Knowledge Pathways Pty Ltd v TBM Training Pty Ltd

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE
COMMERCIAL COURT

S CI 2015 5352

KNOWLEDGE PATHWAYS PTY LTD (ABN 87 086 496 460) & ANOR (in accordance with the attached Schedule)	Plaintiffs
v
TBM TRAINING PTY LTD (ABN 95 101 144 843) & ANOR (in accordance with the attached Schedule)	Defendants

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JUDGE:	HARGRAVE J
WHERE HELD:	Melbourne
DATE OF HEARING:	18 July 2016
DATE OF JUDGMENT:	29 July 2016
CASE MAY BE CITED AS:	Knowledge Pathways Pty Ltd v TBM Training Pty Ltd
MEDIUM NEUTRAL CITATION:	[2016] VSC 434

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CONTRACTUAL INTERPRETATION – Undertaking to preserve fund pending resolution of proceeding – undertaking subject to an exception allowing payment of the fund to a specified third party on request – Whether undertaking given by company and its CEO jointly, or only by the company – Whether fund paid to third party under terms of the exception – Held: (1) undertaking bound both the company and its CEO; (2) fund paid to third party in accordance with the exception; and (3) proceeding against CEO dismissed.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiffs	Mr P D Corbett QC with Mr B Barr	McMahon Fearnley Lawyers
For the Second Defendant	Mr D J Farrands with Mr K F Jones (appearing under Victorian Bar Duty Barrister Scheme)

TABLE OF CONTENTS

Background......................................................................................................................................... 1

Applicable law.................................................................................................................................. 13

Is Mr Drayton personally bound by the undertaking?............................................................ 15

Did the Department require TBM to repay the Department funds?...................................... 20

Conclusion......................................................................................................................................... 23

HIS HONOUR:

Background

This dispute arises out of contractual arrangements made between the parties in early 2015 in relation to the provision of services by the plaintiffs to the first defendant in the vocational education and training (‘VET’) sector. The VET sector is regulated by Commonwealth and State government authorities. Relevantly, the Victorian Department of Education and Early Childhood Development, which was later replaced by the Department of Education and Training, was the responsible body for registration and administration of funding programs for the VET sector in Victoria (the ‘Department’, or ‘Skills Victoria’ as it was usually referred to both by the parties and by the Department to describe its VET regulation division).

The first defendant, TBM Training Pty Ltd, is a registered training organisation under the relevant VET legislation. TBM’s Chief Executive Officer, sole director and shareholder is the second defendant Barry Drayton.

As a registered training organisation, TBM had a ‘VET funding contract’ with the Department. By that funding contract, the Department agreed to fund TBM in respect of each ‘Eligible Individual’, defined as an individual who was eligible for government subsidised training in accordance with the eligibility requirements set out in the VET funding contract and related guidelines. Any moneys provided by the Department to TBM under the VET funding contract were defined as ‘Funds’.

Relevantly, the VET funding contract provided that if TBM breached its obligations under the contract, or the Department reasonably suspected it had done so, the Department had a range of options including suspending funding, requiring Funds already paid to be repaid, or setting-off money due to the Department by reason of non-compliance by TBM with the contract from Funds otherwise payable to TBM thereunder.

By an agreement signed by the parties on 19 January 2015, effective as of 1 January 2015, TBM engaged the first plaintiff, Knowledge Pathways Pty Ltd, to provide it with sales and marketing services, with the aim of engaging students to undertake training courses with TBM (‘marketing agreement’). That agreement also envisaged that Knowledge Pathways would assist TBM in providing trainers and assessors for use in its VET activities by an ‘on-hire arrangement’.[1]
[1]As appears below, the on-hire services were subsequently provided by the second plaintiff.

Under the terms of the marketing agreement:

(1) Knowledge Pathways was to act as an independent contractor to TBM;

(2) each party was required to comply with all applicable legislation and regulation affecting their activities in the VET sector;

(3) TBM was required to apply for and obtain funding from the Department;

(4) TBM agreed to pay ‘Commission’ (as defined) to Knowledge Pathways in respect of each ‘Eligible Student’ (as defined), including ‘Trailing Commission’ (as defined). The Commission payable to Knowledge Pathways was calculated by reference to the amount of funding received by TBM from the Department in respect of each Eligible Student engaged by Knowledge Pathways; and

(5) an Eligible Student was defined to mean ‘a student procured by [Knowledge Pathways] who is eligible to receive funding from [the Department] in respect of a training course offered by TBM’. In other words, an ‘Eligible Individual’ within the meaning of the VET funding contract.

By a separate labour hire agreement commencing 1 February 2015 between TBM and the second plaintiff, Russell Inserra & Associates Pty Ltd (‘labour hire agreement’), Russell Inserra agreed to supply labour to TBM in the form of ‘trainers’.

The labour hire agreement relevantly provided that:

(1) Russell Inserra would provide its services as an independent contractor and the trainers would not be employees of TBM;

(2) the trainers were required to comply with the relevant provisions of the VET funding contract and applicable VET standards and guidelines; and

(3) TBM would pay fees to Russell Inserra (calculated on an hourly basis for work performed by the trainers) within 14 days of receipt of an invoice.

