and no less than a part of its general jurisdiction to "act in personam" in aid of a legal right, and it must be subject to the same principles which apply generally to equitable remedies.[21]
[21](1950) 82 CLR 1 at 51.
The Court’s power to rectify the register is exercised to give effect to some legal or equitable right on the part of a plaintiff.[22] An explanation of the practical advantages of rectifying the register is required for the Court to exercise its power of rectification.[23] The register may be rectified nunc pro tunc or as of the date of the court’s orders.[24]
[22]Price v Powers [2005] WASC 154 per Le Miere J at [98].
[23]Peninsula Gold Pty Ltd v Sunbeam Victa Holdings Ltd (1996) 20 ACSR 553 at 559.
[24]Re Independent Quarries Pty Ltd (1993) 12 ACSR 188; see by way of example In the matter of Mogul Stud Pty Limited [2012] NSWSC 1639; Young v Sal Mar Enterprises Lot Pty Ltd [2005] FCA 1853; Homestake Gold of Australia v Peninsula Gold Pty Ltd (1996) 20 ACSR 67.
Common mistake
The evidence establishes that at the time of formation of the buy-back agreement, the parties were mistaken as to an assumption of law upon which the arrangement was based, namely, that notwithstanding the timing of the buy-back of the HWG Holdings shares, Fairlie Court was entitled to make use of the franking credits which attached to the dividend.
The mistake related to a central aspect of the buy-back agreement, namely, the effective price of the transaction.
The evidence establishes that the mistake was a common mistake, as it was held by the person who was the controlling mind of Fairlie Court (Greenham) and by the individuals who were the controlling mind of HWG Holdings for the purpose of the transaction (Greenham and Ryan).
By reason of the parties’ common mistake, they have under seal declared the buy-back agreement void. However, Fairlie Court's shares which had been the subject of the suggested void buy-back remain wrongly omitted from HWG Holdings' share register. For that reason, a further step is required. The parties seek the assistance of the Court, pursuant to s 175(1) of the Corporations Act, to ‘un do’ the buy-back agreement by rectifying the register, and thereby place the parties back in the position they would have been if the buy-back agreement had never been entered into.
Pursuant to s 257H(3) of the Corporations Act, upon registration of a share buy-back, the subject shares are immediately cancelled. There are no express provisions of the Corporations Act which provide for a cancellation of shares pursuant to a buy-back to be reversed or invalidated.[25] Although HWG Holdings could, subject to compliance with relevant statutory provisions, now issue to Fairlie Court the same number of shares as were cancelled in June 2010, such approach would not properly reflect the position as if the buy-back transaction had not occurred.
[25]Pursuant to s 259F of the Corporations Act, in the event that the procedure for a buy back is not followed, the validity of the buy-back is not affected.
For this reason, the plaintiffs, being the only contracting parties, seek an order of the Court rectifying the register, nunc pro tunc, in order to put the parties back in a position which reflects that the buy-back agreement was as contended by them void ab initio.
Such an order would give effect to the parties’ rights as recorded in the Deed of Acknowledgement. By reason of the buy-back agreement being void, it was contended that Fairlie Court is, and at all times since first acquiring the shares in June 2010 has been, a holder of 533,467 of HWG Holdings shares. Fairlie Court has an equity which the court ought protect, as its name is wrongly excluded from HWG Holdings’ register.
The practical advantages of such an order are manifest. Fairlie Court will it was submitted be entitled to the benefit of the franking credit on the dividends, and not required to pay a price over $2million higher than it had bargained for under the share buy-back agreement.
Central to the plaintiffs’ contention is that the buy-back agreement was void (not merely voidable) with the consequence that the register should be rectified nunc pro tunc.
Plaintiffs’ submissions
Where parties enter into a contract under the influence of a mistake, the mistake can, it was submitted, in certain circumstances affect or nullify contractual rights. The effect of an operative mistake at common law renders the contract void ab initio. An operative mistake in equity results in the contract being voidable for mistake.
