Kay v KRM (Vic) Pty Ltd;; Classic Bet (NSW) Pty Ltd v Kay

[2020] NSWCA 92

Court of Appeal

Supreme Court

New South Wales

• Summary available

Medium Neutral Citation:

Kay v KRM (Vic) Pty Ltd;; Classic Bet (NSW) Pty Ltd v Kay & Ors [2020] NSWCA 92

Hearing dates:

7 April 2020

Decision date:

12 May 2020

Before:

Meagher JA at [1];
Gleeson JA at [30];
White JA at [32]

Decision:

In appeal 2020/6311 (Ryan Kay v KRM (Vic) Pty Ltd) order that:
(1)   the appeal be dismissed.
(2)   the appellant pay the respondent’s costs of the appeal.

 In appeal 2020/12237 (Classic Bet (NSW) Pty Ltd & Anor v Ryan Kay & Ors) order that:
(1)   the appeal be dismissed.
(2)   the appellants pay the respondents’ costs of the appeal.

Catchwords:

CONTRACTS — Construction — Interpretation –whether proper construction required that when a liability was incurred under the clause it was incurred collectively by all three promisees regardless of the promisees’ contribution to that liability – whether proper construction of the phrase ‘collectively and individually, as the case may be’ was akin to joint and several liability – where value of the liability was contingent on calculating the commissions earned by each promisee individually - where the promisees’ dealings resulted in an unequal contribution to the total size of the liability incurred

 

CONTRACTS — Construction — Interpretation – whether promise by seller to indemnify the buyer against liabilities incurred by the company prior to completion was also a promise to the company – where liability potentially incurred prior to completion but not acquitted in final settlement calculations

 

CONTRACTS — Construction — Interpretation – whether a contract to pay commission on Net Cash generated by introduced clients created a liability upon entry into the contract – where at the time of entry no clients had been introduced – where numerous contingencies must eventuate for a liability to crystallise

 

CONTRACTS — Construction — Interpretation – whether email correspondence amounted to a Notice of Proposed Change of Control pursuant to the contract – where emails not expressed to be such a notice – where context in which the emails were sent militated against the conclusion that they were contractual notices

  CORPORATIONS — Directors and officers — Directors’ duties — Duty to act in good faith in the best interests of company – whether failure to cause company to issue a contractual notice to defer the incurrence of a liability was a breach of duty – whether company sustained loss for the purposes of a statutory action for damages

Legislation Cited:

Corporations Act 2001 (Cth), ss 181, 182, 588G

Cases Cited:

Bans Pty Ltd v Ling [1995] NSW ConvR 55-739; (1995) 16 ACSR 404
Crimmins v Stevedoring Industry Finance Committee (1999) 200 CLR 1 per McHugh J at 52-53; [1999] HCA 59
Hawkins v Bank of China (1992) 26 NSWLR 562
Healthscope (Tasmania) Pty Ltd v Australian Hospital Care Pty Ltd [2011] VSC 132
Hooker v Foster 1 SW (2d) 276 (1928) (Texas, US)
McDonald v Hanselmann (1998) 28 ACSR 49; [1998] NSWSC 171
O’Keefe v Calwell (1949) 77 CLR 261
Standard Chartered Bank of Australia Ltd v Antico (Nos. 1 and 2) (1995) 38 NSWLR 290
Woodgate v Davis (2002) 55 NSWLR 222; [2002] NSWSC 616

Category:

Principal judgment

Parties:

2020/6311
Ryan Kay (Appellant)
KRM (Vic) Pty Ltd (Respondent)

  2020/12237
Classic Bet (NSW) Pty Ltd (First Appellant)
Best Bet (NSW) Pty Ltd (Second Appellant)
Ryan Kay (First Respondent)
Alexander Kay (Second Respondent)
KRM (Vic) Pty Ltd (Third Respondent)

Representation:

Counsel:
B Walker SC with N Kabilafkas (Kays)
I Pike SC with E Walker (Classic Bet (NSW)/Best Bet (NSW))
J Clarke SC with A Harding (KRM (Vic))

  Solicitors:
Price & Company (Kays)
Yates Beaggi Lawyers (Classic Bet (NSW)/Best Bet (NSW))
K & L Gates (KRM (Vic))

File Number(s):

2020/6311;2020/12237

 Decision under appeal 

Court or tribunal:

Supreme Court of New South Wales

Jurisdiction:

Equity Division

Citation:

[2019] NSWSC 1773

Date of Decision:

29 November 2019

Before:

Rein J

File Number(s):

2018/314837

HEADNOTE

[This headnote is not to be read as part of the judgment]

These proceedings concerned two appeals from a decision of a judge of the Equity Division regarding two commercial agreements. Messrs Ryan Kay and Alexander Kay were respectively the sole director and shareholder of Bestbet.com.au Pty Ltd (“Best”) and Classic Bet Pty Ltd (“Classic”). On 28 July 2017 Classic, Best and Ryan Kay entered into an agreement called an “Affiliation Program Agreement” (“APA”) with KRM (Vic) Pty Ltd (“KRM”). In that agreement the term “Classicbet” was defined to mean: “collectively and individually, as the case may be, Classic Bet Pty Ltd ACN 167 422 406, Ryan Kay and Bestbet.com.au Pty Ltd 607 108 645.” The APA provided for the payment of commission to KRM calculated monthly as a percentage of the Net Cash received from clients introduced by KRM in accordance with the agreement. The APA also provided that should a ‘change of control’ or ‘proposed change of control’ take place with respect to Classicbet, KRM could at its election proceed with the APA or bring the agreement to an end by requiring Classicbet to make a payment to “buy out the tail” of the commissions payable under the APA.

On 23 March 2018 two agreements called Share Sale and Purchase Agreements (“SSPAs”) were entered into. One agreement was made between Classic, Alexander Kay and Playup Australia Pty Ltd (“Playup”) and the other agreement was made between Playup, Ryan Kay, Best. The agreements were in materially identical terms with the completion date set as two business days after Playup received from the Northern Territory Racing Commission or Harness Racing (NSW) regulatory approval in writing to operate the Company’s Business under Playup’s existing licence. The approval was obtained on 17 May 2018 with the completion date being 22 May 2018.

After the settlement of the SSPAs a dispute arose between Ryan Kay and KRM as to whether he was liable to buy out the tail in accordance with the APA or whether that obligation rested with Classic and Best. That was the subject of the dispute in 2020/6311. A dispute also arose before the primary judge as to whether Ryan Kay ought to have been granted leave to raise an alternative defence.

A second dispute arose between Classic and Best, and Ryan and Alexander Kay concerning the construction of the APA and the SSPAs regarding the liability of the latter to the former and whether certain emails between Ryan Kay and KRM constituted a Notice of Proposed Change of Control. Disputes also arose as to whether by their conduct the Kay’s had breached their directors duties. Those were the disputes in 2020/12237.

In relation to 2020/6311, the issues on appeal were:

(i)   whether the proper construction of cl 16.1 and the term “Classicbet” in the APA imposes a liability on the appellant (Ryan Kay) to the respondent (KRM) to “buy out the tail”.

(ii)   whether the primary judge erred in not granting the appellant leave to amend his defence to raise issues of waiver and election.

In relation to 2020/12237, the issues on appeal were:

(i)   whether the promise in cl 6.1 of the SSPAs to satisfy the liabilities of the appellants (Classic and Best, respectively) was a promise made by the first and second respondents (Alexander and Ryan Kay) to the appellants.

(ii)   whether the appellant’s incurred a liability to KRM within the meaning of cl 6.1 of the SSPAs upon entry into the APA.

(iii)   whether the emails between the first respondent (Ryan Kay) and the third respondent (KRM) constituted notice of a change of control or proposed change of control at a time earlier than found by the trial judge resulting in the appellant’s incurring a liability to KRM prior to completion of the SPAAs.

(iv)   whether the first and second respondent’s breached their statutory directors duties to the appellants by failing to provide a notice of proposed change of control to the third respondent prior to the completion date.