Pursuant to these arrangements, the plaintiffs provided services and labour to TBM and TBM paid for those services for a time. By August 2015, however, a dispute had developed under both the marketing agreement and the labour hire agreement. By a letter of demand dated 21 August 2015, the plaintiffs’ solicitors demanded that TBM pay $400,000 plus GST to the plaintiffs in respect of outstanding Commission under the marketing agreement and fees under the labour hire agreement. Legal proceedings were threatened.

In response, TBM’s then solicitors alleged that there were falsified documents in Knowledge Pathway’s records and that it had marketed VET services to non-compliant students — ie students who were not Eligible Students within the meaning of the marketing agreement. In this context, there was an internal audit commissioned by TBM and, as a result of it self-reporting its concerns about the eligibility of the students who were the subject of the claims for Commission to the Department, the Department commenced its own inquiries. The Department’s inquiries created the risk that it would suspend funding under its contractual arrangements with TBM and require repayment of some or all of the funding previously provided. It appears that government funding was the sole source of TBM’s income, and thus its ability to pay Commissions and fees to the plaintiffs was dependent on receipt of that funding.

In the context of this contentious correspondence, the solicitors for the parties canvassed whether TBM should undertake that it would not deal with the balance of the Department’s funding still held by it until the determination of the dispute. The suggestion of an undertaking first emanated from TBM’s solicitors. The undertaking which eventually resulted is central to the issues for determination in this proceeding. The relevant correspondence leading to the undertaking is set out below:

(1) 2 September 2015 letter. TBM’s solicitors stated:

6… As ha[s] been noted, upon completion of the reviews and audits, our client will pay any commission due without hesitation. It will otherwise repay funds as required to Skills Victoria for those claims which do not meet compliance or are able to be made compliant. However, as a show of good faith, our client is prepared to either:-
a)Pay the whole of the monies into your Firm’s Trust Account to be held in Trust until the Skills Victoria determination is made and to then pay the funds in accordance with the Skills Victoria determination. A written undertaking will be required from each of the Partners of your Firm if this alternative is selected; or
b)Our Firm will hold the Funds in Trust on the identical terms and conditions set out in 6(a) hereof.

(2) 3 September 2015 letter. In response, the plaintiffs’ solicitors stated that it was not appropriate that the Department funds held by TBM (as defined below) be held in trust, noted that TBM had not offered an undertaking that it would not disburse or otherwise deal with the funds without the plaintiffs’ consent or order of the Court, and proposed that the Department funds be paid into Court unless such an undertaking was given.

(3) 8 September 2015 letter. TBM’s solicitors responded that TBM would not give the suggested undertaking because:

in all reality [it will] be obliged to repay the amount held by it to Skills Victoria and cannot therefore undertake not to deal with the Skills Victoria funds without [the plaintiffs’] prior consent or approval unless that provides, inter alia, for repayment to Skills Victoria.’[2]
[2]Emphasis added.

(4) 18 September 2015 letter. The plaintiffs’ solicitors proposed that the funds be deposited into a joint interest bearing account in the names of both parties or, if that was not agreed to, sought an undertaking from TBM as follows:

… we seek a written undertaking from TBM that it will not deal with at least $1,393,726.40 [the amount of the plaintiffs’ total claims] in its possession, custody or control without the prior consent of [the plaintiffs] until such time as [the parties] resolve the dispute regarding such amount.
If TBM is unwilling to provide that undertaking, we seek a written undertaking from TBM that unless a written demand is made by Skills Victoria to TBM for repayment of funds and the funds in TBM’s possession, custody or control total less than $1,393,726.40, TBM will not deal with at least $1,393,726.40 in its possession, custody or control without the prior consent of [the plaintiffs] until such time as [the parties] resolve the dispute regarding such amount.[3]
[3]Emphasis added.

(5) 22 September 2015 letter. TBM’s solicitors proposed an undertaking to be given by TBM, as follows:

Our client remains committed to retaining the funds it presently holds until such time as Skills Victoria has made a determination as to what parts of those funds are to be repaid to Skills, Victoria. It will not otherwise disburse those funds and is not prepared to invest the funds in any joint interest bearing Account. Our client is not willing nor prepared to give an undertaking not to deal with ‘at least $1,393,726.40’ as it does not accept that this amount is or may be payable to your clients. The undertaking that our client is prepared to provide is as previously stated, namely not to disburse the funds that it has received from Skills Victoria in respect of [the plaintiffs] other than to repay those funds to Skills Victoria upon request/demand by Skills Victoria and any amount then remaining will be disbursed upon resolution of the dispute with your clients.[4]
[4]Emphasis added.

(6) 23 September 2015 letter. The plaintiffs’ solicitors accepted the undertaking proffered by TBM through its solicitors, but added requirements as to its form:

The undertaking should be in writing, refer to a specific dollar amount that is subject to the undertaking, and signed by an authorised representative of TBM.