The scope of the doctrine of common mistake at common law is it was submitted narrower than in equity. In the leading case of Bell v Lever Bros Ltd, Lord Atkin described the common law test for common mistake to be ‘[d]oes the state of the new facts destroy the identity of the subject matter as it was in the original state of affairs?’[26]
[26][1932] AC 161.
Lord Atkin’s test has been restated in various forms, including by Steyn J in Associated Japanese Bank (International) Ltd v Credit du Nord SA.[27] Steyn J said that for common mistake to avoid a contract at common law it,
‘…must be shared by both parties,…must relate to the facts as they existed at the time the contract was made…[and] must render the subject matter of the contract essentially and radically different from the subject matter which the parties believed to exist.’[28]
Steyn J said that a party cannot rely on common mistake when there is no reasonable basis for the mistaken belief.
[27][1989] 1 WLR 255. (Associated Japanese Bank)
[28]Ibid, 268.
In equity, more flexibility in the remedy has the result that broader categories of mistake justify the court’s intervention. In Solle v Butcher[29] Lord Denning restated the longstanding principle regarding common mistake in equity, holding that a contract is liable to be set aside in equity,
…if the parties were under a common misapprehension either as to the fact or as to their relative and respective rights, provided that the misapprehension was fundamental and that the party seeking to set it aside was not himself at fault.[30]
[29][1950] 1 KB 671.
[30]Ibid, 693.
In Taylor v Johnson[31] the High Court endorsed the approach taken in Solle v Butcher. Although that case concerned unilateral mistake, Mason ACJ, Murphy and Deane JJ stated that a contract is voidable if it is affected by operative mistake, and observed that Solle v Butcher has been accepted by the court in McRae v Commonwealth Disposals Commission[32] and Svanosio v McNamara.[33]
[31](1983) 151 CLR 422 at 429, 430.
[32](1951) 84 CLR 377 (McRae).
[33](1956) 96 CLR 186.
Recently, in England, in Great Peace Shipping Ltd v Tsaviliris Salvage (International) Ltd,[34] the Court of Appeal overturned Solle v Butcher. The position in England now is, it was submitted, that a contract will be enforced if it remained essentially performable notwithstanding that some error in fact led the parties to enter into it. For a party to avoid a contract by reason of a mistake, they must show that its essential terms cannot be performed. As a result, in England the doctrine of common mistake is very narrow.
[34][2003] QB 679 (Great Peace Shipping).
The decision of Great Peace Shipping has been considered in Australian courts, but it does not, it was submitted, reflect the law in Australia. In Australia Estates Pty Ltd v Cairns City Council,[35] Atkinson J (with whom Jerrard JA agreed, McMurdo P deciding it was unnecessary to decide) found that the decision of Great Peace was to be preferred over Solle v Butcher. However those remarks were, it was submitted, arguably obiter, as the case concerned unilateral not common mistake. In Errichetti Nominees Pty Ltd v Paterson Ground Architects Pty Ltd,[36] the Court left the question open.
[35][2005] QCA 328 (Australian Estates).
[36][2007] WASC 77 at [50]-[63].
It was submitted that the English position is inconsistent with the High Court case of Taylor v Johnson and the court's acceptance of the broad statements of principle in Solle v Butcher. Accordingly, in the absence of a contrary determination by the High Court, it was submitted that the broad separate equitable doctrine of common mistake continues to exist in Australia.
Consideration
I propose in the peculiar circumstances of this case to rectify the share register of HWG to record Fairlie as a member or shareholder with effect from the date that it ceased being a member, so that the membership of Fairlie is continuous and regarded and recorded as never having ceased.
In my opinion the Deed of Acknowledgment is of the first importance and critical to the favourable resolution of this application. The Deed of Acknowledgement is a subsequent contract between the parties. Like any other contract the parties and the court must give full effect to the terms thereof and construe the contract accordingly.
The Deed of Acknowledgement not only specifically terminates the buy-back agreement but regulates, particularly in relation to timing the date of such termination. The parties have in effect, by subsequent Deed, effectively terminated the buy-back agreement ab initio. In the circumstances they regard the buy-back agreement as never having been entered into. This is the intended effect of the Deed of Acknowledgment.