The Court of Appeal (Meagher, Gleeson and White JJA) unanimously dismissed the appeal in 2020/12237 and by majority dismissed the appeal in 2020/6311

Per White JA (Meagher JA and Gleeson JA agreeing at [29] and [30] respectively) regarding 2020/12237:

As to issue (i):

The obligation in cl 6.1 on the first and second respondents is owed to the Buyer under the SSPAs alone; it is not owed to the appellants: [118], [161]. Clauses 5.2, 6.3, 6.7, 6.8, 6.11 and 7.3, which inform the construction of cl 6.1, demonstrate that the promise cannot be owed to the appellants [113], [115], [119].

As to issue (ii):

No obligation was incurred by the appellants upon entry into the APA: [130]. There was no liability incurred upon entry to the APA as there were too many contingencies that had to be satisfied before such a liability crystallised: [124], [125], [126], [127], [128], [129]. The proper construction of the SSPAs was that they applied to liabilities that were actually incurred: [139], [145].

O’Keefe v Calwell (1949) 77 CLR 261 at 295-296: applied.

Woodgate v Davis (2002) 55 NSWLR 222; [2002] NSWSC 616; Standard Chartered Bank of Australia Ltd v Antico (Nos. 1 and 2) (1995) 38 NSWLR 290; Hawkins v Bank of China (1992) 26 NSWLR 562: referred to.

As to issue (iii):

The emails from the first respondent cannot be construed as a notice under cl 16.1 of the APA as they were not styled as such and they lacked the necessary information for KRM to assess whether to make its election under the clause. Further, the emails were provided as purported explanations as to why Classic and Best were not giving notices of a change of control: [160].

As to issue (iv):

The first respondent breached his statutory duties duty not to gain an advantage for himself or to cause detriment to the appellants by failing to cause the appellant’s to provide a notice under cl 16.1 of the APA: [164]. However, as the relief sought was by way of damages it falls to the appellant’s to establish loss: [169]. There is no evidence to support a finding that the appellant’s have suffered loss: [170].

Corporations Act 2001 (Cth), ss 181 and 182: applied.

There was no evidence which would justify a finding of breach of duty by the second respondent: [164].

Per Meagher JA (Gleeson JA agreeing at [31]) regarding 2020/6311:

As to issue (i):

The issue of the proper construction of the defined term “Classicbet” does not arise for determination as, on any available construction, the text and purpose of cl 16.1 require that the term operate “collectively’”: [4].

When the balance of the clauses in the APA are considered: [14], [18], [19], [24], [25] it is apparent that the commercially sensible operation of the payment obligation in cl 16 is that Classicbet “collectively”, meaning Classic, Ryan Kay and Best, incurs the obligation and has the benefit of its satisfaction: [26], [27]. The rate and amount of commission payable under the APA was to be calculated with respect to Classicbet’s collective activities and therefore was payable “collectively”, and that obligation to pay commission was the subject of the “buy out” under cl 16.1. That analysis is supported by the licensing regime against which the APA operated, which suggests the APA contemplated betting activities being conducted by Ryan Kay, either through Best or directly, in addition to Classic: [11], [12].

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

Per White JA (dissenting) regarding 2020/6311:

As to issue (i):

The defined term ‘Classicbet’ derives its meaning from the context in which it appears in each clause of the APA: [83], [84], [85]. Should ‘collectively and individually’ be construed to mean jointly and severally in all circumstances the words ‘as the case may be’ would have no work to do: [87], [99].

The nature of the parties betting business was such that a single bet could not be placed with more than one entity and the balance of clauses in the agreements reflects the inaptitude of joint and several liability, the term “collectively and individually, as the case may be” means “individually or collectively as appropriate”: [89], [91], [93], [95], [96], [99]. As the appellant did not take bets from the relevant clients he was excluded from incurring liability upon the tail being bought out: [86], [99].

McDonald v Hanselmann (1998) 28 ACSR 49; [1998] NSWSC 171; Hooker v Foster 1 SW (2d) 276 (1928) (Texas, US): referred to.

As to issue (ii):

The primary judge was correct to refuse leave as it would have led to an adjournment: [101]. In light of Ryan Kay’s conduct it may have been doubtful that the point could have been validly taken in any event: [102].

Judgment

1. MEAGHER JA: These reasons adopt the terminology used by White JA and assume a familiarity with the underlying facts as described by his Honour. For the reasons his Honour gives, the appeals of Classic and Best should be dismissed.

2. The question in Ryan Kay’s appeal is whether the promise given by Classicbet in cl 16.1.4 is to be understood as referring to Classic, Best and Ryan Kay “collectively” or to them severally and distributively, in the sense that the clause is to be read as applying separately to each only in respect of its or his betting activities that have generated commissions payable to KRM. Doing so, it is said that the obligation of any such entity under cl 16.1.4 is to pay only that part of the lump sum “buy out” amount referrable to commissions generated by its or his betting activities with Affiliate Clients.

3. That question arises because Classicbet is defined in the Affiliation Program Agreement (APA) to mean “collectively and individually, as the case may be,” Classic, Ryan Kay and Best. In that expression the qualifying words “as the case may be” indicate a choice between two bases of liability as promisor, which is to be resolved by reference to the context in which the defined term is used. On the face of it, those bases, joined by “and”, are not expressed as alternatives. If the words “as the case may be” are read as qualifying all of the words that precede them, they may have no work to do unless “collectively” and “individually” are treated as the relevant alternatives. That is the construction preferred by White JA at [99] below. However, the words “as the case may be” may be read as qualifying only the word “individually” so that the relevant alternatives become “collectively” and “collectively and individually”. Doing so gives effect to all the language of the definition and was the construction preferred by the primary judge: KRM (Vic) Pty Ltd v Classicbet Pty Ltd [2019] NSWSC 1773 at [48], [49].

4. Ultimately, it is not necessary to resolve this question of construction because in my view a consideration of the text and purpose of the agreement shows that where used to describe payment obligations under cll 7 and 16, Classicbet means the three entities “collectively”.

5. By way of summary, under cl 7 Classicbet agreed to pay commission at a rate calculated from 1 January 2018 by reference to the turnover profit generated from all betting activities with Affiliate Clients, and to do so “in perpetuity” (cl 7.9(b)). The agreement does not contemplate that different commission rates apply depending on the outcome of betting activities of the individual entities with Affiliate Clients. Clause 16.1 conferred on KRM the right, in the event of a Change of Control of Classic or Best, to require Classicbet to “buy out” that ongoing liability to pay Commission. On the payment of the buy out amount, the Classicbet entities were released from that ongoing obligation and secured the benefit of KRM’s covenant not thereafter to market and promote betting or wagering services to any of the Affiliate Clients (cl 7.9, 16.2.1).

6. It is necessary to begin with a consideration of the nature of the APA, and the rights of the respective parties. It is an agreement between KRM, an introducer of prospective bettors described as “Clients”, and the three Classicbet entities, whose collective commercial activity (Classicbet Business) was described as a “gaming business of Classicbet in accepting bets for purposes permitted under” two bookmakers’ licences. Those bookmakers’ licences were issued to Classic and Ryan Kay by Harness Racing NSW and Greyhound Racing NSW, respectively.

7. Under the Betting and Racing Act 1998 (NSW) (B&R Act), a bookmaker includes any person who seeks to gain a livelihood “wholly or partly by betting or making wagers”. A “licensed bookmaker” is a person authorised by a “racing controlling body” – one of Racing NSW, Harness Racing NSW and Greyhound Racing NSW – to carry on bookmaking. Those racing controlling bodies are able to grant bookmaking licences to individuals or proprietary companies under their respective Acts: Thoroughbred Racing Act 1996 (NSW), s 14A; Harness Racing Act 2009 (NSW), s 19; and Greyhound Racing Act 2017 (NSW), s 52.

8. Under s 16 of the B&R Act, the Minister may authorise a licensed bookmaker to accept or make bets by telephone or electronically. If authorised by their licensing racing controlling body, that betting activity may be conducted on premises that are not on a licensed racecourse (s 16A). By s 18, the Minister may also prescribe an event other than a race (such as a sporting event) as a “declared betting event” and, on the application of a licensed bookmaker, grant authority to accept bets on such events (s 19).

9. A “betting service provider” includes a bookmaker, and a “licensed betting service provider” is a betting service provider who holds a licence or authority to carry out “its betting services” (whether under the B&R Act or other legislation). It is an offence for a person who is not a licensed betting service provider to publish any betting information (s 29), defined as any information or advice as to betting or betting odds on any race or declared betting event (s 27). It is also an offence to publish an advertisement for gambling services carried on by a person who is not a licensed bookmaker (s 30).