(7) 24 September 2015 letter. TBM’s solicitors responded that TBM would provide an undertaking signed by its Chief Executive Officer, Barry Drayton, who subsequently became the second defendant in the proceeding:

Undertaking
My client [TBM] will provide an undertaking on their letter head signed by Barry Drayton confirming that TBM will not disburse any funds held and being funds paid by Skills [Victoria in] respect of [the plaintiffs] other than to repay those funds or any part required to be refunded to Skills Victoria and notify your clients so soon as such notification is received from Skills Victoria. The undertaking will be provided by the 30^th September next which is the earliest opportunity for this to be facilitated.
By the by, we now confirm that the total amount of payments received from Skills Victoria in respect of [Knowledge Pathways] and/or [Russell Inserra] matters is as follows:-
July payment — $204,123.90 being $144,985.15 commission and $59,138.75 Labour Hire;
August payment — $227,541.16 being $193,540.16 Commission and $34,001.00 LH;
September payment — $92,531.67 being $38,796.67 Commission and $53,735.00 LH.
Without Prejudice Discussion[5]
[5]Emphasis added. Bold type in original.

(8) 28 September 2015 letter. The plaintiffs’ solicitors noted they ‘[looked] forward to receiving the undertaking by 30 September 2015’. They also demanded unpaid fees under the labour hire agreement in the sum of $146,874.75, on the basis that those fees ‘are not calculated by reference to amounts received from Skills Victoria … [and are not] contingent upon TBM receiving Skills Victoria funding.’

(9) 10 November, 12 November 2015 letters. The plaintiffs’ solicitors sought the written undertaking, which had not been provided by 30 September 2015 as promised.

(10) 12 November 2015 letter. TBM provided the promised undertaking under cover of a letter stating, among other things:

3. Undertaking:
Attached is the written undertaking signed by the Chief Executive Officer [of TBM], Mr Barry Drayton.
4. Payments received from Skills Victoria:
There have been no additional monies paid by Skills Victoria [to TBM] in respect of any [Knowledge Pathways] and/or [Russell Inserra] matters beyond the monies confirmed as at the 24^th September 2015, being $524,196.73.
The above stated funds remain in our client’s Bank Account and have not been dealt with.

In the meantime, there had been significant developments:

(1) the parties had terminated the marketing agreement and the labour hire agreement;

(2) on 12 October 2015, the Department suspended funding to TBM under the VET funding contract, on the grounds that it reasonably suspected that TBM was in breach of the VET funding contract;

(3) on 14 October 2015, the plaintiffs commenced this proceeding against TBM only; and

(4) by letter dated 22 October 2015 from TBM to the Department, TBM sought to have the Department ameliorate the funding suspension by releasing other funding entitlements which were not affected by the issues concerning Knowledge Pathways, as disclosed by TBM. In the course of that letter, TBM stated:

· TBM has made its intention to repay any funding amounts paid that are now in question, and as you are aware currently holds more than $500,000.00 that is currently withheld from the broker and labour hire companies…
· TBM is prepared to make an immediate substantial payment ahead of confirmation by [the Department] of the final amount to be repaid…

The undertaking enclosed with the 12 November 2015 letter is on TBM’s corporate letterhead and reads as follows:
[Logo] TBM Training Pty Ltd
A sound Learning experience
Knowledge Pathways Pty Ltd
& Russell Inserra & Associates Pty Ltd
C/ McMahon Fearnley Lawyers Pty Ltd
256 Queen Street
MELBOURNE VIC 3000
Dear addressed recipients,
I, the undersigned, being the Chief Executive Officer of TBM Training Pty Ltd do hereby give this written undertaking that I will retain all amounts paid to TBM Training Pty Ltd by Skills Victoria in respect of commission and labour hire and being a total of $524,196-73 (as set out in the letter from Littleton Hackford & D’Alessandro to McMahon Fearnley Lawyers Pty Ltd dated 24^th September 2015) in the Banking Account of TBM Training Pty Ltd and not pay or deal with those funds without the prior written consent of Knowledge Pathways Pty Ltd and Russell Inserra & Associates Pty Ltd except to repay so much of those funds as are directed to be repaid to Skills Victoria upon the written request of Skills Victoria.
Any funds from the specified amount that are not required to be repaid to Skills Victoria shall be retained in the TBM Training Pty Ltd Account until such time as the dispute between the parties has been resolved or written agreement between all parties is agreed upon as to the dispersal of any funds then remaining.
I give this undertaking for and on behalf of TBM Training Pty Ltd.
Yours faithfully
[Signed]
Barry Drayton, CEO in the presence of: [Signed] [6]
Witness
[6]Emphasis added.
I will refer to the sum of $524,196.73 referred to in the undertaking as the ‘Department funds’.

The proceeding continued. In its defence, TBM admitted that Knowledge Pathways had provided marketing services and that it had not paid Commissions in accordance with the marketing agreement, but contended that it was entitled to withhold payment of further Commissions because ‘the overwhelming majority of students enrolled by [Knowledge Pathways] were not eligible students and/or had non-compliant files which was necessary for [Knowledge Pathways] to be paid for its [services].’ As to the labour hire agreement, TBM contended that the workers provided by Russell Inserra ‘were not competent and did not meet the skills required’.