There is no reason in principle or authority why the court should not, certainly as between the parties, give full effect to the Deed of Acknowledgment.[37] The position may be different where third party interests have intruded. Parties may not agree to treat a contract as void ab initio if it would affect accrued rights. There is no evidence of any accrued or vested rights. All other members agree and the Commissioner of Taxation has not asserted any accrued right. Accordingly, the parties can be fully restored to their pre-contractual position.
[37]N C Seddon & M P Ellinghaus, Law of Contract (LexisNexis Butterworths, 9th Australian ed, 2008) 1066; JLR Davis (ed), Contract: General Principles — The Laws of Australia, (Thomson Reuters, 2nd ed 2012) 626.
Accordingly the register will be rectified to accord with the clear intention of the parties expressed in their subsequent agreement, namely the Deed of Acknowledgement.
The remaining question is whether the buy-back agreement is void ab initio.[38] To say that the law in this regard is unclear and inconsistent would be an understatement.[39]
[38]The Plaintiffs did not, for reasons that are obvious, advance a case that the buy-back agreement was voidable and should be set aside pursuant to the Court’s equitable jurisdiction. There is therefore no need to consider whether this jurisdiction still exists in the light of Australian Estates.
[39]Nick Seddon “Contract: Mistake Mistake” (2006) 80 Australian Law Journal 92 at 95-6, cited in Errichetti Nominees Pty Ltd v Paterson Group Architects Pty Ltd [2007] WASC 77, [50]. See also [62].
Although this issue is certainly not free from difficulty, was not fully argued, and was not the subject of any submissions by a contradictor (none being necessary or desirable in this case), I am inclined to the view that despite extreme difficulties in this area of the law, and in the circumstances of this case, the buy-back agreement is void at common law because of the clear common mistake of the parties. I will state my reasons briefly.
In this case, as pointed out, it is not necessary to consider the decision of the Queensland Court of Appeal in Australian Estates, the effect of which is to abolish or severely restrict the equitable jurisdiction to set aside a contract for mistake. The case before me is only concerned with the common law position which is accepted and to some extent clarified by Great Peace Shipping, the English case relied on by the Queensland Court of Appeal in Australian Estates.
It should however be noted that there is ample Australian authority to the effect that there is a clear difference between common mistake at law and common mistake in equity. The essential remedial difference is that mistake at law renders the contract void whereas mistake in equity renders the contract merely voidable. Of course as pointed out this is not the issue in this case.[40] This case only concerns the common law position. The fact that there are, for good reason, very few cases dealing with common mistake at common law is not to the point.
[40]Whether a contract may in certain cases continue to be set aside in equity based on the common mistake of the parties will depend on whether Australian courts follow Australian Estates. Most cases concerning common mistake have been in this category. Whether, the leading English authority of Solle v Butcher on which many Australian authorities are based remains good law is a matter for another day.
Despite various statements by Lord Denning in relation to the extent and ambit of Bell v Lever Brothers, it remained good authority on common mistake at law, according to Steyn J (as his Lordship then was) in Associated Japanese Bank.[41]
[41][1989] 1 WLR 255.
It is as well to set out relevant passages from the decision of Steyn J. His Lordship said —
It seems to me that the better view is that the majority in Bell v Lever Bros Ltd [1932] A.C. 161 had in mind only mistake at common law. That appears to be indicated by the shape of the argument, the proposed amendment (see p. 191) placed before the House of Lords and the speeches of Lord Atkin and Lord Thankerton. But, if I am wrong on this point, it is nevertheless clear that mistake at common law was in the forefront of the analysis in the speeches of the majority. The law has not stood still in relation to mistake in equity. Today, it is clear that mistake in equity is not circumscribed by common law definitions. A contract affected by mistake in equity is not void but may be set aside on terms: see Solle v Butcher [1950] 1 K.B. 671; Magee v Pennine Insurance Co Ltd [1969] 2 Q.B. 507 and Grist v Bailey [1967] Ch. 532. It does not follow, however, that Bell v Lever Bros Ltd is no longer an authoritative statement of mistake at common law. On the contrary, in my view the principles enunciated in that case clearly still govern mistake at common law. It is true that in Solle v Butcher [1950] 1 K.B. 671, 693, Denning LJ interpreted Bell v Lever Bros Ltd differently. He said that a common mistake, even on a most fundamental matter, does not make the contract void at law. That was an individual opinion. Neither Bucknill LJ (who agreed in the result) nor Jenkins LJ (who dissented) even mentioned Bell v Lever Bros Ltd.[42]
[42]Ibid, 266.