10. A betting service provider is prohibited by s 33 from using NSW race field information in connection with the making or accepting of a bet, or in the course of their business, unless authorised by the relevant racing control body under s 33A of the B&R Act. At the time the APA was executed, a betting service provider could receive an approval from Racing NSW (for instance) to use Thoroughbred Race Field information if they held an “Australian Wagering Licence”, defined in the approval conditions as a “licence, permit, approval or authority (however described) under the laws of any Australian State or Territory to conduct any form of wagering”, including bookmaking. Classic and Ryan Kay each held such approvals.

11. The effect of the foregoing is that under their bookmakers’ licences Classic and Ryan Kay were able to accept bets and make wagers by the internet, from premises which were not on a racecourse licensed by the relevant race controlling bodies, and in relation to races and other events not controlled by the body which issued their licences. Furthermore, the unlicensed Best could take bets, maintain betting accounts, and conduct business as a bookmaker only under the licence of another. It is plain that the APA contemplated that Best would engage in betting activities, and for that purpose maintain Betting Accounts, under Ryan Kay’s licence. Under the B&R Act, Ryan Kay would be the “licensed bookmaker” and “licensed betting service provider” with respect to those activities of Best. There remained the possibility that Ryan Kay might carry on that bookmaking activity directly, by his accepting bets or wagers from Affiliate Clients, rather than ‘through’ Best. On any view the APA did not contemplate that the Classicbet Business would involve only betting activities of Classic under its licence. Betting Accounts for Affiliate Clients could be opened and maintained by Classic, Best doing so under Ryan Kay’s licence, or Ryan Kay. That was the position when the APA was made and accordingly forms part of the context in which its meaning at that time is to be determined: Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603; [2009] NSWCA 407 at [322] (Campbell JA).

1. For its part, KRM agreed to promote Classicbet and to introduce Affiliate Clients (cll 4, 5). It was not thereby prevented from encouraging any Affiliate Client from doing business or placing bets with any competitor of Classicbet (cl 4.2, the internal reference being to cl 16.2). In return, Classicbet agreed to pay Commission calculated as a percentage of the Net Cash generated from betting activities with Affiliate Clients, defined to mean any client introduced by KRM who “opens, or where appropriate reactivates, an account for betting purposes with Classicbet”. The reference to the singular ‘account’ is to be taken to include the plural (cl 2(a)). By cl 6, Classicbet undertook to open Betting Accounts for New Clients and maintain a record of each Affiliate Client introduced by KRM, as well as of each Affiliate Client’s transactions. The reason for requiring that it do so, from KRM’s perspective, was to enable the reporting and determination of the Net Cash position for each Affiliate Client for each calendar month, as well as the monthly Turnover from all Affiliate Clients, in each case using a Betting Account or Betting Accounts maintained by or for a licensed entity.

2. The APA contained a ‘two-tiered’ Commission structure which applied from 1 January 2018 (cl 7.2(b)). The rate of Commission to which KRM was entitled depended on the overall return to Classicbet from all betting activities with all Affiliate Clients (Turnover Profit Percentage). If that return was less than 7% (Target Turnover Profit Percentage), the commission rate was 25% (Reduced Commission). If that percentage was 7% or more, the commission rate was 30% (Standard Commission) (cl 7.2(b)(i)).

3. The Turnover Profit Percentage was to be calculated by dividing gross client wagering losses (Net Cash) by gross client turnover (Turnover), each defined by reference to the wagering losses and turnover of all Affiliate Clients and irrespective of whether the relevant betting activity was undertaken by Classic, Best or Ryan Kay. Turnover as defined was the “total monthly amount in dollars of all bets wagered by all Affiliate Clients using their Betting Accounts”, and Net Cash was the amount equal to “all monies paid by an Affiliate Client... into the Affiliate Client’s Betting Account during a calendar month less any payment out of the Betting Account during such calendar month to Affiliate Clients as winnings or refunds or otherwise” (emphasis added). In this definition of Net Cash, the singular ‘Betting Account’ is to be taken to include ‘Betting Accounts’. The resulting monthly commission rates over the 12 months were then to be adjusted at year end by reference to the Turnover Profit Percentage for the year (cl 7.2). The “intention” of this provision, as stated in cl 7.2, was “for [KRM] to be paid the Standard Commission for the whole of a relevant year if the Turnover Profit Percentage for the whole of such relevant year achieves the Target Turnover Profit Percentage”.

4. The rate provided for by cl 7.2 was to be determined by reference to Classicbet’s collective activities. And the rate so derived was to be applied to the Net Cash generated by those same collective activities. Accordingly, the resulting sum was due from Classicbet collectively. From KRM’s perspective, it was introducing Affiliate Clients to Classicbet. It was agnostic as to the bookmakers’ licence under which any betting activity with an Affiliate Client occurred. Thus the two-tier commission rate structure treated the three entities as conducting one business with respect to their betting activities with Clients introduced by KRM.

5. Classicbet’s obligation described in cl 7.1, to provide various statements in respect of each Affiliate Client on a monthly basis, was also imposed with respect to the collective activities of the three entities. Those statements included a statement of “all betting activities” of each Affiliate Client (Reconciliation Statement); a statement of the Turnover, being the amount of “all bets wagered” for each Client (Turnover Statement); and a statement of the Net Cash for each Affiliate Client (Net Cash Statement).

6. Where only one Classicbet entity was transacting bets through Betting Accounts maintained for Affiliate Clients, the obligation under cl 7.1 could have been be satisfied by the provision of statements which related only to that entity. However, the obligation remained to provide statements for “each Affiliate Client” in respect of “all betting activities” of that Client. Where more than one of the entities was transacting bets, the obligation under cl 7.1 could not have been satisfied by the provision of separate statements in relation to the first entity only.

7. Clauses 7.3 to 7.6 dealt with two aspects of Classicbet’s obligation to pay monthly Commission. If that Commission was less than $100, that liability was to be carried forward rather than discharged by payment (cll 7.3, 7.4). More significantly for present purposes, during a 3 month period from the Commencement Date (22 May 2017), any negative Commission for the month was to be carried forward to the following calendar month. However, in calendar months after 22 August 2017, negative Commission was not to be carried forward and was to be “zeroed” (cl 7.6). The apparent purpose of this provision was to accommodate the possibility during the early period of the agreement that there might be imbalances in the monthly results due to a preponderance of higher turnover clients in the business first introduced. It applied to Commission determined in accordance with cl 7.2, and accordingly by reference to the Net Cash generated from all of the Betting Accounts of Affiliate Clients. It is not likely that the parties would have agreed to such an arrangement as applying to a negative turnover profit percentage based on wagering losses incurred by an individual entity without bringing to account wagering profits made by the other entity or entities in the same month.

8. Clause 14 provided for termination of the agreement for breach or, in particular circumstances or on the happening of specified events, by written notice. For the purpose of these termination provisions there are two parties – the party in breach, or Defaulting Party, and the other party, or Terminating Party. The events which entitled Classicbet as Terminating Party to bring the agreement to an end by giving written notice included it being of the reasonable opinion that it may be liable to lose one or other of the bookmakers’ licences as a consequence of actions of KRM (cl 14.3(b)). In these provisions the references to Classicbet must be to the entities “collectively”. The agreement did not contemplate that it should be terminated or “expire” in relation to one or more, but not all, of those entities.

9. Turning to cl 16, it addressed two events. The first is a Change of Control of Classic or Best, as Control is defined in the Corporations Act 2001 (Cth). The second is a sale, transfer or assignment by Classicbet of all or part of the Classicbet Business that includes “any Affiliate Clients” to a third party.

10. In the case of a sale of a book of business that includes any Affiliate Clients, the reference to Classicbet must be to the three entities collectively. The subject matter of the sale or transfer would be the benefit of the custom as bettors of those Clients. That customer connection was acquired by those entities collectively, and was subject to their collective obligation to pay Commission. In the event of such a sale, KRM could elect to take a lump sum payment from Classicbet or the third party purchaser, or to continue with the agreement. If it elected to continue with the agreement, the third party was to enter into a separate affiliate agreement under which it was to pay the Net Cash Share, a term which is not defined but which presumably refers to commission calculated as a percentage of the Net Cash generated by the third party from the “acquired” Affiliate Clients going forward. In that event, those Clients would cease to be Affiliate Clients under the APA, and become clients under the separate affiliate agreement. That would be so irrespective of whether they placed bets with one only of the three Classicbet entities.