By letter dated 26 November 2015 from the Department to Mr Drayton as Chief Executive Officer of TBM, the Department stated that, following its audit, it was satisfied that TBM was in breach of its VET funding contract (the ’26 November letter’). The Department relevantly stated:

At the meeting on 29 September 2015, you advised the Department that TBM had no direct oversight of the trainers and assessors conducting the training under the labour hire arrangements with Knowledge Pathways and Russell Inserra & Associates (the third parties), nor had TBM sighted any of the training actually taking place. As such, TBM was unaware of the age profile of the students, having not overseen any part of the enrolment process (including Pre-Training Review). Despite having no oversight of the training and assessment, TBM uploaded reported training delivery to the Department for payment. Further, after becoming aware of potential issues with the enrolments under these third party arrangements, TBM continued to claim payment for these students.
…
It is the Department’s view that TBM did not have the principal line of management of trainers or assessors sourced through labour hire and as such, the arrangements with the third parties are considered to be unauthorised sub-contracting arrangements. As you are aware, the third parties are not Registered Training Organisations.
Analysis of SVTS data shows that over 750 students enrolled in EAL qualifications and the Certificate I in Information, Digital Media and Technology at TBM in 2015 are over 64 years old. 27 students enrolled in Certificate I in Information, Digital Media and Technology are over 80 years old.
Given the age profile of these students, there are significant doubts as to the suitability of the training. In accordance with clause 4.1 [of the VET funding contract], the RTO must:

a) provide high quality Training Services, including:
i)training and assessment that is suitable and appropriate for each Eligible Individual, where:
A.suitable means the training and assessment meets the individual’s needs, links to likely job and/or participation outcomes and minimises duplication of the individual’s existing competencies.

It is the Department’s view that TBM is in breach of clause 4.1. Further, TBM have notified the Department that they had no oversight of any aspect of the Training Services including the assessment of eligibility and Pre-Training Review. Given the finding by TBM in relation to potential falsification of documentation ‘including signatures’ the Department has serious concerns as to whether the training actually occurred and will reserve its rights in this regard.
…
Intention to terminate the 2014–16 VET Funding Contract
In accordance with clause 17.3(a) and clause 17.3(b) [of the VET funding contract], the Department may terminate immediately by written notice to the [registered training organisation].
…
Prior to making any decision to terminate the [VET funding contract], the Department will provide TBM with a final opportunity to respond to the issues raised in this letter.
You are at liberty to respond within seven (7) business days…[7]

[7]Emphasis in original.

In this context, the Department concluded its letter with an analysis of the funding paid by it to TBM in relation to ‘non-compliant students’ (sourced by Knowledge Pathways), and, on the basis of that analysis, concluded:

Funds
Prior to the meeting of 29 September 2015, the Department requested that TBM provide an excel spreadsheet with the details for all students affected under the third party arrangements, with a brief description of the ‘non-compliance’ found. In response, TBM provided the Department with an excel spreadsheet listing 1123 individual students enrolled in 2015 in EAL qualifications and the Certificate I in Information, Digital Media and Technology.
Of these students, 1060 are recorded as having ‘non-compliances’. These ‘non-compliances’ are recorded by TBM as ‘missing documentation’, ‘missing signatures’, ‘incomplete documentation’ and ‘falsified’. The amount of funding paid in relation to these students is $1,146,381.50 (including GST). 12 of the students listed are recorded as withdrawn and 52 students are recorded as ‘no non-compliance’.
Pursuant to clauses 7.3(b), 16.1(a) and 16.2(c) [of the VET funding contract], the Department requires TBM to refund the Funds paid in relation to the students for which TBM has identified to be ‘non-compliant’.
As of today’s date, the Department is holding payment in relation to claims to the amount of $491,114.27 (including GST). In accordance with clause 7.3(b), 16.1(b) and 16.2(d), the Department will set off this amount from the Funds due to be returned. As such, TBM is required to refund the Department $655,267.23 (including GST). An invoice for this amount will be issued shortly. The Department notes your advice in your letter of 22 October 2015 in relation to the fund TBM is currently holding in relation to the third party arrangements.
The Department reserves all of its rights under the 2014–16 VET Funding Contract.[8]

[8]Emphasis added.

The Department’s reference to TBM’s ‘advice in your letter of 22 October 2015 in relation to the fund TBM is currently holding in relation to the third party arrangements’ was clearly a reference to the Department funds as referred to in the undertaking.

Following receipt of this letter, TBM’s solicitors provided a copy of it to the plaintiffs’ solicitors under cover of a letter dated 30 November 2015. In that letter, TBM’s solicitors stated that, in accordance with the undertaking, TBM intended to repay the Department funds to the Department forthwith. The plaintiffs’ solicitors responded that the letter from the Department ‘does not contain any formal demand for payment or direction to pay [the Department funds]’, and foreshadowed that Mr Drayton would be joined as a defendant to the proceeding if the Department funds were paid back to the Department.