After an introductory paragraph dealing with the correct approach, his Lordship continued —
The first imperative must be that the law ought to uphold rather than destroy apparent contracts. Secondly, the common law rules as to a mistake regarding the quality of the subject matter, like the common law rules regarding commercial frustration, are designed to cope with the impact of unexpected and wholly exceptional circumstances on apparent contracts. Thirdly, such a mistake in order to attract legal consequences must substantially be shared by both parties, and must relate to facts as they existed at the time the contract was made. Fourthly, and this is the point established by Bell v Lever Bros Ltd [1932] A.C. 161, the mistake must render the subject matter of the contract essentially and radically different from the subject matter which the parties believed to exist. While the civilian distinction between the substance and attributes of the subject matter of a contract has played a role in the development of our law (and was cited in the speeches in Bell v Lever Bros Ltd), the principle enunciated in Bell v Lever Bros Ltd is markedly narrower in scope than the civilian doctrine. It is therefore no longer useful to invoke the civilian distinction. The principles enunciated by Lord Atkin and Lord Thankerton represent the ratio decidendi of Bell v Lever Bros Ltd.[43]
[43]Ibid, 268.
Accordingly, on the authorities referred to, there is sensibly a narrow doctrine of common law mistake (Bell v Lever Brothers) and a wider, far more flexible doctrine of mistake in equity (Solle v Butcher and later cases). According to Steyn J this distinction should remain ‘[a]nd there ought be no reason to struggle to avoid its application by artificial interpretations of Bell v Lever Bothers Ltd’.[44]
[44]Ibid.
As pointed out by the plaintiffs, in Great Peace Shipping[45] after an extensive review of the authorities, the English Court of Appeal effectively overruled Solle v Butcher and the English decisions which had followed it. The Court of Appeal held that a contract will be void at common law by reason of common mistake if the following elements are present:
(i)there must be a common assumption as to the existence of a state of affairs;
(ii)there must be no warranty by either party that that state of affairs exists;
(iii)the non-existence of the state of affairs must not be attributable to the fault of either party;
(iv)the non-existence of the state of affairs must render performance of the contract impossible;
(v)the state of affairs may be the existence, or a vital attribute, of the consideration to be provided or circumstances which must subsist if performance of the contractual adventure is to be possible.[46]
[45][2002] EWCA Civ 1407; [2003] QB 679.
[46]Ibid, 703.
As noted earlier, in Australia Estates,[47] Atkinson J (with whom Jerrard JA agreed, McMurdo P considering it unnecessary to decide the question of mistake) reviewed the Australian authorities, including the decisions of the High Court to which I have referred above, in the light of the decision of the English Court of Appeal in Great Peace Shipping and concluded that Solle v Butcher was no longer good law in Australia. Her Honour concluded that the test to be applied in a case of common mistake is that found in the five elements set out in Great Peace Shipping.
[47][2005] QCA 328.
Her Honour said as follows:
The common law doctrine of common mistake, as the Court of Appeal held, fills a gap in the contract where it transpires that it is impossible of performance without the fault of either party and the parties have not, expressly or by implication, dealt with their rights and obligations in that eventuality. A common mistake at common law makes a contract void ab initio. For example in Strickland v Turner neither the vendor nor the purchaser of an annuity realised that the annuitant had died when the bargain was completed. In such a case there was no annuity in existence, and the contract was void ab initio. A common mistake in equity on the other hand rendered a contract voidable. An example is found in Cooper v Phibbs when a contract whereby a purchaser bought property which neither he nor the seller realised already belonged to the purchaser was liable to be set aside in equity for that common mistake. However the Court of Appeal observed that cases of common mistake were likely to be rare because where parties agree that something shall be done which is impossible at the time of making the agreement, it is more likely that, on a true construction of the agreement, one or the other will have undertaken responsibility for the mistaken state of affairs.