11. In the case of a Change of Control of Classic or Best, KRM was granted an option either to “continue with this Agreement or have Classicbet ‘buy out the tail’ as set out in this clause 16.1” (cl 16.1.2). In the event that it elected to continue with the agreement, KRM remained entitled under cl 7 to Commission from Classicbet, including the same corporate entities although differently controlled, in perpetuity (cl 7.9).

12. If KRM elected “for the purchase of the Commissions payable” under the APA (cl 16.2), the lump sum to be paid under cl 16.1.4 was to be calculated by reference to a multiple derived from the price of the shares transferred or issued and resulting in the Change of Control. The greater of that multiple and a multiple of 5 was applied to historical commissions paid by Classicbet in the previous 12, or up to 24, months. The clause provided:

... then Classicbet must, within 20 business days of such exercise, pay to the Affiliate a lump sum payment equal to X times the greater of:

(a) an amount equal to 12 times the average monthly Commission paid by Classicbet to the Affiliate in the period of 24 months immediately preceding the date that the option by the Affiliate is exercised (or if the option is exercised by the Affiliate before the Agreement has been in force for a period of less than 24 months, then an amount equal to 12 times the average monthly Commission paid by Classicbet to Affiliate during such period); or

(b) an amount equal to 12 times the average monthly Commission paid by Classicbet to the Affiliate during the 12 months immediately preceding the date that the option is exercised by the Affiliate.

24. The amount thereby derived was required to be paid as a “lump sum” within 20 business days of the exercise of the option. The historical Commissions were those payable and paid under cl 7, and accordingly in respect of “all bets wagered by all Affiliate Clients using their Betting Accounts” (emphasis added). Upon the payment of that amount, KRM covenanted as follows (cl 16.2):

the Affiliate must thereafter not solicit, canvass , poach or market and promote services (in relation to betting or wagering services) to any of the Affiliate Clients that contribute to and form part of the Commissions so purchased;

if the lump sum payment is an amount of $5,000,000 or more, the Affiliate must not, and must ensure that Kevin Mccrohan must not, for a period of 3 years from the date that the lump sum payment is paid to the Affiliate, conduct (either alone or with another person or entity) a business as an affiliate with any other bookmaker in Australia without the prior written consent of Classicbet.

25. Thus, on the payment of the lump sum, each of the Classicbet entities secured both the release of the ongoing joint obligation to pay Commission as well as the benefit of one or both of the restrictive covenants. From that time, they were entitled jointly to the benefit of the customer connection of each of the Affiliate Clients.

26. This commercially sensible operation of cl 16 when Classicbet is construed “collectively” is to be contrasted with its application when construed distributively where two of the three entities have been engaged in betting activities at the time the option is exercised, and only one makes its “lump sum payment”. At least two difficulties arise. First, does the non-paying entity get the benefit of a release from its ongoing obligation to pay Commission under cl 7 in respect of the common and any exclusive Affiliate Clients of that entity? The terms of the option conferred by cl 16.1.2 suggest that it is not intended the agreement “continue” at all after Classicbet buys out the tail. Secondly, how does KRM’s covenant not to solicit or market and promote services to Affiliate Clients operate with respect to common Affiliate Clients, namely those who have conducted betting activities with both the paying and non-paying entities? That covenant is not qualified to exclude such clients, either generally or with respect to dealings with the non-paying entity. The result would appear to be that the non-paying entity would also secure the benefit of that covenant in respect of those common Affiliate Clients. Clause 16.2.2, which operates only where the amount of the “lump sum payment” equals or exceeds $5 million, raises further difficulties. Is that condition satisfied by the sum of the separate payments, or does each separately have to satisfy the condition? And if one entity satisfies the condition by its payment, does the other get the benefit of the covenant? Again it would seem so. All of these difficulties arise in relation to a construction of cl 16 which is inconsistent with the construction of the obligation to pay Commission that is the subject of the “purchase” brought about by cl 16.

27. The text, context and purpose of the APA make plain that the payment obligations under cll 7 and 16 are obligations of Classicbet “collectively”, meaning Classic, Ryan Kay and Best.

28. Accordingly, in appeal 2020/6311 (Ryan Kay v KRM (Vic) Pty Ltd) I propose the following orders:

1. Appeal dismissed.

2. Order that the appellant pay the respondent’s costs of the appeal.

29. I agree with the orders proposed by White JA in appeal 2020/12237.

30. GLEESON JA: As to the appeals of Classic and Best (2020/12237), I agree with the orders proposed by White JA, for the reasons his Honour gives.

31. As to the appeal of Ryan Kay (2020/6311), I agree with the orders proposed by Meagher JA, for the reasons his Honour gives.

32. WHITE JA: These appeals raise some intricate questions of construction of two commercial agreements.

33. In July 2017 a company called Classic Bet Pty Ltd was engaged in the business of providing on-line betting services. Mr Alexander Kay was the sole shareholder and director of Classic Bet Pty Ltd (“Classic”).

34. Bestbet.com.au Pty Ltd (“Best”) engaged in a similar business. Alex’s son, Mr Ryan Kay, was the sole director and shareholder of Best.

35. On 28 July 2017 Classic, Best and Ryan Kay entered into an agreement called an “Affiliation Program Agreement” (“APA”) with KRM (Vic) Pty Ltd (“KRM”).

36. In that agreement the term “Classicbet” was defined to mean:

“collectively and individually, as the case may be, Classic Bet Pty Ltd ACN 167 422 406, Ryan Kay and Bestbet.com.au Pty Ltd 607 108 645.”

37. The APA provided for Classicbet to pay a commission to KRM to be calculated monthly as a percentage of the Net Cash received by Classicbet from New Clients or Lapsed Clients introduced by KRM. The Net Cash was the difference between bets placed by such clients and the winnings paid out to them. (Capitalised terms were defined.)

38. The rate of commission was generally 30 per cent but could be reduced to 25 per cent. Provided a New Client or a Lapsed Client introduced by KRM continued to bet and continued to lose money, KRM was entitled to its commission.

39. The APA contained a clause (cl 16.1) headed “Buy Out – Change of Control or Sale). The clause concerns KRM’s rights if there were an actual or proposed Change of Control of Classic or Best or of the business of Classicbet.

40. In the case of a proposed or actual Change of Control of the business of Classicbet, Classicbet was required to give notice of the change to KRM who then had the option to commute its rights to future commissions for at least the equivalent of five times the historical average annual commission payable. KRM had the same right if there were an actual Change of Control of Classic or Best (as distinct from a Change of Control of their businesses). There is an issue (explained below) as to whether KRM had the same right if there were only a proposed, rather than an actual, change of control of Classic or Best.

41. Clause 16.1 of the APA provided:

16.1 Buy Out – Change in Control or Sale

1. In this clause 16.1, ‘X’ means the greater of:-

(a) 5 times, and

(b) (i) if clause 16.1.2 applies, then the multiple used by the Third Party to determine the price of the shares purchased by, or issued to, the Third Party or as the Third Party directs:

(ii) if clause 16.1.5 applies, then the multiple used by the Third Party to determine the price of all or part of the Business purchased by the Third Party and/or nominee of the Third Party.

2. If, there is a Change of Control of Classicbet Pty Ltd or Bestbet.com.au Pty Ltd (or both) due to either or both:-

(a) the purchase of issued shares in either of them by a third party (being a person or entity who as at the date of this Agreement is not a shareholder of Classicbet Pty Ltd and Bestbet.com.au Pty Ltd) (‘Third Party’), other than for reconstruction or amalgamation as referred to in the definition of ‘Change of Control’ in clause 1;

(b) the issue of further shares in either Classicbet Pty Ltd and Bestbet.com.au Pty Ltd

Then Affiliate has the option to either continue with this Agreement or have Classicbet ‘buy out the tail’ as set out in this clause 16.1.