By letter dated 14 December 2015 from TBM to the Department, TBM sought to avoid termination of its VET funding contract on a number of grounds, including that it had taken ‘actions to ensure there [was] no re-occurrence of the current situation’. Read in the context of the evidence as a whole, I infer that ‘the current situation’ was a reference to the non-compliances found by the Department concerning TBM’s relationship with the plaintiffs, or at least Knowledge Pathways. As part of TBM’s entreaties for the Department to give it ‘another chance’, Mr Drayton asked the Department for its ‘bank details that will enable TBM to deposit the $540,000.00 [sic] held in its bank account for this purpose’. He specifically sought release to TBM of the funding payments held by the Department ‘that do not relate directly to the enrolments in question’, which I infer is another reference to the non-compliant enrolments concerning Knowledge Pathways, as referred to in the Department’s 26 November letter.

By a further letter from TBM to the Department dated 17 December 2015, Mr Drayton sought to have the Department deal with his requests in the 14 December letter, which he described as ‘a plea for a positive and urgent response’, made further submissions in support of TBM’s case to avoid termination of its VET funding contract and suspension of all funding payments, and concluded with a statement that, as the Department had not provided its banking details as requested, TBM would mail a cheque to the Department for $524,200 on the following day, 18 December 2015, ‘in part repayment of the amount noted to be returned’.

On 18 December 2015, TBM sent a cheque for $524,200 to the Department ‘in part payment of the TBM offer to repay VTG funding related to self-reported issues.’[9] The letter enclosing the cheque was received by the Department on 21 December 2015 and the cheque was banked.
[9]Emphasis added.

By letter dated 21 December 2015, the Department wrote again to Mr Drayton as CEO of TBM. I infer from the terms of the letter that it was written before the writer knew TBM had repaid the Department funds referred to in TBM’s 22 October letter and the undertaking. In the letter, the Department noted its 26 November letter and, based on Mr Drayton’s representations, determined that it would not terminate TBM’s VET funding contract at that time but would take alternative action, including that it would not fund TBM in respect of training in Certificate I in Information, Digital Media and Technology (the ‘relevant course’), which was the course leading to the breaches found by the Department in relation to Knowledge Pathways, as set out in the 26 November letter. The Department concluded the letter with another analysis of its funding concerning non-compliant students, and noted that payments withheld by the Department had increased, such that the amount to be repaid by TBM had decreased to $486,221.50 (as the total amount required to be refunded had been set-off against the increased withheld amount). The Department stated that this amount would ‘be invoiced as soon as possible’.

By a further letter dated 22 December 2015 from Mr Drayton on behalf of TBM to the Department (a copy of which is not in evidence, but is referred to and quoted in part in the 23 December letter from the Department described below), Mr Drayton sought release to TBM of its funding entitlements of $660,160 to allow it to continue operating, on the basis that TBM would then repay ‘$50,000.00 each month commencing February 2016, until payments are finali[s]ed’.

By letter dated 23 December 2015 from the Department to Mr Drayton, the Department noted receipt of the TBM payment of $524,200 and accepted Mr Drayton’s repayment proposal. The Department did not, however, agree to repay immediately the whole of TBM’s funding entitlements (ie $660,160). It agreed to pay $343,243.50 pending correction of errors in TBM’s data (with the balance to be released later).

Following TBM’s repayment of the Department funds, the plaintiffs applied to the Court and were given leave to join Mr Drayton as the second defendant to this proceeding.

By letter dated 10 February 2016, the Department sent TBM an invoice for $622,181.51 for the outstanding balance of the amount repayable to the Department by TBM in accordance with the calculations in Mr Drayton’s 22 December letter, as apparently accepted by the Department, after taking into account the payment of $524,200.

TBM has since been placed in liquidation. The plaintiffs have not sought leave to proceed against it. The remaining issues for determination relate to the undertaking, as follows:

(1) Is Mr Drayton personally bound by the undertaking?

(2) Did the Department require TBM to repay the Department funds?

Before considering these issues, I will set out the applicable law.

Applicable law

The undertaking should be interpreted in accordance with ordinary principles of contractual interpretation. This requires the Court to give objective consideration to what reasonable persons in the position of the parties would have understood the relevant words in the contract to mean ‘by reference to its text, context (the entire context of the contract as well as any contract, document or statutory provision referred to in the text of the contract) and purpose’.[10]
[10]Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37 [46] (French CJ, Nettle and Gordon JJ); see also at [109] (Kiefel and Keane JJ).

In Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd,[11] the High Court considered, without unanimously deciding, the circumstances in which recourse might be had to matters external to the text, context and purpose of a contract as revealed by the contract itself; in particular as to whether ambiguity in the relevant contractual provision must be shown.[12] However, French CJ, Nettle and Gordon JJ stated that:[13]

[o]rdinarily, [the] process of construction is possible by reference to the contract alone. Indeed, if an expression in a contract is unambiguous or susceptible of only one meaning, evidence of surrounding circumstances (events, circumstances and things external to the contract) cannot be adduced to contradict its plain meaning.[14]

[11]Ibid.