After the discussion of Bell v Lever Bros Ltd in Solle v Butcher, it was assumed in later cases that the common law of mistake was different from the equitable jurisdiction to set aside a contract for mistake. In Great Peace Shipping v Tsavliris Salvage, the Court of Appeal held that this had led to incoherence and confusion in this area of the law. The only way of resolving that confusion was to declare, as the court did, that there was no jurisdiction in equity to grant rescission of a contract on the ground of common mistake where that contract was valid and enforceable in common law on ordinary principles of contract law. In doing so, the court overruled Solle v Butcher, as well as many English decisions which had followed it.
…
In this case, the persuasiveness of the court’s reasoning in Great Peace Shipping v Tsavliris Salvage, together with the negative reference to Solle v Butcher by Heydon JA in Harris v Digital Pulse and the somewhat qualified approach taken to Solle v Butcher by the High Court, the history of which is detailed below, suggests that the law as stated in Great Peace Shipping should be applied by this Court in preference to the law as stated in Solle v Butcher and the cases which have followed it.[48]
[48]Ibid, [49] – [52] (citations omitted).
Neither Great Peace Shipping nor Australian Estates[49] affects the common law position. In fact it clarifies and reinforces it, in slightly different language,[50] by reference to and approval of both Bell v Lever Bros and Associated Japanese Bank. Accordingly, if the parties establish that the common mistake rendered the subject matter of the contract ‘essentially and radically different’ from the subject matter which the parties believed to exist, or if there is no subject matter so that the contract has no content, the contract may be void ab initio. As pointed out there are very few cases on point. The principle, however, remains.[51] Most cases are of res extincta, that is where the subject matter does not exist and the contract is incapable of fulfilment.[52] These cases involve mistakes that are obviously very serious and fundamental. Contracts where the subject matter does exist, but is of a lesser quality are more difficult. Nevertheless, the mistake may still be serious and fundamental.[53]
[49]The decisions in Great Peace Shipping and Australia Estates have been criticised. See eg Nick Seddon “Contract: Mistake Mistake” (2006) 80 Australian Law Journal 92 at 95-6. Australia Estates is inconsistent with the decision of the High Court in Taylor v Johnson, and older cases that specifically follow Solle v Butcher.
[50]Impossibility of performance or contractual adventure not possible. See [52] above.
[51]N C Seddon & M P Ellinghaus, Law of Contract (LexisNexis Butterworths, 9th Australian ed, 2008) 646 [12.11].
[52]Ibid, [12.12].
[53]John Cartwright, Misrepresentation, Mistake And Non-Disclosure (Sweet & Maxwell, 3rd ed, 2015) 735 [15-14], 742-761 [15-19]-[15-28].
Courts do not lightly declare or find contracts to be void ab initio for common mistake. However, it is ultimately a matter of construction of the particular contract made by the parties, particularly in relation to which party is to bear the risk.[54] In the unusual case where the contract is silent, gap filing mechanisms are not available, there is no misrepresentation or misleading conduct, and the breach is serious, the result in a particular case may well be the stated narrow common law position, namely that the contract is void ab initio. This is such a case.
[54]The contractual allocation of risk may exclude reliance on mistake. Cases such as McRae v Commonwealth Disposals Commission (1951) 84 CLR 377 were decided on this basis. See also Cartwright, above n 53, 736-742 [15-15-15-18].
In this case, in my view, the subject matter of the contract is essentially and radically different from the subject matter of the contract which the parties believed to exist. It follows that performance of the buy-back agreement as specifically contemplated and intended by the parties is impossible.[55] The parties made a very serious mistake. The buy-back agreement is silent as to risk allocation. There was no misrepresentation or misleading conduct and no-one is a fault. The plaintiffs are accordingly entitled to the relief they seek.
[55]The context and circumstances of the buy-back agreement were entirely and deliberately tax driven in order to achieve legitimate taxation benefits that are impossible to obtain.
Disposition
For the reasons stated the register of HWG Holdings will be rectified and orders have been made accordingly.
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