3. The option referred to in clause 16.1.2 shall be exercised as follows:-

(a) Classicbet must give written notice to Affiliate (‘Classicbet Notice’) of the Change of Control or proposed Change of Control in Classicbet Pty Ltd and/or Bestbet.com.au Pty Ltd;

(b) Within 14 days of the receipt by the Affiliate of the Classicbet Notice, the Affiliate may give written notice to Classicbet (‘Affiliate Notice’) that:-

(i) Affiliate wishes Classicbet to pay to Affiliate the lump sum payment referred to and calculated in accordance with Clause 16.1.4; or

(ii) Affiliate wishes to continue with this Agreement.

If the Affiliate does not give written notice to Classicbet in response to the Classicbet Notice, then Affiliate shall be deemed to have exercised its option to be paid the lump sum referred to and calculated in accordance with clause 16.1.4.

4. If Affiliate exercises its option to be paid the lump sum payment or if the option to be paid the lump sum payment is deemed to be exercised in accordance with Clause 16.1.3(b) then Classicbet must, within 20 business days of such exercise, pay to the Affiliate a lump sum payment equal to X times the greater of:

(a) an amount equal to 12 times the average monthly Commission paid by Classicbet to the Affiliate in the period of 24 months immediately preceding the date that the option by the Affiliate is exercised (or if the option is exercised by the Affiliate before the Agreement has been in force for a period of less than 24 months, then an amount equal to 12 times the average monthly Commission paid by Classicbet to Affiliate during such period); or

(b) an amount equal to 12 times the average monthly Commission paid by Classicbet to the Affiliate during the 12 months immediately preceding the date that the option is exercised by the Affiliate.

5 (a) If Classicbet transfers, sells or assigns (collectively referred to as ‘Sells’, ‘Sale’ or ‘Sold’, as the case may be), or proposes to Sell all or any part of the Classicbet Business that includes any Affiliate Clients to a Third Party, Classicbet shall promptly:-

(i) give a written notice to Affiliate of the Sale or proposed Sale (‘Sale Notice’);

(ii) within 14 days of the receipt by Affiliate of the Sale Notice, Affiliate may give written notice to Classicbet that:-

(A) The Affiliate wishes Classicbet and/or Third Party to pay to Affiliate the lump sum payment referred to and calculated in accordance with Clause 16.1.5(b); or

(B) The Affiliate wishes to continue with this Agreement.

If the Affiliate agrees to continue with this Agreement, Classicbet must ensure that the transferee of the Classicbet Business acknowledges and agrees to take a transfer or assignment of this Agreement or enter into an agreement that is substantially the same as this Agreement in order for the transferee to continue to pay the Net Cash Share to the Affiliate. Alternatively, the transferee may make an offer to purchase the Affiliate’s Clients outright which the Affiliate can accept or decline at its discretion.

If the Affiliate does not give written notice to Classicbet in response to the Sale Notice, then Affiliate shall be deemed to have exercised its option to be paid the lump sum referred to and calculated in accordance with clause 16.1.5(b).

(b) If Affiliate exercises its option to be paid the lump sum payment or if the option to be paid the lump sum payment is deemed to be exercised in accordance with Clause 16.1.5(a)(ii), then Classicbet must, and if appropriate must ensure that the Third Party must, pay to the Affiliate, contemporaneously with the completion of the Sale occurring, a lump sum payment equal to X times the greater of:

(i) an amount equal to 12 times the average monthly Commission paid by Classicbet to the Affiliate in the period of 24 months immediately preceding the date that the option by the Affiliate is exercised (or if the option is exercised by the Affiliate before the Agreement has been in force for a period of less than 24 months, then an amount equal to 12 times the average monthly Commission paid by Classicbet to the Affiliate during such period); or

(ii) an amount equal to 12 times the average monthly commission paid by Classicbet to the Affiliate during the 12 months immediately preceding the date that the option is exercised by the Affiliate.

...

42. On 23 March 2018 two agreements called Share Sale and Purchase Agreements (“SSPAs”) were entered into. One was made between Classic, Alex Kay and Fantasy Sports Australia Pty Ltd (which later changed its name to Playup Australia Pty Ltd (“Playup”)) and two other individuals as guarantors of Playup’s obligations. The other agreement was made between Playup, Ryan Kay, Best, and the guarantors of Playup’s obligations. The agreements were in materially identical terms. The Completion Date for the agreements was two business days after Playup received from the Northern Territory Racing Commission or Harness Racing (NSW) regulatory approval in writing to operate the Company’s Business under Playup’s existing NTRC bookmaker’s licence or such other date as the parties might agree in writing. That approval was obtained on 17 May 2018 (Judgment [16(6)] and [80]). The Completion Date was 22 May 2018.

43. Ryan Kay was informed of that approval sometime between 18 and 22 May 2018 (Judgment [80]).

44. Clause 6.1 of the SSPAs provided:

“The Seller agrees to satisfy and discharge in the proper time all liabilities of the Company and the Business incurred or accrued before and on the Completion Date and agrees to indemnify, and to keep indemnified, the Buyer with respect to all claims in relation to those pre Completion Date liabilities.

45. In the Classic SSPA the Seller was Alex Kay and the Company was Classic. In the Best SSPA the Seller was Ryan Kay and the Company was Best. The Buyer (Playup) was not a party to these proceedings.

46. Classic and Best submit that the obligation of the Seller under cl 6.1 was an obligation owed to them and not merely to Playup and that Alex and Ryan Kay were required to satisfy and discharge their liabilities to KRM under cl 16.1 of the APA, which, they say, were liabilities that had been incurred or accrued before the Completion Date.

47. Completion of the SSPAs did not occur on 22 May 2018. Completion occurred on 7 June 2018. Notwithstanding that the SSPAs provided that between the date of entry into the agreements (23 March 2018) and the Completion Date the Buyer and not the Seller was entitled to the benefit of all profits earned by the Business and would indemnify the Seller against all losses sustained in that period (cl 3.3), Classic and Best contend that Alex and Ryan Kay were obliged to them to discharge the liabilities to KRM that they say had been incurred or which had accrued to KRM prior to 22 May 2018. Classic and Best contend that those liabilities were incurred on entry into the APA. Alternatively, they say that emails sent by Ryan Kay to KRM on 11 and 26 April 2018 were written notices of a proposed change of control of those companies within the meaning of cl 16.1.3(a) of the APA and triggered a liability of each company to KRM to commute the companies’ obligations to pay future commission by payment of a lump sum unless within 14 days KRM elected to continue with the Agreements. Classic and Best submit that this means that Alex and Ryan Kay were required to discharge their liabilities to KRM.

48. KRM disputes that the emails of 11 and 26 April 2018 were notices of proposed change of control within the meaning of cl 16.1 of the APA. It says that the only notice given under cl 16.1 of the APA was a notice of change of control given on 12 October 2018.

49. KRM insisted that Classicbet (Classic, Best and Ryan Kay) were required to provide notices that stated explicitly whether a change of control was proposed or had occurred and which provided information that KRM would require to make an informed election. It contended that the first time it received such a notice was on 12 October 2018 (after strongly pressing for it). That notice was sent by the solicitors for Playup. On 15 October 2018 KRM elected to commute its entitlement to commission.

50. Ryan Kay does not dispute that the notice of 12 October 2018 triggered KRM’s right to elect to commute its rights to future commission. He says that on a proper construction of the APA he is not liable to pay any amount because he personally did not conduct the relevant business through which commissions were earned. He submits that the definition of Classicbet as meaning Classic, Best and himself “collectively and individually as the case may be” means that the obligation of Classicbet to pay a lump sum in commutation of KRM’s right to future commission was imposed on Classic and Best which were the companies that conducted the businesses that triggered the right to future commissions.

51. Classic and Best do not dispute that they are liable to pay a commuted sum to KRM. As indicated above they say that the liability arose not after 12 October 2018, but after 11 or 26 April 2018 when, they say, notice of a proposed change of control was given and KRM did not elect to continue with its agreement. Classic and Best submit that KRM’s entitlement to commuted sums should be calculated from an earlier date, 14 days after 11 or 26 April 2018. This would mean that KRM was not entitled to commission from such dates until October 2018. Classic and Best do not dispute that if this argument is unsuccessful, they are liable to pay KRM the commuted amount of the commission as found by the primary judge. They supported the primary judge’s finding that Ryan Kay was also liable for that amount.