[12]Ibid [48]–[52] (French CJ, Nettle and Gordon JJ), [108]–[113] (Kiefel and Keane JJ), [118]–[119] (Bell and Gageler JJ).

[13]Ibid [48] (French CJ, Nettle and Gordon JJ) (citation in original).

[14]Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337, 352. See also Sir Anthony Mason, ‘Opening Address’, (2009) 25 Journal of Contract Law 1 at 3.

In interpreting the words and resolving any ambiguity, the Court should proceed in a common sense and non-technical way and give the agreement a commercially sensible construction.[15] The Court should have regard to all of the words used in the agreement ‘so as to render them all harmonious with one another’[16] and to ensure ‘a construction supplying a congruent operation to the various components as a whole.’[17]
[15]Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640, 656–7 [35], adopting the observations of Arden LJ in Re Golden Key Ltd [2009] EWCA Civ 636 [28].
[16]Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99, 109.
[17]Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522, 529 [16].

In giving contracts a businesslike interpretation, the Court approaches the task on the assumption that the parties intended to produce a commercial result and, accordingly, a commercial contract is to be construed so as to avoid ‘making commercial nonsense or working commercial inconvenience.’[18] Accordingly, if there are reasonably open competing constructions, the preferred construction is the one that avoids capricious, unreasonable, inconvenient or unjust consequences.[19]
[18]Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640, 656–7 [35], adopting the observations of Arden LJ in Re Golden Key Ltd [2009] EWCA Civ 636 [28] and citing Zhu v Treasurer (NSW) (2004) 218 CLR 530, 559 [82].
[19]Australian Broadcasting Commission v Australasian Performing Rights Association Ltd (1973) 129 CLR 99, 109; Bank of Queensland Ltd v Chartis Australia Insurance Ltd [2013] QCA 183 [70].

The task of interpreting a contractual term begins with the words. If they are unambiguous and do not give rise to commercial nonsense or commercial inconvenience, the Court must give effect to them, notwithstanding that it may be guessed or suspected that the parties intended something different.[20] As to whether a proffered construction of a term produces commercial nonsense or inconvenience, the Court must, in accordance with the objective approach to interpretation of contracts, assess those matters by reference to what persons in the position of the parties would have reasonably understood at the time the contract was made.
[20]Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99, 109.

I proceed to consider the questions for determination, based on these principles.

Is Mr Drayton personally bound by the undertaking?

The plaintiffs contend that the undertaking was given by both Mr Drayton, in his personal capacity, and by him on behalf of TBM. Mr Drayton contends that the undertaking was given by him only on behalf of TBM.

Both the plaintiffs and Mr Drayton start from the position that the words of the undertaking are not ambiguous and support their respective interpretations. Alternatively, if the court finds ambiguity, the plaintiffs and Mr Drayton each rely upon the whole of the surrounding circumstances leading to the giving of the undertaking, as set out above.

Before considering the competing contentions based only on the text of the undertaking, it is necessary to note that the text of the undertaking refers to the 24 September 2015 letter from TBM’s solicitors to the plaintiffs’ solicitors. Accordingly, for the purpose of giving the undertaking a commercial interpretation, the relevant content of that letter is a contextual fact which may be considered in the absence of any ambiguity in the words of the undertaking.[21] The possible ramifications of the undertaking referring to the 24 September letter are discussed below.
[21]Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37 [46] (French CJ, Nettle and Gordon JJ); see also at [109] (Kiefel and Keane JJ).

The plaintiffs’ contention that the text of the undertaking unambiguously contains a personal undertaking from Mr Drayton, on his own behalf and on behalf of TBM, may be summarised as follows:

(1) The plain meaning of the word ‘I’ in the context of the undertaking as a whole unambiguously means Mr Drayton:

· ‘I, the undersigned … do hereby give this written undertaking that I will retain … ‘.

· ‘I give this undertaking for and on behalf of TBM Training Pty Ltd’;

(2) Mr Drayton signed the undertaking above the words ‘Barry Drayton, CEO’. He did not purport to sign the undertaking in his capacity as the sole director and secretary of TBM and no company seal is affixed to the undertaking. This signature clause is consistent with the description of Mr Drayton in the undertaking as ‘being the Chief Executive Officer of TBM Training Pty Ltd’. There is accordingly a distinction between the personal capacity of Mr Drayton as CEO and TBM as a corporate entity; and

(3) Mr Drayton’s statement that he gave the undertaking ‘for and on behalf of TBM Training Pty Ltd’ means only that the undertaking was jointly provided by Mr Drayton and TBM. If the undertaking were to be interpreted otherwise – as given by Mr Drayton on behalf of TBM only – that would negate the plain meaning of the opening words of the undertaking and convert what would otherwise be a personal undertaking into one given by TBM only.

Mr Drayton’s contention that he gave the undertaking on behalf of TBM only, and not in any personal capacity, was based upon the following considerations:

(1) the undertaking is given on TBM corporate letterhead;

(2) the opening words of the undertaking state the capacity in which Mr Drayton is the signatory, namely:

I, the undersigned, being the Chief Executive Officer of TBM Training Pty Ltd do hereby give this written undertaking…;[22]
[22]Emphasis added.