52. The primary judge entered judgment against Classic, Best and Ryan Kay for $3,684,690.98 plus costs. His Honour declared that each of the defendants was entitled to equitable contribution in respect of that judgment and costs order. Classic’s and Best’s cross-claims against Ryan and Alex Kay were dismissed (Judgment [97]). A third cross-claim brought by Classic and Best against KRM was also dismissed (Judgment [95]).

53. Two appeals were brought from the orders of the primary judge. Ryan Kay appealed against the order that he was liable under cl 16.1 of the APA to pay a lump sum payable by Classicbet. Ryan Kay contended that the primary judge ought to have held that the expression “collectively and individually, as the case may be” did not mean “jointly and severally”, and that he did not have any liability to pay any sum to KRM under cl 16.1 of the APA to “buy out the tail”.

54. Classic and Best appealed against the orders against them in favour of KRM to the extent they were based on KRM’s entitlement to payment under cl 16.1 of the APA arising only after 12 October 2016. They also appealed against the dismissal of their cross-claims against Ryan and Alex Kay.

55. For the reasons which follow Ryan Kay’s appeal should be allowed and Classic’s and Best’s appeals should be dismissed.

Ryan Kay’s appeal

56. Although not expressly named as such, it was common ground that the “Affiliate” under the APA was KRM. “Affiliate” was defined to mean “the individual or entity who agrees to introduce Affiliate Clients” on the terms and conditions of the agreement. It was common ground that KRM was that entity.

57. The APA included the following definitions.

“Affiliate Client means a New Client or a Lapsed Client who is introduced to Classicbet by the Affiliate or its Associates or its Sub Affiliates, and includes prospective clients who are introduced to Classicbet by any New Client or Lapsed Client, who opens, or where appropriate reactivates, an account for betting purposes with Classicbet.

Betting Account means the betting account registered to any Affiliate Client with Classicbet.

Classicbet means collectively and individually, as the case may be, Classicbet Pty Ltd ACN 167 422 406, Ryan Kay and Bestbet.com.au Pty Ltd ACN 607 108 645.

Classicbet Business means the gaming business of Classicbet in accepting bets for purposes permitted under the Licence.

Classicbet Website means or or both, as the case may be.

Debt means any monies owed by an Affiliate Client to Classicbet as a result of wagering activity using the Betting Account of the Affiliate Client.

Licence means collectively and individually, as the case may be:-

- the Bookmakers Licence no. 1 issued to Classicbet Pty Ltd by Harness Racing NSW

- the Bookmakers Licence issued to Ryan Kay by Greyhound Racing NSW.”

58. Clause 4 provided:

4. Appointment of Affiliate

1 Classicbet appoints the Affiliate as an affiliate to:

(a) advertise, market and promote the Classicbet Website and

(b) introduce to Classicbet:-

(i) New Clients; and

(ii) Lapsed Clients,

2 Subject to clause 16.3 and provided that the Affiliate Client is not at the relevant time an Affiliate Debt Client, nothing in this Agreement prevents the Affiliate from marketing to any client, including an Affiliate Client, or from encouraging any Affiliate Client from doing business or placing bets with any other person, including a competitor of Classicbet.

59. There was no clause 16.3 and it is clear that the reference should have been to cl 16.2 set out below:

16.2 Buy Out­ Ownership of Affiliate Clients & Restrictive Covenant

If Classicbet (and/or the Third Party, if applicable)pays the lump sum payment to the Affillate pursuant to clause 16.1of this Agreement for the purchase of the Commissions payable to the Affiliate under this Agreement:-

1. the Affiliate must thereafter not solicit, canvass , poach or market and promote services (in relation to betting or wagering services) to any of the Affiliate Clients that contribute to and form part of the Commissions so purchased;

2. if the lump sum payment is an amount of $5,000,000 or more, the Affiliate must not, and must ensure that Kevin Mccrohan must not, for a period of 3 years from the date that the lump sum payment is paid to the Affiliate, conduct (either alone or with another person or entity) a business as an affiliate with any other bookmaker in Australia without the prior written consent of Classicbet.

60. Clause 5.1 required the Affiliate to use reasonable efforts to advertise, market and promote Classicbet.

61. Clause 5.3 required the Affiliate to notify Classicbet as soon as practical of any New Client’s intention to register a Betting Account with Classicbet prior to the New Client commencing any betting with Classicbet. It was also required to notify Classicbet of any Lapsed Client’s intention to assume betting through the Lapsed Client’s Betting Account. “Betting Account” meant the betting account registered to any Affiliate Client with Classicbet.

62. The obligations of Classicbet in clause 6.1 included:

6. Classicbet Obligations

1. ...

...

(e) Diligently, and promptly upon receipt of notices from the Affiliate received in accordance with Clause 5:

(i) Open Betting Accounts for New Clients, provided the Affiliate has provided Classicbet with all information and documents necessary to lawfully open a Betting Account;

(ii) To the extent necessary, reactivate the Betting Account of any Lapsed Client; and

(iii) Commence monitoring wagering activity of each Affiliate Client for the purposes of generating accurate Statements listed in Clause 7.1 below.

...

(g) Provide quality, professional services to Affiliate Clients.

...

(i) Comply with all laws, regulations and its License conditions in relation to its affiliate arrangement with the Affiliate pursuant to this Agreement and specifically, without limitation, when creating accounts for Affiliate Clients.

63. Classicbet was obliged to pay commission. Clause 7.1 provided:

7. Commission

1. Classicbet will within seven (7) days after the end of each calendar month, provide the Affiliate, in respect of each Affiliate Client introduced by the Affiliate:

(a) A Reconciliation Statement;

(b) A Net Cash Statement;

(c) A Commission Statement;

(d) A Turnover Statement; and

(e) A Turnover Profit Percentage Statement. (Blue 574)

64. A “Reconciliation Statement” was defined to mean “a Classicbet-generated statement of all betting activities by each Affiliate Client for a calendar month.”

65. A “Net Cash Statement” was defined as a Classicbet-generated statement of the Net Cash for each Affiliate Client each calendar month. Net Cash was an amount equal to all moneys paid by an Affiliate Client (or on their behalf) into the Affiliate Client’s Betting Account during a calendar month, less any payments out of the Betting Account as winnings or refunds or otherwise.

66. A Commission Statement meant a Classicbet-generated statement of the Commission payable to the Affiliate for each Affiliate Client each calendar month. A Turnover Statement meant a Classicbet-generated statement of the turnover for each Affiliate Client for each calendar month. Turnover meant the total monthly amount in dollars of all bets wagered by all Affiliate Clients using their Betting Accounts.

67. A Turnover Profit Percentage Statement meant a Classicbet-generated statement of the Turnover Profit Percentage for each Affiliate Client for each calendar month. Turnover Profit Percentage meant the Net Cash in a calendar month divided by Turnover. The agreement provided an example that if in a calendar month Net Cash was $20,000 and Turnover was $200,000, then Turnover Profit Percentage for such calendar month was 10 per cent.

68. Standard Commission was 30 per cent of the Net Cash exclusive of GST calculated on a calendar monthly basis. Reduced Commission was 25 per cent share of Net Cash exclusive of GST calculated on a calendar monthly basis.

69. The Target Turnover Profit Percentage was seven per cent.

70. Under cl 7.2 Classicbet was obliged to pay the Standard Commission to KRM up to 31 December 2017. From 1 January 2018 KRM was entitled to Standard Commission if Turnover Profit was at least seven per cent. If in any month Turnover Profit was less than seven per cent, then the commission payable was the Reduced Commission in that month. But if the Turnover Profit calculated over a calendar year was more than seven per cent, then there would be a retrospective adjustment of the commission payable for those months when the Turnover Profit had been calculated at a reduced rate. Clause 7.2 illustrated the operation of the clause by an example upon which counsel for KRM relied, which was as follows:

“For purposes of clarity and by way of example only:-

● Assume that the Relevant Year is the calendar year 1 January 2018 to 31 December 2018;

● By 7 January 2019, Classicbet will deliver to the Affiliate a Turnover Statement and a Turnover Profit Percentage Statement for the whole of 2018;

● The Turnopver Profit Percentage for the whole of 2018 is 8.5% and therefore it is greater than the Target Turnover Profit Percentage;

● During 2018, the Affiliate did not achieve the Target Turnover Profit Percentage in May 2018 and in September 2018 so for those two months, Classicbet paid to the Affiliate the Reduced Commission of 25% of Net Cash for each such month namely;:-

-   $10,000 (example) plus GST in May 2018 (assume that the Net Cash for May 2018 is $40,000, so 25% of $40,000), and

-    [$]20,000 (example) plus GST in September 2018 (assume that the Net Cash for [September] 2018 is $80,000, 25% of $80,000)

●    The amount of the commission for May 2018 and for September 2018 at the Standard Rate of 30% of Net Cash for each such month would have been:-

-    $12,000 plus GST in May [2018], being 30% of $40,000, and

-    $24,000 plus GST in September 2018, being 30% of $80,000

●    The difference in the Commission for each month is therefore $2,000 for May 2018 and $4,000 plus GST for September 2018, making a total of $6,000 plus GST;

●    Classicbet will pay to the Affiliate amount [of] $6,000 plus GST by 30 January 2019.”

71. Clause 7.9(b) provided:

“Upon the termination (for whatever reason) or expiry of this Agreement:-

...

(b)    Classicbet must continue to pay to the Affiliate the Commission per calendar month for each calendar month after such termination for each Affiliate Client in perpetuity in accordance with this clause 7.”

72. The critical clause is cl 16.1 which was headed “Buy Out – Change in Control or Sale” (at [41] above). (The APA did not contain a term that the heading could not be used to construe the Agreement.)

73. Change of Control was defined as follows:

“Change of Control occurs, in respect of an entity when:

(a)    a person who did not have Control of the entity at the date of this Agreement acquires Control of the entity; or

(b)    a person who did have Control of the entity at the date of this Agreement ceases to have Control of the entity,

but does not include a change due to an amalgamation or reconstruction of the shareholding of the entity as at the date of this Agreement involving an Associated Entity of the shareholder as at that date.”

74. “Control” was defined as having:

“the meaning given in the Corporations Act 2001 (Cth).”

75. The Corporations Act 2001 (Cth) defines “Control” as:

(1)  For the purposes of this Act, an entity controls a second entity if the first entity has the capacity to determine the outcome of decisions about the second entity’s financial and operating policies.

(2)  In determining whether the first entity has this capacity:

(a)  the practical influence the first entity can exert (rather than the rights it can enforce) is the issue to be considered; and

(b)  any practice or pattern of behaviour affecting the second entity’s financial or operating policies is to be taken into account (even if it involves a breach of an agreement or a breach of trust).

(3)  The first entity does not control the second entity merely because the first entity and a third entity jointly have the capacity to determine the outcome of decisions about the second entity’s financial and operating policies.

(4)  If the first entity:

(a)  has the capacity to influence decisions about the second entity’s financial and operating policies; and

(b)  is under a legal obligation to exercise that capacity for the benefit of someone other than the first entity’s members;

the first entity is taken not to control the second entity.

76. In the present case there was a Change of Control of Classic and Best that it was agreed occurred on 7 June 2018. There was not a sale of the Classicbet Business to attract the operation of cl 16.1.5. Instead, cll 16.1.2 and 16.1.3 were engaged. On the giving of written notice by Classicbet under cl 16.1.3(a), KRM had the option of either continuing the agreement or taking a lump sum payment to be calculated in accordance with cl 16.1.4. In terms of cl 16.1.2 KRM elected to “buy out the tail”. Under cl 16.1.4 it was entitled to a payment of at least five times the amount equal to 12 times the average monthly commission.

77. Ryan Kay did not dispute that that option was available whether there was a Change of Control of either Classic or Best. If there were a Change of Control of either company then KRM had the option to be paid a lump sum in respect of 60 times the average monthly commission earned by both Classic and Best. Although not explained, I assume that this concession was based upon cl 16.1.2 that gave KRM the option to either continue with the Agreement or have Classicbet buy out the tail if there were a Change of Control of either Classic or Best. Under cl 16.1.3 if KRM elected to be paid a lump sum payment to be calculated in accordance with cl 16.1.4, then the payment was to be calculated on the average monthly Commission that had been paid by Classicbet, being a reference to both companies that paid Commission.

78. The primary judge accepted the submission of KRM that in the definition of “Classicbet” the phrase “collectively and individually, as the case may be”, meant “jointly and severally liable, as the case may be”. His Honour said:

“48   Mr Clarke [Counsel for KRM] submits that:

(1)   The phrase ‘collectively and individually liable, as the case may be’ is akin to ‘jointly and severally liable, as the case may be’. The use of these words does not relieve any of the three parties from obligations for performance under the APA but, rather, indicates that there may be obligations which each would have individually, such as providing net cash statements.

(2)   The construction of the clause should not be undertaken with reference to how the parties conducted themselves under the contract: Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407; (2009) 76 NSWLR 603. The argument whether Bestbet and Mr Kay received any commissions is irrelevant.

15    These approaches, while they may present difficulties in particular cases, are clear. ‘Incurring’ is the act or omission of the company through which exposure of it to a monetary obligation arises.”

142. This decision does not assist Classic and Best. It might be arguable that the act of Classic and Best through which they were exposed to the monetary obligation for which KRM sued was, as a matter of substance and commercial reality, their entry into the SSPAs. But as a matter of substance and commercial reality, that obligation was not incurred on entering into the APA.

143. Classic and Best also submitted that the primary judge was wrong in not applying what Kirby P said in Hawkins v Bank of China (at 576) that:

“The expression ‘incurs a debt’ ... is, in isolation, entirely apt to describe an act on the part of a corporation whereby it renders itself liable to pay a sum of money in the future as a debt. The act of ‘incurring’ happens when the corporation so acts as to expose itself contractually to an obligation to make a future payment of a sum of money as a debt. The mere fact that such sum of money will only be paid on a future contingency does not make the assumption of the obligation any less ‘incurring’ a ‘debt’.”

144. This statement was applied by Sifris J in the Supreme Court of Victoria in Healthscope (Tasmania) Pty Ltd v Australian Hospital Care Pty Ltd [2011] VSC 132 at [22]. The circumstances of the incurring of a liability in that case were far different from the present. The defendants did not suggest that no debt or liability had been incurred (at [28]).

145. As I have said above, Classic and Best did not, by entering into the APA, expose themselves contractually to an obligation to make a future payment to KRM under cl 16.1 in commutation of their liability to pay future commission. As a matter of substance they only incurred that liability after entering into the SSPAs.

146. Classic and Best’s alternative argument was that their liability to KRM was incurred prior to the Completion Date because of emails sent by Ryan Kay on behalf of both companies to KRM on 11 and 26 April 2018.

147. On 1 April 2018 Mr Di Natale, who was acting for KRM, wrote to Ryan Kay as follows:

“Hi Ryan,

It was good to catch up with you last Monday (26 March 2018).

We note your advice that you (your family’s interests) have agreed to sell out of Classicbet. Whilst we note that you advised that it will be the shares that are being sold, we are unsure whether this means the shares in both Classicbet Pty Ltd and Bestbet.com.au Pty Ltd.

Since meeting with you, we have reviewed the signed Affiliation Program Agreement which of course outlines what occurs in these circumstances. So that there is no misunderstanding or confusion, we request that the procedure outlined in the Agreement be followed, in particular clause 16.1. This therefore means that we need to receive written notice of the proposed sale of shares. Kevin’s (KRM (Vic) Pty Ltd) period of 14 days to make a decision under clause 16.1.3(b) will not commence until KRM has received such written notice.

According, could you please provide us such written notice, including the following information which is important to enable KRM to make a decision under clause 16.1.3(b):-

1.   Are all the shares in both Classicbet Pty Ltd and Bestbet.com.au Pty Ltd being sold;

2.   What was the multiple used in order to determine the price of the shares purchased. This is relevant for purposes of clause.16.1, in order to determine the multiple to be applied to determine/calculate the lump sum payable to KRM.

Please also provide us with:-

1.   The monthly commission statements for January 2018, February 2018 and March 2018. As March concludes tomorrow, please also provide us with the March 2018 statement;

2.   The monthly amount paid for January 2018 and the monthly amount paid for February 2018;

3.   Your calculation of the lump sum payment in accordance with clause 16.1.4 of the Agreement.

In line and consistent with our emails below, KRM expressly continues to reserve and maintain its position in relation to the disputed carryforward negative commission for September 2017, which is relevant in this situation.