(3) Mr Drayton’s undertaking to retain the Department funds (‘I will retain all amounts…’) concerns money ‘paid to TBM … in the Banking Account of TBM’, and not Mr Drayton’s money or money held in his personal account;

(4) the undertaking was given by Mr Drayton expressly ‘for and on behalf of TBM Training Pty Ltd’. Reasonable business people would recognise, and understand, those words as a common form by which an agent signs a document intended to bind the principal only. Thus, an undertaking given ‘for’ a principal involves no personal liability of the agent, and nor does an undertaking given ‘on behalf of’ the principal. The composite phrase ‘for and on behalf of’ does not mean that the agent signs both in a personal capacity and on behalf of the principal;

(5) that position is made clear by the fact that Mr Drayton is described in the opening words of the undertaking, and in the words underneath his signature, as ‘the Chief Executive Officer of TBM’ or simply ‘CEO’. In neither case does his name appear without his description as TBM’s Chief Executive Officer; and

(6) the undertaking does not expressly state that Mr Drayton gives it personally.

In my opinion, the plaintiffs’ contention should generally be accepted. By the terms of the undertaking, Mr Drayton unambiguously gave a personal undertaking on his own behalf and also on behalf of TBM. My reasons follow.

As to whether Mr Drayton gave the undertaking in his personal capacity, the critical words are the opening words, namely:

I, the undersigned, being the Chief Executive Officer of TBM Training Pty Ltd do hereby give this written undertaking that I will retain all amounts paid to TBM…

In circumstances where the text of the undertaking makes it clear that the amounts in question (the Department funds) were paid to TBM and are held in its bank account, reasonable business people would in my opinion understand from the opening words that Mr Drayton, as TBM’s Chief Executive Officer, was personally undertaking to ensure that TBM would retain the Department funds in its bank account subject to the exceptions contained in the undertaking.

Further, reasonable business people would understand that Mr Drayton was, by the final paragraph of the undertaking, also giving the undertaking ‘for and on behalf of TBM’.

In my opinion, this interpretation is not altered by the reference to the 24 September letter in the text of the undertaking. An issue arises as to whether the whole of that letter is admissible as part of the context in which the undertaking was given, or whether the only admissible part of the letter is that which describes how the amount of the Department funds was calculated. In my opinion, the reference in the undertaking to the 24 September letter was, reading the undertaking as a whole, intended to be for the purpose of describing how the amount of the Department funds to be retained was calculated, with reference to the plaintiffs’ contractual entitlements as set out in the bolded part of the letter quoted above. This result is plain from the text of the undertaking:

all amounts paid to TBM Training Pty Ltd by Skills Victoria in respect of commission and labour hire and being a total of $524,196.73 (as set out in the letter … dated 24^th September 2015) …[23]

[23]Emphasis added.

Reasonable business people in the position of the parties would have so understood the reference to the 24 September letter. The relevant part of the 24 September letter does not affect the interpretation that Mr Drayton gave the undertaking in his personal capacity.

In reaching this conclusion, I have had no regard to any of the other surrounding circumstances (objective facts known to both parties) prior to the undertaking being signed, as set out below. Those objective facts would include the whole of the earlier correspondence and the documents referred to in it, including the marketing agreement, the labour hire agreement and the VET funding contract which TBM was required to enter into so as to comply with clause 5.1(b) of the marketing agreement. However, even if the undertaking is ambiguous as to Mr Drayton’s position, and these documents therefore form part of the external context (ie surrounding circumstances) which may be admissible to interpret the undertaking, I would not reach a different result. My reasons follow.

The fact that the undertaking was sought from TBM, and not personally from Mr Drayton or any other representative of TBM, is not conclusive. The evidence establishes that, in order to protect TBM’s position in case the Department required the Department funds to be refunded, TBM was prepared to give the undertaking requested, and further, as requested, to ensure that it was signed by Mr Drayton as an authorised representative. I infer that the instructions to give the undertaking, and for Mr Drayton to sign it, came from Mr Drayton himself as TBM’s CEO. Once TBM and Mr Drayton agreed that the undertaking would be given, it was a matter for them and their solicitors to draft the undertaking and provide it to the plaintiffs’ solicitors. If that undertaking on its proper interpretation was given by Mr Drayton personally and on behalf of TBM (as I have indeed found), that is the result of the objective approach to contractual interpretation. It matters not that TBM, Mr Drayton and/or their solicitors could have provided an undertaking in a different form which did not involve Mr Drayton giving a personal undertaking. Nor does it matter that, on the evidence, it might be inferred that an undertaking given by TBM only, for example under its corporate seal witnessed by Mr Drayton, would have been accepted by the plaintiffs.

I turn to consider whether the Department gave TBM a written direction, request or requirement to repay the Department funds which were the subject of the undertaking.

Did the Department require TBM to repay the Department funds?

Mr Drayton has the onus of establishing that the Department’s 26 November 2015 letter constituted a written direction, request or requirement that TBM repay the Department funds. Mr Drayton contends that the Department required TBM to refund the Department funds, as part of a larger amount ($655,267.23), by its 26 November letter. He contends that, when read as a whole, that letter required TBM to refund to the Department all Funds previously paid by it to TBM in respect of the non-compliant students who had been sold training courses by Knowledge Pathways under the management agreement, and trained by trainers provided by Russell Inserra under the labour hire agreement. I accept that contention. When read as a whole, the 26 November letter:

(1) defines the plaintiffs as ‘third parties’;

(2) states that TBM’s lack of any direct oversight of the trainers and assessors conducting the training under the labour hire arrangements constituted a breach of clause 5 of the VET funding contract. Accordingly, the contractual arrangements under the marketing agreement and the labour hire agreement were considered by the Department to be unauthorised sub-contracting arrangements with third parties who were not themselves registered training organisations;

(3) states the Department’s view that, on analysis of the relevant data, over 750 students enrolled in a relevant course were over 64 years old and 27 students enrolled in that course were over 80 years old. Given that the relevant course involved digital media and technology, the Department was of the opinion that TBM was in breach of clause 4.1 of the VET funding agreement, because the training services were not ‘suitable’ to such students as they did not have the necessary links to likely job and/or participation outcomes;

(4) states that, based on these and other breaches, the Department had formed the view that TBM was in ‘Material Breach’ of the VET funding contract, that such breaches could not be remedied, and that it was considering terminating the VET funding contract for that reason. TBM was given an opportunity to avoid termination by responding to the issues raised in the 26 November letter within seven business days; and

(5) on the basis of ‘non-compliances’ in respect of ‘students affected under the third party arrangements’, the Department asserted that the ‘amount of funding paid in relation to these students was $1,146,381.50 (including GST)’. On this basis, the Department required TBM to repay the whole of that sum (‘the Department requires TBM to refund the Funds paid in relation to the students for which TBM has identified to be non-compliant’). However, as the Department was holding payment in relation to other funding claims by TBM for $491,114.27 (including GST) the Department said that it would:

set off this amount from the Funds due to be returned. As such, TBM is required to refund the Department $655,267.23 (including GST). An invoice for this amount will be issued shortly. The Department notes your advice in your letter of 22 October 2015 in relation to the funds TBM is currently holding in relation to the third party arrangements.

The plaintiffs contend that the 26 November letter did not satisfy the exception in the undertaking, for the following reasons:

(1) the Department’s requirement for a refund in the 26 November letter was not for the exact amount of the Department funds, being $524,196.73;

(2) the 26 November letter was not a ‘formal’ demand for repayment. It was no more than ‘a statement of intention…subject to further inquiries and qualifications’;

(3) the facts demonstrate that the Department in fact continued making inquiries, and the amount of the invoice finally issued was only for the sum of $622,181.50, which is a lesser sum than that stated in the 26 November letter; and

(4) the fact that TBM repaid the Department funds prior to receipt of the final invoice is indicative of it volunteering payment as part of its own endeavours to avoid termination of its VET funding contract and thus continue in business.

I do not accept the plaintiffs’ contentions. In my opinion, the 26 November letter constituted a written direction, request or requirement from the Department that the Department funds be repaid to it, together with the balance of the larger sum demanded in respect of Funds paid by the Department to TBM in respect of non-compliant students affected by TBM’s breaches of the VET funding contract in relation to its arrangements with the plaintiffs. The 26 November letter contains no statement that the Department’s continuing investigations will affect the amount required to be refunded. The fact that there were further investigations and changes to the amount of valid claims for funding due to TBM, resulting in a final invoice for less than the amount required to be repaid by the 26 November letter, is not to the point. Prior to the Department funds being repaid on 18 December 2015, the Department did not require repayment of a lesser amount. The Department’s letter of 21 December 2015 and the TBM letter dated 18 December 2015 enclosing its cheque for the Department funds apparently crossed in the mail.

As to the contention that TBM ‘volunteered’ its repayment of the Department funds, that is irrelevant. The Department either required those funds to be repaid or it did not. For the above reasons, it did so require.

The above reasons dispose of the proceeding against Mr Drayton. For completeness, I note that the amount of the final invoice exceeds the amount of the Department funds stated in the undertaking and includes those funds. Accordingly, even if a breach of the undertaking has been proved, it could not result in any damage to the plaintiffs. This is because TBM could, and on the evidence would, have paid the final invoiced amount, and such payment would have been consistent with the exception in the undertaking.

Conclusion

For the above reasons, the plaintiffs’ claim against the second defendant, Mr Drayton, will be dismissed. I will hear the parties as to costs.

SCHEDULE OF PARTIES

S CI 2015 5352
BETWEEN:
KNOWLEDGE PATHWAYS PTY LTD (ABN 87 086 496 460)	Firstnamed Plaintiff
RUSSELL INSERRA & ASSOCIATES PTY LTD (ACN 081 984 769)	Secondnamed Plaintiff
- and -
TBM TRAINING PTY LTD (ABN 95 101 144 843)	Firstnamed Defendant
BARRY RONALD DRAYTON	Secondnamed Defendant

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29 July 2016