We therefore look forward to the written notice to trigger the provisions of clause 16.”

148. Mr Di Natale slightly amended his email on 2 April 2018 but without changing its substance.

149. On 11 April 2018 Mr Di Natale wrote to Ryan Kay saying:

“We haven’t received your written notice yet regarding the sale, have you sent it?”

150. Ryan Kay replied later that day saying:

“Hi Jack,

Sorry for the delay, I have been waiting for the approval from NT authorities.

It should come through Friday.

Are you available to meet Friday? The crown or somewhere that suits you better?

Kind Regards

Ryan”

151. Mr Di Natale pressed Ryan Kay on 22 April. He sent an email on that day saying:

“When can we expect to receive the written notice of the share sale as set out below, we were fine to receive it at the proposed dinner last week but with that not occurring can you please arrange to have it forwarded to us (on behalf of (KRM (Vic) Pty Ltd) ASAP.

Thanks, wait to hear from you.”

152. On 26 April 2018 Ryan Kay replied:

“Hi Jack,

The transaction has yet to be approved by NT regulators.

I will let you know progress.

Did you want to pencil in lunch or dinner next Wednesday?

Kind Regards,

Ryan”

153. Classic and Best submitted that the emails from Ryan Kay of 11 and 26 April were a notice of proposed change of control within the meaning of cl 16.1.3 of the APA because Ryan Kay implicitly confirmed KRM’s understanding that a share sale agreement for at least one of the companies had been entered into that was subject to the approval of the Northern Territory Racing and Gaming Commission. Hence there was a potential change of control of Classic and Best, or at least Classic or Best.

154. There is an issue as to whether KRM’s option to either continue with the APA or have Classicbet “buy out the tail”, that is, commute its right to future commission, could be triggered only on a potential change of control. Clause 16.1.2 provides for KRM to have that option if there were a Change of Control of either Classic or Best. The definitions of “Change of Control” and “Control” are set out at [73] and [74] above.

155. It might have been arguable that on entry into the SSPAs there was an actual change of control and not merely a potential change of control because Playup became entitled to the profits of the Classicbet business from the date of entry into the SSPAs. It was submitted by Mr Walker SC that it could be inferred that Playup took over the management of the Classicbet business from entry into the SSPAs. The majority of the purchase price was payable on entry into those agreements.

156. However, this point was not argued either below or on appeal. On the assumption that there was no actual change of control on entry into the SSPAs, there is an issue of construction of cl 16.1.2 and 16.1.3 as to whether the option in cl 16.1.2 or 16.1.3 was triggered by the entry by Classic and Best into the SSPAs. Whereas cl 16.1.2 confers the option only in terms of there being a Change of Control, cl 16.1.3 states that the option referred to in cl 16.1.2 is to be exercised by Classicbet giving written notice of the Change of Control or proposed Change of Control.

157. The inconsistency in these provisions could be reconciled either by reading into cl 16.1.2 an implication that the option provided for by that clause was triggered either on a Change of Control or a proposed Change of Control. That would require reading words into cl 16.1.2. That construction would be harmonious with cl 16.5, dealing with a change of control of Classicbet’s business.

158. On the other hand, the inconsistency could be resolved by excising from cl 16.1.3(a) the words “or proposed Change of Control”.

159. It would only be necessary to resolve this issue if the emails sent by Ryan Kay on 11 and 26 April 2018 could be characterised as written notice of proposed Change of Control in Classic and/or Best for the purpose of that clause.

160. The primary judge was correct to conclude that the emails cannot be so regarded. They contain no such express statement. They did not provide the information that KRM would require in order to exercise its option under cl 16.1.2. Rather than being notices given under cl 16.1.3, they were purported explanations as to why Classic and Best were not giving notices under that clause.

161. For these reasons the primary judge was correct to conclude both that the promise under cl 6.1 of the SSPAs was not made by Alex or Ryan Kay to Classic and Best, but that, in any event, no liability had been incurred prior to the Completion Date to which cl 6.1 could apply on the basis of the arguments advanced at trial.

162. Classic and Best also contended that Alex Kay as a director of Classic, and Ryan Kay as a director of Best, breached their duties owed to those companies by not giving a proposed notice of change of control under cl 16.1.3 of the APA after those companies entered into the SSPAs for the sale of their shares to Playup. They were in a position of conflict between their duties to the Company of which they were the director and their personal interest because it was in their personal interest as Sellers under the SSPAs that the Company of which each was a director not incur a liability prior to the Completion Date of the SSPA.

163. Classic and Best did not plead a breach of the Kays’ fiduciary duties. They did plead a breach of their statutory duties to act in good faith in the best interests of each Company and for a proper purpose, and they pleaded breach of the statutory duty not to gain an advantage for himself or to cause detriment to the Company (Corporations Act 2001 (Cth), ss 181 and 182).

164. This allegation was made out in the case of Ryan Kay. This court was not taken to evidence which would justify a finding of breach of duty by Alex Kay. It is clear that Ryan Kay, who was apparently acting for both Best and Classic, was resisting giving a notice of proposed change of control. There was no credible explanation for that resistance, except that until 18 or 22 May 2018 approval of the change of control had not been given by the Northern Territory Racing Commissioner. There was clearly a proposed change of control, as KRM asserted, albeit one that was conditional on the Northern Territory Racing Commissioner’s approval.

165. Even after that approval was given, the Kays did not cause Classic and Best to give the requisite notices under cl 16.1.3 of the APA. Had notices been promptly given, there was still time for KRM to have elected to take a lump sum payment before Completion occurred, although not before the Completion Date.

166. The primary judge found that Classic and Best had not established that had a proposed notice of change of control been given, KRM would have elected to take the option of a lump sum payment. Mr Di Natale, who was the only witness called for KRM, was not asked about that matter.

167. But Mr Di Natale was not the decision-maker for KRM. The decision-maker for KRM was Mr McCrohan. KRM was suing Classic and Best. Classic and Best could not have been expected to call him in their own case.

168. I agree with the submission for Classic and Best that it should be inferred that had the proposed notice of change of control been issued to KRM, it is probable that KRM would have elected to take a lump sum payment. KRM was pressing for the issue of such a notice in order to trigger its right of election. Once it ultimately received a notice, it acted promptly to exercise its right to take the lump sum payment. It can be inferred that had notice been given by Classic and Best after March 2018, it would have made the same election as it ultimately made in October 2018.

169. But this part of Classic and Best’s cross-claim against Alex and Ryan Kay is a claim for damages for breach of Alex and Ryan Kay’s statutory duties as directors. The question is whether Classic and Best established any loss for which damages would be payable. (The same question would arise if their claim could properly be classified as a claim for equitable compensation for breach of fiduciary duty.)

170. Classic and Best incurred a liability to pay the lump sums payable under cl 16.1 of the APA. But they are relieved from their ongoing liability to pay indefinite future commissions under cl 7 of the APA. There was no evidence that the liability incurred was worth more than the burden relieved.

171. Recognising this, counsel for Classic and Best accepted that it would only be if Classic and Best had a liability under cl 6.1 of the SSPAs to pay the liability incurred that any damages could be recoverable from Alex and Ryan Kay for breach of their duties as directors for not causing notices of proposed change of control to be given. That concession was rightly made. For the reasons above, cl 6.1 did not make Alex and Ryan Kay liable to Classic and Best (as distinct from Playup) for not discharging Classic’s and Best’s liabilities.

172. For these reasons the appeal of Classic and Best should be dismissed.

173. In appeal 2020/6311 (Ryan Kay v KRM (Vic) Pty Ltd) I propose the following orders:

1. appeal allowed.

2. orders 1, 2 and 3 made on 18 December 2019 be set aside insofar as those orders apply to the appellant (third defendant in the court below);

3. in lieu thereof order:

1. judgment for the third defendant on the plaintiff’s statement of claim; and

2. the plaintiff pay the third defendant’s costs of the statement of claim.

4. the respondent pay the appellant’s costs of the appeal.

174. In appeal 2020/12237 (Classic Bet (NSW) Pty Ltd & Anor v Ryan Kay & Ors) I propose the following orders:

1. appeal dismissed.

2. order that the appellants pay the respondents’ costs of the appeal.

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Endnote

Decision last updated: 12 May 2020